10-Q

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, 2012 

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	(I.R.S. Employer Identification No.)
of incorporation or organization)
4501 Cox Road, Glen Allen, VA 23060
(Address of principal executive offices, including 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 x No ¨

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 x  Non-accelerated filer ¨  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

13,776,538 shares of the registrant’s common stock, par value $0.01 per share, were outstanding at August 1, 2012.

Franklin Financial Corporation

Form 10-Q

Table of Contents

		Page No.
Part I.	Financial Information
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at June 30, 2012 (unaudited) and September 30, 2011	2
	Consolidated Income Statements for the Three and Nine Months Ended June 30, 2012 and 2011 (unaudited)	3
	Consolidated Statements of Comprehensive Income and Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2012 and 2011 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011 (unaudited)	5
	Notes to the Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II.	Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
Signatures		48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)	June 30, 2012			September 30, 2011
	(unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	18,746		$	4,366
Interest-bearing deposits in other banks		100,606			72,955
Money market investments		11,521			38,428
Total cash and cash equivalents		130,873			115,749
Securities available for sale		384,389			396,809
Securities held to maturity		21,801			25,517
Loans, net of deferred loan fees		473,667			493,047
Less allowance for loan losses		10,806			14,624
Net loans		462,861			478,423
Loans held for sale		665			922
Federal Home Loan Bank stock		10,206			11,014
Office properties and equipment, net		6,219			6,287
Other real estate owned		10,569			8,627
Accrued interest receivable:
Loans		2,049			2,339
Mortgage-backed securities and collateralized mortgage obligations		725			761
Other investment securities		1,494			1,801
Total accrued interest receivable		4,268			4,901
Cash surrender value of bank-owned life insurance		32,679			31,714
Prepaid expenses and other assets		16,464			17,014
Total assets	$	1,080,994		$	1,096,977
Liabilities and Stockholders’ Equity
Deposits:
Savings deposits	$	264,776		$	265,192
Time deposits		382,548			383,562
Total deposits		647,324			648,754
Federal Home Loan Bank borrowings		171,887			190,000
Advance payments by borrowers for property taxes and insurance		1,526			2,335
Accrued expenses and other liabilities		6,772			6,330
Total liabilities		827,509			847,419
Commitments and contingencies (see note 9)
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized, no shares issued or outstanding		-			-
Common stock: $0.01 par value; 75,000,000 shares authorized; 14,302,838 shares issued; 13,776,538 shares and 14,302,838 shares outstanding, respectively		138			143
Additional paid-in capital		135,751			142,882
Unearned ESOP shares		(10,586	)		(11,082	)
Unearned equity incentive plan shares		(4,320	)		-
Undistributed stock-based deferral plan shares: 252,215 shares		(2,533	)		(2,533	)
Retained earnings		129,699			125,770
Accumulated other comprehensive income (loss)		5,336			(5,622	)
Total stockholders’ equity		253,485			249,558
Total liabilities and stockholders’ equity	$	1,080,994		$	1,096,977

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

2

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Income Statements

Three and Nine Months Ended June 30, 2012 and 2011 (Unaudited)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
(Dollars in thousands, except per share amounts)	2012			2011			2012			2011
Interest and dividend income:
Interest and fees on loans	$	7,558		$	8,015		$	23,173		$	23,998
Interest on deposits in other banks		47			89			101			166
Interest and dividends on securities:
Taxable		3,022			3,564			9,663			10,036
Nontaxable		71			78			215			237
Total interest and dividend income		10,698			11,746			33,152			34,437
Interest expense:
Interest on deposits		1,934			2,547			5,944			7,984
Interest on borrowings		2,055			2,291			6,658			6,873
Total interest expense		3,989			4,838			12,602			14,857
Net interest income		6,709			6,908			20,550			19,580
Provision for loan losses		(390	)		1,825			(542	)		2,537
Net interest income after provision for loan losses		7,099			5,083			21,092			17,043
Noninterest (expense) income:
Service charges on deposit accounts		14			11			38			31
Other service charges and fees		167			87			781			240
Gains on sales of loans held for sale		65			40			206			255
(Losses) gains on sales of securities, net		(777	)		-			(777	)		265
Gains (losses) on sales of other real estate owned		711			(85	)		1,336			(32	)
Impairment of securities, net:
Impairment of securities		(2,005	)		(1,157	)		(4,884	)		(1,943	)
Less: Impairment recognized in other comprehensive income		53			96			(500	)		(9	)
Net impairment reflected in income		(2,058	)		(1,253	)		(4,384	)		(1,934	)
Increase in cash surrender value of bank-owned life insurance		323			321			965			956
Other operating income		214			264			439			414
Total noninterest (expense) income		(1,341	)		(615	)		(1,396	)		195
Other noninterest expenses:
Personnel expense		2,665			2,270			6,743			6,097
Occupancy expense		227			209			667			617
Equipment expense		249			226			707			672
Advertising expense		46			53			156			125
Federal deposit insurance premiums		207			315			618			833
Charitable contributions to The Franklin Federal Foundation		-			5,555			-			5,555
Impairment of other real estate owned		611			58			611			839
Other operating expenses		1,060			901			2,729			2,346
Total other noninterest expenses		5,065			9,587			12,231			17,084
Income (loss) before provision for income taxes		693			(5,119	)		7,465			154
Federal and state income tax expense (benefit)		1,047			(1,844	)		3,536			(340	)
Net (loss) income	$	(354	)	$	(3,275	)	$	3,929		$	494
Basic net (loss) income per common share	$	(0.03	)	$	(0.25	)(1)	$	0.30		$	0.04	(1)
Diluted net (loss) income per common share	$	(0.03	)	$	(0.25	)(1)	$	0.30		$	0.04	(1)

⁽¹⁾ Weighted-average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC’s mutual-to-stock conversion, 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, 2012 and 2011 (Unaudited)

										Undistributed			Unearned					Accumulated
				Additional			Unearned			Stock-Based			Equity					Other			Total
	Common			Paid-in			ESOP			Deferral Plan			Incentive			Retained		Comprehensive			Stockholders’
(Dollars in thousands)	Stock			Capital			Shares			Shares			Plan Shares			Earnings		Income (Loss)			Equity
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 income:
Net unrealized holding losses arising during the period, net of income tax benefit of $857		-			-			-			-			-			-		(831	)		(831	)
Reclassification adjustment for losses included in net income, 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
Balance at September 30, 2011	$	143		$	142,882		$	(11,082	)	$	(2,533	)	$	-		$	125,770	$	(5,622	)	$	249,558
ESOP shares allocated		-			141			496			-			-			-		-			637
Repurchase of common stock		(5	)		(7,989	)		-			-			-			-		-			(7,994	)
Stock-based compensation expense		-			717			-			-			-			-		-			717
Common stock purchased for equity incentive plan		-			-			-			-			(4,320	)		-		-			(4,320	)
Net income		-			-			-			-			-			3,929		-			3,929
Other comprehensive income:
Net unrealized holding gains arising during the period, net of income tax expense of $6		-			-			-			-			-			-		6,052			6,052
Reclassification adjustment for losses included in net income, net of income tax benefit of $556		-			-			-			-			-			-		4,323			4,323
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax benefit of $110		-			-			-			-			-			-		(180	)		(180	)
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 $467		-			-			-			-			-			-		763			763
Comprehensive income																						14,887
Balance at June 30, 2012	$	138		$	135,751		$	(10,586	)	$	(2,533	)	$	(4,320	)	$	129,699	$	5,336		$	253,485

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, 2012 and 2011 (Unaudited)

	2012			2011
(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	3,929		$	494
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		630			586
Provision for loan losses		(542	)		2,537
Impairment charges on other real estate owned		611			839
Charitable contribution of stock to The Franklin Federal Foundation		-			4,165
Losses (gains) on sales of securities available for sale, net		777			(265	)
Impairment charge on securities		4,384			1,934
Losses (gains) on sales or disposal of office properties and equipment, net		13			(7	)
(Gains) losses on sales of other real estate owned, net		(1,336	)		32
Net amortization on securities		1,864			1,031
Amortization of deferred amounts related to Federal Home Loan Bank borrowings		195			-
Originations of loans held for sale		(9,127	)		(12,093	)
Sales and principal payments on loans held for sale		9,385			13,632
ESOP compensation expense		637			176
Stock-based compensation expense		717			-
Changes in assets and liabilities:
Accrued interest receivable		633			(150	)
Cash surrender value of bank-owned life insurance		(965	)		(956	)
Prepaid expenses and other assets		(369	)		(249	)
Advance payments by borrowers for property taxes and insurance		(809	)		(677	)
Accrued expenses and other liabilities		974			(961	)
Net cash and cash equivalents provided by operating activities		11,601			10,068
Cash Flows From Investing Activities
Net redemptions of Federal Home Loan Bank stock		808			1,180
Proceeds from maturities, calls and paydowns of securities available for sale		102,972			77,124
Proceeds from sales of securities available for sale		12,646			12,173
Purchases of securities available for sale		(98,196	)		(222,984	)
Proceeds from maturities and paydowns of securities held to maturity		3,566			5,843
Net decrease (increase) in loans		13,576			(7,371	)
Purchases of office properties and equipment		(541	)		(641	)
Proceeds from sales of office properties and equipment		-			13
Capitalized improvements of other real estate owned		-			(46	)
Proceeds from sales of other real estate owned		744			1,913
Net cash and cash equivalents provided (used) by investing activities		35,575			(132,796	)
Cash Flows From Financing Activities
Net (decrease) increase in savings deposits		(416	)		4,602
Net (decrease) increase in time deposits		(1,014	)		11,350
Repurchase of common stock		(7,994	)		-
Common stock purchased for equity incentive plan		(4,320	)		-
Deferred Federal Home Loan Bank prepayment penalty		(18,308	)		-
Proceeds from issuance of common stock, net of issuance costs		-			136,261
Stock purchased by ESOP		-			(11,442	)
Net cash and cash equivalents (used) provided by financing activities		(32,052	)		140,771
Net increase in cash and cash equivalents		15,124			18,043
Cash and cash equivalents at beginning of period		115,749			97,909
Cash and cash equivalents at end of period	$	130,873		$	115,952
Supplemental disclosures of cash flow information
Cash payments for interest	$	12,345		$	14,790
Cash payments for income taxes	$	4,104		$	2,400
Supplemental schedule of noncash investing and financing activities
Unrealized gains (losses) on securities available for sale	$	12,167		$	(119	)
Transfer of loans to other real estate owned, net	$	4,058		$	2,454
Sales of other real estate owned financed by the Bank	$	1,529		$	2,841

.

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, 2012

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 consolidated 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 consolidated 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 the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 (“2011 Form 10-K”).  These interim consolidated 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, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012 or any other future period. The consolidated balance sheet as of September 30, 2011 was derived from the Company’s audited annual consolidated financial statements in the 2011 Form 10-K.

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, valuation of stock-based compensation, 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.

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.

6

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.

Stock-Based Compensation — The Company issues restricted stock and stock options under the Franklin Financial Corporation 2012 Equity Incentive Plan to key officers and outside directors. In accordance with the requirements of ASC 718, Compensation – Stock Compensation, the Company has adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.

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, earnings per share, 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 2 “Securities” and note 3 “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 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 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. See note 10 of the notes to the unaudited consolidated financial statements for disclosures about fair value measurements.

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.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11: Disclosures about Offsetting Assets and Liabilities. The eligibility criteria for offsetting are different in International Financial Reporting Standards (“IFRS”) and GAAP. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. To allow investors to better compare financial statements prepared in accordance with IFRS or GAAP, the Boards have issued common disclosure requirements related to offsetting arrangements in ASU No. 2011-11. The amendments to the Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact of ASU No. 2011-11 on its consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (discussed above), so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU No. 2011-12 on its consolidated financial statements.

8

Note 2.   Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
States and political subdivisions	$	12,186	$	-	$	12,186	$	1,159	$	44	$	13,301
Agency mortgage-backed securities		38,627		-		38,627		1,030		5		39,652
Agency collateralized mortgage obligations		190,134		-		190,134		2,134		336		191,932
Corporate equity securities		21,050		-		21,050		2,611		215		23,446
Corporate debt securities		109,996		-		109,996		6,386		324		116,058
Total	$	371,993	$	-	$	371,993	$	13,320	$	924	$	384,389

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
U.S. government and agency securities	$	7,500	$	-	$	7,500	$	1	$	-	$	7,501
States and political subdivisions		18,143		-		18,143		765		735		18,173
Agency mortgage-backed securities		23,561		-		23,561		1,259		25		24,795
Agency collateralized mortgage obligations		207,123		-		207,123		2,497		917		208,703
Corporate equity securities		28,735		-		28,735		442		7,504		21,673
Corporate debt securities		110,289		1,230		111,519		5,854		1,409		115,964
Total	$	395,351	$	1,230	$	396,581	$	10,818	$	10,590	$	396,809

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	4,904	$	-	$	4,904	$	180	$	-	$	5,084
Agency collateralized mortgage obligations		5,509		-		5,509		626		-		6,135
Non-agency collateralized mortgage obligations		11,388		1,125		12,513		1,253		2,617		11,149
Total	$	21,801	$	1,125	$	22,926	$	2,059	$	2,617	$	22,368

9

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	5,512	$	-	$	5,512	$	187	$	-	$	5,699
Agency collateralized mortgage obligations		6,552		-		6,552		835		1		7,386
Non-agency collateralized mortgage obligations		13,453		835		14,288		908		5,033		10,163
Total	$	25,517	$	835	$	26,352	$	1,930	$	5,034	$	23,248

The amortized cost and estimated fair value of securities at June 30, 2012, 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	$	15,223	$	15,587	$	-	$	-
Due after one year through five years		53,787		56,072		-		-
Due after five years through ten years		19,695		21,627		-		-
Due after ten years		33,477		36,073		-		-
Total non-mortgage debt securities		122,182		129,359		-		-
Mortgage-backed securities		38,627		39,652		4,904		5,084
Collateralized mortgage obligations		190,134		191,932		18,022		17,284
Corporate equity securities		21,050		23,446		-		-
Total securities	$	371,993	$	384,389	$	22,926	$	22,368

The following tables present information regarding temporarily impaired securities as of June 30, 2012 and September 30, 2011:

	June 30, 2012
	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:
State and political subdivisions	$	1,540	$	44	$	-	$	-	$	1,540	$	44
Agency mortgage-backed securities		-		-		2,901		5		2,901		5
Agency collateralized mortgage obligations		21,491		13		19,656		323		41,147		336
Corporate equity securities		6,738		211		21		4		6,759		215
Corporate debt securities		23,796		255		1,931		69		25,727		324
Total available for sale		53,565		523		24,509		401		78,074		924
Held to maturity:
Non-agency collateralized mortgage obligations		224		109		9,459		2,508		9,683		2,617
Total held to maturity		224		109		9,459		2,508		9,683		2,617
Total temporarily impaired securities	$	53,789	$	632	$	33,968	$	2,909	$	87,757	$	3,541

10

	September 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:
States and political subdivisions	$	1,715	$	735	$	-	$	-	$	1,715	$	735
Agency mortgage-backed securities		4,592		25		-		-		4,592		25
Agency collateralized mortgage obligations		50,933		901		3,097		16		54,030		917
Corporate equity securities		17,982		7,504		-		-		17,982		7,504
Corporate debt securities		17,816		1,191		11,783		218		29,599		1,409
Total available for sale		93,038		10,356		14,880		234		107,918		10,590
Held to maturity:
Agency collateralized mortgage obligations		-		-		116		1		116		1
Non-agency collateralized mortgage obligations		845		259		7,530		4,774		8,375		5,033
Total held to maturity		845		259		7,646		4,775		8,491		5,034
Total temporarily impaired securities	$	93,883	$	10,615	$	22,526	$	5,009	$	116,409	$	15,624

The Company’s securities portfolio consists of investments in various debt and equity securities as permitted by regulations of the Office of the Comptroller of the Currency (“OCC”) and the Board of Governors of the Federal Reserve System (“FRB”), 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, 2012 the Company recognized gross gains on sales of securities available for sale of $693,000 and gross losses of $1.5 million. During the three months ended June 30, 2011 the Company recognized no gains or losses on sales of securities available for sale. During the nine months ended June 30, 2012 and 2011, the Company recognized gross gains on sales of securities available for sale of $693,000 and $705,000, respectively, and gross losses of $1.5 million and $440,000, 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 issuer 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.

The Company recognized total impairment charges on debt and equity securities in income of $2.1 million and $1.3 million during the three months ended June 30, 2012 and 2011, respectively, and $4.4 million and $1.9 million for the nine months ended June 30, 2012 and 2011, respectively.

11

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, 2011	$	79
Additions for credit losses on securities not previously recognized		29
Additional credit losses on securities previously recognized as impaired		47
Reductions for increases in expected cash flows		(81	)
Balance of credit losses at June 30, 2012	$	74

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 seventy 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 seven securities and were considered temporary. 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 $211.9 million at June 30, 2012 compared to $262.1 million at September 30, 2011.

Note 3. Loans

Loans held for investment at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Loans
One-to four-family	$	108,283	$	114,947
Multi-family		82,202		79,106
Nonresidential		212,538		190,747
Construction		24,316		43,992
Land and land development		49,221		67,049
Other		547		650
Total loans		477,107		496,491
Deferred loan fees		3,440		3,444
Loans, net of deferred loan fees		473,667		493,047
Allowance for loan losses		10,806		14,624
Net loans	$	462,861	$	478,423

The Company pledges certain loans as collateral for its FHLB borrowings. Loans collateralizing FHLB borrowings had a carrying value of $295.4 million at June 30, 2012 compared to $252.9 million at September 30, 2011.

12

Note 4.   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 in each segment based on credit rating. Loans rated Excellent have no associated allowance. No loans were rated Excellent at June 30, 2012 or September 30, 2011. 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.

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 $34.2 million of loans classified as impaired at June 30, 2012, $28.7 million were considered “collateral dependent” and evaluated using the fair value of collateral method and $5.5 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.

13

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

	One-to			Multi-			Non-						Land and land
(Dollars in thousands)	four-family			family			residential			Construction			development			Other			Total
Balance, September 30, 2011	$	1,324		$	1,357		$	3,146		$	1,724		$	7,064		$	9		$	14,624
Provision		263			(188	)		(179	)		(539	)		105			(4	)		(542	)
Recoveries		5			-			-			5			8			-			18
Charge-offs		(68	)		-			-			(9	)		(3,217	)		-			(3,294	)
Balance, June 30, 2012	$	1,524		$	1,169		$	2,967		$	1,181		$	3,960		$	5		$	10,806

	One-to			Multi-		Non-						Land and land
(Dollars in thousands)	four-family			family		residential			Construction			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

During the three and nine months ended June 30, 2012, the Company recorded net charge-offs of $10,000 and $3.3 million, respectively, compared to net charge-offs of $317,000 and $2.5 million, respectively, in the three and nine months ended June 30, 2011. As a result of continued concerns regarding the valuations of collateral for land and land development loans, the Company recorded a provision for loan losses of $105,000 in the nine months ended June 30, 2012 for the portfolio of land and land development loans. The Company also recorded a provision for loan losses of $263,000 for its portfolio of one-to four-family loans due to an increase in historical charge-offs and nonaccrual loans in the Company’s portfolio of non-owner-occupied one-to four-family loans. These provisions were more than offset by decreases in the allowances for the Company’s multi-family, nonresidential, and construction loan portfolios. These decreases were partially the result of improving credit quality combined with decreased loan balances in the construction loan portfolio.

