Franklin Financial (FRNK) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number:   1-35085

                      FRANKLIN FINANCIAL CORPORATION                     

(Exact name of registrant as specified in its charter)

Virginia	27-4132729
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
4501 Cox Road, Glen Allen, Virginia	23060
(Address of principal executive offices)	(Zip Code)

                                    (804) 967-7000                                    

(Registrant’s telephone number, including area code)

                                                                 Not applicable                                                                 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was reported to submit and post such files).  Yes xNo  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer  ¨
Non-accelerated filer  x	Smaller Reporting Company  ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No  x

14,302,838 shares of the registrant’s common stock, par value $0.01 per share, were outstanding at August 1, 2011.

FRANKLIN FINANCIAL CORPORATION

FORM 10-Q

Table of Contents

		Page No.
Part I.	Financial Information	2
Item 1.	Financial Statements	2
	Consolidated Statements of Financial Condition at June 30, 2011 and  September 30, 2010 (unaudited)	2
	Consolidated Statements of Earnings for the Three and Nine Months Ended June 30, 2011 and 2010 (unaudited)	3
	Consolidated Statements of Comprehensive Income and Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010 (unaudited)	5
	Notes to the Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
Part II.	Other Information	39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	[Removed and Reserved]	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		40

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands)	June 30, 2011			September 30, 2010
	(unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	10,722		$	7,401
Interest-bearing deposits in other banks		63,490			90,028
Money market investments		41,740			480
Total cash and cash equivalents		115,952			97,909
Securities available for sale		407,971			276,643
Securities held to maturity		29,465			35,518
Loans, net of deferred loan fees		494,522			490,454
Less allowance for loan losses		13,432			13,419
Net loans		481,090			477,035
Loans held for sale		1,243			2,781
Federal Home Loan Bank stock		11,362			12,542
Office properties and equipment, net		6,203			6,099
Real estate owned		9,571			11,581
Accrued interest receivable:
Loans		2,446			2,442
Mortgage-backed securities and collateralized mortgage obligations		818			667
Other investment securities		1,608			1,613
Total accrued interest receivable		4,872			4,722
Cash surrender value of bank-owned life insurance		31,386			30,430
Prepaid expenses and other assets		16,221			15,795
Total assets	$	1,115,336		$	971,055
Liabilities and Stockholders’ Equity
Deposits:
Savings deposits	$	271,296		$	266,694
Time deposits		391,783			380,433
Total deposits		663,079			647,127
Federal Home Loan Bank borrowings		190,000			190,000
Advance payments by borrowers for property taxes and insurance		1,663			2,340
Accrued expenses and other liabilities		3,898			4,819
Total liabilities		858,640			844,286
Commitments and contingencies (see note 9)
Stockholders’ equity:
Common stock: $0.01 par value; 75,000,000 shares authorized; 14,302,828 and 0 shares issued and outstanding, respectively		143			-
Additional paid-in capital		142,845			-
Unearned ESOP shares		(11,295	)		-
Undistributed stock-based deferral plan shares: 245,783 and 0 shares, respectively		(2,533	)		-
Retained earnings		124,833			124,339
Accumulated other comprehensive income		2,703			2,430
Total stockholders’ equity		256,696			126,769
Total liabilities and stockholders’ equity	$	1,115,336		$	971,055

The accompanying notes are an integral part of these consolidated financial statements.

2

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings

Three and Nine Months Ended June 30, 2011 and 2010 (Unaudited)

	Three months ended June 30,						Nine months ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Interest and dividend income:
Interest and fees on loans	$	8,015		$	8,030		$	23,998		$	24,455
Interest on deposits in other banks		89			45			166			120
Interest and dividends on securities:
Taxable		3,564			3,956			10,036			11,981
Nontaxable		78			81			237			249
Total interest and dividend income		11,746			12,112			34,437			36,805
Interest expense:
Interest on deposits		2,547			3,348			7,984			10,851
Interest on borrowings		2,291			2,628			6,873			8,137
Total interest expense		4,838			5,976			14,857			18,988
Net interest income		6,908			6,136			19,580			17,817
Provision for loan losses		1,825			1,661			2,537			3,762
Net interest income after provision for loan losses		5,083			4,475			17,043			14,055
Noninterest income (expense) :
Service charges on deposit accounts		11			11			31			40
Other service charges and fees		87			91			240			528
Gains on sales of loans		40			57			255			199
Gains on sales of securities, net		-			36			265			2,012
Impairment of securities, net:
Impairment of securities		(1,157	)		(985	)		(1,943	)		(3,945	)
Less: Impairment recognized in other comprehensive income		96			-			(9	)		(456	)
Net impairment reflected in earnings		(1,253	)		(985	)		(1,934	)		(3,489	)
Increase in cash surrender value of bank-owned life insurance		321			320			956			958
Other operating income		179			197			511			454
Total noninterest income (expense)		(615	)		(273	)		324			702
Other noninterest expenses:
Personnel expense		2,270			1,893			6,269			5,751
Occupancy expense		209			193			617			649
Equipment expense		226			219			672			655
Advertising expense		53			38			125			159
Federal deposit insurance premiums		315			287			833			838
Fee on early retirement of FHLB borrowings		-			-			-			318
Contributions to The Franklin Federal Foundation		5,555			-			5,555			-
Other operating expenses		959			756			3,142			2,144
Total other noninterest expenses		9,587			3,386			17,213			10,514
Income (loss) before provision for income taxes		(5,119	)		816			154			4,243
Federal and state income tax (benefit) expense		(1,844	)		185			(340	)		1,024
Net income (loss)	$	(3,275	)	$	631		$	494		$	3,219
Basic net income (loss) per common share(1)	$	(0.25	)		N/A		$	0.04			N/A
Diluted net income (loss) per common share(1)	$	(0.25	)		N/A		$	0.04			N/A

(1) Weighted-average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011 to June 30, 2011.

The accompanying notes are an integral part of these consolidated financial statements.

3

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income and Changes in Stockholders’ Equity

Nine Months Ended June 30, 2011 and 2010 (Unaudited)

(Dollars in thousands)	Common Stock		Additional Paid-in Capital			Unearned ESOP Shares			Undistributed Stock-Based Deferral Plan Shares			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at September 30, 2009	$	-	$	-		$	-		$	-		$	125,420	$	(1,782	)	$	123,638
Net income													3,219		-			3,219
Other comprehensive income (loss):
Net unrealized holding gains arising during the period, net of income tax expense of $1,818															901			901
Reclassification adjustment for gains included in net earnings, net of income tax expense of $631															(1,030	)		(1,030	)
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax benefit of $220															(359	)		(359	)
Amortization of previously recognized other-than-temporary impairment of available-for-sale securities related to factors other than credit, net of income tax expense of $391															638			638
Comprehensive income																		3,369
Balance at June 30, 2010	$	-	$	-		$	-		$	-		$	128,639	$	(1,632	)	$	127,007
Balance at September 30, 2010	$	-	$	-		$	-		$	-		$	124,339	$	2,430		$	126,769
Issuance of common stock		143		142,885														143,028
Common stock issuance costs				(2,602	)													(2,602	)
Shares purchased by ESOP							(11,442	)										(11,442	)
Shares purchased by stock-based deferral plan				2,533						(2,533	)
ESOP shares allocated				29			147											176
Net income													494		-			494
Other comprehensive loss:
Net unrealized holding losses arising during the period, net of income tax benefit of $857															(831	)		(831	)
Reclassification adjustment for losses included in net earnings, net of income tax benefit of $205															334			334
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax expense of $81															131			131
Amortization of previously recognized other-than-temporary impairment of available-for-sale securities related to factors other than credit, net of income tax expense of $392															639			639
Comprehensive income																		767
Balance at June 30, 2011	$	143	$	142,845		$	(11,295	)	$	(2,533	)	$	124,833	$	2,703		$	256,696

The accompanying notes are an integral part of these consolidated financial statements.

4

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine Months Ended June 30, 2011 and 2010 (Unaudited)

	2011			2010
(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	494		$	3,219
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		586			511
Provision for loan losses		2,537			3,762
Impairment charge on other real estate owned		839			-
Contribution of stock to The Franklin Federal Foundation		4,165			-
Gain on sales of securities available for sale, net		(265	)		(2,012	)
Impairment charge on securities		1,934			3,489
Gain on sales or disposal of office properties and equipment, net		(7	)		(10	)
Gain on sale of other real estate owned		31			-
Net amortization (accretion) on securities		1,031			(427	)
Originations of loans held for sale		(12,093	)		(13,459	)
Sales and principal payments on loans held for sale		13,632			10,894
ESOP compensation expense		176			-
Changes in assets and liabilities:
Accrued interest receivable		(150	)		142
Cash surrender value of bank-owned life insurance		(956	)		(958	)
Prepaid expenses and other assets		(249	)		(2,245	)
Advance payments by borrowers for property taxes and insurance		(677	)		(808	)
Accrued expenses and other liabilities		(960	)		(543	)
Net cash and cash equivalents provided by operating activities		10,068			1,555
Cash Flows From Investing Activities
Net redemptions of Federal Home Loan Bank stock		1,180			-
Net deposits of term interest bearing deposits in other banks		-			5,326
Proceeds from maturities, calls and paydowns of securities available for sale		77,124			49,000
Proceeds from sales and redemptions of securities available for sale		12,173			27,585
Purchases of securities available for sale		(222,984	)		(53,354	)
Proceeds from maturities and paydowns of securities held to maturity		5,843			8,203
Net increase in loans		(7,371	)		(5,560	)
Purchases of office properties and equipment		(641	)		(383	)
Proceeds from sales of office properties and equipment		13			12
Proceeds from sales of real estate owned		1,913			1,544
Capitalized improvements of real estate owned		(46	)		-
Net cash and cash equivalents (used) provided by investing activities		(132,796	)		32,373
Cash Flows From Financing Activities
Net increase in savings deposits		4,602			41,894
Net increase (decrease) in time deposits		11,350			(29,995	)
Net repayments of long-term Federal Home Loan Bank borrowings		-			(40,000	)
Proceeds from the issuance of common stock, net of issuance costs		136,261			-
Stock purchased by ESOP		(11,442	)		-
Net cash and cash equivalents provided (used) by financing activities		140,771			(28,101	)
Net increase in cash and cash equivalents		18,043			5,827
Cash and cash equivalents at beginning of period		97,909			62,783
Cash and cash equivalents at end of period	$	115,952		$	68,610
Supplemental disclosures of cash flow information
Cash payments for:
Interest	$	14,790		$	19,164
Income taxes	$	2,400		$	293
Supplemental schedule of noncash investing and financing activities
Unrealized (losses) gains on securities available for sale	$	(119	)	$	1,057
Transfer of loans to other real estate owned, net	$	2,454		$	6,801

.

The accompanying notes are an integral part of these consolidated financial statements.

5

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Note 1. Nature of Business and Summary of Significant Accounting Policies

Organization and Description of Business — Franklin Financial Corporation (“Franklin Financial”), a Virginia corporation, is the holding company for Franklin Federal Savings Bank (the “Bank”), a federally chartered capital stock savings bank engaged in the business of attracting retail deposits from the general public and originating both owner and non-owner-occupied one-to four-family loans as well as multi-family loans, nonresidential real estate loans, construction loans, land and land development loans, and non-mortgage commercial loans.  The Bank has two wholly owned subsidiaries, Franklin Service Corporation, which provides trustee services on loans originated by the Bank, and Reality Holdings LLC, which, through its subsidiaries, holds and manages foreclosed properties purchased from the Bank.  The interim financial statements presented in this report include the unaudited financial information of Franklin Financial and subsidiaries on a consolidated basis. The Company (as defined below) operates as one segment.

These interim financial statements do not contain all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Franklin Financial’s Prospectus filed pursuant to Rule 424(b)(3) of the Securities Act of 1933, as amended, on February 22, 2011.  These financial statements include all normal and recurring adjustments that management believes are necessary in order to conform to GAAP.  The results for the three and nine months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending September 30, 2011 or any other future period.  The consolidated balance sheet as of September 30, 2010 was derived from the audited annual consolidated financial statements of Franklin Financial’s predecessor organization, Franklin Financial Corporation MHC (the “MHC”), which ceased to exist in April 2011 as a result of the MHC’s conversion from mutual to stock form of organization as described below in note 2.

Principles of Consolidation — The consolidated financial statements include the accounts of Franklin Financial, the Bank, Franklin Service Corporation, and Reality Holdings LLC and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The accounting and reporting policies of the Company conform to GAAP.