Details of the allowance for loan losses by portfolio segment and impairment methodology at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	104,129	$	1,149	$	4,154	$	375	$	108,283	$	1,524		1.41	%		14.1	%
Multi-family		69,526		1,169		12,676		-		82,202		1,169		1.42			10.8
Nonresidential		207,040		2,967		5,498		-		212,538		2,967		1.40			27.5
Construction		24,272		1,181		44		-		24,316		1,181		4.86			10.9
Land and land development		37,416		3,960		11,805		-		49,221		3,960		8.05			36.7
Other		547		5		-		-		547		5		0.91			-
Total allowance	$	442,930	$	10,431	$	34,177	$	375	$	477,107	$	10,806		2.26			100.0	%

14

	September 30, 2011
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	110,047	$	1,192	$	4,900	$	132	$	114,947	$	1,324		1.15	%		9.1	%
Multi-family		66,347		1,145		12,759		212		79,106		1,357		1.71			9.2
Nonresidential		180,895		3,146		9,852		-		190,747		3,146		1.65			21.5
Construction		43,903		1,697		89		27		43,992		1,724		3.92			11.8
Land and land development		40,500		4,070		26,549		2,994		67,049		7,064		10.54			48.3
Other		650		9		-		-		650		9		1.40			0.1
Total allowance	$	442,342	$	11,259	$	54,149	$	3,365	$	496,491	$	14,624		2.95			100.0	%

Details regarding classified loans and impaired loans at June 30, 2012 and September 30, 2011 are as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Special mention
One-to four-family	$	2,892	$	5,372
Nonresidential		3,127		-
Construction		666		3,142
Land and land development		11,953		7,944
Total special mention loans		18,638		16,458
Substandard
One-to four-family		4,491		4,347
Multi-family		249		253
Nonresidential		2,064		3,156
Construction		675		166
Land and land development		6,993		623
Total substandard loans		14,472		8,545
Impaired
One-to four-family		4,154		4,900
Multi-family		12,676		12,759
Nonresidential		5,498		9,852
Construction		44		90
Land and land development		11,805		26,548
Total impaired loans		34,177		54,149
Total rated loans	$	67,287	$	79,152

The increase in special mention and substandard loans at June 30, 2012 compared to September 30, 2011 was primarily the result of the reclassification of certain loans classified as impaired at September 30, 2011 to special mention or substandard.

Included in impaired loans are troubled debt restructurings of $8.2 million and $10.6 million at June 30, 2012 and September 30, 2011, respectively that had related allowance balances of $0 and $239,000, respectively. Troubled debt restructurings that were performing in accordance with modified terms were $5.5 million and $0 at June 30, 2012 and September 30, 2011, respectively.

15

Troubled Debt Restructurings

During the nine months ended June 30, 2012, the Company modified five loans in troubled debt restructurings, including two construction loans to one borrower, one nonresidential loan, and two land and land development loans. The restructuring of the construction loans, which had an outstanding balance of $44,000 at June 30, 2012, involved the reduction in the loan’s interest rate floor and monthly principal payment requirement to accommodate cash flow difficulties being experienced by the borrower. A discounted cash flows analysis revealed that no specific allowance was required for these two loans. The loans remained on accrual status as the borrower was current at June 30, 2012. The nonresidential loan modification consisted of further principal payment reductions and an extension of the call date on a loan previously recognized as a troubled debt restructuring. This loan, which had an outstanding balance of $5.5 million at June 30, 2012, was returned to accrual status during the nine months ended June 30, 2012 as it had remained current on restructured payment requirements for over nine months, and the Company believes that the borrower has the intent and ability to keep the loan current. The two land and land development loans restructured share the same collateral and had been previously identified as impaired loans. These loans, which had an outstanding balance of $1.8 million at June 30, 2012, have matured, and the restructurings consisted of forbearance agreements extending the maturity dates of the loans in order to provide the borrowers more time to sell the collateral. Interest recognized on a cash basis on restructured loans was not material for the three and nine months ended June 30, 2012.

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.

Loans and the related allowance for loan losses summarized by loan type and credit rating at June 30, 2012 are as follows:

							Watch		Special
(Dollars in thousands)	Total		Good		Satisfactory		List		Mention		Substandard		Impaired		Not Rated
Loans
One-to four-family(1)	$	108,283	$	-	$	24,927	$	1,443	$	1,999	$	2,781	$	4,154	$	72,979
Multi-family		82,202		13,993		41,247		2,037		-		249		12,676		12,000
Nonresidential		212,538		93,595		103,144		-		3,127		2,064		5,498		5,110
Construction		24,316		-		13,074		513		666		675		44		9,344
Land and land development		49,221		-		15,829		-		11,953		6,993		11,805		2,641
Other		547		-		-		-		-		-		-		547
Total loans	$	477,107	$	107,588	$	198,221	$	3,993	$	17,745	$	12,762	$	34,177	$	102,621

							Watch		Special
(Dollars in thousands)	Total		Good		Satisfactory		List		Mention		Substandard		Impaired		Not Rated
Allowance for loan losses
One-to four-family(1)	$	1,524	$	-	$	399	$	35	$	64	$	133	$	375	$	518
Multi-family		1,169		28		825		61		-		15		-		240
Nonresidential		2,967		215		2,352		-		143		141		-		116
Construction		1,181		-		582		34		59		90		-		416
Land and land development		3,960		-		990		-		1,494		1,311		-		165
Other		5		-		-		-		-		-		-		5
Total allowance for loans losses	$	10,806	$	243	$	5,148	$	130	$	1,760	$	1,690	$	375	$	1,460

⁽¹⁾ Owner-occupied one-to four-family loans are considered “Not Rated” in the calculation of the allowance for loan losses.

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Details regarding the delinquency status of the Company’s loan portfolio at June 30, 2012 are as follows:

					31-60		61-90		91-120		121-150		151-180		180+
(Dollars in thousands)	Total		Current		Days		Days		Days		Days		Days		Days
One-to four-family	$	108,283	$	101,559	$	505	$	-	$	542	$	163	$	349	$	5,165
Multi-family		82,202		76,127		-		-		-		-		-		6,075
Nonresidential		212,538		210,474		2,064		-		-		-		-		-
Construction		24,316		24,150		-		-		-		-		-		166
Land and land development		49,221		36,183		2,999		-		-		-		20		10,019
Other		547		547		-		-		-		-		-		-
Total	$	477,107	$	449,040	$	5,568	$	-	$	542	$	163	$	369	$	21,425

The following is a summary of information pertaining to impaired and non-accrual loans at June 30, 2012 and September 30, 2011:

	June 30, 2012				September 30, 2011
(Dollars in thousands)	Amount		Allowance		Amount		Allowance
Impaired loans with a specific allowance
One-to four-family	$	4,154	$	375	$	2,328	$	132
Multi-family		-		-		1,265		212
Construction		-		-		90		28
Land and land development		-		-		9,879		2,993
Total impaired loans with a specific allowance	$	4,154	$	375	$	13,562	$	3,365
Impaired loans for which no specific allowance
is necessary
One-to four-family	$	-	$	-	$	2,572	$	-
Multi-family		12,676		-		11,494		-
Nonresidential		5,498		-		9,852		-
Construction		44		-		-		-
Land and land development		11,805		-		16,669		-
Total impaired loans for which no specific
allowance is necessary	$	30,023	$	-	$	40,587	$	-

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Nonaccrual loans
One-to four-family	$	9,158	$	9,879
Multi-family		6,075		6,103
Nonresidential		-		12,572
Construction		166		255
Land and land development		11,871		13,396
Total non-accrual loans	$	27,270	$	42,205

There were no loans past due ninety days or more and accruing at June 30, 2012 or September 30, 2011. The weighted average balance of impaired loans was $31.7 million and $40.8 million for the three months ended June 30, 2012 and 2011, respectively, and $46.8 million and $34.8 million for the nine months ended June 30, 2012 and 2011, respectively. Accrued interest on impaired loans was not material at June 30, 2012 or September 30, 2011. Interest recognized on a cash basis on impaired loans was $299,000 and $249,000 for the three months ended June 30, 2012 and 2011, respectively, and $792,000 and $647,000 for the nine months ended June 30, 2012 and 2011, respectively. Interest recognized on a cash basis on nonaccrual loans, including loans classified as impaired, was $394,000 and $342,000 for the three months ended June 30, 2012 and 2011, respectively, and $821,000 and $1.1 million for the nine months ended June 30, 2012 and 2011, respectively.

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Note 5.   Other Real Estate Owned

Other real estate owned at June 30, 2012 and September 30, 2011 is summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Other real estate owned
Other real estate held for sale	$	2,063	$	1,545
Other real estate held for development and sale		8,506		7,082
Total other real estate owned	$	10,569	$	8,627

During the nine months ended June 30, 2012, the Company sold other real estate owned totaling $1.5 million. The Company recognized net gains on sales of other real estate owned of $711,000 and $1.3 million for the three and nine months ended June 30, 2012, respectively, compared with net losses of $85,000 and $32,000 for the three and nine months ended June 30, 2011, respectively. Gains on sales for the three months ended June 30, 2012 included the recognition of $95,000 in gains on properties sold in previous periods that had been deferred in accordance with GAAP because financing was provided by the Company and the sales did not meet either initial or continuing investment criteria to qualify for gain recognition. The total of such deferred gains recognized and included in gains on sales for the nine months ended June 30, 2012 was $598,000. At June 30, 2012, the Company had deferred gains on sales of other real estate owned of $239,000 compared to $771,000 at September 30, 2011. Impairment charges on other real estate owned of $611,000 were recognized for the three and nine months ended June 30, 2012 compared with impairment charges of $58,000 for the three months ended June 30, 2011 and $839,000 for the nine months ended June 30, 2011.

Note 6.   Borrowings

During the three months ended June 30, 2012, the Company exchanged nine FHLB borrowings totaling $160.0 million for new advances of the same amount. In connection with these exchanges, the Company paid prepayment penalties totaling $18.3 million. The new advances were not considered to be substantially different from the original advances in accordance with ASC 470-50, Debt – Modifications and Exchanges, and as a result the prepayment penalties have been treated as a discount on the new debt and are being amortized over the life of the new advances as an adjustment to rate. Details regarding these exchanges are as follows (dollars in thousands):

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						Effective			Reduced
						Rate of			Expense Over
		Advance		Prepayment		New			the Next
Terms of Original Advance	Terms of New Advance	Amount		Penalty		Advance			Twelve Months
Interest payable monthly at a fixed rate of 3.49%, principal due and payable on December 5, 2013	Interest payable quarterly at a fixed rate of 1.30%, principal due and payable on April 25, 2017	$	10,000	$	476		2.25	%	$	124
Interest payable monthly at a fixed rate of 3.44%, principal due and payable on December 10, 2013	Interest payable quarterly at a fixed rate of 1.06%, principal due and payable on April 25, 2016		10,000		470		2.23	%		121
Interest payable quarterly at a fixed rate of 3.72%, principal due and payable on June 9, 2015	Interest payable quarterly at a fixed rate of 3.04%, principal due and payable on May 4, 2018		25,000		*		3.04	%		170
Interest payable quarterly at a fixed rate of 5.58%, principal due and payable on May 16, 2016	Interest payable quarterly at a fixed rate of 4.31%, principal due and payable on May 9, 2022		25,000		*		4.31	%		316
Interest payable monthly at a fixed rate of 5.36%, principal due and payable on November 1, 2016	Interest payable quarterly at a fixed rate of 2.28%, principal due and payable on May 4, 2021		25,000		4,710		4.41	%		239
Interest payable quarterly at a fixed rate of 5.07%, principal due and payable on October 23, 2017	Interest payable quarterly at a fixed rate of 4.49%, principal due and payable on May 21, 2032		10,000		*		4.49	%		58
Interest payable monthly at a fixed rate of 3.90%, principal due and payable on April 18, 2018	Interest payable quarterly at a fixed rate of 2.44%, principal due and payable on May 16, 2022		5,000		687		3.85	%		5
Interest payable monthly at a fixed rate of 5.85%, principal due and payable on September 17, 2018	Interest payable quarterly at a fixed rate of 3.69%, principal due and payable on May 3, 2032		25,000		6,411		5.03	%		204
Interest payable monthly at a fixed rate of 5.05%, principal due and payable on January 21, 2020	Interest payable quarterly at a fixed rate of 3.56%, principal due and payable on May 17, 2032		25,000		5,554		4.72	%		82
		$	160,000	$	18,308				$	1,319

 *The prepayment penalty is embedded in the rate for the new advance.

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, 2012.

	Three months ended						Nine months ended
	June 30,			June 30,			June 30,		June 30,
(Amounts in thousands, except per share data)	2012			2011			2012		2011
Numerator:
Net (loss) income available to common stockholders	$	(354	)	$	(3,275	)	$	3,929	$	494
Denominator:
Weighted-average common shares outstanding		13,029			13,166			13,152		13,166
Effect of dilutive securities		21			-			7		-
Weighted-average common shares outstanding - assuming dilution		13,050			13,166			13,159		13,166
Earnings per common share	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)
Earnings per common share - assuming dilution	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)

⁽¹⁾ Weighted-average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC’s mutual-to-stock conversion, to June 30, 2011.

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 who were employed on or before July 31, 2011. The Bank froze the Pension Plan to new participants effective August 1, 2011, and, therefore, employees hired after July 31, 2011 are not eligible to participate in the Pension Plan. Retirement benefits under this plan are generally based on the employee’s years of service and compensation during the five consecutive years of highest compensation in the ten years immediately preceding retirement.

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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, 2012, 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.

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, 2012 and 2011 are as follows:

	Three months ended						Nine months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Service cost	$	150		$	143		$	451		$	429
Interest cost		166			161			498			485
Expected return on plan assets		(203	)		(217	)		(609	)		(652	)
Recognized net actuarial loss		58			17			173			49
Net periodic benefit cost	$	171		$	104		$	513		$	311

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

Equity Incentive Plan

On February 21, 2012, the Company adopted the Franklin Financial Corporation 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”), which provides for awards of restricted stock and stock options to key officers and outside directors. The cost of the 2012 Equity Incentive Plan is based on the fair value of restricted stock and stock option awards on their grant date.

The vesting of the restricted stock awards is contingent upon service, performance, and market conditions. Performance conditions consist of the achievement of certain benchmarks regarding tangible book value per share, while market conditions consist of provisions that allow for partial vesting of shares in the event that certain share price targets are met even if performance criteria are not fully met. The fair value of restricted stock is determined based upon management’s assumptions regarding the achievement of performance and market conditions stipulated for each award. For awards with performance conditions, fair value is based upon the price of the Company’s stock on the grant date. For awards with both performance and market conditions, fair value is based on a Monte Carlo analysis incorporating the closing price of the Company’s stock on the grant date along with assumptions related to the Company’s stock price given the achievement of certain performance criteria. Restricted stock awards may not be disposed of or transferred during the vesting period but carry with them the right to receive dividends. The cost of restricted stock awards will be recognized using the graded-vesting method over the five-year vesting period during which participants are required to provide services in exchange for the awards.

The vesting of stock options is contingent only upon meeting service conditions. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option terms. These assumptions are based on judgments regarding future events, are subjective in nature, and cannot be determined with precision. Since stock option awards contain only service conditions, management has elected to recognize the cost of stock option awards on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.

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Shares of common stock issued under the 2012 Equity Incentive Plan may be authorized unissued shares or, in the case of restricted stock awards, may be shares repurchased on the open market. As of June 30, 2012, the Company, through an independent trustee, had repurchased 284,600 shares on the open market for $4.3 million, or an average cost of $15.18 per share.

The maximum number of shares that may be awarded under the plan is 2,002,398, including 1,430,284 for option exercises and 572,114 restricted stock shares. Share-based compensation related to stock options and restricted stock recognized for the three and nine months ended June 30, 2012 was $700,000 and $717,000, respectively, and the related income tax benefit was $266,000 and $273,000, respectively.

The table below presents stock option activity for the nine months ended June 30, 2012:

			Weighted-		Remaining		Aggregate
			average		contractual life		intrinsic
(Dollars in thousands, except per share amounts)	Options		exercise price		(years)		value
Options outstanding at September 30, 2011		-		N/A		N/A		N/A
Granted		1,152,000	$	13.42		10.00	$	12
Exercised		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Options outstanding at June 30, 2012		1,152,000	$	13.42		9.75	$	3,491

Expected volatility – Based on the historical volatility of the Company’s stock.

Risk-free interest rate – Based on the U.S. Treasury yield curve and the expected life of the options at the time of grant.

Expected dividends – The Company has not declared a dividend, and therefore no dividends are assumed.

Expected life – Based on a weighted-average of the five-year vesting period and the 10-year contractual term of the stock option plan.

Grant price for the stock options – Based on the closing price of the Company’s stock on the grant date.

The fair value of the Company’s stock option grants in 2012 was determined using the Black-Scholes option pricing formula, which resulted in a fair value of $3.76 per option. The following assumptions were used in the formula:

Expected volatility		24.39	%
Risk-free interest rate		1.43	%
Expected dividends		0.00	%
Expected life (in years)		6.5
Grant price for the stock options	$	13.42

At June 30, 2012, the Company had $2.9 million of unrecognized compensation expense related to 805,484 stock options expected to vest. No shares were vested as of June 30, 2012. The table below presents information about stock options expected to vest over the five-year vesting period at June 30, 2012:

(Dollars in thousands, except per share amounts)
Options expected to vest at period end		805,484
Weighted-average exercise price	$	13.42
Remaining contractual life (years)		9.75
Aggregate intrinsic value	$	2,441

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The table below presents restricted stock award activity for the nine months ended June 30, 2012:

			Weighted-
	Restricted		average grant
	stock awards		date fair value
Non-vested at September 30, 2011		-		N/A
Granted		464,500	$	13.42
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2012		464,500	$	13.42

At June 30, 2012, unrecognized compensation expense adjusted for expected forfeitures was $3.8 million related to 324,728 shares of restricted stock expected to vest over the five-year vesting period. The weighted-average period over which compensation cost related to non-vested awards is expected to be recognized was five years at June 30, 2012.

Employee Stock Ownership Plan

In connection with the Company’s stock conversion completed in April 2011, the Bank established an employee stock ownership plan (“ESOP”) for the benefit of all of its eligible employees. Employees at the date of conversion and employees of the Bank hired after the conversion 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.

Unearned ESOP shares are shown as a reduction of stockholders’ equity. Dividends on unearned 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 expense related to the ESOP for the three and nine months ended June 30, 2012 was $215,000 and $637,000, respectively, compared to $176,000 for the three and nine months ended June 30, 2011. The fair value of unearned ESOP shares, using the closing quoted market price per share of the Company’s stock, was $17.4 million at June 30, 2012. A summary of ESOP share allocation for the nine months ended June 30, 2012 is as follows:

Shares allocated at September 30, 2011	35,987
Shares allocated during the period	49,673
Shares distributed during the period	-
Allocated shares held by the ESOP trust at June 30, 2012	85,660
Unearned shares at June 30, 2012	1,058,567
Total ESOP shares	1,144,227

Stock-Based Deferral Plan

In connection with the Company’s stock conversion completed in April 2011, 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 and 6,432 thereafter. 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 consolidated balance sheet in accordance with GAAP.

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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 $102.0 million and $55.7 million at June 30, 2012 and September 30, 2011, respectively.

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, 2012 and September 30, 2011, respectively. The amount of standby letters of credit was $501,000 and $1.0 million at June 30, 2012 and September 30, 2011, respectively. The Company believes that the likelihood of having to perform on standby letters of credit is remote based on the financial condition of the guarantors and the Company’s historical experience.