Use of Estimates — Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, the projected benefit obligation for the defined benefit pension plan, the valuation of deferred taxes, and the analysis of securities for other-than-temporary impairment.

Loans — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs and net of the allowance for loan losses and any deferred fees or costs. Loan origination fees and certain direct loan origination costs are deferred and recognized over the contractual lives of the related loans as an adjustment of the loans’ yields using the level-yield method on a loan-by-loan basis.

Loans are placed on nonaccrual status when they are three monthly payments or more past due unless management believes, based on individual facts, that the delay in payment is temporary and that the borrower will be able to bring past due amounts current and remain current. All interest accrued but not collected for loans that are placed on non-accrual status is reversed against interest income. Any payments made on these loans while on non-accrual status are accounted for on a cash-basis until the loan qualifies for return to accrual status or is subsequently charged-off. Loans are returned to accrual status when the principal and interest amounts due are brought current and management believes that the borrowers will be able to continue to make required contractual payments.

6

Allowance for Loan Losses — The allowance for loan losses is maintained at an amount estimated to be sufficient to absorb probable principal losses, net of principal recoveries (including recovery of collateral), inherent in the existing loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance for loan losses consists of specific and general components.

The specific component relates to loans identified as impaired. The Company determines and recognizes impairment of certain loans when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans that experience insignificant delays and payment shortfalls generally are not classified as impaired. An impaired loan is measured at net realizable value, which is equal to present value less estimated costs to sell. The present value is estimated using expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent.

The general component covers loans not identified for specific allowances and is based on historical loss experience adjusted for various qualitative factors. The allowance for loan losses is increased by provisions for loan losses and decreased by charge-offs (net of recoveries). In estimating the allowance, management segregates its portfolio by loan type and credit grading. Management’s periodic determination of the allowance for loan losses is based on consideration of various factors, including the Company’s past loan loss experience, current delinquency status and loan performance statistics, industry loan loss statistics, periodic loan evaluations, real estate value trends in the Company’s primary lending areas, regulatory requirements, and current economic conditions. The delinquency status of loans is computed based on the contractual terms of the loans.

Management’s estimate of the adequacy of the allowance is subject to evaluation and adjustment by the Bank’s regulators.  Management believes that the current allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio.

Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss, capital loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount deemed more likely than not to be realized in future periods. It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Any interest and penalties assessed on tax positions are recognized in income tax expense.

Reclassifications — Certain reclassifications have been made to the financial statements of prior periods to conform to the current period presentation. Net income and stockholders’ equity previously reported were not affected by these reclassifications.

Concentrations of Credit Risk — Most of the Company’s activities are with customers in Virginia with primary geographic focus in the Richmond metropolitan area, which includes the city of Richmond and surrounding counties. Securities and loans also represent concentrations of credit risk and are discussed in note 3 “Securities” and note 4 “Loans” in the notes to the unaudited consolidated financial statements. Although the Company believes its underwriting standards are conservative, the nature of the Company’s portfolio of construction loans, land and land development loans, and income-producing nonresidential real estate loans and multi-family loans results in a smaller number of higher-balance loans. As a result, the default of loans in these portfolio segments may result in more significant losses to the Company.

7

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted.   See note 10 for the Company’s discussion of fair value measurements for the quarter ended June 30, 2011.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for credit losses; and the changes and reasons for those changes in the allowance for credit losses. To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; the aging of past due financing receivables at the end of the reporting period by class of financing receivables; and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. See note 5 for the Company’s discussion of the allowance for loan losses for the quarter ended June 30, 2011.

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings.  The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB ASC Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties.  For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  The Company is evaluating the impact of ASU 2011-02 on its consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments to the Codification in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  The Company is evaluating the impact of ASU 2011-04 on its consolidated financial statements.

8

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU 2011-05 on the presentation of its consolidated financial statements.

Note 2. Stock Conversion

Franklin Financial completed its initial public stock offering in connection with the MHC’s conversion from the mutual to the stock form of organization on April 27, 2011. Franklin Financial sold a total of 13,886,250 shares of its common stock at an offering price of $10.00 per share.  This included 1,144,227 shares purchased by the Franklin Federal Savings Bank Employee Stock Ownership Plan (“ESOP”) funded by a loan from Franklin Financial.  In addition, Franklin Financial contributed $1.4 million in cash and 416,588 shares of common stock to The Franklin Federal Foundation, resulting in total shares outstanding of 14,302,838. Trading of Franklin Financial’s common stock commenced on the NASDAQ Global Market stock exchange on April 28, 2011 under the symbol “FRNK”.

During February 2011, Franklin Financial began receiving cash for subscriptions to purchase shares of its common stock.  Franklin Financial returned $131.0 million to subscribers whose orders were not filled on April 28, 2011.  Conversion costs of $2.6 million were deducted upon closing from the $138.9 million of aggregate proceeds.  The net proceeds of $136.3 million received in the offering and $4.2 million issued to The Franklin Federal Foundation are reflected in the Company’s stockholders’ equity in the June 30, 2011 unaudited consolidated statement of financial condition.

Note 3. Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at June 30, 2011 and September 30, 2010 are summarized as follows:

	June 30, 2011
(Dollars in thousands)	Adjusted amortized cost		OTTI recognized in AOCI		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Available for sale:
U.S. government and federal agencies	$	12,500	$	-	$	12,500	$	4	$	12	$	12,492
States and political subdivisions		18,549		-		18,549		302		590		18,261
Agency mortgage-backed securities		26,306		-		26,306		1,299		51		27,554
Agency collateralized mortgage obligations		203,695		-		203,695		2,241		376		205,560
Corporate equity securities		25,720		-		25,720		1,131		1,598		25,253
Corporate debt securities		112,234		1,477		113,711		5,548		408		118,851
Total	$	399,004	$	1,477	$	400,481	$	10,525	$	3,035	$	407,971

	September 30, 2010
(Dollars in thousands)	Adjusted amortized cost		OTTI recognized in AOCI		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Available for sale:
States and political subdivisions	$	20,066	$	-	$	20,066	$	774	$	-	$	20,840
Agency mortgage-backed securities		27,017		-		27,017		1,655		-		28,672
Agency collateralized mortgage obligations		83,520		-		83,520		2,120		573		85,067
Corporate equity securities		23,846		-		23,846		603		1,636		22,813
Corporate debt securities		112,077		2,508		114,585		5,846		1,180		119,251
Total	$	266,526	$	2,508	$	269,034	$	10,998	$	3,389	$	276,643

9

	June 30, 2011
(Dollars in thousands)	Adjusted amortized cost		OTTI recognized in AOCI		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held to maturity:
Agency mortgage-backed securities	$	5,720	$	-	$	5,720	$	175	$	-	$	5,895
Agency collateralized mortgage obligations		6,883		-		6,883		649		1		7,531
Non-agency collateralized mortgage obligations		16,862		776		17,638		1,034		4,339		14,333
Total	$	29,465	$	776	$	30,241	$	1,858	$	4,340	$	27,759

	September 30, 2010
(Dollars in thousands)	Adjusted amortized cost		OTTI recognized in AOCI		Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held to maturity:
Agency mortgage-backed securities	$	6,343	$	-	$	6,343	$	154	$	4	$	6,493
Agency collateralized mortgage obligations		8,271		-		8,271		883		1		9,153
Non-agency collateralized mortgage obligations		20,904		988		21,892		1,450		5,491		17,851
Total	$	35,518	$	988	$	36,506	$	2,487	$	5,496	$	33,497

The amortized cost and estimated fair value of securities at June 30, 2011, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

	Available for sale				Held to maturity
	Amortized		Estimated fair		Amortized		Estimated fair
(Dollars in thousands)	cost		value		cost		value
Non-mortgage debt securities:
Due in one year or less	$	9,021	$	9,150	$	-	$	-
Due after one year through five years		53,614		56,047		-		-
Due after five years through ten years		34,175		36,349		-		-
Due after ten years		47,950		48,058		-		-
						-		-
Total non-mortgage debt securities		144,760		149,604
Mortgage-backed securities		26,306		27,554		5,720		5,895
Collateralized mortgage obligations		203,695		205,560		24,521		21,864
Corporate equity securities		25,720		25,253		-		-
Total securities	$	400,481	$	407,971	$	30,241	$	27,759

10

The following tables present information regarding temporarily impaired securities as of June 30, 2011 and September 30, 2010:
 

	June 30, 2011
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	fair		unrealized		fair		unrealized		fair		unrealized
(Dollars in thousands)	value		losses		value		losses		value		losses
Available for sale:
U.S. government and federal agencies	$	9,991	$	12	$	-	$	-	$	9,991	$	12
States and political subdivisions		2,010		590		-		-		2,010		590
Agency mortgage-backed securities		5,200		51		-		-		5,200		51
Agency collateralized mortgage obligations		40,941		350		3,967		26		44,908		376
Corporate equity securities		11,508		1,598		-		-		11,508		1,598
Corporate debt securities		5,872		198		11,789		210		17,661		408
Total available for sale		75,522		2,799		15,756		236		91,278		3,035
Held to maturity:
Agency collateralized mortgage obligations		-		-		122		1		122		1
Non-agency collateralized mortgage obligations		1,312		433		10,461		3,906		11,773		4,339
Total held to maturity		1,312		433		10,583		3,907		11,895		4,340
Total temporarily impaired securities	$	76,834	$	3,232	$	26,339	$	4,143	$	103,173	$	7,375

	September 30, 2010
	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	fair		unrealized		fair		unrealized		fair		unrealized
(Dollars in thousands)	value		losses		value		losses		value		losses
Available for sale:
Agency collateralized mortgage obligations	$	26,492	$	573	$	-	$	-	$	26,492	$	573
Corporate equity securities		15,366		1,617		3,512		19		18,878		1,636
Corporate debt securities		-		-		27,820		1,180		27,820		1,180
Total available for sale		41,858		2,190		31,332		1,199		73,190		3,389
Held to maturity:
Agency mortgage-backed securities		592		4		-		-		592		4
Agency collateralized mortgage obligations		-		-		138		1		138		1
Non-agency collateralized mortgage obligations		5,448		2,607		8,686		2,884		14,134		5,491
Total held to maturity		6,040		2,611		8,824		2,885		14,864		5,496
Total temporarily impaired securities	$	47,898	$	4,801	$	40,156	$	4,084	$	88,054	$	8,885

The Company’s securities portfolio consists of investments in various debt and equity securities as permitted by OTS regulations, including mortgage-backed securities, collateralized mortgage obligations, government agency bonds, state and local government obligations, corporate debt obligations, and common stock of various companies.

During the three months ended June 30, 2011, the Company had no gains or losses on sales of securities available for sale compared to gross gains of $36,000 and no losses for the three months ended June 30, 2010.  During the nine months ended June 30, 2011 and 2010, the Company recognized gross gains on sales of securities available for sale of $705,000 and $2.0 million and gross losses of $440,000 and $0, respectively.

The Company performs an other-than-temporary impairment analysis of the securities portfolio on a quarterly basis. The determination of whether a security is other-than-temporarily impaired is highly subjective and requires a significant amount of judgment. In evaluating for other-than-temporary impairment, management considers the duration and severity of declines in fair value, the financial condition of the issuers of each security, as well as whether it is more likely than not that the Company will be required to sell these securities prior to recovery, which may be maturity, based on market conditions and cash flow requirements. In performing its analysis for debt securities, the Company’s consideration of the financial condition of the issuer of each security was focused on the issuer’s ability to continue to perform on its debt obligations, including any concerns about the issuer’s ability to continue as a going concern. In performing its analysis for equity securities, the Company’s analysis of the financial condition of the issuers of each security included the issuer’s economic outlook, distressed capital raises, large write-downs causing dilution of capital, distressed dividend cuts, discontinuation of significant segments, replacement of key executives, and the existence of a pattern of significant operating losses. In addition to the financial condition of each issuer, the Company considered the severity and duration of impairments and the likelihood that the fair value of securities would recover over a reasonable time horizon.

11

The Company recognized total impairment charges in earnings of $1.3 million and $985,000 during the three months ended June 30, 2011 and 2010, respectively, and $1.9 million and $3.5 million during the nine months ended June 30, 2011 and 2010, respectively, on debt and equity securities.

The table below provides a cumulative rollforward of credit losses recognized in earnings for debt securities for which a portion of OTTI is recognized in AOCI:

(Dollars in thousands)
Balance of credit losses at September 30, 2010	$	526
Additions for credit losses on securities not previously recognized		84
Additional credit losses on securities previously recognized as impaired		2
Reductions for increases in expected cash flows		(209	)
Balance of credit losses at June 30, 2011	$	403

To determine the amount of other-than-temporary impairment losses that are related to credit versus the portion related to other factors, management compares the current period estimate of future cash flows to the prior period estimated future cash flows, both discounted at each security’s yield at purchase.  Any other-than-temporary impairment recognized in excess of the difference of these two values is deemed to be related to factors other than credit.

Unrealized losses in the remainder of the Company’s portfolio of collateralized mortgage obligations, mortgage-backed securities, securities of states and political subdivisions, and corporate debt securities were related to eighty-one securities and were caused by increases in market interest rates, spread volatility, or other factors that management deems to be temporary, and because management believes that it is not more likely than not that the Company will be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

Unrealized losses in the remainder of the Company’s portfolio of equity securities were related to fourteen securities and were considered temporary. Each of these securities has been in an unrealized loss position for fewer than twelve months, and because management believes that it is not more likely than not that the Company will be required to sell these equity positions for a reasonable period of time sufficient for a recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

The Company pledges certain securities as collateral for its FHLB borrowings.  Securities collateralizing FHLB borrowings had a carrying value of $262.9 million at June 30, 2011.

Note 4. Loans

Loans held for investment at June 30, 2011 and September 30, 2010 are summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2011		2010
Loans
One-to four-family	$	118,426	$	128,696
Multi-family		80,817		78,183
Nonresidential		192,553		173,403
Construction		37,447		40,294
Land and land development		68,000		70,482
Other		677		2,997
Total loans		497,920		494,055
Deferred loan fees		3,398		3,601
Loans, net of deferred loan fees		494,522		490,454
Allowance for loan losses		13,432		13,419
Net loans	$	481,090	$	477,035

12

The Company pledges certain loans as collateral for its FHLB borrowings.  Loans collateralizing FHLB borrowings had a carrying value of $254.9 million at June 30, 2011.

Note 5. Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate to provide for our estimate of probable credit losses inherent in the loan portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. While the Company uses the best information available to make its evaluation, future adjustments may be necessary if there are significant changes in conditions.

The allowance is comprised of two components: (1) a general allowance related to loans both collectively and individually evaluated and (2) a specific allowance related to loans individually evaluated and identified as impaired. A summary of the methodology the Company employs on a quarterly basis related to each of these components to estimate the allowance for loan losses is as follows.

Credit Rating Process

As discussed in note 1 above, the Company's methodology for estimating the allowance for loan losses incorporates the results of periodic loan evaluations for certain non-homogeneous loans, including non-homogenous loans in lending relationships greater than $2.0 million and any individual loan greater than $1.0 million.  The Company's loan grading system analyzes various risk characteristics of each loan type when considering loan quality, including loan-to-value ratios, current real estate market conditions, location and appearance of properties, income and net worth of any guarantors, and rental stability and cash flows of income-producing nonresidential real estate loans and multi-family loans.  The credit rating process results in one of the following classifications for each loan in order of increasingly adverse classification: Excellent, Good, Satisfactory, Watch List, Special Mention, Substandard, and Impaired.  The Company continually monitors the credit quality of loans in the portfolio through communications with borrowers as well as review of delinquency and other reports that provide information about credit quality.  Credit ratings are updated at least annually with more frequent updates performed for problem loans or when management becomes aware of circumstances related to a particular loan that could materially impact the loan’s credit rating.  Management maintains a classified loan list consisting of watch list loans along with loans rated special mention or lower that is reviewed on a monthly basis by the Company’s Internal Asset Review Committee.

General Allowance

To determine the general allowance, the Company segregates loans by portfolio segment as defined by loan type.  Loans within each segment are then further segregated by credit rating.  The Company determines a base reserve rate for each portfolio segment by calculating the average charge-off rate for each segment over a historical time period determined by management, typically one to three years.  The base reserve rate is then adjusted based on qualitative factors that management believes could result in future loan losses differing from historical experience.  Such qualitative factors can include delinquency rates, loan-to-value ratios, and local economic and real estate conditions.  The base reserve rate plus these qualitative adjustments results in a total reserve rate for each portfolio segment.  A multiple of the total reserve rate for each segment is then applied to the balance of loans that are in loan relationships greater than $2.0 million in each segment based on credit rating.  Loans rated Excellent have no associated allowance.  No loans were rated Excellent at June 30, 2011 or September 30, 2010.  Loans rated Good are multiplied by 10% of the total reserve rate, Satisfactory loans are multiplied by 100% of the total reserve rate, and loans rated Watch List, Special Mention, and Substandard are multiplied by 150%, 200%, and 300% of the total reserve rate, respectively.  This tiered structure is used by the Company to account for a higher probability of loss for loans with increasingly adverse credit ratings.

13

Specific Allowance for Impaired Loans

Impaired loans include loans identified as impaired through our credit rating system as well as loans modified in a troubled debt restructuring.  Loans are identified as impaired when management believes, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the underlying loan agreement.  Once a loan is identified as impaired, management determines a specific allowance by comparing the outstanding loan balance to net realizable value, which is equal to fair value less estimated costs to sell.  The amount of any allowance recognized is the amount by which the loan balance exceeds the net realizable value.  If the net realizable value exceeds the loan balance, no allowance is recorded.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Of the $40.1 million of loans classified as impaired at June 30, 2011, $38.6 million were considered “collateral dependent” and evaluated using the fair value of collateral method and $1.5 million were evaluated using discounted estimated cash flows.  See note 10 for further discussion of the Company's method for estimating fair value on impaired loans.

Activity in the allowance for loan losses by portfolio segment is summarized as follows:

(Dollars in thousands)	One-to four-family			Multi- family		Non- residential			Construction			Land and land development			Other			Total
Balance, September 30, 2010	$	1,260		$	1,177	$	2,888		$	2,700		$	5,372		$	22		$	13,419
Provision		570			1,001		629			(54	)		403			(12	)		2,537
Recoveries		1			-		25			-			-			-			26
Charge-offs		(519	)		-		(262	)		(933	)		(836	)		-			(2,550	)
Balance, June 30, 2011	$	1,312		$	2,178	$	3,280		$	1,713		$	4,939		$	10		$	13,432

(Dollars in thousands)	One-to four-family			Multi- family		Non- residential			Construction			Land and land development			Other			Total
Balance, September 30, 2009	$	1,046		$	620	$	1,306		$	2,729		$	2,781		$	42		$	8,524
Provision		(6	)		357		1,306			596			1,561			(52	)		3,762
Recoveries		3			-		-			66			-			75			144
Charge-offs		(195	)		-		(203	)		(353	)		(812	)		-			(1,563	)
Balance, June 30, 2010	$	848		$	977	$	2,409		$	3,038		$	3,530		$	65		$	10,867

Details of the allowance for loan losses by portfolio segment and impairment methodology at June 30, 2011 and September 30, 2010 are as follows:
 

	June 30, 2011
	General Allowance				Specific Allowance				Total		Total					Allowance as % of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	113,228	$	1,162	$	5,198	$	150	$	118,426	$	1,312		1.11	%		9.8	%
Multi-family		80,817		2,178		-		-		80,817		2,178		2.69	%		16.2
Nonresidential		181,769		3,280		10,784		-		192,553		3,280		1.70	%		24.4
Construction		37,357		1,685		90		28		37,447		1,713		4.57	%		12.7
Land and land development		43,961		4,882		24,039		57		68,000		4,939		7.26	%		36.8
Other		677		10		-		-		677		10		1.40	%		0.1
Total allowance	$	457,809	$	13,197	$	40,111	$	235	$	497,920	$	13,432		2.70	%		100.0	%

	September 30, 2010
																Allowance as
	General Allowance				Specific Allowance				Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	127,378	$	799	$	1,318	$	461	$	128,696	$	1,260		0.98	%		9.4	%
Multi-family		78,183		1,177		-		-		78,183		1,177		1.51	%		8.8
Nonresidential		171,143		2,673		2,260		215		173,403		2,888		1.67	%		21.5
Construction		37,770		1,818		2,524		882		40,294		2,700		6.70	%		20.1
Land and land development		53,921		4,458		16,561		914		70,482		5,372		7.62	%		40.0
Other		2,997		22		-		-		2,997		22		0.72	%		0.2
Total allowance	$	471,392	$	10,947	$	22,663	$	2,472	$	494,055	$	13,419		2.72	%		100.0	%

14

Details regarding classified loans and impaired loans at June 30, 2011 and September 30, 2010 are as follows:

	June 30,		September 30,
(Dollars in thousands)	2011		2010
Special mention
One-to four-family	$	4,215	$	7,189
Nonresidential		-		6,579
Construction		2,930		422
Land and land development		7,946		7,875
Total special mention loans		15,091		22,065
Substandard
One-to four-family		4,913		3,823
Multi-family		12,773		13,539
Nonresidential		3,159		6,018
Construction		166		166
Land and land development		4,051		10,270
Total substandard loans		25,062		33,816
Impaired
One-to four-family		5,198		1,318
Nonresidential		10,784		2,260
Construction		90		2,524
Land and land development		24,039		16,561
Total impaired loans		40,111		22,663
Total rated loans	$	80,264	$	78,544

Included in impaired loans are troubled debt restructurings of $10.6 million and $4.3 million at June 30, 2011 and September 30, 2010, respectively, that had related allowance balances of $114,000 and $281,000, respectively.

During the nine months ended June 30, 2011, the Company modified three loans in troubled debt restructurings, including one land and land development loan with an outstanding balance of $760,000, one construction loan with an outstanding balance of $90,000, and one nonresidential loan with a balance of $5.5 million.  The restructuring of the land and land development loan consisted of a reduction in the monthly principal payment requirement to accommodate cash flow difficulties being experienced by the borrower.  This loan had previously been identified as impaired and is considered collateral dependent; therefore, there was no effect on the consolidated financial statements as a result of this modification.  This loan remained on accrual status as the borrower was current at June 30, 2011.  All other loans modified in troubled debt restructurings were classified as non-accrual at June 30, 2011.  The construction loan was previously classified as impaired and considered collateral-dependent, and the restructuring consisted of forgiving past-due principal amounts and eliminating a monthly principal payment requirement.  Since the loan was already classified as impaired, there was no effect on the consolidated financial statements as a result of this modification.  The nonresidential loan was already on nonaccrual status at the time of modification, and the restructuring consisted of a reduction in near-term principal payment requirements as well as forgiving unpaid late charges. Interest recognized on a cash basis on restructured loans was not material.

During the nine months ended June 30, 2010, the Company modified one land and land development loan in a troubled debt restructuring.  The restructuring consisted of a reduction in the stated interest rate and capitalization of past-due amounts to accommodate cash flow difficulties being experienced by the borrower.  As a result of the restructuring, the loan was classified as impaired and has since had a specific allowance established using the present value of estimated cash flows.

15

During the nine months ended June 30, 2011, one nonresidential loan with a balance of $2.3 million modified in a troubled debt restructuring in the previous twelve months, which was classified as impaired and on nonaccrual status, remained in default on its restructured payments.