At June 30, 2012, the Company had rate lock commitments to originate mortgage loans amounting to $400,000 and mortgage loans held for sale of $665,000 compared to $3.8 million and $922,000, respectively, at September 30, 2011. At June 30, 2012, the Company had corresponding commitments outstanding of $1.1 million to sell loans on a best-efforts basis compared to $4.7 million at September 30, 2011. 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.

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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.

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, 2012, 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 beginning 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.

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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.

Other real estate owned: Other real estate owned (“OREO”) is adjusted to net realizable value, which is equal to fair value less costs to sell, upon foreclosure. Subsequently, OREO 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 OREO. When the fair value of OREO 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 OREO 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 OREO is further impaired below the appraised value and there is no observable market price, the Company classifies the OREO as a Level 3 asset. Additionally, if the fair value of the OREO 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 OREO as a Level 3 asset.

Assets measured at fair value on a recurring basis as of June 30, 2012 are summarized below:

	Total		Level 1		Level 2		Level 3
Securities available for sale
States and political subdivisions	$	13,301	$	-	$	11,761	$	1,540
Agency mortgage-backed securities		39,652		-		39,652		-
Agency collateralized mortgage obligations		191,932		-		191,932		-
Corporate equity securities		23,446		23,446		-		-
Corporate debt securities		116,058		-		111,221		4,837
Total assets at fair value	$	384,389	$	23,446	$	354,566	$	6,377

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

Balance of Level 3 assets measured on a recurring basis at September 30, 2011	$	6,685
Principal payments in period		(320	)
Accretion (amortization) of premiums or discounts		(21	)
Other-than-temporary impairment charges included in noninterest income		(686	)
Increase (decrease) in unrealized gains or losses included in accumulated other comprehensive income		719
Balance of Level 3 assets measured on a recurring basis at June 30, 2012	$	6,377

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Level 3 securities measured at fair value on a recurring basis at June 30, 2012 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 a combination of the observable market prices of similar securities based on their trading activity and broker quotes. Price estimates are then adjusted for liquidity discounts necessary to account for the lack of trading activity for each security. Changes in the liquidity discount applied could result in significantly higher or lower fair value measurements. During the nine months ended June 30, 2012, the Company recognized an other-than-temporary impairment charge on the municipal bond of $686,000, which is included in noninterest income (expense) in the income statement.

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, including held-to-maturity securities, impaired loans, and real estate owned. Held-to-maturity securities are measured at fair value in a period in which an other-than-temporary impairment charge is recognized. Impaired loans are measured at fair value when a change in the value of the underlying collateral or a change in the present value of estimated future cash flows result in a change in the specific allowance for such a loan. Real estate owned is measured at fair value in the period of foreclosure or in a period in which a change in net realizable value results in an impairment charge.

Assets measured at fair value on a non-recurring basis as of June 30, 2012 are included in the table below:

	Total		Level 1		Level 2		Level 3
Non-agency collateralized mortgage obligations	$	325	$	-	$	-	$	325
Impaired loans
One-to four-family		3,780		-		3,780		-
Other real estate owned		6,432		-		81		6,351
Total assets at fair value	$	10,537	$	-	$	3,861	$	6,676

In estimating the fair value of non-agency collateralized mortgage obligations (“CMOs”), the Company performs a discounted cash flow analysis that uses certain unobservable inputs, including delinquency and loss severity rates for the collateral underlying each security, cash flow estimates obtained from a third-party service, and the discount rate applied. Since there is no readily-available discount rate for each individual security, the Company begins with the rate of a seven-year corporate bond (which management believes mirrors the expected remaining life of these securities) with a credit rating of B as of the balance sheet date. The Company applies this rate as the discount rate on non-agency CMOs rated as “investment grade” by the major rating agencies and applies multiples of this rate to non-agency CMO’s of lower credit quality. For securities rated one level below investment grade, the Company applies this rate times a factor of two; for securities rated two levels below investment grade, the Company applies this rates times a factor of three; and for securities rate three or more levels below investment grade, the Company applies this rate times a factor of four. The following table provides information about unobservable inputs used in the valuation of non-agency CMOs at June 30, 2012:

	Range		Weighted Average
Delinquency rate		0.00% - 72.79%		16.55	%
Loss severity		9.55% - 81.87%		46.03	%
Discount rate		5.53% - 26.25%		18.40	%

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.

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Deposits: The carrying values of 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, as well as their classifications in the fair value hierarchy, at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	130,873	$	130,873	$	130,873	$	130,873	$	-	$	-	$	-	$	-
Securities available for sale		384,389		384,389		23,446		23,446		354,566		354,566		6,377		6,377
Securities held to maturity		21,801		22,368		-		-		10,413		11,219		11,388		11,149
Net loans		462,861		480,648		-		-		-		-		462,861		480,648
Loans held for sale		665		665		-		-		665		665		-		-
FHLB stock		10,206		10,206		10,206		10,206		-		-		-		-
Accrued interest receivable		4,268		4,268		4,268		4,268		-		-		-		-
Financial liabilities:
Deposits		647,324		654,342		-		-		647,324		654,342		-		-
FHLB borrowings		171,887		208,843		-		-		171,887		208,843		-		-
Accrued interest payable		927		927		927		927		-		-		-		-
Advance payments by borrowers for taxes and insurance		1,526		1,526		1,526		1,526		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		101,983		-		-		-		-		-		101,983		-
Standby letters of credit		501		6		-		-		-		-		501		6

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	September 30, 2011
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	115,749	$	115,749	$	115,749	$	115,749	$	-	$	-	$	-	$	-
Securities available for sale		396,809		396,809		21,673		21,673		368,451		368,451		6,685		6,685
Securities held to maturity		25,517		23,248		-		-		12,064		13,085		13,453		10,163
Net loans		478,423		497,084		-		-		-		-		478,423		497,084
Loans held for sale		922		922		-		-		922		922		-		-
FHLB stock		11,014		11,014		11,014		11,014		-		-		-		-
Accrued interest receivable		4,901		4,901		4,901		4,901		-		-		-		-
Financial liabilities:
Deposits		648,754		655,790		-		-		648,754		655,790		-		-
FHLB borrowings		190,000		223,240		-		-		190,000		223,240		-		-
Accrued interest payable		904		904		904		904		-		-		-		-
Advance payments by borrowers for taxes and insurance		2,335		2,335		2,335		2,335		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		55,702		-		-		-		-		-		55,702		-
Standby letters of credit		1,015		3		-		-		-		-		1,015		3

Note 11. Stock Repurchase Program

On May 3, 2012, the Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 715,141 shares, of its outstanding common stock either on the open market or through private transactions until October 31, 2012. Purchases will be conducted through an SEC Rule 10b5-1 repurchase plan with Sandler O’Neill & Partners, L.P. (“Sandler”) whereby Sandler will, from time to time and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, act as agent for the Company in purchasing shares based upon the parameters of the Rule 10b5-1 repurchase plan. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout period. During the three months ended June 30, 2012, the Company repurchased 526,300 shares of outstanding common stock for $8.0 million, or an average price of $15.19 per share.

Note 12. Subsequent Events

There are two types of subsequent events as defined by U.S. generally accepted accounting principles. The first are recognized subsequent events, which include events or transactions that provide additional evidence about conditions that existed as of the balance sheet date, including the estimates inherent in the process of preparing financial statements. The second are unrecognized subsequent events, which include events or transactions that provide evidence about conditions that did not exist as of the balance sheet date but arose after that date. The Company is required to disclose material subsequent events that arise after the balance sheet date and before the financial statements are available to be issued to prevent the financial statements from being misleading.

At the time the consolidated financial statements were available to be issued on August 7, 2012, there were no material recognized or unrecognized subsequent events.

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 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 in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 under Item 1A 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 collectability 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 4 of the notes to the unaudited consolidated financial statements.

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Other-Than-Temporary Impairment. Investment securities are reviewed at each quarter 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 illiquid and thinly traded securities where market quotes are not available, we use discounted cash flows to determine fair value. Additional information regarding our accounting for investment securities is included in note 2 of 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.

Valuation of Stock-Based Compensation. The Company accounts for its stock options and restricted stock in accordance with ASC Topic 718, Compensation – Stock Compensation. ASC 718 requires companies to expense the fair value of stock-based compensation. Management utilizes the Black-Scholes option valuation model and the Monte Carlo model to estimate the fair value of stock options and restricted stock, respectively. These models require the input of highly subjective assumptions, including expected stock price volatility, option life and ability to achieve performance and market conditions stipulated for restricted stock awards. These subjective input assumptions materially affect the fair value estimate.

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.

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Comparison of Financial Condition at June 30, 2012 and September 30, 2011

Assets. Total assets at June 30, 2012 were $1,081.0 million, a decrease of $16.0 million, or 1.5%, from total assets of $1,097.0 million at September 30, 2011.

Cash and cash equivalents increased $15.1 million to $130.9 million at June 30, 2012 compared to $115.7 million at September 30, 2011, an increase of 13.1%. Securities decreased $16.1 million, or 3.8%, to $406.2 million at June 30, 2012 compared to $422.3 million at September 30, 2011. The decrease in securities included increases due to the purchase of $90.0 million of agency CMOs and MBSs and $8.2 million of corporate bonds and a $12.2 million increase in net unrealized gains on securities available-for-sale ($9.5 million of which related to the Company’s corporate equity securities), which were more than offset by other-than-temporary impairment charges on securities of $4.9 million, $94.8 million of normal principal payments on securities, $4.0 million of maturities of corporate bonds, $7.8 million of calls of agency and municipal bonds, $4.2 million of sales of municipal bonds, and $8.4 million of sales of corporate equity securities.

The Company did not purchase any corporate equity securities during the nine months ended June 30, 2012. The Company plans to reduce its common stock investments, but, in the short-term, reductions will be made in investments in larger cap entities. Because of the continued global uncertainty, particularly in Europe, the recent weakening in the United States economy, and the continuing other-than-temporary impairment charges (“OTTI”) on corporate equity securities, this divestiture process has been accelerated. In July 2012, the Company sold $5.6 million of corporate equity securities and realized a net gain of $281,000 on these sales. At June 30, 2012, the Company had net unrealized gains of $2.4 million on corporate equity securities. A further discussion of the OTTI charges is contained in the comparative earnings analyses below.

Total loans, excluding loans held for sale, decreased $19.4 million, or 3.9%, to $477.1 million at June 30, 2012 compared to $496.5 million at September 30, 2011. The decrease was the result of several significant loan prepayments as well as charge-offs of $3.3 million. One- to four-family loans declined $6.7 million, construction loans declined $19.7 million, and land and land development loans declined $17.8 million. These declines were partially offset by increases in multi-family loans of $3.1 million and nonresidential loans of $21.8 million.

Liabilities. Total liabilities at June 30, 2012 were $827.5 million compared to $847.4 million at September 30, 2011, a decrease of $19.9 million, or 2.3%, primarily as a result of a $18.1 million decrease in FHLB borrowings resulting from the restructuring of nine FHLB advances (see note 6 of the notes to unaudited consolidated financial statements for further discussion of these restructurings). This decrease also reflected a $1.0 million decrease in certificates of deposit and a $416,000 decrease in money market checking and money market savings accounts. Changes in other liability categories were not significant.

Stockholders’ equity. Stockholders’ equity was $253.5 million at June 30, 2012, an increase of $3.9 million, or 1.6%, from September 30, 2011 despite the purchase of $8.0 million of company stock as part of the Company’s stock repurchase program and the purchase of $4.3 million of company stock for the 2012 Equity Incentive Plan (see notes 8 and 11 of the notes to unaudited consolidated financial statements). The increase was the result of net income to retained earnings of $3.9 million and an $11.0 million increase of accumulated other comprehensive income caused primarily by a net increase in the estimated fair value of our portfolio of available-for-sale securities.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and June 30, 2011

General. The Company had a net loss of $354,000, or $0.03 per share, for the three months ended June 30, 2012 compared to net loss of $3.3 million for the three months ended June 30, 2011, an improvement of $2.9 million, or 89.2%. The decrease in net loss was primarily attributable to the $5.6 million charitable contribution to The Franklin Federal Foundation in the three months ended June 30, 2011 compared to $0 in the three months ended June 30, 2012. Other factors included a $199,000 decrease in net interest income, a $2.2 million decrease in the provision for loan losses, a $805,000 increase in other-than-temporary impairment charges on securities included in income, $777,000 of net losses on sales of securities in the three months ended June 30, 2012 compared to $0 in the three months ended June 30, 2011, a $796,000 increase in net gains on sales of other real estate owned, a $395,000 increase in personnel expense (primarily attributable to the 2012 Equity Incentive Plan), a $553,000 increase in impairment charges on other real estate owned, and a $2.9 million increase in income tax expense due to improved earnings.

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Net Interest Income. Net interest income decreased $199,000, or 2.9%, to $6.7 million in the quarter ended June 30, 2012 from $6.9 million in the quarter ended June 30, 2011. The decrease in net interest income was the result of a lower interest rate environment and a higher mix of investment securities rather than loans in the quarter ended June 30, 2012 compared to the comparable 2011 quarter.

Total interest and dividend income decreased $1.0 million, or 8.9%, to $10.7 million for the quarter ended June 30, 2012 from $11.7 million for the quarter ended June 30, 2011. Interest income on loans decreased $457,000 from the comparable quarter in the prior year primarily due to a decrease of $24.4 million in the average balance of loans for the three months ended June 30, 2012 compared to the comparable quarter in the prior year. The average balance of nonresidential loans increased $19.5 million while the yield declined 18 basis points for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The average balance of multi-family loans increased $482,000 and the yield declined 37 basis points. These increases in average balance were more than offset by a $7.6 million decline in the average balance of one- to four-family loans, a $16.9 million decline in the average balance of construction loans, and an $18.7 million decline in the average balance of land and land development loans. The yields on land and land development loans increased 44 basis points while the yield on the other loan categories declined, including a 12 basis point decline in yield on one- to four-family loans and a 77 basis point decline in the yield on construction loans. Rates on land and land development loans were positively affected in the quarter ended June 30, 2012 by collections on nonaccrual loans and by rate floors.

Interest and dividend income on investment securities decreased $565,000, or 15.6%, as a $16.7 million increase in the average balance of investment securities for the three months ended June 30, 2012 compared to the comparable quarter in the prior year was more than offset by a 66 basis point decline in yield. The decrease was due primarily to a $564,000 decline in interest income on CMOs for the three months ended June 30, 2012 compared to the comparable quarter in the prior year due to a 125 basis point decline in yield that more than offset a $16.2 million increase in the average balance. The Company has significantly increased its investment in short-term CMOs to meet regulatory qualified thrift lender requirements, to better position the Company for rising interest rates, and to manage the proceeds from the Company’s stock conversion until the funds can be effectively deployed into new loan opportunities. Interest income on combined other investment securities was essentially unchanged for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 as changes in average balances were offset by changes in rate, including an increase in the average balance of MBSs of $11.2 million offset by a 116 basis point decline in yield, a decrease in the average balance of municipal bonds of $4.6 million offset by an increase in yield of 78 basis points, a $12.4 million decline in the average balance of investments in the securities of U.S. government agencies as these securities were called by the issuers, a $2.0 million increase in the average balance of corporate equity securities combined with a 77 basis point increase in yield, and a $4.3 million increase in the average balance of corporate bonds offset by a 8 basis point decrease in yield.

Total interest expense decreased $849,000, or 17.5%, to $4.0 million for the quarter ended June 30, 2012 from $4.8 million for the three months ended June 30, 2011. The decline was the result of a $613,000 decrease in deposit costs and a $236,000 decrease in FHLB borrowings costs for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The average balance of interest-bearing deposits decreased $24.8 million due to a decrease in average certificates of deposit of $15.5 million along with a $9.2 million decrease in money market savings and money market checking accounts. The Company has not been aggressive in deposit pricing since its mutual to stock conversion because of the large amount of cash raised in the conversion. The average interest rate paid on deposits decreased 32 basis points as a result of the lower interest rate environment for deposits in the quarter ended June 30, 2012 compared to the comparable period in the prior year. The average balance of Federal Home Loan Bank borrowings decreased $10.3 million and the average interest rate paid declined 24 basis points due to the debt modifications discussed in note 6 of the notes to unaudited consolidated financial statements.

Provision for Loan Losses. The provision for loan losses decreased $2.2 million to a credit provision of $390,000 for the three months ended June 30, 2012 compared to a provision expense of $1.8 million for the three months ended June 30, 2011. The decrease in the provision reflects a decrease in nonperforming loans and a leveling-off of problem loans in certain portfolios for the most recent quarter compared to the three months ended June 30, 2011. Net loan charge-offs were $10,000 for the quarter ended June 30, 2012 compared to $315,000 for the quarter ended June 30, 2011. The overall allowance rate declined 12 basis points at June 30, 2012 to 2.26% of total loans from 2.38% of total loans at March 31, 2012. See note 4 of the notes to the unaudited consolidated financial statements for a discussion of our methodology for estimating the allowance for loan losses.

32

Noninterest Income (Expense)

The following table presents the components of noninterest income and the percentage change in each for the periods indicated:

	Three Months Ended June 30,						Increase (Decrease)
(Dollars in thousands)	2012			2011			%
Service charges on deposit accounts	$	14		$	11			30.5	%
Other service charges and fees		167			87			91.8
Gains on sales of loans held for sale		65			40			64.0
Losses on sales of securities, net		(777	)		-			(100.0	)
Gains (losses) on sales of other real estate owned		711			(85	)		NM
Impairment of securities		(2,005	)		(1,157	)		73.3
Impairment recognized in OCI		53			96			(44.7	)
Net impairment reflected in earnings		(2,058	)		(1,253	)		64.2
Increase in cash surrender value of bank-owned life insurance		323			321			0.6
Other operating income		214			264			(19.1	)
Total noninterest income (expense)	$	(1,341	)	$	(615	)		117.7

Gains, Losses, and Impairment Charges on Securities. Other-than-temporary-impairment charges on securities reflected in earnings increased $805,000 to $2.1 million for the three months ended June 30, 2012 compared to $1.3 million for the quarter ended June 30, 2011. Impairment charges reflected in earnings consisted of $153,000 in charges on debt securities and $1.9 million on equity securities for the three months ended June 30, 2012 compared to $501,000 on debt securities and $752,000 on equity securities in the three months ended June 30, 2011. Impairment charges for the three months ended June 30, 2012 primarily related to the impairment of the Company’s equity investment in an exchange-traded fund designed to move inversely with 20-year treasury yields. These securities have been adversely affected by the Federal Reserve’s maturity extension program (“operation twist”), and their value has declined quarter over quarter. In addition to the impairment charge recognized, the Company sold a portion of its investment in the exchange-traded fund and realized a loss on sale of $1.4 million during the three months ended June 30, 2012. This loss on sale was partially offset by gains on sales of other securities for net losses on sales of securities of $777,000 in the three months ended June 30, 2012 compared to no net gains or losses in the three months ended June 30, 2011. In July 2012, the Company sold all of its remaining investment in the exchanged-traded fund as well as other equity securities, particularly those exposed to global risks, for $5.6 million, resulting in a net gain of $281,000.

Noninterest Income, Excluding Gains, Losses, and Impairment Charges on Securities. Total other noninterest income excluding gains, losses, and impairment charges on securities increased $856,000, or 134.4%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, primarily as a result of $711,000 in net gains on sales of real estate owned in the three months ended June 30, 2012 compared to net losses on sale of $85,000 in the comparable period in the prior year.

33

Other Noninterest Expense.

The following table presents the components of noninterest expense and the percentage change for the periods indicated:

	Three Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2012		2011		%
Personnel expense	$	2,665	$	2,270		17.4	%
Occupancy expense		227		209		8.6
Equipment expense		249		226		10.2
Advertising expense		46		53		(12.6	)
Federal deposit insurance premiums		207		315		(34.4	)
Charitable contributions to The Franklin Federal Foundation		-		5,555		(100.0	)
Impairment of other real estate owned		611		58		953.4
Other operating expenses		1,060		901		17.5
Total other noninterest expenses	$	5,065	$	9,587		(47.2	)

Total noninterest expenses decreased $4.5 million, or 47.2%, to $5.1 million for the three months ended June 30, 2012 compared to $9.6 million for the three months ended June 30, 2011. The decrease in noninterest expenses was due primarily to a $5.6 million charitable contribution to The Franklin Federal Foundation made in the three months ended June 30, 2011 in connection with the Company’s mutual-to-stock conversion compared to no such contributions in the three months ended June 30, 2012. This decrease was partially offset by a $395,000 increase in personnel expense related to the stock options and restricted stock granted under the Company’s 2012 Equity Incentive Plan and a $553,000 increase in impairment charges on other real estate owned.

Income Tax Expense. Income tax expense was $1.0 million for the three months ended June 30, 2012 compared to an income tax benefit of $1.8 million for the three months ended June 30, 2011. The effective income tax rate for the three months ended June 30, 2012 was 151.1% compared to an effective income tax rate of 36.0% for the three months ended June 30, 2011. The effective tax rates were affected by losses incurred on sales and impairments of corporate equity securities. Net capital losses and impairments on equity securities were $777,000 and $1.9 million, respectively, for the three months ended June 30, 2012. Net capital losses and impairments on equity securities were $0 and $752,000, respectively, for the three months ended June 30, 2011.

Comparison of Operating Results for the Nine Months Ended June 30, 2012 and June 30, 2011

General. We had net income of $3.9 million for the nine months ended June 30, 2012 compared to $494,000 for the nine months ended June 30, 2011, an increase of $3.4 million. The increase was the net result of a $970,000 increase in net interest income, a $3.1 million decrease in the provision for loan losses, a $1.0 million decrease in gains on sales of securities, a $1.4 million increase in gains on sales of other real estate owned, a $2.5 million increase in other-than-temporary impairment charges on securities included in income, a $4.9 million decrease in other noninterest expenses, and a $3.9 million increase in income tax expense.

Net Interest Income. Net interest income increased $970,000, or 5.0%, to $20.6 million in the nine months ended June 30, 2012 from $19.6 million in the nine months ended June 30, 2011. The increase in net interest income resulted from investing the funds received in the mutual-to-stock conversion completed in April 2011 and a decline in rates paid on deposits.

Total interest and dividend income decreased $1.3 million, or 3.7%, to $33.2 million for the nine months ended June 30, 2012 from $34.4 million for the nine months ended June 30, 2011. Interest income on loans decreased $825,000 from the prior year primarily due to a decrease of $15.4 million in the average balance of loans for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. The average balance of nonresidential loans increased $13.4 million while the yield declined 8 basis points for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. The average balance of multi-family loans increased $646,000 while the yield declined 26 basis points for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. These increases in average balances were more than offset by a $10.9 million decline in the average balance of one- to four-family loans, an $8.3 million decline in the average balance of construction loans, and a $9.5 million decline in the average balance of land and land development loans. The yield on land and land development loans increased 32 basis points while the yield on one- to four-family loans and construction loans declined 7 basis points and 35 basis points, respectively. Rates on land and land development loans were positively affected in the nine months ended June 30, 2012 by collections on nonaccrual loans and by rate floors.

34

Interest and dividend income on investment securities decreased $430,000, or 4.2%, as a $69.8 million increase in the average balance of investment securities for the nine months ended June 30, 2012 compared to the comparable period in the prior year more than offset a 72 basis point decline in yield. The average balance of CMOs increased $79.8 million and the yield decreased 125 basis points, resulting in a decrease in interest income of $381,000 for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. The Company has significantly increased its investment in short-term CMOs to meet regulatory qualified thrift lender requirements, to better position the Company for rising interest rates, and to manage the proceeds from the Company’s stock conversion until the funds can be effectively deployed into new loan opportunities. Additionally, interest income on MBSs decreased $202,000 for the nine months ended June 30, 2012 compared to the comparable period in the prior year as a 101 basis point decline in yield that was more than offset by a $2.2 million increase in the average balance. These decreases were partially offset by a $198,000 increase in interest income on corporate bonds resulting from an increase in yield of 25 basis points that was more than offset by a $829,000 decline in the average balance for the nine months ended June 30, 2012 compared to the comparable period in the prior year.

Total interest expense decreased $2.3 million, or 15.2%, to $12.6 million for the nine months ended June 30, 2012 from $14.9 million for the nine months ended June 30, 2011. The decline was the result of a $2.0 million decrease in deposit costs and a $215,000 decrease in Federal Home Loan Bank borrowing costs. The average balance of interest-bearing deposits decreased $19.9 million due to a decrease in average certificates of deposit of $12.6 million along with a $7.3 million decrease in money market savings and money market checking accounts. The average interest rate paid on deposits decreased 38 basis points as a result of the lower interest rate environment for deposits in the nine months ended June 30, 2012.

Provision for Loan Losses. The provision for loan losses decreased $3.1 million to a credit provision of $542,000 for the nine months ended June 30, 2012 compared to a provision expense of $2.5 million for the nine months ended June 30, 2011. The decrease in the provision reflects a combination of a decrease in the balance of loans outstanding as well as a lower outstanding balance of nonperforming loans and a leveling-off of problem loans in certain portfolios for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. The Company recorded provisions of $263,000 and $105,000 in the one-to four-family and land and land development loan portfolios, respectively. The provision for the one-to four-family loan portfolio was the result of an increase in nonperforming non-owner-occupied loans, while the provision for the land and land development portfolio reflects management’s continued concerns regarding collateral valuations in this portfolio. The Company recorded credit provisions for the multi-family, nonresidential, and construction loan portfolios totaling $906,000, partially as a result of declining loan balances and partially due to improving credit quality in the Company’s nonresidential and construction loan portfolios. Net loan charge-offs were $3.3 million for the nine months ended June 30, 2012 compared to $2.6 million for the nine months ended June 30, 2011. The overall allowance rate declined 69 basis points at June 30, 2012 to 2.26% of total loans from 2.95% of total loans at September 30, 2011. See note 4 of the notes to the unaudited consolidated financial statements for a discussion of our methodology for estimating the allowance for loan losses.

35

Noninterest Income (Expense)

The following table presents the components of noninterest income and the percentage change in each for the periods indicated:

	Nine months Ended June 30,						Increase (Decrease)
(Dollars in thousands)	2012			2011			%
Service charges on deposit accounts	$	38		$	31			23.4	%
Other service charges and fees		781			240			225.9
Gains on sales of loans held for sale		206			255			(19.4	)
(Losses) gains on sales of securities, net		(777	)		265			(393.6	)
Gains (losses) on sales of other real estate owned		1,336			(32	)		NM
Impairment of securities		(4,884	)		(1,943	)		151.3
Impairment recognized in OCI		(500	)		(9	)		NM
Net impairment reflected in earnings		(4,384	)		(1,934	)		126.6
Increase in cash surrender value of bank-owned life insurance		965			956			0.9
Other operating income		439			414			6.0
Total noninterest income (expense)	$	(1,396	)	$	195			(816.4	)

Gains, Losses, and Impairment Charges on Securities. Other-than-temporary-impairment charges on securities reflected in earnings increased $2.5 million to $4.4 million for the nine months ended June 30, 2012 compared to $1.9 million for the nine months ended June 30, 2011. Impairment charges reflected in earnings consisted of $968,000 in charges on debt securities and $3.4 million on equity securities for the nine months ended June 30, 2012 compared to $1.1 million on debt securities and $803,000 on equity securities in the nine months ended June 30, 2011. Debt impairment charges for the nine months ended June 30, 2012 related primarily to the Company’s investment in an auction-rate municipal bond backed by student loans that was downgraded in the three months ended June 30, 2012 and is experiencing deteriorating collateral quality. Equity impairment charges for the nine months ended June 30, 2012 primarily related to the impairment of the Company’s investment in one Virginia-based community bank with a price trend that raised at the time significant concern about the ability of the stock price to return to the Company’s cost basis in a reasonable period of time as well as the Company’s investment in an exchange-traded fund designed to move inversely with 20-year treasury yields. These securities have been adversely affected by the Federal Reserve’s operation twist, and their value has declined quarter over quarter. In addition to the impairment charge recognized on this exchange-traded fund, the Company sold a portion of the investment and realized a loss on sale of $1.4 million. This loss on sale was partially offset by gains on sales of other equity instruments for net losses on sales of securities of $777,000 in the nine months ended June 30, 2012 compared to net gains of $265,000 in the quarter ended June 30, 2011.

In July 2012, the Company sold all of its remaining investment in the exchange-traded fund as well as a significant portion of its investments in stocks of financial institutions and other companies with exposure to global credit, currency and other risks. In total, the Company sold $5.6 million of such stocks in July 2012 and realized a gain on the sale of $281,000. At July 31, 2012, the Company’s available for sale corporate equity securities had an estimated fair value of $18.9 million, with gross unrealized gains of $3.1 million and gross unrealized losses of $397,000. Of the $18.9 million, approximately 74% was in Virginia-based community banks.

Despite the realized losses and the OTTI charges on equity securities recognized in net income for the nine months ended June 30, 2012, there was unrealized appreciation on equity securities of $5.3 million for the nine months ended June 30, 2012, and the equity securities portfolio improved from a net unrealized loss of $7.1 million at September 30, 2011 to a net unrealized gain of $2.4 million at June 30, 2012.

Noninterest Income, Excluding Gains, Losses, and Impairment Charges on Securities. Total other noninterest income excluding gains, losses, and impairment charges on securities increased $1.9 million, or 102.0%, for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011, primarily as a result of a $541,000 increase in other service charges and fees and a $1.4 million increase in gains on sales of other real estate owned. The increase in other service charges and fees was the result of fees received in connection with the prepayment of several large loans due either to refinancing or the sale of the underlying collateral, which totaled $549,000 in the nine months ended June 30, 2012 compared to $54,000 in the comparable nine months in the prior year.

36

Other Noninterest Expense.

The following table presents the components of noninterest expense and the percentage change for the periods indicated:

	Nine months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2012		2011		%
Personnel expense	$	6,743	$	6,097		10.6	%
Occupancy expense		667		617		8.1
Equipment expense		707		672		5.2
Advertising expense		156		125		24.9
Federal deposit insurance premiums		618		833		(25.9	)
Charitable contributions to The Franklin Federal Foundation		-		5,555		(100.0	)
Impairment of other real estate owned		611		839		(27.2	)
Other operating expenses		2,729		2,346		16.3
Total other noninterest expenses	$	12,231	$	17,084		(28.4	)

Total noninterest expenses decreased $4.9 million, or 28.4%, to $12.2 million for the nine months ended June 30, 2012 compared to $17.1 million for the nine months ended June 30, 2011. The decrease in noninterest expenses was due primarily to a $215,000 decrease in federal deposit insurance premiums, a $228,000 decrease in impairments of other real estate owned and a decrease of $5.6 million in contributions to The Franklin Federal Foundation. In the nine months ended June 30, 2011, the Company made $5.6 million in contributions to the Foundation in connection with its mutual-to-stock conversion that was not repeated in the nine months ended June 30, 2012. These decreases were partially offset by a $646,000 increase in personnel expense and a $383,000 increase in other operating expenses. The increase in personnel expense was caused by a $462,000 increase in expenses related to the Company’s ESOP, which was only in effect for a portion of the nine months ended June 30, 2011, a $555,000 increase in compensation expense related to stock options and restricted stock granted to officers in fiscal 2012 under the 2012 Equity Incentive Plan, and a $203,000 increase in pension plan expenses. These increases in personnel expense were partially offset by a $650,000 decrease in deferred compensation plan expenses. The increase in operating expenses was the result of $163,000 in expenses related to stock options and restricted stock granted to directors in fiscal 2012 under the 2012 Equity Incentive Plan as well as a $237,000 increase in fees paid for audit, legal, and other professional services related to reporting as a public entity in the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011.

Income Tax Expense. Income tax expense was $3.5 million for the nine months ended June 30, 2012 compared to an income tax benefit of $340,000 for the nine months ended June 30, 2011. The effective income tax rate for the nine months ended June 30, 2012 was 47.4% compared to an effective income tax benefit rate of 220.0% for the nine months ended June 30, 2011. The effective tax rates were affected by losses incurred on sales and impairments of corporate equity securities. Net capital losses and impairments on corporate equity securities were $777,000 and $3.4 million, respectively, for the nine months ended June 30, 2012. Net capital gains and impairments on corporate equity securities were $45,000 and $803,000, respectively, for the nine months ended June 30, 2011.

37

Average Balances, Interest and Dividend Income and Interest Expense, 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,
	2012								2011
(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	$	110,056		$	1,895		6.93	%	$	117,661		$	2,067		7.05	%
Multi-family		80,502			1,346		6.72			80,984			1,431		7.09
Nonresidential		204,794			3,405		6.69			185,315			3,173		6.87
Construction		23,577			245		4.18			40,454			499		4.95
Land and land development		49,671			656		5.31			68,404			831		4.87
Other		550			11		8.04			691			14		8.13
Total loans		469,150			7,558		6.48			493,509			8,015		6.51
Securities:
Collateralized mortgage obligations		218,310			918		1.69			202,088			1,482		2.94
Mortgage-backed securities		43,860			262		2.40			32,676			290		3.56
States and political subdivisions		13,554			180		5.34			18,113			206		4.56
U. S. government agencies		-			-		-			12,430			31		1.00
Corporate equity securities		26,404			121		1.84			24,442			65		1.07
Corporate debt securities		123,406			1,572		5.12			119,102			1,544		5.20
Total securities		425,534			3,053		2.89			408,851			3,618		3.55
Investment in FHLB stock		10,395			40		1.55			11,703			24		0.82
Other interest-earning assets		113,823			47		0.17			164,817			89		0.22
Total interest-earning assets		1,018,902			10,698		4.22			1,078,880			11,746		4.37
Allowance for loan losses		(11,653	)							(12,417	)
Noninterest-earning assets		87,010								88,254
Total assets	$	1,094,259							$	1,154,717
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits:
Money market savings	$	220,002			252		0.46		$	226,945			468		0.83
Money market checking		43,905			52		0.48			46,185			92		0.80
Certificates of deposit		380,057			1,630		1.72			395,594			1,987		2.01
Total deposits		643,964			1,934		1.21			668,724			2,547		1.53
FHLB borrowings		179,652			2,055		4.60			190,000			2,291		4.84
Total interest-bearing liabilities		823,616			3,989		1.95			858,724			4,838		2.26
Noninterest bearing liabilities		9,686								102,312
Total liabilities		833,302								961,036
Stockholders’ equity		260,957								193,681
Total liabilities and stockholders’ equity	$	1,094,259							$	1,154,717
Net interest income				$	6,709							$	6,908
Interest rate spread(1)							2.27	%							2.11	%
Net interest margin(2)							2.65	%							2.60	%
Average interest-earning assets to average interest-bearing liabilities							123.71	%							125.64	%

⁽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.

38

	For the Nine months Ended June 30,
	2012								2011
(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	$	110,858		$	5,815		7.01	%	$	121,752		$	6,451		7.08	%
Multi-family		79,094			3,937		6.65			78,448			4,055		6.91
Nonresidential		194,156			9,837		6.77			180,723			9,255		6.85
Construction		33,060			1,193		4.82			41,362			1,599		5.17
Land and land development		59,477			2,355		5.29			69,017			2,567		4.97
Other		582			36		8.26			1,292			71		7.35
Total loans		477,227			23,173		6.49			492,594			23,998		6.51
Securities:
Collateralized mortgage obligations		241,177			3,394		1.88			161,344			3,775		3.13
Mortgage-backed securities		35,176			729		2.77			32,931			931		3.78
States and political subdivisions		14,725			556		5.04			19,103			635		4.44
U. S. government agencies		1,660			18		1.45			9,897			69		0.93
Corporate equity securities		24,929			306		1.64			23,735			221		1.24
Corporate debt securities		121,000			4,779		5.28			121,829			4,581		5.03
Total securities		438,667			9,782		2.98			368,839			10,212		3.70
Investment in FHLB stock		10,627			96		1.21			12,032			61		0.68
Other interest-earning assets		96,860			101		0.14			100,439			166		0.22
Total interest-earning assets		1,023,381			33,152		4.33			973,904			34,437		4.73
Allowance for loan losses		(12,874	)							(12,444	)
Noninterest-earning assets		82,350								85,064
Total assets	$	1,092,857							$	1,046,524
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits:
Money market savings	$	221,116			762		0.46		$	226,366			1,494		0.88
Money market checking		43,430			155		0.48			45,439			304		0.89
Certificates of deposit		373,830			5,027		1.80			386,446			6,186		2.14
Total deposits		638,376			5,944		1.24			658,251			7,984		1.62
FHLB borrowings		186,563			6,658		4.77			190,000			6,873		4.84
Total interest-bearing liabilities		824,939			12,602		2.04			848,251			14,857		2.34
Noninterest bearing liabilities		10,396								47,318
Total liabilities		835,335								895,569
Stockholders’ equity		257,522								150,955
Total liabilities and stockholders’ equity	$	1,092,857							$	1,046,524
Net interest income				$	20,550							$	19,580
Interest rate spread(1)							2.29	%							2.39	%
Net interest margin(2)							2.67	%							2.69	%
Average interest-earning assets to average interest-bearing liabilities							124.06	%							114.81	%

(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.

39

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, 2012 Compared to Three Months Ended June 30, 2011									Nine months Ended June 30, 2012 Compared to Nine months Ended  June 30, 2011
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	(418	)	$	(39	)	$	(457	)	$	(751	)	$	(74	)	$	(825	)
Securities		869			(1,434	)		(565	)		2,407			(2,837	)		(430	)
Investment in FHLB stock		(18	)		34			16			(13	)		48			35
Other interest earning assets		(24	)		(18	)		(42	)		(6	)		(59	)		(65	)
Total		409			(1,457	)		(1,048	)		1,637			(2,922	)		(1,285	)
Interest expense:
Deposits:
Money market savings		(14	)		(202	)		(216	)		(41	)		(691	)		(732	)
Money market checking		(4	)		(36	)		(40	)		(10	)		(139	)		(149	)
Certificates of deposit		(76	)		(281	)		(357	)		(101	)		(1,058	)		(1,159	)
FHLB borrowings		(124	)		(112	)		(236	)		(119	)		(96	)		(215	)
Total		(218	)		(631	)		(849	)		(271	)		(1,984	)		(2,255	)
Increase (decrease) in net interest income	$	627		$	(826	)	$	(199	)	$	1,908		$	(938	)	$	970

Asset Quality

Nonperforming Assets (NPAs)

At June 30, 2012, nonperforming assets totaled $37.8 million, a decrease of $13.0 million from $50.8 million at September 30, 2011. Our level of NPAs remains elevated over historical experience as a result of stresses in real estate markets, 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 in some cases may be foreclosure.