Loans and the related allowance for loan losses summarized by loan type and credit rating at June 30, 2011 are as follows:

(Dollars in thousands)	Total		Good		Satisfactory		Watch List		Special Mention		Substandard		Impaired		Not Rated
Loans
One-to four-family	$	118,426	$	168	$	26,376	$	-	$	3,638	$	644	$	5,198	$	82,402
Multi-family		80,817		10,652		47,253		-		-		12,773		-		10,139
Nonresidential		192,553		51,857		112,582		-		-		3,159		10,784		14,171
Construction		37,447		11,390		11,406		-		2,226		166		90		12,169
Land and land development		68,000		-		30,903		-		7,946		3,783		24,039		1,329
Other		677		-		-		-		-		-		-		677
Total loans	$	497,920	$	74,067	$	228,520	$	-	$	13,810	$	20,525	$	40,111	$	120,887

(Dollars in thousands)	Total		Good		Satisfactory		Watch List		Special Mention		Substandard		Impaired		Not Rated
Allowance for loan losses
One-to four-family	$	1,312	$	-	$	390	$	-	$	108	$	29	$	150	$	635
Multi-family		2,178		25		1,063		-		-		862		-		228
Nonresidential		3,280		119		2,612		-		-		220		-		329
Construction		1,713		65		648		-		253		28		28		691
Land and land development		4,939		-		2,537		-		1,304		932		57		109
Other		10		-		-		-		-		-		-		10
Total allowance for loans losses	$	13,432	$	209	$	7,250	$	-	$	1,665	$	2,071	$	235	$	2,002

Details regarding the delinquency status of the Company’s loan portfolio at June 30, 2011 are as follows:

(Dollars in thousands)	Total		Current		31-60 Days		61-90 Days		91-120 Days		121-150 Days		151-180 Days		180+ Days
One-to four-family	$	118,426	$	108,916	$	2,108	$	1,016	$	367	$	2,354	$	2,830	$	835
Multi-family		80,817		70,544		1,269		9,004		-		-		-		-
Nonresidential		192,553		185,460		47		2,066		-		-		2,720		2,260
Construction		37,447		37,191		90		-		-		-		-		166
Land and land development		68,000		52,957		18		3,960		-		-		-		11,065
Other		677		677		-		-		-		-		-		-
Total	$	497,920	$	455,745	$	3,532	$	16,046	$	367	$	2,354	$	5,550	$	14,326

The following is a summary of information pertaining to impaired and non-accrual loans at June 30, 2011 and September 30, 2010:

	June 30, 2011				September 30, 2010
(Dollars in thousands)	Amount		Allowance		Amount		Allowance
Impaired loans with a specific allowance
One-to four-family	$	5,071	$	150	$	907	$	461
Nonresidential		-		-		2,260		215
Construction		90		28		2,324		882
Land and land development		1,527		57		4,259		914
Total impaired loans with a specific allowance	$	6,688	$	235	$	9,750	$	2,472
Impaired loans for which no specific allowance is necessary
One-to four-family	$	127	$	-	$	410	$	-
Nonresidential		10,784		-		-		-
Construction		-		-		201		-
Land and land development		22,513		-		12,302		-
Total impaired loans for which no specific allowance is necessary	$	33,424	$	-	$	12,913	$	-

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(Dollars in thousands)	June 30, 2011		September 30, 2010
Nonaccrual loans
One-to four-family	$	10,200	$	4,576
Nonresidential		13,504		7,830
Construction		255		1,470
Land and land development		12,660		14,667
Total non-accrual loans	$	36,619	$	28,543
Loans past due ninety days or more and still accruing
Construction	$	-	$	90
Land and land development		-		1,140
Total loans past due ninety days or more and still accruing	$	-	$	1,230

The weighted average balance of impaired loans was $34.8 million and $17.0 million for the nine months ended June 30, 2011 and 2010, respectively.  Accrued interest on impaired loans was not material at June 30, 2011 or September 30, 2010.  Interest recognized on a cash basis on impaired loans was $249,000 and $129,000 for the three months ended June 30, 2011 and 2010, respectively, and $647,000 and $852,000 for the nine months ended June 30, 2011 and 2010, respectively.   Interest recognized on a cash basis on all nonaccrual loans was $342,000 and $172,000 for the three months ended June 30, 2011 and 2010, respectively, and $1.1 million and $1.3 million for the nine months ended June 30, 2011 and 2010, respectively.

Note 6. Real Estate Owned

Real estate owned at June 30, 2011 and September 30, 2010 is summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2011		2010
Real estate owned
Real estate held for sale	$	2,142	$	3,240
Real estate held for development and sale		7,429		8,341
Total real estate owned	$	9,571	$	11,581

During the nine months ended June 30, 2011, the Company foreclosed on several properties securing loans that had been classified as impaired.  These foreclosures resulted in additions of $2.5 million to real estate owned, including $881,000 classified as held-for-sale comprised of six non-owner-occupied single-family homes and one speculative home, and $1.6 million classified as held-for-development and sale consisting of 23 developed lots for construction of single-family homes and undeveloped land intended for residential development.  These foreclosures were more than offset by sales of real estate owned totaling $3.6 million.  In addition, the Company recognized impairment charges on real estate owned of $839,000 for the nine months ended June 30, 2011.  These charges were partially the result of updated appraisals on various properties but primarily related to a $532,000 impairment charge taken on a retail shopping center for which the Company had originally estimated net realizable value based upon an “upon stabilization” appraisal value that assumed the leasing of vacant units.  However, after the Company was unable to lease-up the property within a reasonable time frame, management decided that the use of an “as-is” appraisal was more appropriate.  No impairment charges were recognized in the nine months ended June 30, 2010.

Note 7. Earnings per Share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The Company had no dilutive potential common shares for the three and nine months ended June 30, 2011. Because the mutual to stock conversion was not completed until April 27, 2011, per-share earnings data is not presented for the three months and nine months ended June 30, 2010.

17

	Three months ended			Nine months ended
(Amounts in thousands, except per share data)	June 30, 2011			June 30, 2011
Numerator:
Net income (loss) available to common stockholders	$	(3,275	)	$	494
Denominator:
Weighted-average common shares outstanding		13,166			13,166
Effect of dilutive securities		-			-
Weighted-average common shares outstanding - assuming dilution		13,166			13,166
Earnings (loss) per common share	$	(0.25	)	$	0.04
Earnings (loss) per common share - assuming dilution	$	(0.25	)	$	0.04

Note 8. Employee Benefit Plans

Pension Plan

The Bank has a noncontributory defined benefit pension plan (the Pension Plan) for substantially all of the Bank’s employees. Retirement benefits under this plan are generally based on the employee’s years of service and compensation during the five years of highest compensation in the ten years immediately preceding retirement.

The Pension Plan assets are held in a trust fund by the plan trustee. The trust agreement under which assets of the Pension Plan are held is a part of the Virginia Bankers Association Master Defined Benefit Pension Plan (the “Plan”). The Plan’s administrative trustee is appointed by the board of directors of the Virginia Bankers Association Benefits Corporation. At June 30, 2011, Reliance Trust Company was investment manager for the Plan. Contributions are made to the Pension Plan, at management’s discretion, subject to meeting minimum funding requirements, up to the maximum amount allowed under the Employee Retirement Income Security Act of 1974 (ERISA), based upon the actuarially determined amount necessary for meeting plan obligations. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned by employees in the future.

In July 2011, the Bank froze the Plan to new participants effective August 1, 2011.  Employees hired after July 31, 2011 are not eligible to participate in the Plan.

The Company uses a September 30 measurement date for the Pension Plan.

Components of net periodic benefit cost for the three and nine months ended June 30, 2011 and 2010 are as follows:

	Three months ended June 30,						Nine months ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Service cost	$	143		$	159		$	429		$	510
Interest cost		161			199			485			636
Expected return on plan assets		(217	)		(260	)		(652	)		(833	)
Recognized net actuarial loss		17			25			49			78
Net periodic benefit cost	$	104		$	123		$	311		$	391

The net periodic benefit cost is included in personnel expense in the consolidated statements of earnings.

18

Employee Stock Ownership Plan

In connection with the stock conversion discussed in note 2 above, the Bank established an employee stock ownership plan (“ESOP”) for the benefit of all of its eligible employees.  Full-time employees of the Bank who have been credited with at least 1,000 hours of service during a 12-month period and who have attained age 21 are eligible to participate in the ESOP.  It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to Franklin Financial over a period of 20 years.

Unallocated ESOP shares are not considered outstanding and are shown as a reduction of stockholders’ equity. Dividends on unallocated ESOP shares, if paid, will be considered to be compensation expense.  The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they become committed to be released.  To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential will be recognized in stockholders’ equity.  The Company will receive a tax deduction equal to the cost of the shares released.  As the ESOP is internally leveraged, the loan receivable by Franklin Financial from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
 

Compensation cost related to the ESOP for the three and nine months ended June 30, 2011 was $176,000.  The fair value of the unearned ESOP shares, using the closing quoted market price per share of the Company’s stock, was $13.6 million at June 30, 2011.  A summary of the ESOP share allocation as of June 30, 2011 is as follows:

Shares allocated at April 27, 2011	-
Shares allocated during the current fiscal year	14,764
Shares distributed during the current fiscal year	-
Allocated shares held by the ESOP trust at period end	14,764
Unallocated shares	1,129,463
Total ESOP shares	1,144,227

Stock-Based Deferral Plan

In connection with the stock conversion discussed in note 2 above, the Company adopted a stock-based deferral plan whereby certain officers and directors could use funds from previously existing nonqualified deferred compensation plans to invest in stock of the Company.  The Company established a trust to hold shares purchased through the stock-based deferral plan, and the trust purchased 245,783 shares in the conversion.  The trust qualifies as a rabbi trust that will be settled upon the retirement of participating officers and directors through the distribution of shares held by the trust.  As a result, shares held by the trust are accounted for in a manner similar to treasury stock, and the deferred compensation balance is recorded as a component of additional paid-in capital on the Company’s balance sheet in accordance with GAAP.

Note 9. Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet its investment and funding needs and the financing needs of its customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized or disclosed in the consolidated financial statements. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit and collateral policies in making commitments to extend credit and standby letters of credit as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since some commitments may expire without being funded, the commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The total amount of loan commitments was $91.5 million and $130.8 million at June 30, 2011 and September 30, 2010, respectively.  At June 30, 2011, this included $22.8 million of commitments to fund fixed-rate loans with a weighted-average interest rate of 5.9%.

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Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk and recourse provisions involved in issuing letters of credit are essentially the same as those involved in extending loans to customers, and the estimated fair value of these letters of credit, which is included in accrued expenses and other liabilities, was not material at June 30, 2011 and September 30, 2010, respectively. The amount of standby letters of credit was $1.0 million and $1.1 million at June 30, 2011 and September 30, 2010. The Company believes it is reasonably possible that it will have to perform on four standby letters of credit totaling $667,000 due to the default of one borrower. The letters of credit are related to a residential development in the Richmond MSA. However, the Company expects that any amounts funded on these letters of credit will add to the value of the related projects and will ultimately be recovered from sale of the development. The Company believes that the likelihood of having to perform on additional standby letters of credit is remote based on the financial condition of the guarantors and the Company’s historical experience.

At June 30, 2011, the Company had rate lock commitments to originate mortgage loans amounting to $3.1 million and mortgage loans held for sale of $1.2 million compared to $5.5 million and $2.8 million at September 30, 2010, respectively. At June 30, 2011, the Company had corresponding commitments outstanding of $4.3 million to sell loans on a best-efforts basis compared to $8.3 million at September 30, 2010. These commitments to sell loans are designed to eliminate the Company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

Note 10. Fair Value Measurements

The fair value of a financial instrument is the current amount that would be exchanged between willing parties in an orderly market, other than in a forced liquidation. Fair value is best determined based on quoted market prices. In cases where quoted market prices are not available or quoted prices are reflective of a disorderly market, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instruments. The Codification (Section 825-10-50) excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Under current fair value guidance, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. These levels are:
 

• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

• Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

• Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and, based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

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Securities available for sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using a combination of methods, including model pricing based on spreads obtained from new market issues of similar securities, dealer quotes, and trade prices. Level 1 securities include common equity securities traded on nationally recognized securities exchanges. Level 2 securities include mortgage-backed securities and collateralized mortgage obligations issued by government sponsored entities, municipal bonds, and corporate debt securities.

Securities held to maturity: Securities held-to-maturity are recorded at fair value on a non-recurring basis. A held-to-maturity security’s amortized cost is adjusted only in the event that a decline in fair value is deemed to be other-than-temporary. At June 30, 2011, certain held-to-maturity securities were deemed to be other-than-temporarily impaired. These securities are classified as Level 3 securities and were written down to fair value at the balance sheet date determined by discounting estimated future cash flows. Management believes that classification and valuation of these securities, consisting of private-label asset-backed securities, as Level 3 assets was necessary as the market for such securities severely contracted beginning in 2008 and became and has remained inactive since that time. While the market for highly-rated private-label securities with low delinquency levels and high subordination saw significant price improvement in the second half of fiscal 2010, the market for securities similar to those recognized as other-than-temporarily impaired, which had low ratings, high delinquency levels, and low subordination levels, remained inactive. As a result, management does not believe that quoted prices on similar assets were representative of fair value as there were few transactions, and transactions were often executed at distressed prices. Management estimates and discounts future cash flows based on a combination of observable and unobservable inputs, including a security’s subordination percentage, projected delinquency rates, and estimated loss severity given default. These estimates are discounted using observable current market rates for securities with similar credit quality.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary-market prices. If the fair value of a loan is below its carrying value, a lower-of-cost-or-market adjustment is made to reduce the basis of the loan. If fair value exceeds carrying value, no adjustment is made. As such, the Company classifies loans held for sale as Level 2 assets and makes fair value adjustments on a non-recurring basis.

Impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and, if necessary, a specific allowance for loan losses is established. Loans for which it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management writes the loan down to net realizable value, which is equal to fair value less estimated costs to sell, if the loan balance exceeds net realizable value. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. For loans deemed to be “collateral dependent,” fair value is estimated using the appraised value of the related collateral. At the time the loan is identified as impaired, the Company determines if an updated appraisal is needed and orders an appraisal if necessary. Subsequent to the initial measurement of impairment, management considers the need to order updated appraisals each quarter if changes in market conditions lead management to believe that the value of the collateral may have changed materially. Impaired loans where a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or an appraised value less than one year old estimated utilizing information gathered from an active market, the Company classifies the impaired loan as a Level 2 asset. When an appraised value is not available, is greater than one year old, or if management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the impaired loan as a Level 3 asset. Additionally, if the fair value of an impaired loan is determined using an appraisal less than one year old that utilizes information gathered from an inactive market or contains material adjustments based upon unobservable market data, the Company classifies the impaired loan as a Level 3 asset. Impaired loans evaluated using discounted estimated cash flows are classified as Level 3 assets.

21

Real estate owned: Real estate owned (“REO”) is adjusted to net realizable value, which is equal to fair value less costs to sell, upon foreclosure. Subsequently, REO is adjusted on a non-recurring basis to the lower of carrying value or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the REO. When the fair value of REO is based on an observable market price or an appraised value less than one year old estimated utilizing information gathered from an active market, the Company classifies the REO as a Level 2 asset. When an appraised value is not available, is greater than one year old, or if management determines the fair value of the REO is further impaired below the appraised value and there is no observable market price, the Company classifies the REO as a Level 3 asset. Additionally, if the fair value of the REO is determined using an appraisal less than one year old that utilizes information gathered from an inactive market or contains material adjustments based upon unobservable market data, the Company classifies the REO as a Level 3 asset.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 are summarized below:

	Total		Level 1		Level 2		Level 3
Securities available for sale
U.S. government and federal agencies	$	12,492	$	-	$	12,492	$	-
States and political subdivisions		18,261		-		16,251		2,010
Agency mortgage-backed securities		27,554		-		27,554		-
Agency collateralized mortgage obligations		205,560		-		205,560		-
Corporate equity securities		25,253		25,253		-		-
Corporate debt securities		118,851		-		113,918		4,933
Total assets at fair value	$	407,971	$	25,253	$	375,775	$	6,943

A rollforward of securities classified as Level 3 measured at fair value on a recurring basis from the prior quarter end is as follows:

Balance of Level 3 assets measured on a recurring basis at March 31, 2011	$	6,992
Principal payments in period		(136	)
Accretion (amortization) of premiums or discounts		(7	)
Increase (decrease) in unrealized gains or losses included in accumulated other comprehensive income		94
Balance of Level 3 assets measured on a recurring basis at June 30, 2011	$	6,943

Level 3 securities measured at fair value on a recurring basis at June 30, 2011 consist of one municipal bond and one corporate debt security for which the Company was not able to obtain dealer quotes due to lack of trading activity. These two securities are measured at fair value based on the observable market price of similar securities adjusted for certain unobservable inputs necessary to account for aspects specific to the securities owned by the Company.

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a non-recurring basis as of June 30, 2011 are included in the table below:

	Total		Level 1		Level 2		Level 3
Non-agency collateralized mortgage obligations	$	388	$	-	$	-	$	388
Impaired loans
One-to four-family		4,921		-		4,541		380
Nonresidential		934		-		934		-
Construction		62		-		-		62
Land and land development		2,228		-		757		1,471
Real estate owned		835		-		232		603
Total assets at fair value	$	9,368	$	-	$	6,464	$	2,904

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The following methods and assumptions were used to estimate fair value of other classes of financial instruments:

Cash and cash equivalents: The carrying amount is a reasonable estimate of fair value.

Loans held for investment: The fair value of loans held for investment is determined by discounting the future cash flows using the rates currently offered for loans of similar remaining maturities. Estimates of future cash flows are based upon current account balances, contractual maturities, prepayment assumptions, and repricing schedules.

Federal Home Loan Bank stock: The carrying amount of restricted stock approximates the fair value based on the redemption provisions.

Accrued interest receivable: The carrying amount is a reasonable estimate of fair value.

Deposits: The carrying values of passbook savings, money market savings, and money market checking accounts are reasonable estimates of fair value. The fair value of fixed-maturity certificates of deposit is determined by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

FHLB borrowings: The fair values of FHLB borrowings are determined by discounting the future cash flows using rates currently offered for borrowings with similar terms.

Accrued interest payable: The carrying amount is a reasonable estimate of fair value.

Advance payments by borrowers for property taxes and insurance: The carrying amount is a reasonable estimate of fair value.

Commitments to extend credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The majority of the Company’s commitments to extend credit carry current interest rates if converted to loans.

Standby letters of credit: The fair value of standby letters of credit is based on fees the Company would have to pay to have another entity assume its obligation under the outstanding arrangement.

The estimated fair values of the Company’s financial instruments at June 30, 2011 and September 30, 2010 are as follows:

	June 30, 2011				September 30, 2010
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	115,952	$	115,952	$	97,909	$	97,909
Securities available for sale		407,971		407,971		276,643		276,643
Securities held to maturity		29,465		27,759		35,518		33,497
Net loans		481,090		490,882		477,035		478,892
Loans held for sale		1,243		1,243		2,781		2,781
FHLB stock		11,362		11,362		12,542		12,542
Accrued interest receivable		4,872		4,872		4,722		4,722
Financial liabilities:
Deposits		663,079		642,457		647,127		636,612
FHLB borrowings		190,000		214,827		190,000		221,776
Accrued interest payable		913		913		926		926
Advance payments by borrowers for taxes and insurance		1,663		1,663		2,340		2,340
Off-balance-sheet financial instruments:
Commitments to extend credit		91,492		-		130,815		-
Standby letters of credit		1,032		4		1,063		9

23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to our actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• general economic conditions, either internationally, nationally, or in our primary market area, that are worse than expected;

• a continued decline in real estate values;

• changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

• legislative, regulatory or supervisory changes that adversely affect our business;

• adverse changes in the securities markets; and

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

Additional factors that may affect our results are discussed beginning on page 12 of the Company’s prospectus, dated February 11, 2011 under the section titled “Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we assume no obligation and disclaim any obligation to update any forward-looking statements.

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.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, our regulator, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 5 of the notes to the unaudited consolidated financial statements.

24

Other-Than-Temporary Impairment. Investment securities are reviewed at each quarter-end reporting period to determine whether the fair value is below the current amortized cost. When the fair value of any of our investment securities has declined below its amortized cost, management is required to assess whether the decline is other than temporary. In making this assessment, we consider such factors as the type of investment, the length of time and extent to which the fair value has been below the carrying value, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment long enough to allow for any anticipated recovery. The decision to record a write-down, its amount and the period in which it is recorded could change if management’s assessment of the above factors were different. We do not record impairment write-downs on debt securities when impairment is due to changes in interest rates, since we have the intent and ability to realize the full value of the investments by holding them to maturity. Quoted market value is considered to be fair value for actively traded securities. For privately issued securities, and for thinly traded securities where market quotes are not available, we use estimation techniques to determine fair value. Estimation techniques used include discounted cash flows for debt securities. Additional information regarding our accounting for investment securities is included in note 3 to the notes to the unaudited consolidated financial statements.

Income Taxes. Management makes estimates and judgments to calculate certain tax liabilities and to determine the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. The Company also estimates a valuation allowance for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective.

In evaluating the recoverability of deferred tax assets, management considers all available positive and negative evidence, including past operating results, recent cumulative losses – both capital and operating – and the forecast of future taxable income – also both capital and operating. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require judgments about future taxable income and are consistent with the plans and estimates to manage the Company’s business. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Pension Plan. The Company has a noncontributory, defined benefit pension plan. This plan is accounted for under the provisions of ASC Topic 715: Compensation-Retirement Benefits, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. ASC Topic 715 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. Management must make certain estimates and assumptions when determining the projected benefit obligation. These estimates and assumptions include the expected return on plan assets, the rate of compensation increases over time, and the appropriate discount rate to be used in determining the present value of the obligation.

Comparison of Financial Condition at June 30, 2011 and September 30, 2010

Assets.Total assets at June 30, 2011 were $1.1 billion, an increase of $144.3 million, or 14.9%, from total assets of $971.1 million at September 30, 2010.

Cash and cash equivalents increased $18.0 million to $116.0 million at June 30, 2011 compared to $97.9 million at September 30, 2010, an increase of 18.4%. The increase in cash and cash equivalents was due to the receipt of $136.3 million in net proceeds from our mutual to stock conversion plus an increase in deposits of $16.0 million, or 2.5%. The foregoing increases in cash and cash equivalents were mostly offset by the purchase of agency CMOs for the purposes of meeting qualified thrift lender requirements and investing stock conversion proceeds until they can be effectively deployed in other areas.

25

Securities increased $125.3 million, or 40.1%, to $437.4 million at June 30, 2011 compared to $312.2 million at September 30, 2010. The increase was primarily the result of the investment of the net offering proceeds of $136.3 million from our mutual to stock conversion. The increase in securities included the purchase of $183.9 million of agency CMOs, $12.5 million of agency bonds, $20.1 million of corporate bonds, and $6.6 million of corporate equity securities, partially offset by $68.8 million of normal principal payments on mortgage-backed securities (“MBSs”) and CMOs, $8.2 million of sales of corporate bonds, $4.0 million of sales of corporate equity securities, and $12.2 million of corporate bond maturities.

Total loans, excluding loans held for sale, increased $3.9 million, or 0.8%, to $497.9 million at June 30, 2011 compared to $494.1 million at September 30, 2010. The increase was the net result of new loan originations partially offset by charge-offs of $2.5 million along with the repayment and refinancing of several loans due to the low interest rate environment. One- to four-family loans declined $10.3 million, construction loans declined $2.8 million, land and land development loans declined $2.5 million, and other loans declined $2.3 million. More than offsetting these decreases were net increases in nonresidential loans of $19.2 million and multi-family loans of $2.6 million.

Liabilities. Total liabilities at June 30, 2011 were $858.6 million compared to $844.3 million at September 30, 2010, an increase of $14.3 million, or 1.7%, as a result of a $16.0 million increase in deposit accounts, a $677,000 decrease in advance payments held in escrow for borrowers, and a $921,000 decrease in accrued expenses and other liabilities.

Total deposits increased $16.0 million, or 2.5%, to $663.1 million at June 30, 2011 compared to $647.1 million at September 30, 2010. The increase in deposits was due to a $4.6 million increase in money market savings and money market checking accounts and a $11.4 million increase in certificates of deposit.

FHLB borrowings were $190.0 million at June 30, 2011, unchanged from September 30, 2010.

Stockholders’ equity. Stockholders’ equity was $256.7 million at June 30, 2011, an increase of $129.9 million from September 30, 2010. The increase was primarily the result of the net proceeds received in our conversion from the mutual to stock form of organization as discussed in note 2 to the unaudited consolidated financial statements. In addition to the net proceeds from the stock offering, stockholders’ equity increased $494,000 due to net income recognized in retained earnings along with an increase of $273,000 in other accumulated comprehensive income.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and June 30, 2010

General. We had a net loss of $3.3 million for the three months ended June 30, 2011 compared to net income of $631,000 for the three months ended June 30, 2010. The net loss for the three months ended June 30, 2011 included the impact of the $5.6 million contribution made to The Franklin Federal Foundation ($1.4 million in cash and $4.2 million in stock) in connection with our mutual to stock conversion. Net income excluding the conversion-related charitable contribution and the related income tax benefit was $168,000, a $463,000, or 73.3%, decrease from the three months ended June 30, 2010. The decrease was primarily the net result of a $772,000 increase in net interest income, a $164,000 increase in the provision for loan losses, a $268,000 increase in other-than-temporary impairment charges on securities included in earnings, a $36,000 decrease in gains on sales of securities, a $646,000 increase in other noninterest expenses, and an $82,000 increase in income tax expense.

Net Interest Income. Net interest income increased $772,000, or 12.6%, to $6.9 million in the quarter ended June 30, 2011 from $6.1 million in the quarter ended June 30, 2010. The increase in net interest income resulted from a decline in total interest and dividend income that was more than offset by a decline in interest expense on savings deposits and FHLB borrowings.