Nonperforming assets at June 30, 2012 included $27.3 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, 2012		March 31, 2012		Change
Nonaccrual loans:
One-to four-family	$	9,158	$	9,356	$	(198	)
Multi-family		6,075		6,091		(16	)
Nonresidential		-		7,037		(7,037	)
Construction		166		247		(81	)
Land and land development		11,871		13,235		(1,364	)
Total		27,270		35,966		(8,696	)
Accruing loans past due 90 days or more		-		-		-
Total nonperforming loans	$	27,270	$	35,966	$	(8,696	)

40

At June 30, 2012, the allowance for loan losses as a percentage of total loans was 2.26% compared to 2.95% at September 30, 2011. While management believes there are signs of stabilization in the local economy and real estate markets, it continues to believe that the market for large-tract land developments in the Richmond MSA is significantly stressed, and, as a result, in the three months ended December 31, 2011, the Company partially charged-off certain land and land development loans that had specific reserves at September 30, 2011. Additionally, management increased the allowance for loan losses for the remainder of loans in this portfolio by $105,000, resulting in an allowance of 10.6% at June 30, 2012 for land and land development loans analyzed as part of the general allowance. See note 4 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, 2012			September 30, 2011
Nonperforming loans	$	27,270		$	42,205
Other real estate owned		10,569			8,627
Total nonperforming assets	$	37,839		$	50,832
Allowance for loan losses	$	10,806		$	14,624
Total loans	$	477,107		$	496,491
Ratios
Allowance as a percentage of total loans		2.26	%		2.95	%
Allowance as a percentage of nonperforming loans		39.63	%		34.65	%
Total nonperforming loans to total loans		5.72	%		8.50	%
Total nonperforming loans to total assets		2.52	%		3.85	%
Total nonperforming assets to total assets		3.50	%		4.63	%

At June 30, 2012, 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 residential development within a planned unit development. This loan had a balance of $4.9 million and was classified as impaired at June 30, 2012. The collateral was valued at $11.0 million based upon a September 2011 appraisal, and a specific allowance calculation on this loan resulted in no allowance at June 30, 2012 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 $4.1 million and was classified as impaired at June 30, 2012. The collateral was valued at $13.8 million (of which $4.6 million is attributable to the Company) based upon an August 2011 appraisal, and a specific allowance calculation on this loan resulted in no allowance at June 30, 2012 due to sufficient collateral.

- Two loans on adjoining single-family residential developments in central Virginia with a combined balance of $1.8 million at June 30, 2012. These loans are participations with five other banks, and the Company’s participation percentage on each loan is 23.6%. While these loans were current at June 30, 2012, they were identified as impaired due to significant deterioration of the value of the underlying collateral. The borrowers are actively seeking investors or buyers for the underlying collateral with the encouragement of the participating banks. A May 2011 appraisal indicated a value of $8.5 million for the development, $2.0 million of which was attributable to the Company’s participation interest. A specific allowance calculation on this loan resulted in no allowance at June 30, 2012 due to sufficient collateral.

• Multifamily

- One loan on an apartment complex in central Virginia that had a balance of $6.1 million and was over 180 days delinquent at June 30, 2012. The apartment complex is valued at $14.1 million based upon a February 2012 appraisal. This loan was considered impaired at June 30, 2012, but no specific allowance was necessary due to sufficient collateral. The Company has two other loans on this property totaling $5.4 million that were rated substandard at June 30, 2012 and are discussed below in substandard loans other than nonperforming loans.

41

• One-to four-family

- Fifty loans on one-to four-family residential properties in central Virginia to multiple borrowers with an aggregate balance of $5.0 million at June 30, 2012.

- Two loans outstanding to separate entities controlled by the same guarantor totaling $4.2 million secured by twenty-one non-owner-occupied one-to four-family homes, almost all of which were rented at June 30, 2012. These loans were over 180 days delinquent at June 30, 2012 because the rental cash flows from the properties were not sufficient to fully cover debt service. A specific allowance calculation on these loans resulted in a specific allowance of $375,000 at June 30, 2012 based on February 2012 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, 2012		September 30, 2011
Loans(1)
Special mention	$	18,638	$	16,458
Substandard		43,151		62,694
Total criticized loans		61,789		79,152
Securities
Substandard		8,987		13,563
Doubtful		2,516		3,002
Total classified securities		11,503		16,565
Total criticized assets	$	73,292	$	95,717

⁽¹⁾ For regulatory reporting, performing troubled debt restructurings can be reclassified at the beginning of each calendar year. As a result, total classified and criticized loans for GAAP and regulatory reporting may be different.

At June 30, 2012, substandard loans, other than nonperforming loans, were comprised primarily of the following:

- Two additional loans on the apartment complex in central Virginia discussed above under nonaccrual multi-family loans totaling $5.4 million. The apartment complex is valued at $14.1 million based upon a February 2012 appraisal.

- One loan on a 64-unit apartment complex in central Virginia with a balance of $1.2 million at June 30, 2012. The apartment complex does not generate enough cash to service the debt and requires support from the guarantor. This loan was identified as impaired at June 30, 2012 and had no specific allowance due to sufficient collateral based on a June 2012 appraisal of the apartment complex indicating a value of $1.5 million.

- Two loans that matured in May 2012 secured by several hundred acres of undeveloped land in central Virginia proposed for residential development. The loans had a combined balance of $3.0 million at June 30, 2012. The borrower on one of the loans, with a balance of $2.3 million, declared bankruptcy in December 2009. An appraisal dated January 2007 valued the collateral at $9.9 million.

- One loan secured by several hundred acres of partially-developed residential land in central Virginia. The property is zoned for 107 potential lots. The “as-is” value of the collateral based on an April 2008 appraisal is $6.6 million, and the Company’s loan balance at June 30, 2012 was $3.9 million. The loan was current at June 30, 2012 and, to date, has received support from the guarantors as needed.

- 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 31 - 60 days delinquent at June 30, 2012. The collateral for this loan was valued at $2.7 million based on a June 2011 appraisal of the day care center and the lots. We have two other loans to entities controlled by the guarantor on this loan as described above in the section regarding nonaccrual one-to four-family loans.

42

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, 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 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, 2012, cash and cash equivalents totaled $130.9 million. In addition, at June 30, 2012, we had the ability to borrow a total of approximately $172.8 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 $116.1 million at June 30, 2012.

At June 30, 2012, we had $102.0 million in loan commitments outstanding, which included $70.7 million in undisbursed loans. Certificates of deposit due within one year of June 30, 2012 totaled $212.8 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.

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, 2012, 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, 2012 and September 30, 2011:

43

	Actual					Amount required to be "adequately capitalized"					Amount required to be "well capitalized"
(Dollars in thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage
June 30, 2012
Tier 1 capital (to adjusted tangible assets)	$	173,731		17.15	%	$	40,514		4.00	%	$	51,049		5.00	%
Tier 1 risk-based capital (to risk weighted assets)		173,731		25.85			26,881		4.00			40,321		6.00
Tangible capital (to adjusted tangible assets)		173,731		17.15			15,193		1.50			15,193		1.50
Risk-based capital (to risk weighted assets)		182,156		27.11			53,762		8.00			67,202		10.00

	Actual					Amount required to be "adequately capitalized"					Amount required to be "well capitalized"
(Dollars in thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage
September 30, 2011
Tier 1 capital (to adjusted tangible assets)	$	164,347		16.07	%	$	40,915		4.00	%	$	51,490		5.00	%
Tier 1 risk-based capital (to risk weighted assets)		164,347		23.81			27,605		4.00			41,408		6.00
Tangible capital (to adjusted tangible assets)		164,347		16.07			15,343		1.50			15,343		1.50
Risk-based capital (to risk weighted assets)		173,006		25.07			55,211		8.00			69,013		10.00

There were no dividends declared by the Bank to Franklin Financial in the nine months ended June 30, 2012.

The following is a reconciliation of the Bank’s GAAP capital to regulatory capital at June 30, 2012 and September 30, 2011 (dollars in thousands):

	June 30, 2012
(Dollars in thousands)	Tier 1 capital			Tier 1 risk- based capital			Tangible capital			Risk-based capital
GAAP capital	$	179,292		$	179,292		$	179,292		$	179,292
Accumulated gains on certain available- for-sale securities		(5,501	)		(5,501	)		(5,501	)		(5,501	)
Disallowed deferred tax assets		(2,620	)		(2,620	)		(2,620	)		(2,620	)
Pension plan		2,560			2,560			2,560			2,560
General allowance for loan losses		-			-			-			8,425
Regulatory capital – computed	$	173,731		$	173,731		$	173,731		$	182,156

44

	September 30, 2011
(Dollars in thousands)	Tier 1 capital			Tier 1 risk- based capital			Tangible capital			Risk-based capital
GAAP capital	$	168,711		$	168,711		$	168,711		$	168,711
Accumulated gains on certain available- for-sale securities		(4,002	)		(4,002	)		(4,002	)		(4,002	)
Disallowed deferred tax assets		(2,922	)		(2,922	)		(2,922	)		(2,922	)
Pension plan		2,560			2,560			2,560			2,560
General allowance for loan losses		-			-			-			8,659
Regulatory capital – computed	$	164,347		$	164,347		$	164,347		$	173,006

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, 2011 and the nine months ended June 30, 2012, 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.

Item3.   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, 2012 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 $41.3 million of investable assets held by Franklin Financial Corporation at June 30, 2012.

	Present Value of Equity
Change in	Market
Basis Points	Value		$ Change			% Change
	(Dollars in thousands)
300	$	166,372	$	(5,216	)		(3.0	)%
200		169,374		(2,214	)		(1.3	)
100		170,218		(1,370	)		(0.8	)
0		171,588		-			-
-100		158,164		(13,424	)		(7.8	)

45

 Using the same assumptions as above, the sensitivity of our projected net interest income for the twelve months ending June 30, 2013 is as follows:

	Projected Net Interest Income
Change in	Net Interest
Basis Points	Income		$ Change			% Change
	(Dollars in thousands)
300	$	25,274	$	(1,983	)		(7.3	)%
200		26,152		(1,105	)		(4.1	)
100		26,872		(385	)		(1.4	)
0		27,257		-			-
-100		25,256		(2,001	)		(7.3	)

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.

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 Annual Report filed on Form 10-K for the year ended September 30, 2011. As of June 30, 2012, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

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

Not applicable.

46

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   Mine Safety Disclosures

Not applicable.

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
101	The following materials from the Franklin Financial Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Income Statements; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Comprehensive Income and Changes in Stockholders’ Equity; and (v) related notes.

(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.

47

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 7, 2012	By:	/s/ Richard T. Wheeler, Jr.
		Richard T. Wheeler, Jr.
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)
August 7, 2012	By:	/s/ Donald F. Marker
		Donald F. Marker
		Vice President, Chief Financial Officer and Secretary/Treasurer
		(Principal Financial and Accounting Officer)

48

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Richard T. Wheeler, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 7, 2012
	/s/ Richard T. Wheeler, Jr.
	Richard T. Wheeler, Jr.
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Donald F. Marker, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d-5(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 7, 2012
	/s/ Donald F. Marker
	Donald F. Marker
	Vice President, Chief Financial Officer and Secretary/Treasurer
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

To my knowledge, this Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 of Franklin Financial Corporation (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Franklin Financial Corporation and subsidiaries.

	By:	/s/ Richard T. Wheeler, Jr.
		Richard T. Wheeler, Jr.
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Donald F. Marker
		Donald F. Marker
		Vice President, Chief Financial Officer and Secretary/Treasurer
		(Principal Financial and Accounting Officer)
August 7, 2012

XML

Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Sep. 30, 2011	Jun. 30, 2011	Sep. 30, 2010
Total loans	$ 477,107		$ 496,491
Allowance for loan losses	10,806		14,624	13,432	13,419
Good [Member]
Total loans	107,588
Allowance for loan losses	243
Satisfactory [Member]
Total loans	198,221
Allowance for loan losses	5,148
Watch List [Member]
Total loans	3,993
Allowance for loan losses	130
Special Mention [Member]
Total loans	17,745
Allowance for loan losses	1,760
Substandard [Member]
Total loans	12,762
Allowance for loan losses	1,690
Impaired [Member]
Total loans	34,177
Allowance for loan losses	375
Not Rated [Member]
Total loans	102,621
Allowance for loan losses	1,460
One To Four Family [Member]
Total loans	108,283	[1]
Allowance for loan losses	1,524	[1]
One To Four Family [Member] | Good [Member]
Total loans	0	[1]
Allowance for loan losses	0	[1]
One To Four Family [Member] | Satisfactory [Member]
Total loans	24,927	[1]
Allowance for loan losses	399	[1]
One To Four Family [Member] | Watch List [Member]
Total loans	1,443	[1]
Allowance for loan losses	35	[1]
One To Four Family [Member] | Special Mention [Member]
Total loans	1,999	[1]
Allowance for loan losses	64	[1]
One To Four Family [Member] | Substandard [Member]
Total loans	2,781	[1]
Allowance for loan losses	133
One To Four Family [Member] | Impaired [Member]
Total loans	4,154	[1]
Allowance for loan losses	375	[1]
One To Four Family [Member] | Not Rated [Member]
Total loans	72,979	[1]
Allowance for loan losses	518	[1]
Multi Family [Member]
Total loans	82,202
Allowance for loan losses	1,169
Multi Family [Member] | Good [Member]
Total loans	13,993
Allowance for loan losses	28
Multi Family [Member] | Satisfactory [Member]
Total loans	41,247
Allowance for loan losses	825
Multi Family [Member] | Watch List [Member]
Total loans	2,037
Allowance for loan losses	61
Multi Family [Member] | Special Mention [Member]
Total loans	0
Allowance for loan losses	0
Multi Family [Member] | Substandard [Member]
Total loans	249
Allowance for loan losses	15
Multi Family [Member] | Impaired [Member]
Total loans	12,676
Allowance for loan losses	0
Multi Family [Member] | Not Rated [Member]
Total loans	12,000
Allowance for loan losses	240
Nonresidential [Member]
Total loans	212,538
Allowance for loan losses	2,967
Nonresidential [Member] | Good [Member]
Total loans	93,595
Allowance for loan losses	215
Nonresidential [Member] | Satisfactory [Member]
Total loans	103,144
Allowance for loan losses	2,352
Nonresidential [Member] | Watch List [Member]
Total loans	0
Allowance for loan losses	0
Nonresidential [Member] | Special Mention [Member]
Total loans	3,127
Allowance for loan losses	143
Nonresidential [Member] | Substandard [Member]
Total loans	2,064
Allowance for loan losses	141
Nonresidential [Member] | Impaired [Member]
Total loans	5,498
Allowance for loan losses	0
Nonresidential [Member] | Not Rated [Member]
Total loans	5,110
Allowance for loan losses	116
Construction [Member]
Total loans	24,316
Allowance for loan losses	1,181
Construction [Member] | Good [Member]
Total loans	0
Allowance for loan losses	0
Construction [Member] | Satisfactory [Member]
Total loans	13,074
Allowance for loan losses	582
Construction [Member] | Watch List [Member]
Total loans	513
Allowance for loan losses	34
Construction [Member] | Special Mention [Member]
Total loans	666
Allowance for loan losses	59
Construction [Member] | Substandard [Member]
Total loans	675
Allowance for loan losses	90
Construction [Member] | Impaired [Member]
Total loans	44
Allowance for loan losses	0
Construction [Member] | Not Rated [Member]
Total loans	9,344
Allowance for loan losses	416
Land and Land Development [Member]
Total loans	49,221
Allowance for loan losses	3,960
Land and Land Development [Member] | Good [Member]
Total loans	0
Allowance for loan losses	0
Land and Land Development [Member] | Satisfactory [Member]
Total loans	15,829
Allowance for loan losses	990
Land and Land Development [Member] | Watch List [Member]
Total loans	0
Allowance for loan losses	0
Land and Land Development [Member] | Special Mention [Member]
Total loans	11,953
Allowance for loan losses	1,494
Land and Land Development [Member] | Substandard [Member]
Total loans	6,993
Allowance for loan losses	1,311
Land and Land Development [Member] | Impaired [Member]
Total loans	11,805
Allowance for loan losses	0
Land and Land Development [Member] | Not Rated [Member]
Total loans	2,641
Allowance for loan losses	165
Other [Member]
Total loans	547
Allowance for loan losses	5
Other [Member] | Good [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Satisfactory [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Watch List [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Special Mention [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Substandard [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Impaired [Member]
Total loans	0
Allowance for loan losses	0
Other [Member] | Not Rated [Member]
Total loans	547
Allowance for loan losses	$ 5

[1] Owner-occupied one-to four-family loans are considered "Not Rated" in the calculation of the allowance for loan losses.

XML

Employee Benefit Plans (Details 5)	9 Months Ended
	Jun. 30, 2012
Shares allocated at September 30, 2011	35,987
Shares allocated during the period	49,673
Shares distributed during the period	0
Allocated shares held by the ESOP trust at June 30, 2012	85,660
Unearned shares at June 30, 2012	1,058,567
Total ESOP shares	1,144,227

XML

Earnings per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended			9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011		Jun. 30, 2012	Jun. 30, 2011
Numerator:
Net (loss) income available to common stockholders	$ (354)	$ (3,275)		$ 3,929	$ 494
Denominator:
Weighted-average common shares outstanding (in shares)	13,029	13,166		13,152	13,166
Effect of dilutive securities	$ 21	$ 0		$ 7	$ 0
Weighted-average common shares outstanding - assuming dilution (in shares)	13,050	13,166		13,159	13,166
Earnings per common share (in dollars per share)	$ (0.03)	$ (0.25)	[1]	$ 0.30	$ 0.04	[1]
Earnings per common share - assuming dilution (in dollars per share)	$ (0.03)	$ (0.25)	[1]	$ 0.30	$ 0.04	[1]

[1] Weighted - average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC's mutual-to-stock conversion, to June 30, 2011.

XML

Employee Benefit Plans (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Defined Benefit Plan, Measurement Date			September 30
Options, Exercised			0
Share-Based Compensation			$ 717,000	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			5 years
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term			9 years 9 months
Stock Options Fair Value Per Share	$ 3.76		$ 3.76
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	2,900,000		2,900,000
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Vested and Expected To Vest, Outstanding, Number	805,484,000		805,484,000
Share Based Compensation Restricted Shares Expected To Vest			324,728
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition			5 years
Esop Loan Payable Amortization Period			20 years
ESOP compensation expense	215,000,000	176,000	637,000	176,000
Unearned ESOP Shares	10,586,000		10,586,000		11,082,000
Trust Shares Purchased In Conversion			245,783
Trust Shares Purchased In Conversion Thereafter			6,432
Employee Service Share Based Compensation Quantity Of Shares Repurchased In Period			284,600
Employee Service Share Based Compensation Value Of Shares Repurchased In Period			4,300,000
Employee Service Share Based Compensation Per Share Value Of Shares Repurchased In Period			$ 15.18
Stock Option and Restricted Stock [Member]
Share-Based Compensation	700,000		717,000
Employee Service Share-based Compensation, Tax Benefit from Compensation Expense	266,000		273,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Share-based Awards Other than Options	$ 3,800,000		$ 3,800,000
Two Thousand and Twelve Equity Incentive Plan [Member]
Maximum Number Of Shares Issuable For Stock Option And Restricted Stock Under Plan	2,002,398		2,002,398
Maximum Number Of Stock Options Issuable Under Plan	1,430,284		1,430,284
Maximum Number Of Retricted Stock Shares Issuable Under Plan	572,114		572,114

XML

Borrowings (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2012
Advance Amount	$ 160,000
Prepayment Penalty	18,308
Reduced Expense Over the Next Twelve Months	1,319
Federal Home Loan Banks Borrowings 1 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 3.49%, principal due and payable on December 5, 2013
Terms of New Advance	Interest payable quarterly at a fixed rate of 1.30%, principal due and payable on April 25, 2017
Advance Amount	10,000
Prepayment Penalty	476
Effective Rate of New Advance	2.25%
Reduced Expense Over the Next Twelve Months	124
Federal Home Loan Banks Borrowings 2 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 3.44%, principal due and payable on December 10, 2013
Terms of New Advance	Interest payable quarterly at a fixed rate of 1.06%, principal due and payable on April 25, 2016
Advance Amount	10,000
Prepayment Penalty	470
Effective Rate of New Advance	2.23%
Reduced Expense Over the Next Twelve Months	121
Federal Home Loan Banks Borrowings 3 [Member]
Terms of Original Advance	Interest payable quarterly at a fixed rate of 3.72%, principal due and payable on June 9, 2015
Terms of New Advance	Interest payable quarterly at a fixed rate of 3.04%, principal due and payable on May 4, 2018
Advance Amount	25,000
Prepayment Penalty	0	[1]
Effective Rate of New Advance	3.04%
Reduced Expense Over the Next Twelve Months	170
Federal Home Loan Banks Borrowings 4 [Member]
Terms of Original Advance	Interest payable quarterly at a fixed rate of 5.58%, principal due and payable on May 16, 2016
Terms of New Advance	Interest payable quarterly at a fixed rate of 4.31%, principal due and payable on May 9, 2022
Advance Amount	25,000
Prepayment Penalty	0	[1]
Effective Rate of New Advance	4.31%
Reduced Expense Over the Next Twelve Months	316
Federal Home Loan Banks Borrowings 5 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 5.36%, principal due and payable on November 1, 2016
Terms of New Advance	Interest payable quarterly at a fixed rate of 2.28%, principal due and payable on May 4, 2021
Advance Amount	25,000
Prepayment Penalty	4,710
Effective Rate of New Advance	4.41%
Reduced Expense Over the Next Twelve Months	239
Federal Home Loan Banks Borrowings 6 [Member]
Terms of Original Advance	Interest payable quarterly at a fixed rate of 5.07%, principal due and payable on October 23, 2017
Terms of New Advance	Interest payable quarterly at a fixed rate of 4.49%, principal due and payable on May 21, 2032
Advance Amount	10,000
Prepayment Penalty	0	[1]
Effective Rate of New Advance	4.49%
Reduced Expense Over the Next Twelve Months	58
Federal Home Loan Banks Borrowings 7 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 3.90%, principal due and payable on April 18, 2018
Terms of New Advance	Interest payable quarterly at a fixed rate of 2.44%, principal due and payable on May 16, 2022
Advance Amount	5,000
Prepayment Penalty	687
Effective Rate of New Advance	3.85%
Reduced Expense Over the Next Twelve Months	5
Federal Home Loan Banks Borrowings 8 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 5.85%, principal due and payable on September 17, 2018
Terms of New Advance	Interest payable quarterly at a fixed rate of 3.69%, principal due and payable on May 3, 2032
Advance Amount	25,000
Prepayment Penalty	6,411
Effective Rate of New Advance	5.03%
Reduced Expense Over the Next Twelve Months	204
Federal Home Loan Banks Borrowings 9 [Member]
Terms of Original Advance	Interest payable monthly at a fixed rate of 5.05%, principal due and payable on January 21, 2020
Terms of New Advance	Interest payable quarterly at a fixed rate of 3.56%, principal due and payable on May 17, 2032
Advance Amount	25,000
Prepayment Penalty	5,554
Effective Rate of New Advance	4.72%
Reduced Expense Over the Next Twelve Months	$ 82

[1] The prepayment penalty is embedded in the rate for the new advance.

XML

Securities (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Available-for-sale Securities, Gross Realized Gains	$ 693,000	$ 0	$ 693,000	$ 705,000
Available-for-sale Securities, Gross Realized Losses	1,500,000	0	1,500,000	440,000
Net impairment reflected in earnings	(2,058,000)	(1,253,000)	(4,384,000)	(1,934,000)
Pledged Financial Instruments, Not Separately Reported, Securities for Federal Home Loan Bank	$ 211,900,000		$ 211,900,000		$ 262,100,000

XML

Fair Value Measurements (Details) (Available-for-sale Securities [Member], USD $)	Jun. 30, 2012
Total assets at fair value	$ 384,389
Level 1 [Member]
Total assets at fair value	23,446
Level 2 [Member]
Total assets at fair value	354,566
Level 3 [Member]
Total assets at fair value	6,377
States And Political Subdivisions [Member]
Total assets at fair value	13,301
States And Political Subdivisions [Member] | Level 1 [Member]
Total assets at fair value	0
States And Political Subdivisions [Member] | Level 2 [Member]
Total assets at fair value	11,761
States And Political Subdivisions [Member] | Level 3 [Member]
Total assets at fair value	1,540
Agency Mortgage-Backed Securities [Member]
Total assets at fair value	39,652
Agency Mortgage-Backed Securities [Member] | Level 1 [Member]
Total assets at fair value	0
Agency Mortgage-Backed Securities [Member] | Level 2 [Member]
Total assets at fair value	39,652
Agency Mortgage-Backed Securities [Member] | Level 3 [Member]
Total assets at fair value	0
Agency Collateralized Mortgage Obligations [Member]
Total assets at fair value	191,932
Agency Collateralized Mortgage Obligations [Member] | Level 1 [Member]
Total assets at fair value	0
Agency Collateralized Mortgage Obligations [Member] | Level 2 [Member]
Total assets at fair value	191,932
Agency Collateralized Mortgage Obligations [Member] | Level 3 [Member]
Total assets at fair value	0
Corporate Equity Securities [Member]
Total assets at fair value	23,446
Corporate Equity Securities [Member] | Level 1 [Member]
Total assets at fair value	23,446
Corporate Equity Securities [Member] | Level 2 [Member]
Total assets at fair value	0
Corporate Equity Securities [Member] | Level 3 [Member]
Total assets at fair value	0
Corporate Debt Securities [Member]
Total assets at fair value	116,058
Corporate Debt Securities [Member] | Level 1 [Member]
Total assets at fair value	0
Corporate Debt Securities [Member] | Level 2 [Member]
Total assets at fair value	111,221
Corporate Debt Securities [Member] | Level 3 [Member]
Total assets at fair value	$ 4,837

XML

Borrowings (Tables)

9 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Schedule Of Federal Home Loan Bank Borrowing Exchanges [Table Text Block]

Details regarding these exchanges are as follows (dollars in thousands): 

						Effective			Reduced
						Rate of			Expense Over
		Advance		Prepayment		New			the Next
Terms of Original Advance	Terms of New Advance	Amount		Penalty		Advance			Twelve Months
Interest payable monthly at a fixed rate of 3.49%, principal due and payable on December 5, 2013	Interest payable quarterly at a fixed rate of 1.30%, principal due and payable on April 25, 2017	$	10,000	$	476		2.25	%	$	124
Interest payable monthly at a fixed rate of 3.44%, principal due and payable on December 10, 2013	Interest payable quarterly at a fixed rate of 1.06%, principal due and payable on April 25, 2016		10,000		470		2.23	%		121
Interest payable quarterly at a fixed rate of 3.72%, principal due and payable on June 9, 2015	Interest payable quarterly at a fixed rate of 3.04%, principal due and payable on May 4, 2018		25,000		*		3.04	%		170
Interest payable quarterly at a fixed rate of 5.58%, principal due and payable on May 16, 2016	Interest payable quarterly at a fixed rate of 4.31%, principal due and payable on May 9, 2022		25,000		*		4.31	%		316
Interest payable monthly at a fixed rate of 5.36%, principal due and payable on November 1, 2016	Interest payable quarterly at a fixed rate of 2.28%, principal due and payable on May 4, 2021		25,000		4,710		4.41	%		239
Interest payable quarterly at a fixed rate of 5.07%, principal due and payable on October 23, 2017	Interest payable quarterly at a fixed rate of 4.49%, principal due and payable on May 21, 2032		10,000		*		4.49	%		58
Interest payable monthly at a fixed rate of 3.90%, principal due and payable on April 18, 2018	Interest payable quarterly at a fixed rate of 2.44%, principal due and payable on May 16, 2022		5,000		687		3.85	%		5
Interest payable monthly at a fixed rate of 5.85%, principal due and payable on September 17, 2018	Interest payable quarterly at a fixed rate of 3.69%, principal due and payable on May 3, 2032		25,000		6,411		5.03	%		204
Interest payable monthly at a fixed rate of 5.05%, principal due and payable on January 21, 2020	Interest payable quarterly at a fixed rate of 3.56%, principal due and payable on May 17, 2032		25,000		5,554		4.72	%		82
		$	160,000	$	18,308				$	1,319

 *The prepayment penalty is embedded in the rate for the new advance.

XML

Employee Benefit Plans (Details 1) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Sep. 30, 2011
Options, outstanding at September 30, 2011	0
Options, Granted	1,152,000
Options, Exercised	0
Options, Forfeited	0
Options, Expired	0
Options outstanding at June 30, 2012	1,152,000
Weighted - average exercise price, Granted	$ 13.42
Weighted - average exercise price, Exercised	$ 0
Weighted - average exercise price, Forfeited	$ 0
Weighted - average exercise price, Expired	$ 0
Weighted - average exercise price, Options outstanding at June 30, 2012	$ 13.42	$ 13.42
Remaining contractuallife (years), Granted	10 years
Remaining contractuallife (years), Exercised	0 years
Remaining contractuallife (years), Forfeited	0 years
Remaining contractuallife (years), Expired	0 years
Remaining contractuallife (years), Options outstanding at June 30, 2012	9 years 9 months
Aggregate intrinsic value, Granted	$ 12
Aggregate intrinsic value, Exercised	0
Aggregate intrinsic value, Forfeited	0
Aggregate intrinsic value, Expired	0
Aggregate intrinsic value, Options outstanding at June 30, 2012	$ 3,491

XML

Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Nonaccrual loans	$ 27,270	$ 42,205
One To Four Family [Member]
Nonaccrual loans	9,158	9,879
Multi Family [Member]
Nonaccrual loans	6,075	6,103
Nonresidential [Member]
Nonaccrual loans	0	12,572
Construction [Member]
Nonaccrual loans	166	255
Land and Land Development [Member]
Nonaccrual loans	$ 11,871	$ 13,396

XML

Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011	Jun. 30, 2011	Sep. 30, 2010
General Allowance Balance	$ 442,930	$ 442,342
General Allowance	10,431	11,259
Specific Allowance Balance	34,177	54,149
Specific Allowance	375	3,365
Total Balance	477,107	496,491
Total Allowance	10,806	14,624	13,432	13,419
Coverage	2.26%	2.95%
Allowance as % of total allowance	100.00%	100.00%
One-to four-family [Member]
General Allowance Balance	104,129	110,047
General Allowance	1,149	1,192
Specific Allowance Balance	4,154	4,900
Specific Allowance	375	132
Total Balance	108,283	114,947
Total Allowance	1,524	1,324	1,312	1,260
Coverage	1.41%	1.15%
Allowance as % of total allowance	14.10%	9.10%
Multi-family [Member]
General Allowance Balance	69,526	66,347
General Allowance	1,169	1,145
Specific Allowance Balance	12,676	12,759
Specific Allowance	0	212
Total Balance	82,202	79,106
Total Allowance	1,169	1,357	2,178	1,177
Coverage	1.42%	1.71%
Allowance as % of total allowance	10.80%	9.20%
Non-residential [Member]
General Allowance Balance	207,040	180,895
General Allowance	2,967	3,146
Specific Allowance Balance	5,498	9,852
Specific Allowance	0	0
Total Balance	212,538	190,747
Total Allowance	2,967	3,146	3,280	2,888
Coverage	1.40%	1.65%
Allowance as % of total allowance	27.50%	21.50%
Construction [Member]
General Allowance Balance	24,272	43,903
General Allowance	1,181	1,697
Specific Allowance Balance	44	89
Specific Allowance	0	27
Total Balance	24,316	43,992
Total Allowance	1,181	1,724	1,713	2,700
Coverage	4.86%	3.92%
Allowance as % of total allowance	10.90%	11.80%
Land and land development [Member]
General Allowance Balance	37,416	40,500
General Allowance	3,960	4,070
Specific Allowance Balance	11,805	26,549
Specific Allowance	0	2,994
Total Balance	49,221	67,049
Total Allowance	3,960	7,064	4,939	5,372
Coverage	8.05%	10.54%
Allowance as % of total allowance	36.70%	48.30%
Other [Member]
General Allowance Balance	547	650
General Allowance	5	9
Specific Allowance Balance	0	0
Specific Allowance	0	0
Total Balance	547	650
Total Allowance	$ 5	$ 9	$ 10	$ 22
Coverage	0.91%	1.40%
Allowance as % of total allowance	0.00%	0.10%

XML

Employee Benefit Plans (Details 3) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Jun. 30, 2012
Options expected to vest at period end	805,484
Weighted-average exercise price	$ 13.42
Remaining contractual life (years)	9 years 9 months
Aggregate intrinsic value	$ 2,441

XML

Fair Value Measurements (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011	Jun. 30, 2011	Sep. 30, 2010
Financial assets:
Cash and cash equivalents, Carrying Value	$ 130,873	$ 115,749	$ 115,952	$ 97,909
Securities available for sale, Carrying Value	384,389	396,809
Securities held to maturity, Carrying Value	21,801	25,517
Net loans, Carrying Value	462,861	478,423
Loans held for sale, Carrying Value	665	922
FHLB stock, Carrying Value	10,206	11,014
Accrued interest receivable, Carrying Value	4,268	4,901
Financial liabilities:
Deposits, Carrying Value	647,324	648,754
FHLB borrowings, Carrying Value	171,887	190,000
Accrued interest payable, Carrying Value	927	904
Advance payments by borrowers for taxes and insurance, Carrying Value	1,526	2,335
Off-balance-sheet financial instruments:
Commitments to extend credit, Carrying Value	101,983	55,702
Standby letters of credit, Carrying Value	501	1,015
Financial assets:
Cash and cash equivalents, Fair Value	130,873	115,749
Securities available for sale, Fair Value	384,389	396,809
Securities held to maturity, Fair Value	22,368	23,248
Net loans, Fair Value	480,648	497,084
Loans held for sale, Fair Value	665	922
FHLB stock, Fair Value	10,206	11,014
Accrued interest receivable, Fair Value	4,268	4,901
Financial liabilities:
Deposits, Fair Value	654,342	655,790
FHLB borrowings, Fair Value	208,843	223,240
Accrued interest payable, Fair Value	927	904
Advance payments by borrowers for taxes and insurance, Fair Value	1,526	2,335
Off-balance-sheet financial instruments:
Commitments to extend credit, Fair Value	0	0
Standby letters of credit, Fair Value	6	3
Level 1 [Member]
Financial assets:
Cash and cash equivalents, Carrying Value	130,873	115,749
Securities available for sale, Carrying Value	23,446	21,673
Securities held to maturity, Carrying Value	0	0
Net loans, Carrying Value	0	0
Loans held for sale, Carrying Value	0	0
FHLB stock, Carrying Value	10,206	11,014
Accrued interest receivable, Carrying Value	4,268	4,901
Financial liabilities:
Deposits, Carrying Value	0	0
FHLB borrowings, Carrying Value	0	0
Accrued interest payable, Carrying Value	927	904
Advance payments by borrowers for taxes and insurance, Carrying Value	1,526	2,335
Off-balance-sheet financial instruments:
Commitments to extend credit, Carrying Value	0	0
Standby letters of credit, Carrying Value	0	0
Financial assets:
Cash and cash equivalents, Fair Value	130,873	115,749
Securities available for sale, Fair Value	23,446	21,673
Securities held to maturity, Fair Value	0	0
Net loans, Fair Value	0	0
Loans held for sale, Fair Value	0	0
FHLB stock, Fair Value	10,206	11,014
Accrued interest receivable, Fair Value	4,268	4,901
Financial liabilities:
Deposits, Fair Value	0	0
FHLB borrowings, Fair Value	0	0
Accrued interest payable, Fair Value	927	904
Advance payments by borrowers for taxes and insurance, Fair Value	1,526	2,335
Off-balance-sheet financial instruments:
Commitments to extend credit, Fair Value	0	0
Standby letters of credit, Fair Value	0	0
Level 2 [Member]
Financial assets:
Cash and cash equivalents, Carrying Value	0	0
Securities available for sale, Carrying Value	354,566	368,451
Securities held to maturity, Carrying Value	10,413	12,064
Net loans, Carrying Value	0	0
Loans held for sale, Carrying Value	665	922
FHLB stock, Carrying Value	0	0
Accrued interest receivable, Carrying Value	0	0
Financial liabilities:
Deposits, Carrying Value	647,324	648,754
FHLB borrowings, Carrying Value	171,887	190,000
Accrued interest payable, Carrying Value	0	0
Advance payments by borrowers for taxes and insurance, Carrying Value	0	0
Off-balance-sheet financial instruments:
Commitments to extend credit, Carrying Value	0	0
Standby letters of credit, Carrying Value	0	0
Financial assets:
Cash and cash equivalents, Fair Value	0	0
Securities available for sale, Fair Value	354,566	368,451
Securities held to maturity, Fair Value	11,219	13,085
Net loans, Fair Value	0	0
Loans held for sale, Fair Value	665	922
FHLB stock, Fair Value	0	0
Accrued interest receivable, Fair Value	0	0
Financial liabilities:
Deposits, Fair Value	654,342	655,790
FHLB borrowings, Fair Value	208,843	223,240
Accrued interest payable, Fair Value	0	0
Advance payments by borrowers for taxes and insurance, Fair Value	0	0
Off-balance-sheet financial instruments:
Commitments to extend credit, Fair Value	0	0
Standby letters of credit, Fair Value	0	0
Level 3 [Member]
Financial assets:
Cash and cash equivalents, Carrying Value	0	0
Securities available for sale, Carrying Value	6,377	6,685
Securities held to maturity, Carrying Value	11,388	13,453
Net loans, Carrying Value	462,861	478,423
Loans held for sale, Carrying Value	0	0
FHLB stock, Carrying Value	0	0
Accrued interest receivable, Carrying Value	0	0
Financial liabilities:
Deposits, Carrying Value	0	0
FHLB borrowings, Carrying Value	0	0
Accrued interest payable, Carrying Value	0	0
Advance payments by borrowers for taxes and insurance, Carrying Value	0	0
Off-balance-sheet financial instruments:
Commitments to extend credit, Carrying Value	101,983	55,702
Standby letters of credit, Carrying Value	501	1,015
Financial assets:
Cash and cash equivalents, Fair Value	0	0
Securities available for sale, Fair Value	6,377	6,685
Securities held to maturity, Fair Value	11,149	10,163
Net loans, Fair Value	480,648	497,084
Loans held for sale, Fair Value	0	0
FHLB stock, Fair Value	0	0
Accrued interest receivable, Fair Value	0	0
Financial liabilities:
Deposits, Fair Value	0	0
FHLB borrowings, Fair Value	0	0
Accrued interest payable, Fair Value	0	0
Advance payments by borrowers for taxes and insurance, Fair Value	0	0
Off-balance-sheet financial instruments:
Commitments to extend credit, Fair Value	0	0
Standby letters of credit, Fair Value	$ 6	$ 3