26

Total interest and dividend income decreased $366,000, or 3.0%, to $11.7 million for the quarter ended June 30, 2011 from $12.1 million for the quarter ended June 30, 2010. Interest income on loans was comparable in both periods as a 20 basis point increase in yield was offset by a $17.2 million decrease in the average balance for the three months ended June 30, 2011 compared to the comparable period in the prior year. Interest and dividend income on investment securities declined $419,000, or 10.4%, despite a $56.2 million increase in the average balance for the three months ended June 30, 2011 compared to the comparable period in the prior year. The decrease was due, in part, to a $184,000 decrease in interest income on corporate bonds due to the maturity of several high-yielding bonds. Interest income on CMOs and MBSs declined $126,000 and $103,000, respectively, for the three months ended June 30, 2011 compared to the comparable period in the prior year as lower interest rates in both categories more than offset a $58.7 million increase in the average balance of CMOs and MBSs. Yields declined 175 basis points and 52 basis points on MBSs and CMOs, respectively. These securities continue to prepay at accelerated rates due to the efforts of the Federal Reserve to keep home mortgage interest rates low. We expect to continue to purchase shorter-term MBSs and CMOs with significantly lower yields than those MBSs and CMOs that are prepaying in order to meet regulatory qualified thrift lender requirements and to better position the Company for rising interest rates.

Total interest expense decreased $1.1 million, or 19.0%, to $4.8 million for the quarter ended June 30, 2011 from $6.0 million for the quarter ended June 30, 2010. Deposit costs declined $801,000, or 23.9%, and FHLB borrowing costs declined $337,000, or 12.8%. The average balance of interest-bearing deposits increased $8.3 million, or 1.3%, for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010 because growth in the average balance of money market savings and money market checking accounts more than offset a decline in the average balance of certificates of deposit. The average interest rate paid on deposits decreased 50 basis points as a result of the lower interest rate environment for deposits in the quarter ended June 30, 2011. Interest paid on FHLB borrowings decreased in 2011 due to a decrease in the average balance of higher-rate borrowings of $22.4 million, resulting in a lower average interest rate paid of 12 basis points.

Provision for Loan Losses. The provision for loan losses increased $164,000 to $1.8 million for the quarter ended June 30, 2011 from $1.7 million for the quarter ended June 30, 2010. The increase in the provision reflects higher nonperforming loans as well as higher reserve rates resulting from higher historical charge-offs. The increase in the provision reflects an increase in the overall reserve rate of 29 basis points at June 30, 2011 from March 31, 2011 and a $3.7 million increase in total loans compared to an increase in the overall reserve rate of 22 basis points at June 30, 2010 from March 31, 2010 and a $6.9 million increase in total loans. Net loan charge-offs were $315,000 for the quarter ended June 30, 2011 compared to $368,000 for the quarter ended June 30, 2010. See note 5 of the notes to the unaudited consolidated financial statements for a discussion of our methodology for estimating the allowance for loan losses.

Gains, Losses, and Impairment Charges on Securities. Other-than-temporary-impairment charges on securities reflected in earnings increased $268,000 to $1.3 million for the three months ended June 30, 2011 compared to $985,000 for the quarter ended June 30, 2010. Impairment charges reflected in earnings consisted of $501,000 in charges on debt securities and $752,000 on equity securities for the three months ended June 30, 2011 compared to $653,000 and $332,000 in the comparable period in the prior year, respectively. The increase in impairment charges for the three months ended June 30, 2011 was the result of a $420,000 increase in charges on equity securities partially offset by a $152,000 decrease in charges related to debt securities, which reflects stabilization in the delinquency and loss rates for mortgages underlying our portfolio of non-agency CMOs. Delinquency and loss rates could increase in the future depending on market conditions. There were no gains or losses on sales of securities for the three months ended June 30, 2011 compared to net gains of $36,000 for the three months ended June 30, 2010.

Noninterest Income, Excluding Gains, Losses, and Impairment Charges on Securities. Total other noninterest income excluding gains, losses, and impairment charges on securities decreased $38,000, or 5.6%, for the three months ended June 30, 2011 compared to the three months ended June 30, 2010, primarily as a result of a $18,000 decrease in other operating income and a $17,000 decrease in gains on the sales of loans.

Noninterest Expense. Total noninterest expenses increased $6.2 million, or 183.2%, to $9.6 million for the three months ended June 30, 2011 compared to $3.4 million for the three months ended June 30, 2010. The increase in noninterest expenses was due primarily to a $5.6 million charitable contribution related to the contribution of cash and stock to The Franklin Federal Foundation in connection with our mutual to stock conversion. Excluding the contribution to The Franklin Federal Foundation, noninterest expenses increased $646,000, or 19.1%, to $4.0 million from $3.4 million for the three months ended June 30, 2010. The increase in noninterest expenses exclusive of the contribution to The Franklin Federal Foundation was due to a $377,000 increase in personnel expense, a $28,000 increase in federal deposit insurance premiums, a $23,000 increase in occupancy and equipment expenses, a $15,000 increase in advertising expense, and a $203,000 increase in other operating expenses. The increase in personnel expense was primarily the result of a $171,000 increase in deferred compensation expense for officers and directors and $176,000 in expenses related to the allocation of shares to employees from the newly-created ESOP. Other operating expenses for the three months ended June 30, 2011 increased $108,000 as a result of expenses related to reporting as a public company, including increased legal, external audit and tax, and consulting expenses as well as SEC reporting expenses and expenses related to listing on the NASDAQ Global Market stock exchange. Other operating expenses for the three months ended June 30, 2011 also included a $97,000 increase in impairment charges and losses on the sale of real estate owned compared to the three months ended June 30, 2010 partially offset by a decrease of $57,000 in foreclosure expenses compared to the three months ended June 30, 2010.

27

Income Tax Expense. Income tax benefit was $1.8 million for the three months ended June 30, 2011 compared to an expense of $185,000 for the three months ended June 30, 2010. The effective income tax benefit rate for the three months ended June 30, 2011 was 36.0% compared to an effective income tax expense rate of 22.6% for the three months ended June 30, 2010. As a result of the large loss for the three months ended June 30, 2011, which primarily resulted from the contribution to The Franklin Federal Foundation, the Company’s tax-exempt items had a smaller impact on the effective tax rate.

Comparison of Operating Results for the Nine Months Ended June 30, 2011 and June 30, 2010

General. We had net income of $494,000 for the nine months ended June 30, 2011, a decrease of $2.7 million, or 84.6%, from the $3.2 million earned in the nine months ended June 30, 2010. The decrease included the impact of the $5.6 million contribution made to The Franklin Federal Foundation ($1.4 million in cash and $4.2 million in stock) in connection with our mutual to stock conversion. Net income excluding the conversion-related charitable contribution and the related income tax benefit was $3.9 million, a $723,000, or 22.5%, increase from the nine months ended June 30, 2010. The increase was the net result of a $1.8 million increase in net interest income, a $1.2 million decrease in the provision for loan losses, a $1.6 million decrease in other-than-temporary impairment charges on securities included in earnings, a $288,000 decrease in other service charges and fees, a $1.7 million decrease in gains on sales of securities, a $56,000 increase in gains on sales of loans, a $57,000 increase in other operating income, a $1.1 million increase in other noninterest expenses, and a $749,000 increase in income tax expense.

Net Interest Income. Net interest income increased $1.8 million, or 9.9%, to $19.6 million in the nine months ended June 30, 2011 from $17.8 million in the nine months ended June 30, 2010. The increase in net interest income resulted from a decline in total interest and dividend income that was more than offset by lower interest expense on savings deposits and FHLB borrowings.

Total interest and dividend income decreased $2.4 million, or 6.4%, to $34.4 million for the nine months ended June 30, 2011 from $36.8 million for the nine months ended June 30, 2010. Interest income on loans decreased $457,000, or 1.9%, for the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010 as a result of a $15.2 million decline in the average balance of loans. The interest income on loans was also negatively impacted by our level of nonaccrual loans during the nine months ended June 30, 2011. Additionally, interest and dividend income on investment securities declined $2.0 million, or 16.0%, primarily due to a decline in the yield on MBSs and CMOs, which decreased 46 basis points and 192 basis points, respectively. These securities continue to prepay at accelerated rates due to the efforts of the Federal Reserve to keep home mortgage interest rates low. For the purpose of meeting the regulatory qualified thrift lender requirements and to better position the Company for rising interest rates, we expect to continue to purchase shorter-term MBSs and CMOs with significantly lower yields than those MBSs and CMOs that are pre-paying. Additionally, interest income on corporate debt securities declined $406,000 primarily due to the maturity of several high-yielding bonds.

Total interest expense decreased $4.1 million, or 21.8%, to $14.9 million for the nine months ended June 30, 2011 from $19.0 million for the nine months ended June 30, 2010. Deposit costs declined $2.9 million, or 26.4%, and FHLB borrowing costs declined $1.3 million, or 15.5%. The average balance of interest-bearing deposits increased $5.0 million, or 0.8%, for the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010 because growth in money market savings and money market checking accounts more than offset a decline in certificates of deposit. The average interest rate paid on deposits decreased 60 basis points as a result of the lower interest rate environment for deposits in the nine months ended June 30, 2011. Interest paid on FHLB borrowings decreased in 2011 due to a decrease in the average balance of higher-rate borrowings of $27.9 million, resulting in a lower average interest rate paid of 15 basis points.

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Provision for Loan Losses. The provision for loan losses decreased $1.3 million to $2.5 million for the nine months ended June 30, 2011 from $3.8 million for the nine months ended June 30, 2010. The decrease in the provision reflects a decrease in the overall reserve rate of 2 basis points at June 30, 2011 from September 30, 2010 offset by a $3.9 million increase in total loans compared to an increase in the overall reserve rate of 46 basis points at June 30, 2010 from September 30, 2009 offset by a $2.6 million decrease in total loans. Net loan charge-offs were $2.5 million for the nine months ended June 30, 2011 compared to $1.4 million for the nine months ended June 30, 2010. See note 5 of the notes to the unaudited consolidated financial statements for a discussion of our methodology for estimating the allowance for loan losses.

Gains, Losses, and Impairment Charges on Securities. Other-than-temporary-impairment charges on securities reflected in earnings decreased $1.6 million to $1.9 million for the nine months ended June 30, 2011 compared to $3.5 million for the nine months ended June 30, 2010. Impairment charges reflected in earnings consisted of $1.1 million in charges on debt securities and $803,000 in charges on equity securities for the nine months ended June 30, 2011 compared to $3.1 million and $348,000 in the comparable period in the prior year, respectively. The decrease in impairment charges reflects a current stabilization in the delinquency and loss rates for mortgages underlying our portfolio of non-agency CMOs. Delinquency and loss rates could increase in the future depending on market conditions. Sales of securities resulted in gains of $265,000 for the nine months ended June 30, 2011 compared to $2.0 million for the nine months ended June 30, 2010.

Noninterest Income, Excluding Gains, Losses, and Impairment Charges on Securities. Total other noninterest income decreased $181,000 for the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010, primarily as a result of a $288,000 decrease in other service charges and fees, which was primarily related to late fees received on construction loans in 2010, partially offset by a $56,000 increase in gains on sales of loans, and a $48,000 increase in gains on the sale of other real estate owned.

Noninterest Expense. Total noninterest expenses increased $6.7 million, or 63.7%, to $17.2 million for the nine months ended June 30, 2011 compared to $10.5 million for the nine months ended June 30, 2010. The increase in noninterest expenses was due primarily to a $5.6 million charitable contribution related to the contribution of cash and stock to The Franklin Federal Foundation in connection with our mutual to stock conversion. Excluding the contribution to The Franklin Federal Foundation, noninterest expenses increased $1.1 million, or 10.9%, to $11.7 million from $10.5 million for the nine months ended June 30, 2010. The increase in noninterest expenses exclusive of the contribution to The Franklin Federal Foundation was due to a $518,000 increase in personnel expense and a $998,000 increase in other operating expenses partially offset by a $318,000 decrease in fees on the early retirement of FHLB borrowings. The increase in personnel expenses was primarily the result of a $109,000 increase in salaries, a $197,000 increase in deferred compensation expense for officers and directors and $176,000 in expenses related to the allocation of shares to employees from the newly-created ESOP. Other operating expenses for the nine months ended June 30, 2011 increased $115,000 as a result of expenses related to reporting as a public company, including increased legal, external audit and tax, and consulting expenses as well as SEC reporting expenses and expenses related to listing on the NASDAQ Global Market stock exchange. Other operating expenses for the nine months ended June 30, 2011 also included $839,000 in impairment charges on real estate owned compared to no impairment charges on real estate owned in the nine months ended June 30, 2010, as well as $46,000 in losses on the sale of real estate owned compared to no losses in the comparable period from the prior year. These increases were partially offset by a decrease of $34,000 in advertising expense and a $32,000 decrease in occupancy expense resulting from lower real estate and personal property taxes as well as lower repairs and maintenance expenses.