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Borrowings (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2012
Restructured Advances From Federal Home Loan Banks	$ 160,000
Advance From Federal Home Loan Banks Prepayment Penalty	18,308
Federal Home Loan Banks Borrowings 1 [Member]
Restructured Advances From Federal Home Loan Banks	10,000
Advance From Federal Home Loan Banks Prepayment Penalty	476
Federal Home Loan Banks Borrowings 1 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.49%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Dec. 05, 2013
Federal Home Loan Banks Borrowings 1 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	1.30%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Apr. 25, 2017
Federal Home Loan Banks Borrowings 2 [Member]
Restructured Advances From Federal Home Loan Banks	10,000
Advance From Federal Home Loan Banks Prepayment Penalty	470
Federal Home Loan Banks Borrowings 2 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.44%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Dec. 10, 2013
Federal Home Loan Banks Borrowings 2 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	1.06%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Apr. 25, 2016
Federal Home Loan Banks Borrowings 3 [Member]
Restructured Advances From Federal Home Loan Banks	25,000
Advance From Federal Home Loan Banks Prepayment Penalty	0	[1]
Federal Home Loan Banks Borrowings 3 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.72%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Jun. 09, 2015
Federal Home Loan Banks Borrowings 3 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.04%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 04, 2018
Federal Home Loan Banks Borrowings 4 [Member]
Restructured Advances From Federal Home Loan Banks	25,000
Advance From Federal Home Loan Banks Prepayment Penalty	0	[1]
Federal Home Loan Banks Borrowings 4 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	5.58%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 16, 2016
Federal Home Loan Banks Borrowings 4 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	4.31%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 09, 2022
Federal Home Loan Banks Borrowings 5 [Member]
Restructured Advances From Federal Home Loan Banks	25,000
Advance From Federal Home Loan Banks Prepayment Penalty	4,710
Federal Home Loan Banks Borrowings 5 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	5.36%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Nov. 01, 2016
Federal Home Loan Banks Borrowings 5 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	2.28%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 04, 2021
Federal Home Loan Banks Borrowings 6 [Member]
Restructured Advances From Federal Home Loan Banks	10,000
Advance From Federal Home Loan Banks Prepayment Penalty	0	[1]
Federal Home Loan Banks Borrowings 6 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	5.07%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Oct. 23, 2017
Federal Home Loan Banks Borrowings 6 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	4.49%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 21, 2032
Federal Home Loan Banks Borrowings 7 [Member]
Restructured Advances From Federal Home Loan Banks	5,000
Advance From Federal Home Loan Banks Prepayment Penalty	687
Federal Home Loan Banks Borrowings 7 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.90%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Apr. 18, 2018
Federal Home Loan Banks Borrowings 7 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	2.44%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 16, 2022
Federal Home Loan Banks Borrowings 8 [Member]
Restructured Advances From Federal Home Loan Banks	25,000
Advance From Federal Home Loan Banks Prepayment Penalty	6,411
Federal Home Loan Banks Borrowings 8 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	5.85%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Sep. 17, 2018
Federal Home Loan Banks Borrowings 8 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.69%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 03, 2032
Federal Home Loan Banks Borrowings 9 [Member]
Restructured Advances From Federal Home Loan Banks	25,000
Advance From Federal Home Loan Banks Prepayment Penalty	$ 5,554
Federal Home Loan Banks Borrowings 9 [Member] | Original Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	5.05%
Federal Home Loan Bank Advances General Debt Obligations Due Date	Jan. 21, 2020
Federal Home Loan Banks Borrowings 9 [Member] | New Advance [Member]
Federal Home Loan Bank Interest Maturities Summary By Interest Rate Type Fixed Rate	3.56%
Federal Home Loan Bank Advances General Debt Obligations Due Date	May 17, 2032

[1] The prepayment penalty is embedded in the rate for the new advance.

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Securities

9 Months Ended

Jun. 30, 2012

Securities Available For Sale and Held To Maturity Disclosures [Abstract]

Securities Available For Sale and Held To Maturity Disclosures [Text Block]

Note 2.   Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
States and political subdivisions	$	12,186	$	-	$	12,186	$	1,159	$	44	$	13,301
Agency mortgage-backed securities		38,627		-		38,627		1,030		5		39,652
Agency collateralized mortgage obligations		190,134		-		190,134		2,134		336		191,932
Corporate equity securities		21,050		-		21,050		2,611		215		23,446
Corporate debt securities		109,996		-		109,996		6,386		324		116,058
Total	$	371,993	$	-	$	371,993	$	13,320	$	924	$	384,389

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
U.S. government and agency securities	$	7,500	$	-	$	7,500	$	1	$	-	$	7,501
States and political subdivisions		18,143		-		18,143		765		735		18,173
Agency mortgage-backed securities		23,561		-		23,561		1,259		25		24,795
Agency collateralized mortgage obligations		207,123		-		207,123		2,497		917		208,703
Corporate equity securities		28,735		-		28,735		442		7,504		21,673
Corporate debt securities		110,289		1,230		111,519		5,854		1,409		115,964
Total	$	395,351	$	1,230	$	396,581	$	10,818	$	10,590	$	396,809

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	4,904	$	-	$	4,904	$	180	$	-	$	5,084
Agency collateralized mortgage obligations		5,509		-		5,509		626		-		6,135
Non-agency collateralized mortgage obligations		11,388		1,125		12,513		1,253		2,617		11,149
Total	$	21,801	$	1,125	$	22,926	$	2,059	$	2,617	$	22,368

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	5,512	$	-	$	5,512	$	187	$	-	$	5,699
Agency collateralized mortgage obligations		6,552		-		6,552		835		1		7,386
Non-agency collateralized mortgage obligations		13,453		835		14,288		908		5,033		10,163
Total	$	25,517	$	835	$	26,352	$	1,930	$	5,034	$	23,248

The amortized cost and estimated fair value of securities at June 30, 2012, 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	$	15,223	$	15,587	$	-	$	-
Due after one year through five years		53,787		56,072		-		-
Due after five years through ten years		19,695		21,627		-		-
Due after ten years		33,477		36,073		-		-
Total non-mortgage debt securities		122,182		129,359		-		-
Mortgage-backed securities		38,627		39,652		4,904		5,084
Collateralized mortgage obligations		190,134		191,932		18,022		17,284
Corporate equity securities		21,050		23,446		-		-
Total securities	$	371,993	$	384,389	$	22,926	$	22,368

The following tables present information regarding temporarily impaired securities as of June 30, 2012 and September 30, 2011:

	June 30, 2012
	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:
State and political subdivisions	$	1,540	$	44	$	-	$	-	$	1,540	$	44
Agency mortgage-backed securities		-		-		2,901		5		2,901		5
Agency collateralized mortgage obligations		21,491		13		19,656		323		41,147		336
Corporate equity securities		6,738		211		21		4		6,759		215
Corporate debt securities		23,796		255		1,931		69		25,727		324
Total available for sale		53,565		523		24,509		401		78,074		924
Held to maturity:
Non-agency collateralized mortgage obligations		224		109		9,459		2,508		9,683		2,617
Total held to maturity		224		109		9,459		2,508		9,683		2,617
Total temporarily impaired securities	$	53,789	$	632	$	33,968	$	2,909	$	87,757	$	3,541

	September 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:
States and political subdivisions	$	1,715	$	735	$	-	$	-	$	1,715	$	735
Agency mortgage-backed securities		4,592		25		-		-		4,592		25
Agency collateralized mortgage obligations		50,933		901		3,097		16		54,030		917
Corporate equity securities		17,982		7,504		-		-		17,982		7,504
Corporate debt securities		17,816		1,191		11,783		218		29,599		1,409
Total available for sale		93,038		10,356		14,880		234		107,918		10,590
Held to maturity:
Agency collateralized mortgage obligations		-		-		116		1		116		1
Non-agency collateralized mortgage obligations		845		259		7,530		4,774		8,375		5,033
Total held to maturity		845		259		7,646		4,775		8,491		5,034
Total temporarily impaired securities	$	93,883	$	10,615	$	22,526	$	5,009	$	116,409	$	15,624

The Company’s securities portfolio consists of investments in various debt and equity securities as permitted by regulations of the Office of the Comptroller of the Currency (“OCC”) and the Board of Governors of the Federal Reserve System (“FRB”), 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, 2012 the Company recognized gross gains on sales of securities available for sale of $693,000 and gross losses of $1.5 million. During the three months ended June 30, 2011 the Company recognized no gains or losses on sales of securities available for sale. During the nine months ended June 30, 2012 and 2011, the Company recognized gross gains on sales of securities available for sale of $693,000 and $705,000, respectively, and gross losses of $1.5 million and $440,000, 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 issuer 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.

The Company recognized total impairment charges on debt and equity securities in income of $2.1 million and $1.3 million during the three months ended June 30, 2012 and 2011, respectively, and $4.4 million and $1.9 million for the nine months ended June 30, 2012 and 2011, respectively.

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, 2011	$	79
Additions for credit losses on securities not previously recognized		29
Additional credit losses on securities previously recognized as impaired		47
Reductions for increases in expected cash flows		(81	)
Balance of credit losses at June 30, 2012	$	74

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 seventy 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 seven securities and were considered temporary. 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 $211.9 million at June 30, 2012 compared to $262.1 million at September 30, 2011.

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Fair Value Measurements (Details Textual) (USD $)	9 Months Ended
	Jun. 30, 2012
Fair Value Measurement With Unobservable Inputs Reconciliation Recurring Basis Asset Other Than Temporary Impairment Charges Included In Noninterest Income	$ (686)
Municipal Bonds [Member]
Fair Value Measurement With Unobservable Inputs Reconciliation Recurring Basis Asset Other Than Temporary Impairment Charges Included In Noninterest Income	$ 686,000

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Allowance for Loan Losses (Details Textual) (USD $)	1 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Financing Receivable, Credit Quality, Additional Information				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.
Terms Of Allowance For Loans Receivable Based On Credit Ratings				Loans rated Excellent have no associated allowance. No loans were rated Excellent at June 30, 2012 or September 30, 2011. 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.
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down	$ 10,600,000			$ 8,200,000
Allowance for Credit Losses, Change in Method of Calculating Impairment	239,000	0		0
Financing Receivable, Modifications, Recorded Investment	0	5,500,000		5,500,000
Impaired Financing Receivable, Average Recorded Investment		31,700,000	40,800,000	46,800,000	34,800,000
Impaired Financing Receivable, Interest Income, Cash Basis Method		299,000	249,000	792,000	647,000
Loans and Leases Receivable, Impaired, Interest Lost on Nonaccrual Loans		394,000	342,000	821,000	1,100,000
Allowance For Loan and Lease Losses, Write-Offs		10,000	317,000	(3,294,000)	(2,550,000)
Loans and Leases Receivable, Gross	496,491,000	477,107,000		477,107,000
Land and Land Development Portfolio Segment [Member]
Financing Receivable, Modifications, Recorded Investment		1,800,000	760,000	1,800,000	760,000
Allowance For Loan and Lease Losses, Write-Offs				(3,217,000)	(836,000)
Loans and Leases Receivable, Gross	67,049,000	49,221,000		49,221,000
One To Four Family Portfolio Segment [Member]
Allowance For Loan and Lease Losses, Write-Offs				(68,000)	(519,000)
Loans and Leases Receivable, Gross	114,947,000	108,283,000		108,283,000
Construction Portfolio Segment [Member]
Financing Receivable, Modifications, Recorded Investment		44,000	90,000	44,000	90,000
Allowance For Loan and Lease Losses, Write-Offs				(9,000)	(933,000)
Loans and Leases Receivable, Gross	43,992,000	24,316,000		24,316,000
Non Residential Portfolio Segment [Member]
Financing Receivable, Modifications, Recorded Investment		5,500,000	5,500,000	5,500,000	5,500,000
Allowance For Loan and Lease Losses, Write-Offs				0	(262,000)
Loans and Leases Receivable, Gross	190,747,000	212,538,000		212,538,000
Impaired [Member]
Loans and Leases Receivable, Gross		34,177,000		34,177,000
Impaired Loans Assessed By Discounted Cash Flows [Member]
Loans and Leases Receivable Evaluated Using Discounted Estimated Cash Flows		$ 5,500,000		$ 5,500,000

XML

Securities (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Jun. 30, 2012	Sep. 30, 2011
Available for sale, Adjusted amortized cost	$ 371,993	$ 395,351
Available for sale, OTTI recognized in AOCI	0	1,230
Available for sale, Amortized cost	371,993	396,581
Available for sale, Gross unrealized gains	13,320	10,818
Available for sale, Gross unrealized losses	924	10,590
Available for sale, Estimated fair value	384,389	396,809
Held to maturity, Adjusted amortized cost	21,801	25,517
Held to maturity, OTTI recognized in AOCI	1,125	835
Held to maturity, Amortized cost	22,926	26,352
Held to maturity, Gross unrealized gains	2,059	1,930
Held to maturity, Gross unrealized losses	2,617	5,034
Held to maturity Estimated fair value	22,368	23,248
U.S. Government And Agency Securities [Member]
Available for sale, Adjusted amortized cost		7,500
Available for sale, OTTI recognized in AOCI		0
Available for sale, Amortized cost		7,500
Available for sale, Gross unrealized gains		1
Available for sale, Gross unrealized losses		0
Available for sale, Estimated fair value		7,501
States And Political Subdivisions [Member]
Available for sale, Adjusted amortized cost	12,186	18,143
Available for sale, OTTI recognized in AOCI	0	0
Available for sale, Amortized cost	12,186	18,143
Available for sale, Gross unrealized gains	1,159	765
Available for sale, Gross unrealized losses	44	735
Available for sale, Estimated fair value	13,301	18,173
Agency Mortgage-Backed Securities [Member]
Available for sale, Adjusted amortized cost	38,627	23,561
Available for sale, OTTI recognized in AOCI	0	0
Available for sale, Amortized cost	190,134	23,561
Available for sale, Gross unrealized gains	1,030	1,259
Available for sale, Gross unrealized losses	5	25
Available for sale, Estimated fair value	39,652	24,795
Held to maturity, Adjusted amortized cost	4,904	5,512
Held to maturity, OTTI recognized in AOCI	0	0
Held to maturity, Amortized cost	4,904	5,512
Held to maturity, Gross unrealized gains	180	187
Held to maturity, Gross unrealized losses	0	0
Held to maturity Estimated fair value	5,084	5,699
Agency Collateralized Mortgage Obligations [Member]
Available for sale, Adjusted amortized cost	190,134	207,123
Available for sale, OTTI recognized in AOCI	0	0
Available for sale, Amortized cost	190,134	207,123
Available for sale, Gross unrealized gains	2,134	2,497
Available for sale, Gross unrealized losses	336	917
Available for sale, Estimated fair value	191,932	208,703
Held to maturity, Adjusted amortized cost	5,509	6,552
Held to maturity, OTTI recognized in AOCI	0	0
Held to maturity, Amortized cost	5,509	6,552
Held to maturity, Gross unrealized gains	626	835
Held to maturity, Gross unrealized losses	0	1
Held to maturity Estimated fair value	6,135	7,386
Corporate Equity Securities [Member]
Available for sale, Adjusted amortized cost	21,050	28,735
Available for sale, OTTI recognized in AOCI	0	0
Available for sale, Amortized cost	21,050	28,735
Available for sale, Gross unrealized gains	2,611	442
Available for sale, Gross unrealized losses	215	7,504
Available for sale, Estimated fair value	23,446	21,673
Held to maturity, Amortized cost	0
Held to maturity Estimated fair value	0
Corporate Debt Securities [Member]
Available for sale, Adjusted amortized cost	109,996	110,289
Available for sale, OTTI recognized in AOCI	0	1,230
Available for sale, Amortized cost	109,996	111,519
Available for sale, Gross unrealized gains	6,386	5,854
Available for sale, Gross unrealized losses	324	1,409
Available for sale, Estimated fair value	116,058	115,964
Non-Agency Collateralized Mortgage Obligations [Member]
Held to maturity, Adjusted amortized cost	11,388	13,453
Held to maturity, OTTI recognized in AOCI	1,125	835
Held to maturity, Amortized cost	12,513	14,288
Held to maturity, Gross unrealized gains	1,253	908
Held to maturity, Gross unrealized losses	2,617	5,033
Held to maturity Estimated fair value	$ 11,149	$ 10,163

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Fair Value Measurements (Tables)

9 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

Assets measured at fair value on a recurring basis as of June 30, 2012 are summarized below:

	Total		Level 1		Level 2		Level 3
Securities available for sale
States and political subdivisions	$	13,301	$	-	$	11,761	$	1,540
Agency mortgage-backed securities		39,652		-		39,652		-
Agency collateralized mortgage obligations		191,932		-		191,932		-
Corporate equity securities		23,446		23,446		-		-
Corporate debt securities		116,058		-		111,221		4,837
Total assets at fair value	$	384,389	$	23,446	$	354,566	$	6,377

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

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

Balance of Level 3 assets measured on a recurring basis at September 30, 2011	$	6,685
Principal payments in period		(320	)
Accretion (amortization) of premiums or discounts		(21	)
Other-than-temporary impairment charges included in noninterest income		(686	)
Increase (decrease) in unrealized gains or losses included in accumulated other comprehensive income		719
Balance of Level 3 assets measured on a recurring basis at June 30, 2012	$	6,377

Fair Value Assets Measured On Nonrecurring Basis [Table Text Block]

Assets measured at fair value on a non-recurring basis as of June 30, 2012 are included in the table below:

	Total		Level 1		Level 2		Level 3
Non-agency collateralized mortgage obligations	$	325	$	-	$	-	$	325
Impaired loans
One-to four-family		3,780		-		3,780		-
Other real estate owned		6,432		-		81		6,351
Total assets at fair value	$	10,537	$	-	$	3,861	$	6,676

Schedule Of Unobservable Inputs Used In Valuation Of Non Agency Collateralized Mortgage Obligations [Table Text Block]

The following table provides information about unobservable inputs used in the valuation of non-agency CMOs at June 30, 2012:

	Range		Weighted Average
Delinquency rate		0.00% - 72.79%		16.55	%
Loss severity		9.55% - 81.87%		46.03	%
Discount rate		5.53% - 26.25%		18.40	%

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

The estimated fair values of the Company’s financial instruments, as well as their classifications in the fair value hierarchy, at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	130,873	$	130,873	$	130,873	$	130,873	$	-	$	-	$	-	$	-
Securities available for sale		384,389		384,389		23,446		23,446		354,566		354,566		6,377		6,377
Securities held to maturity		21,801		22,368		-		-		10,413		11,219		11,388		11,149
Net loans		462,861		480,648		-		-		-		-		462,861		480,648
Loans held for sale		665		665		-		-		665		665		-		-
FHLB stock		10,206		10,206		10,206		10,206		-		-		-		-
Accrued interest receivable		4,268		4,268		4,268		4,268		-		-		-		-
Financial liabilities:
Deposits		647,324		654,342		-		-		647,324		654,342		-		-
FHLB borrowings		171,887		208,843		-		-		171,887		208,843		-		-
Accrued interest payable		927		927		927		927		-		-		-		-
Advance payments by borrowers for taxes and insurance		1,526		1,526		1,526		1,526		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		101,983		-		-		-		-		-		101,983		-
Standby letters of credit		501		6		-		-		-		-		501		6

	September 30, 2011
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	115,749	$	115,749	$	115,749	$	115,749	$	-	$	-	$	-	$	-
Securities available for sale		396,809		396,809		21,673		21,673		368,451		368,451		6,685		6,685
Securities held to maturity		25,517		23,248		-		-		12,064		13,085		13,453		10,163
Net loans		478,423		497,084		-		-		-		-		478,423		497,084
Loans held for sale		922		922		-		-		922		922		-		-
FHLB stock		11,014		11,014		11,014		11,014		-		-		-		-
Accrued interest receivable		4,901		4,901		4,901		4,901		-		-		-		-
Financial liabilities:
Deposits		648,754		655,790		-		-		648,754		655,790		-		-
FHLB borrowings		190,000		223,240		-		-		190,000		223,240		-		-
Accrued interest payable		904		904		904		904		-		-		-		-
Advance payments by borrowers for taxes and insurance		2,335		2,335		2,335		2,335		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		55,702		-		-		-		-		-		55,702		-
Standby letters of credit		1,015		3		-		-		-		-		1,015		3