Income Tax Expense. The Company had an income tax benefit of $340,000 for the nine months ended June 30, 2011 compared to income tax expense of $1.0 million for the nine months ended June 30, 2010. The effective income tax benefit rate for the nine months ended June 30, 2011 was not meaningful due to the small income before provision for income taxes and larger federal and state income tax benefit. The effective income tax expense rate was 24.1% for the nine months ended June 30, 2010.

29

Average Balances, Income and Expenses, Yields and Rates

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average daily balances of assets or liabilities, respectively, for the periods presented. Non-accrual loans are included in average loan balances only. Loan fees are included in interest income on loans and are not material.

	For the Three Months Ended June 30,
	2011								2010
(Dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans:
One- to four-family	$	117,661		$	2,067		7.05	%	$	135,094		$	2,389		7.09	%
Multi-family		80,984			1,431		7.09	%		77,826			1,299		6.69	%
Nonresidential		185,315			3,173		6.87	%		168,476			2,702		6.43	%
Construction		40,454			499		4.95	%		54,949			542		3.96	%
Land and land development		68,404			831		4.87	%		71,936			1,069		5.96	%
Other		691			14		8.13	%		2,466			29		4.72	%
Total loans		493,509			8,015		6.51	%		510,747			8,030		6.31	%
Securities:
Collateralized mortgage obligations		202,088			1,482		2.94	%		137,430			1,608		4.69	%
Mortgage-backed securities		32,676			290		3.56	%		38,593			393		4.08	%
States and political subdivisions		18,113			206		4.56	%		21,138			230		4.36	%
U. S. government agencies		12,430			31		1.00	%		-			-		-
Corporate equity securities		24,442			65		1.07	%		25,891			78		1.21	%
Corporate debt securities		119,102			1,544		5.20	%		129,601			1,728		5.35	%
Total securities		408,851			3,618		3.55	%		352,653			4,037		4.59	%
Investment in FHLB stock		11,703			24		0.82	%		13,510			-		-
Other interest-earning assets		164,817			89		0.22	%		72,203			45		0.25	%
Total interest-earning assets		1,078,880			11,746		4.37	%		949,113			12,112		5.12	%
Allowance for loan losses		(12,417	)							(10,146	)
Noninterest-earning assets		88,254								71,300
Total assets	$	1,154,717							$	1,010,267
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
Passbook savings	$	-			-		-		$	2,285			5		0.88	%
Money market savings		226,945			468		0.83	%		218,341			682		1.25	%
Money market checking		46,185			92		0.80	%		38,053			121		1.28	%
Certificates of deposit		395,594			1,987		2.01	%		401,764			2,540		2.54	%
Total interest-bearing deposits		668,724			2,547		1.53	%		660,443			3,348		2.03	%
FHLB borrowings		190,000			2,291		4.84	%		212,363			2,628		4.96	%
Total interest-bearing liabilities		858,724			4,838		2.26	%		872,806			5,976		2.75	%
Noninterest bearing liabilities		102,312								7,538
Total liabilities		961,036								880,344
Stockholders’ equity		193,681								129,923
Total liabilities and stockholders’ equity	$	1,154,717							$	1,010,267
Net interest income				$	6,908							$	6,136
Interest rate spread (1)							2.11	%							2.37	%
Net interest margin (2)							2.60	%							2.62	%
Average interest-earning assets to average interest-bearing liabilities							125.64	%							108.74	%

(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

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	For the Nine Months Ended June 30,
	2011								2010
(Dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans:
One- to four-family	$	121,752		$	6,451		7.08	%	$	126,534		$	6,728		7.11	%
Multi-family		78,448			4,055		6.91	%		89,368			4,455		6.66	%
Nonresidential		180,723			9,255		6.85	%		148,935			7,347		6.60	%
Construction		41,362			1,599		5.17	%		65,125			2,078		4.27	%
Land and land development		69,017			2,567		4.97	%		74,938			3,736		6.67	%
Other		1,292			71		7.35	%		2,868			111		5.17	%
Total loans		492,594			23,998		6.51	%		507,768			24,455		6.44	%
Securities:
Collateralized mortgage obligations		161,344			3,775		3.13	%		130,199			4,916		5.05	%
Mortgage-backed securities		32,931			931		3.78	%		42,297			1,340		4.24	%
States and political subdivisions		19,103			635		4.44	%		21,833			709		4.34	%
U. S. government agencies		9,897			69		0.93	%		-			-		-
Corporate equity securities		23,735			221		1.24	%		24,590			255		1.39	%
Corporate debt securities		121,829			4,581		5.03	%		133,843			4,987		4.98	%
Total securities		368,839			10,212		3.70	%		352,762			12,207		4.63	%
Investment in FHLB stock		12,032			61		0.68	%		13,510			23		0.23	%
Other interest-earning assets		100,439			166		0.22	%		71,942			120		0.22	%
Total interest-earning assets		973,904			34,437		4.73	%		945,982			36,805		5.20	%
Allowance for loan losses		(12,444	)							(9,734	)
Noninterest-earning assets		85,064								69,125
Total assets	$	1,046,524							$	1,005,373
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Deposits:
Passbook savings	$	15			-		-		$	2,994			22		0.98	%
Money market savings		226,351			1,494		0.88	%		208,375			2,156		1.38	%
Money market checking		45,439			304		0.89	%		31,303			329		1.41	%
Certificates of deposit		386,446			6,186		2.14	%		410,542			8,344		2.72	%
Total interest-bearing deposits		658,251			7,984		1.62	%		653,214			10,851		2.22	%
FHLB borrowings		190,000			6,873		4.84	%		217,930			8,137		4.99	%
Total interest-bearing liabilities		848,251			14,857		2.34	%		871,144			18,988		2.91	%
Noninterest bearing liabilities		47,318								7,973
Total liabilities		895,569								879,117
Stockholders’ equity		150,955								126,256
Total liabilities and stockholders’ equity	$	1,046,524							$	1,005,373
Net interest income				$	19,580							$	17,817
Interest rate spread (1)							2.39	%							2.29	%
Net interest margin (2)							2.69	%							2.52	%
Average interest-earning assets to average interest-bearing liabilities							114.81	%							108.59	%

(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

	Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010									Nine months ended June 30, 2011 Compared to Nine months ended  June 30, 2010
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	(1,061	)	$	1,046		$	(15	)	$	(856	)	$	399		$	(457	)
Securities		2,856			(3,275	)		(419	)		845			(2,840	)		(1,995	)
Investment in FHLB stock		-			24			24			(4	)		42			38
Other interest earning assets		80			(36	)		44			46			-			46
Total		1,875			(2,241	)		(366	)		31			(2.399	)		(2,368	)
Interest expense:
Deposits:
Passbook savings		(3	)		(2	)		(5	)		(11	)		(11	)		(22	)
Money market savings		171			(385	)		(214	)		273			(935	)		(662	)
Money market checking		122			(151	)		(29	)		165			(190	)		(25	)
Certificates of deposit		(38	)		(515	)		(553	)		(466	)		(1,692	)		(2,158	)
FHLB borrowings		(274	)		(63	)		(337	)		(1,024	)		(240	)		(1,264	)
Total		(22	)		(1,116	)		(1,138	)		(1,063	)		(3,068	)		(4,131	)
Increase (decrease) in net interest income	$	1,897		$	(1,125	)	$	772		$	1,094		$	669		$	1,763

Asset Quality

Nonperforming Assets (NPAs)

At June 30, 2011, nonperforming assets totaled $46.2 million, an increase of $4.8 million from $41.4 million at September 30, 2010. Our level of NPAs remains elevated over historical experience as a result of stresses in the real estate market, which are largely a result of the broader and extended economic slowdown. While we intend to actively work to reduce our NPAs, these levels of nonperforming assets are likely to remain elevated in the near term as problem loans work to resolution, which may be foreclosure.

Nonperforming assets at June 30, 2011 included $36.6 million in nonperforming loans (NPLs) as summarized in the table below. The following table reflects the balances and changes from the prior quarter:

(Dollars in thousands)	June 30, 2011		March 31, 2011		Change
Nonaccrual loans:
One-to four-family	$	10,200	$	11,421	$	(1,221	)
Nonresidential		13,504		11,075		2,429
Construction		255		255		-
Land and land development		12,660		12,693		(33	)
Total		36,619		35,444		1,175
Accruing loans past due 90 days or more		-		-		-
Total non-performing loans	$	36,619	$	35,444	$	1,175

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At June 30, 2011, the allowance for loan losses as a percentage of total loans was 2.70% compared to 2.41% at March 31, 2011 and 2.72% at September 30, 2010. During the three months ended June 30, 2011, management significantly increased the reserve rate on land and land development loans. Recent appraisals received by the Company indicate that, while the market for developed lots and small-tract developments is showing signs of stabilization, the market for large-tract developments in the Richmond MSA is significantly stressed. See note 5 of the notes to the unaudited consolidated financial statements for further analysis of the allowance for loan losses.

The following table sets forth selected asset quality data and ratios for the dates indicated:

(Dollars in thousands)	June 30, 2011			September 30, 2010
Nonperforming loans	$	36,619		$	29,773
Real estate owned		9,571			11,581
Total non-performing assets	$	46,190		$	41,354
Allowance for loan losses	$	13,432		$	13,419
Total loans	$	497,920		$	494,055
Ratios
Allowance as a percentage of total loans		2.70	%		2.72	%
Allowance as a percentage of nonperforming loans		36.68	%		45.07	%
Total non-performing loans to total loans		7.35	%		6.03	%
Total non-performing loans to total assets		3.28	%		3.07	%
Total non-performing assets to total assets		4.14	%		4.26	%

At June 30, 2011, nonaccrual loans were primarily comprised of the following:

• Land and land development loans:

- One loan on several hundred acres of undeveloped land in central Virginia proposed for a multi-use development within a planned unit development. This loan had a balance of $4.9 million and was classified as impaired at June 30, 2011. The collateral was valued at $12.2 million based upon a December 2010 appraisal, and a specific allowance calculation on this loan resulted in no allowance at June 30, 2011 due to sufficient collateral.

- One loan on several hundred acres of undeveloped land in central Virginia proposed for multi-use development within a planned unit development. This loan is a participation loan with two other banks, each having a one-third interest. The balance of the Company’s portion of this loan was $4.9 million and was classified as impaired at June 30, 2011. The collateral was valued at $37.1 million (of which $12.4 million is attributable to the Company) based upon a November 2010 appraisal, and a specific allowance calculation on this loan resulted in no allowance at June 30, 2011 due to sufficient collateral.

- One loan on 71 single-family lots and approximately 60 acres of developed land in central Virginia. As of June 30, 2011, 11 single-family lots had been sold. The loan is a participation with another bank and was current at June 30, 2011. Our participation interest is 62%, and our balance on this loan was $1.5 million at June 30, 2011. This loan was modified in a troubled debt restructuring during the year ended September 30, 2010 and had a related specific allowance of $57,000 at June 30, 2011.

 - One loan on 18 developed residential lots plus approximately 16 acres of land zoned for residential development in central Virginia. This loan had a balance of $943,000 and was classified as impaired at June 30, 2011. The collateral was valued at $1.1 million based upon a September 2010 appraisal, and a specific allowance calculation on this loan resulted in no allowance at June 30, 2011 due to sufficient collateral.

• Nonresidential real estate loans:

- One loan on a strip shopping center in northern Virginia with four available out-parcel sites. The shopping center, which is 29% leased, is within one mile of a major regional shopping center. The loan is a participation with two other banks, and our participation portion is approximately 32%. Our balance at June 30, 2011 was $2.3 million. This loan was modified in a troubled debt restructuring during the year ended September 30, 2010. Based upon an April 2011 appraisal valuing the collateral at $8.3 million (of which $2.7 million is attributable to the Company), no specific allowance was necessary at June 30, 2011 due to sufficient collateral. The loan was over 180 days delinquent and on nonaccrual status at June 30, 2011.

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- One loan on two shopping centers in North Carolina under one deed of trust. The loan balance was $5.5 million at June 30, 2011. The loan was brought current during the three months ended June 30, 2011 but will remain on nonaccrual status until a sufficient payment history is established. The two shopping centers have a combined appraised value of $7.4 million based upon a December 2010 appraisal. A specific allowance calculation on this loan resulted in no allowance at June 30, 2011 due to sufficient collateral.

- One loan secured by a day care center and twenty-six developed lots in central Virginia. This loan had a balance of $2.1 million and was 61 – 90 days delinquent at June 30, 2011. The collateral for this loan was valued at $2.7 million based on a March 2010 appraisal of the day care center and a June 2011 appraisal of the lots. We have three other loans to entities controlled by the guarantor on this loan as described below in the section regarding nonaccrual one-to four-family loans. A specific allowance calculation on this loan resulted in no allowance at June 30, 2011 due to sufficient collateral.

- One loan on a shopping center in central Virginia with two outparcels. The shopping center was 83% leased but was not generating sufficient cash flow to service the loan debt at June 30, 2011. This loan is a participation with three other banks, and our participation is approximately 22%. During the three months ended June 30, 2011, the participating banks foreclosed on the shopping center. The collateral was sold at the foreclosure auction, but the sale was subject to customary closing procedures and had not closed prior to quarter end. As a result, management charged off the uncollectible portion of this loan based upon the contract price, resulting in a charge-off of $262,000. The remaining balance attributable to the Company at June 30, 2011 was $934,000 and had no related specific allowance. Management expects the sale of the property to close in the last fiscal quarter of 2011.

- One loan on an exhibition hall in central Virginia that was 151-180 days delinquent at June 30, 2011. The loan is a participation with two other banks, and our participation portion is approximately 32%. Our balance at June 30, 2011 was $2.7 million. The participating banks are currently discussing an extension and modification of the loan with the borrower, with the expectation that the borrower will provide additional collateral adjacent to the exhibition hall. A new appraisal has been ordered. The loan is not considered impaired at this time due to the financial strength of the guarantor.

• One-to four-family

- Fifty-one loans on one-to four-family residential properties in central Virginia to multiple borrowers with an aggregate balance of $5.4 million at June 30, 2011.

- Three loans outstanding to separate entities controlled by the same guarantor totaling $4.8 million secured by twenty-three non-owner-occupied one-to four-family homes. These loans were between 121-180 days delinquent at June 30, 2011. A specific allowance calculation on these loans resulted in a specific allowance of $121,000 at June 30, 2011 based on February 2011 appraisals.

The following table shows the aggregate amounts of our classified and criticized loans and securities at the dates indicated in accordance with regulatory classification definitions.

(Dollars in thousands)	June 30, 2011		September 30, 2010
Loans:
Special mention loans	$	15,091	$	22,065
Substandard loans		65,173		56,479
Total criticized and classified loans		80,264		78,544
Securities:
Substandard		21,700		29,414
Doubtful		2,485		3,063
Total classified securities		24,185		32,477
Total criticized and classified assets	$	104,449	$	111,021

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At June 30, 2011, substandard loans, other than nonperforming loans, were comprised primarily of the following:

- One loan on a mixed use development on several hundred acres of land in central Virginia that, as proposed, will contain 80,000 square feet of retail space and more than 300 attached and detached single family lots. As of June 30, 2011, 73 single-family lots had been sold. Payments of principal and interest are made as lots are sold. This loan had a balance of $10.9 million at June 30, 2011 and was identified as impaired. During the three months ended March 31, 2011, this loan was returned to accrual status after it was brought current and had multiple non-contingent contracts for the sale of single-family lots scheduled to close by December 31, 2011. The loan was current at June 30, 2011. The development has an appraised value of $19.1 million based on a December 2010 appraisal.

- Three loans on an apartment complex in central Virginia totaling $11.5 million. Based upon current occupancy, the apartment complex does not generate enough cash to service the debt and requires support from the guarantor. The apartment complex is valued at $15.0 million based upon a January 2011 appraisal.

 - One loan on a 64-unit apartment complex in central Virginia with a balance of $1.3 million at June 30, 2011. The apartment complex does not generate enough cash to service the debt and requires support from the guarantor.

- One loan on a single-family residential development in central Virginia with a balance of $751,000 at June 30, 2011. This loan is a participation with six other banks, and the Bank’s participation percentage is 18.6%. The loan was current at June 30, 2011. However, we received a May 2011 appraisal indicating a value of $1.6 million, $300,000 of which was attributable to the Company.

- One loan on a single-family residential development in central Virginia with a balance of $2.7 million at June 30, 2011. This loan is a participation with six other banks, and the Bank’s participation percentage is 18.6%. The loan was current at June 30, 2011. However, we received a May 2011 appraisal indicating a value of $4.4 million, $1.2 million of which was attributable to the Company.

Liquidity and Capital Resources

Liquidity

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and mortgage-backed securities and collateralized mortgage obligations are greatly influenced by general interest rates, economic conditions and competition.

Our most liquid assets are cash and cash equivalents, interest-bearing deposits in other banks, and securities classified as available-for-sale. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2011, cash and cash equivalents totaled $116.0 million. Securities classified as available-for-sale, whose aggregate market value exceeds cost, provide additional sources of liquidity and had a market value of $315.8 million at June 30, 2011. In addition, at June 30, 2011, we had the ability to borrow a total of approximately $198.7 million in additional funds from the FHLB. Additionally, we established a borrowing arrangement with the Federal Reserve Bank of Richmond, although no borrowings have occurred and no assets have been pledged to date. We intend to use corporate bonds as collateral for this arrangement and had unpledged corporate bonds with an estimated fair value of $118.9 million at June 30, 2011.

At June 30, 2011, we had $91.5 million in loan commitments outstanding, which included $67.5 million in undisbursed loans. Certificates of deposit due within one year of June 30, 2011 totaled $257.0 million. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods. If these maturing deposits are not renewed, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit. Management believes, however, based on past experience that a significant portion of our certificates of deposit will be renewed. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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In addition, we believe that our branch network, which is presently comprised of eight full-service retail banking offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities, will afford us sufficient long-term liquidity.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can initiate certain mandatory and possible discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Bank is required to notify the OCC before paying dividends to Franklin Financial.

The regulations require that savings institutions meet three capital requirements: a core capital requirement, a tangible capital requirement, and a risk-based capital requirement. The Tier 1 capital regulations require a savings institution to maintain Tier 1 capital of not less than 4% of adjusted total assets. The tangible capital regulations require savings institutions to maintain tangible capital of not less than 1.5% of adjusted total assets. The risk-based capital regulations require savings institutions to maintain capital of not less than 8% of risk-weighted assets.

At June 30, 2011, the Bank had regulatory capital in excess of that required under each requirement and was classified as a “well capitalized” institution as determined by the OCC. There are no conditions or events that management believes have changed the Bank’s classification. As a savings and loan holding company regulated by the Federal Reserve Board (“FRB”), Franklin Financial is not currently subject to any separate regulatory capital requirements. The Dodd-Frank Act, however, requires the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. There is a five-year transition period before the capital requirements will apply to savings and loan holding companies. The following table reflects the level of required capital and actual capital of the Bank at June 30, 2011 and September 30, 2010:

	Actual					Amount required to be "adequately capitalized"					Amount required to be "well capitalized"
(Dollars in thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage
As of June 30, 2011
Tier 1 capital	$	163,725		15.82	%	$	41,389		4.00	%	$	52,041		5.00	%
(to adjusted tangible assets)
Tier 1 risk-based capital		163,725		22.35			29,308		4.00			43,962		6.00
(to risk weighted assets)
Tangible capital		163,725		15.82			15,521		1.50			15,521		1.50
(to adjusted tangible assets)
Risk-based capital		172,934		23.60			58,617		8.00			73,271		10.00
(to risk weighted assets)
As of September 30, 2010
Tier 1 capital	$	103,183		10.90	%	$	37,877		4.00	%	$	47,616		5.00	%
(to adjusted tangible assets)
Tier 1 risk-based capital		103,183		14.12			29,234		4.00			43,850		6.00
(to risk weighted assets)
Tangible capital		103,183		10.90			14,204		1.50			14,204		1.50
(to adjusted tangible assets)
Risk-based capital		112,341		15.37			58,467		8.00			73,084		10.00
(to risk weighted assets)

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There were no dividends declared by the Bank to Franklin Financial in the three or nine months ended June 30, 2011. During the three months ended June 30, 2011, Franklin Financial contributed $68.1 million to the Bank from the proceeds of the mutual to stock conversion discussed in note 2 to the unaudited consolidated financial statements.

The following is a reconciliation of the Bank’s GAAP capital to regulatory capital at June 30, 2011 and September 30, 2010 (dollars in thousands):

	June 30, 2011
(Dollars in thousands)	Tier 1 capital			Tier 1 risk- based capital			Tangible capital			Risk-based capital
GAAP capital	$	168,539		$	168,539		$	168,539		$	168,539
Accumulated gains on certain available-for-sale securities		(4,452	)		(4,452	)		(4,452	)		(4,452	)
Disallowed deferred tax assets		(1,644	)		(1,644	)		(1,644	)		(1,644	)
Pension plan		1,282			1,282			1,282			1,282
General allowance for loan losses		-			-			-			9,209
Regulatory capital – computed	$	163,725		$	163,725		$	163,725		$	172,934

	September 30, 2010
(Dollars in thousands)	Tier 1 capital			Tier 1 risk- based capital			Tangible capital			Risk-based capital
GAAP capital	$	107,305		$	107,305		$	107,305		$	107,305
Accumulated gains on certain available- for-sale securities		(4,745	)		(4,745	)		(4,745	)		(4,745	)
Disallowed deferred tax assets		(659	)		(659	)		(659	)		(659	)
Pension plan		1,282			1,282			1,282			1,282
General allowance for loan losses		-			-			-			9,158
Regulatory capital – computed	$	103,183		$	103,183		$	103,183		$	112,341

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the year ended September 30, 2010 and the nine months ended June 30, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our consolidated financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity Analysis

Management uses an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or a 100 basis point decrease in market interest rates with no effect given to any future steps that management might take to counter the impact of that interest rate movement. The following table presents the change in the present value of Franklin Federal’s equity at June 30, 2011 that would occur in the event of an immediate change in interest rates based on management assumptions. The table does not include the effect of approximately $74.4 million of investable assets held by Franklin Financial Corporation at June 30, 2011.

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	Present Value of Equity
Change in	Market
Basis Points	Value		$ Change			% Change
	(Dollars in thousands)
300	$	143,797	$	(33,397	)		(18.8	)%
200		156,080		(21,114	)		(11.9	)
100		167,254		(9,940	)		(5.6	)
0		177,194		-			-
-100		174,956		(2,238	)		(1.3	)

Using the same assumptions as above, the sensitivity of our projected net interest income for the twelve months ending June 30, 2012 is as follows:

	Projected Net Interest Income
Change in	Net Interest
Basis Points	Income		$ Change			% Change
	(Dollars in thousands)
300	$	25,644	$	(3,027	)		(10.6	)%
200		26,918		(1,753	)		(6.1	)
100		27,840		(831	)		(2.9	)
0		28,671		-			-
-100		25,803		(2,868	)		(10.0	)

Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets have features, such as rate caps or floors, that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

Item 4. Controls and Procedures

The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Our management believes that such routine legal proceedings, in the aggregate, are immaterial to our consolidated financial condition and results of operations.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on February 22, 2011. As of June 30, 2011, the risk factors of the Company have not changed materially from those disclosed in the prospectus.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   [Removed and Reserved]

Item 5.   Other Information

Not applicable.

Item 6.   Exhibits

3.1 Articles of Incorporation of Franklin Financial Corporation (1)

3.2 Bylaws of Franklin Financial Corporation (2)

4.0 Form of Common Stock Certificate of Franklin Financial Corporation (3)

31.1 Rule 13a-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a) Certification of Chief Financial Officer

32 Section 1350 Certifications

(1) Incorporated herein by reference to Exhibit 3.1 of pre-effective amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-171108), filed with the Securities and Exchange Commission on January 28, 2011.

(2) Incorporated herein by reference to Exhibit 3.2 of pre-effective amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-171108), filed with the Securities and Exchange Commission on January 28, 2011.

(3) Incorporated herein by reference to Exhibit 4.0 to the Company’s Registration Statement on Form S-1 (File No. 333-171108), as amended, initially filed with the Securities and Exchange Commission on December 10, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FRANKLIN FINANCIAL CORPORATION
	Registrant
August 12, 2011	By:	/s/ Richard T. Wheeler, Jr.
		Richard T. Wheeler, Jr.
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)
August 12, 2011	By:	/s/ Donald F. Marker
		Donald F. Marker
		Vice President, Chief Financial Officer and Secretary/Treasurer
		(Principal Financial and Accounting Officer)

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