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Financial Instruments with Off-Balance-Sheet Risk (Details Textual) (USD $)	Jun. 30, 2012	Sep. 30, 2011
Loan Commitments	$ 102,000,000	$ 55,700,000
Letters Of Credit Potential Obligations	501,000	1,000,000
Rate Lock Commitment To Originate Mortgage Loans	400,000	3,800,000
Loans Held-for-sale, Mortgages	665,000	922,000
Commitments Outstanding To Sell Loans	$ 1,100,000	$ 4,700,000

XML

Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Other real estate owned
Other real estate held for sale	$ 2,063	$ 1,545
Other real estate held for development and sale	8,506	7,082
Total other real estate owned	$ 10,569	$ 8,627

XML

Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Available for sale, Amortized cost	$ 371,993	$ 396,581
Available for sale, Estimated fair value	384,389	396,809
Held to maturity Amortized cost, Total securities	22,926	26,352
Held to maturity Estimated fair value, Total securities	22,368	23,248
Non Mortgage Debt Securities [Member]
Available for sale Amortized cost Due in one year or less	15,223
Available for sale Amortized cost, Due after one year through five years	53,787
Available for sale Amortized cost, Due after five years through ten years	19,695
Available for sale Amortized cost, Due after ten years	33,477
Available for sale, Amortized cost	122,182
Available for sale Estimated fair value, Due in one year or less	15,587
Available for sale Estimated fair value, Due after one year through five years	56,072
Available for sale Estimated fair value, Due after five years through ten years	21,627
Available for sale Estimated fair value, Due after ten years	36,073
Available for sale, Estimated fair value	129,359
Held to maturity Amortized cost, Due in one year or less	0
Held to maturity Amortized cost, Due after one year through five years	0
Held to maturity Amortized cost, Due after five years through ten years	0
Held to maturity Amortized cost, Due after ten years	0
Held to maturity Amortized cost, Total securities	0
Held to maturity Estimated fair value, Due in one year or less	0
Held to maturity Estimated fair value, Due after one year through five years	0
Held to maturity Estimated fair value, Due after five years through ten years	0
Held to maturity Estimated fair value, Due after ten years	0
Held to maturity Estimated fair value, Total securities	0
Mortgage-Backed Securities [Member]
Available for sale, Amortized cost	38,627
Available for sale, Estimated fair value	39,652
Held to maturity Amortized cost, Total securities	4,904
Held to maturity Estimated fair value, Total securities	5,084
Collateralized Mortgage Obligations [Member]
Available for sale, Amortized cost	190,134
Available for sale, Estimated fair value	191,932
Held to maturity Amortized cost, Total securities	18,022
Held to maturity Estimated fair value, Total securities	17,284
Corporate Equity Securities [Member]
Available for sale, Amortized cost	21,050	28,735
Available for sale, Estimated fair value	23,446	21,673
Held to maturity Amortized cost, Total securities	0
Held to maturity Estimated fair value, Total securities	$ 0

XML

Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Available for sale Less Than 12 Months Estimated fair value	$ 53,565	$ 93,038
Available for sale 12 Months or Longer Estimated fair value	24,509	14,880
Available for sale Total Estimated fair value	78,074	107,918
Available for sale Less Than 12 Months, Gross unrealized losses	523	10,356
Available for sale 12 Months or Longer, Gross unrealized losses	401	234
Available for sale Total, Gross unrealized losses	924	10,590
Held to maturity Less Than 12 Months, Estimated fair value	224	845
Held to maturity 12 Months or Longer, Estimated fair value	9,459	7,646
Held to maturity Total, Estimated fair value	9,683	8,491
Held to maturity Less Than 12 Months, Gross unrealized losses	109	259
Held to maturity 12 Months or Longer, Gross unrealized losses	2,508	4,775
Held to maturity Total, Gross unrealized losses	2,617	5,034
Total temporarily impaired securities, Less Than 12 Months Estimated fair value	53,789	93,883
Total temporarily impaired securities, Less Than 12 Months Gross unrealized losses	632	10,615
Total temporarily impaired securities, 12 Months or Longer Estimated fair value	33,968	22,526
Total temporarily impaired securities, 12 Months or Longer Gross unrealized losses	2,909	5,009
Total temporarily impaired securities, Estimated fair value	87,757	116,409
Total temporarily impaired securities, Gross unrealized losses	3,541	15,624
Us States and Political Subdivisions Debt Securities [Member]
Available for sale Less Than 12 Months Estimated fair value	1,540	1,715
Available for sale 12 Months or Longer Estimated fair value	0	0
Available for sale Total Estimated fair value	1,540	1,715
Available for sale Less Than 12 Months, Gross unrealized losses	44	735
Available for sale 12 Months or Longer, Gross unrealized losses	0	0
Available for sale Total, Gross unrealized losses	44	735
Agency Mortgage-Backed Securities [Member]
Available for sale Less Than 12 Months Estimated fair value	0	4,592
Available for sale 12 Months or Longer Estimated fair value	2,901	0
Available for sale Total Estimated fair value	2,901	4,592
Available for sale Less Than 12 Months, Gross unrealized losses	0	25
Available for sale 12 Months or Longer, Gross unrealized losses	5	0
Available for sale Total, Gross unrealized losses	5	25
Agency collateralized mortgage obligations [Member]
Available for sale Less Than 12 Months Estimated fair value	21,491	50,933
Available for sale 12 Months or Longer Estimated fair value	19,656	3,097
Available for sale Total Estimated fair value	41,147	54,030
Available for sale Less Than 12 Months, Gross unrealized losses	13	901
Available for sale 12 Months or Longer, Gross unrealized losses	323	16
Available for sale Total, Gross unrealized losses	336	917
Held to maturity Less Than 12 Months, Estimated fair value	0	0
Held to maturity 12 Months or Longer, Estimated fair value	104	116
Held to maturity Total, Estimated fair value	104	116
Held to maturity Less Than 12 Months, Gross unrealized losses	0	0
Held to maturity 12 Months or Longer, Gross unrealized losses	0	1
Held to maturity Total, Gross unrealized losses	0	1
Non Agency Collateralized Mortgage Obligations [Member]
Held to maturity Less Than 12 Months, Estimated fair value	224	845
Held to maturity 12 Months or Longer, Estimated fair value	9,459	7,530
Held to maturity Total, Estimated fair value	9,683	8,375
Held to maturity Less Than 12 Months, Gross unrealized losses	109	259
Held to maturity 12 Months or Longer, Gross unrealized losses	2,508	4,774
Held to maturity Total, Gross unrealized losses	2,617	5,033
Corporate Equity Securities [Member]
Available for sale Less Than 12 Months Estimated fair value	6,738	17,982
Available for sale 12 Months or Longer Estimated fair value	21	0
Available for sale Total Estimated fair value	6,759	17,982
Available for sale Less Than 12 Months, Gross unrealized losses	211	7,504
Available for sale 12 Months or Longer, Gross unrealized losses	4	0
Available for sale Total, Gross unrealized losses	215	7,504
Corporate Debt Securities [Member]
Available for sale Less Than 12 Months Estimated fair value	23,796	17,816
Available for sale 12 Months or Longer Estimated fair value	1,931	11,783
Available for sale Total Estimated fair value	25,727	29,599
Available for sale Less Than 12 Months, Gross unrealized losses	255	1,191
Available for sale 12 Months or Longer, Gross unrealized losses	69	218
Available for sale Total, Gross unrealized losses	$ 324	$ 1,409

XML

Nature of Business and Summary of Significant Accounting Policies

9 Months Ended

Jun. 30, 2012

Accounting Policies [Abstract]

Business Description and Accounting Policies [Text Block]

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 consolidated 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 consolidated 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 the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 (“2011 Form 10-K”).  These interim consolidated 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, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012 or any other future period. The consolidated balance sheet as of September 30, 2011 was derived from the Company’s audited annual consolidated financial statements in the 2011 Form 10-K.

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, valuation of stock-based compensation, 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.

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.

Stock-Based Compensation — The Company issues restricted stock and stock options under the Franklin Financial Corporation 2012 Equity Incentive Plan to key officers and outside directors. In accordance with the requirements of ASC 718, Compensation – Stock Compensation, the Company has adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.

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, earnings per share, 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 2 “Securities” and note 3 “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.

Recent Accounting Pronouncements

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 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. See note 10 of the notes to the unaudited consolidated financial statements for disclosures about fair value measurements.

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.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11: Disclosures about Offsetting Assets and Liabilities. The eligibility criteria for offsetting are different in International Financial Reporting Standards (“IFRS”) and GAAP. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. To allow investors to better compare financial statements prepared in accordance with IFRS or GAAP, the Boards have issued common disclosure requirements related to offsetting arrangements in ASU No. 2011-11. The amendments to the Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact of ASU No. 2011-11 on its consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (discussed above), so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU No. 2011-12 on its consolidated financial statements.

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012
Balance of credit losses at September 30, 2011	$ 79
Additions for credit losses on securities not previously recognized	29
Additional credit losses on securities previously recognized as impaired	47
Reductions for increases in expected cash flows	(81)
Balance of credit losses at June 30, 2012	$ 74

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Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Current	$ 449,040
31-60 Days	5,568
61-90 Days	0
91-120 Days	542
121-150 Days	163
151-180 Days	369
Financing receivables that are 181 days past due or more	21,425
Total loans	477,107	496,491
One-to four-family [Member]
Current	101,559
31-60 Days	505
61-90 Days	0
91-120 Days	542
121-150 Days	163
151-180 Days	349
Financing receivables that are 181 days past due or more	5,165
Total loans	108,283	114,947
Multi-family [Member]
Current	76,127
31-60 Days	0
61-90 Days	0
91-120 Days	0
121-150 Days	0
151-180 Days	0
Financing receivables that are 181 days past due or more	6,075
Total loans	82,202	79,106
Non-residential [Member]
Current	210,474
31-60 Days	2,064
61-90 Days	0
91-120 Days	0
121-150 Days	0
151-180 Days	0
Financing receivables that are 181 days past due or more	0
Total loans	212,538	190,747
Construction [Member]
Current	24,150
31-60 Days	0
61-90 Days	0
91-120 Days	0
121-150 Days	0
151-180 Days	0
Financing receivables that are 181 days past due or more	166
Total loans	24,316	43,992
Land and land development [Member]
Current	36,183
31-60 Days	2,999
61-90 Days	0
91-120 Days	0
121-150 Days	0
151-180 Days	20
Financing receivables that are 181 days past due or more	10,019
Total loans	49,221	67,049
Other [Member]
Current	547
31-60 Days	0
61-90 Days	0
91-120 Days	0
121-150 Days	0
151-180 Days	0
Financing receivables that are 181 days past due or more	0
Total loans	$ 547	$ 650

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Employee Benefit Plans (Details 4) (USD $)	9 Months Ended
	Jun. 30, 2012
Weighted-average grant date fair value, Granted	$ 13.42
Weighted-average grant date fair value, Vested	$ 0
Weighted-average grant date fair value, Forfeited	$ 0
Weighted-average grant date fair value, Non-vested at June 30, 2012	$ 13.42
Restricted Stock [Member]
Restricted stock awards, Non-vested at September 30, 2011	0
Restricted stock awards, Granted	464,500
Restricted stock awards, Vested	0
Restricted stock awards, Forfeited	0
Restricted stock awards, Non-vested at June 30, 2012	464,500

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Assets
Cash and due from banks	$ 18,746	$ 4,366
Interest-bearing deposits in other banks	100,606	72,955
Money market investments	11,521	38,428
Total cash and cash equivalents	130,873	115,749
Securities available for sale	384,389	396,809
Securities held to maturity	21,801	25,517
Loans, net of deferred loan fees	473,667	493,047
Less allowance for loan losses	10,806	14,624
Net loans	462,861	478,423
Loans held for sale	665	922
Federal Home Loan Bank stock	10,206	11,014
Office properties and equipment, net	6,219	6,287
Other real estate owned	10,569	8,627
Accrued interest receivable:
Loans	2,049	2,339
Mortgage-backed securities and collateralized mortgage obligations	725	761
Other investment securities	1,494	1,801
Total accrued interest receivable	4,268	4,901
Cash surrender value of bank-owned life insurance	32,679	31,714
Prepaid expenses and other assets	16,464	17,014
Total assets	1,080,994	1,096,977
Liabilities and Stockholders' Equity
Savings deposits	264,776	265,192
Time deposits	382,548	383,562
Total deposits	647,324	648,754
Federal Home Loan Bank borrowings	171,887	190,000
Advance payments by borrowers for property taxes and insurance	1,526	2,335
Accrued expenses and other liabilities	6,772	6,330
Total liabilities	827,509	847,419
Commitments and contingencies (see note 9)
Stockholders' equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized, no shares issued or outstanding	0	0
Common stock: $0.01 par value; 75,000,000 shares authorized; 14,302,838 shares issued; 13,776,538 shares and 14,302,838 shares outstanding, respectively	138	143
Additional paid-in capital	135,751	142,882
Unearned ESOP shares	(10,586)	(11,082)
Unearned equity incentive plan shares	(4,320)	0
Undistributed stock-based deferral plan shares: 252,215 shares	(2,533)	(2,533)
Retained earnings	129,699	125,770
Accumulated other comprehensive income (loss)	5,336	(5,622)
Total stockholders' equity	253,485	249,558
Total liabilities and stockholders' equity	$ 1,080,994	$ 1,096,977

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Real Estate Owned (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Sep. 30, 2011
Real Estate, Cost of Real Estate Sold			$ 1,500,000
Gains (Losses) on Sales of Investment Real Estate	711,000	85,000	1,300,000	32,000
Deferred Gain on Sale of Property	598,000	0	598,000	0
Impairment Of Real Estate	611,000	58,000	611,000	839,000
(Gains) losses on sales of other real estate owned, net	711,000	(85,000)	1,336,000	(32,000)
Deferred Gains On Sales Of Other Real Estate Owned	239,000		239,000		771,000
Gains On Sales Of Other Real Estate	$ 95,000

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Consolidated Statements of Comprehensive Income and Changes in Stockholders' Equity [Parenthetical] (USD $)	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Net unrealized holding gains , net of income tax expense	$ 6	$ 857
Reclassification adjustment for losses included in net income, net of income tax benefit	556	205
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax benefit	110	81
Amortization of previously recognized other-than-temporary impairment of available-for-sale securities related to factors other than credit, net of income tax expense	$ 467	$ 392

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Fair Value Measurements (Details 2) (USD $)	Jun. 30, 2012
Total assets at fair value	$ 10,537
Non-Agency Collateralized Mortgage Obligations [Member]
Total assets at fair value	325
One-to four-family [Member]
Total assets at fair value	3,780
Other real estate owned [Member]
Total assets at fair value	6,432
Level 1 [Member]
Total assets at fair value	0
Level 1 [Member] | Non-Agency Collateralized Mortgage Obligations [Member]
Total assets at fair value	0
Level 1 [Member] | One-to four-family [Member]
Total assets at fair value	0
Level 1 [Member] | Other real estate owned [Member]
Total assets at fair value	0
Level 2 [Member]
Total assets at fair value	3,861
Level 2 [Member] | Non-Agency Collateralized Mortgage Obligations [Member]
Total assets at fair value	0
Level 2 [Member] | One-to four-family [Member]
Total assets at fair value	3,780
Level 2 [Member] | Other real estate owned [Member]
Total assets at fair value	81
Level 3 [Member]
Total assets at fair value	6,676
Level 3 [Member] | Non-Agency Collateralized Mortgage Obligations [Member]
Total assets at fair value	325
Level 3 [Member] | One-to four-family [Member]
Total assets at fair value	0
Level 3 [Member] | Other real estate owned [Member]
Total assets at fair value	$ 6,351

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Loans (Details Textual) (USD $) In Millions, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Pledged Financial Instruments, Not Separately Reported, Loans Receivable Pledged as Collateral	$ 295.4	$ 252.9

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Loans (Tables)

9 Months Ended

Jun. 30, 2012

Receivables [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

Loans held for investment at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Loans
One-to four-family	$	108,283	$	114,947
Multi-family		82,202		79,106
Nonresidential		212,538		190,747
Construction		24,316		43,992
Land and land development		49,221		67,049
Other		547		650
Total loans		477,107		496,491
Deferred loan fees		3,440		3,444
Loans, net of deferred loan fees		473,667		493,047
Allowance for loan losses		10,806		14,624
Net loans	$	462,861	$	478,423

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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Balance, September 30, 2010			$ 14,624	$ 13,419
Provision			(542)	2,537
Recoveries			18	26
Charge-offs	10	317	(3,294)	(2,550)
Balance, June 30, 2011	10,806	13,432	10,806	13,432
One-to four-family [Member]
Balance, September 30, 2010			1,324	1,260
Provision			263	570
Recoveries			5	1
Charge-offs			(68)	(519)
Balance, June 30, 2011	1,524	1,312	1,524	1,312
Multi-family [Member]
Balance, September 30, 2010			1,357	1,177
Provision			(188)	1,001
Recoveries			0	0
Charge-offs			0	0
Balance, June 30, 2011	1,169	2,178	1,169	2,178
Non-residential [Member]
Balance, September 30, 2010			3,146	2,888
Provision			(179)	629
Recoveries			0	25
Charge-offs			0	(262)
Balance, June 30, 2011	2,967	3,280	2,967	3,280
Construction [Member]
Balance, September 30, 2010			1,724	2,700
Provision			(539)	(54)
Recoveries			5	0
Charge-offs			(9)	(933)
Balance, June 30, 2011	1,181	1,713	1,181	1,713
Land and land development [Member]
Balance, September 30, 2010			7,064	5,372
Provision			105	403
Recoveries			8	0
Charge-offs			(3,217)	(836)
Balance, June 30, 2011	3,960	4,939	3,960	4,939
Other [Member]
Balance, September 30, 2010			9	22
Provision			(4)	(12)
Recoveries			0	0
Charge-offs			0	0
Balance, June 30, 2011	$ 5	$ 10	$ 5	$ 10

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Real Estate Owned (Tables)

9 Months Ended

Jun. 30, 2012

Real Estate [Abstract]

Schedule Of Real Estate Owned [Table Text Block]

Other real estate owned at June 30, 2012 and September 30, 2011 is summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Other real estate owned
Other real estate held for sale	$	2,063	$	1,545
Other real estate held for development and sale		8,506		7,082
Total other real estate owned	$	10,569	$	8,627

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash Flows From Operating Activities
Net income	$ 3,929	$ 494
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization	630	586
Provision for loan losses	(542)	2,537
Impairment charges on other real estate owned	611	839
Charitable contribution of stock to The Franklin Federal Foundation	0	4,165
Losses (gains) on sales of securities available for sale, net	777	(265)
Impairment charge on securities	4,384	1,934
Losses (gains) on sales or disposal of office properties and equipment, net	13	(7)
(Gains) losses on sales of other real estate owned, net	(1,336)	32
Net amortization on securities	1,864	1,031
Amortization of deferred amounts related to Federal Home Loan Bank borrowings	195	0
Originations of loans held for sale	(9,127)	(12,093)
Sales and principal payments on loans held for sale	9,385	13,632
ESOP compensation expense	637	176
Stock-based compensation expense	717	0
Changes in assets and liabilities:
Accrued interest receivable	633	(150)
Cash surrender value of bank-owned life insurance	(965)	(956)
Prepaid expenses and other assets	(369)	(249)
Advance payments by borrowers for property taxes and insurance	(809)	(677)
Accrued expenses and other liabilities	974	(961)
Net cash and cash equivalents provided by operating activities	11,601	10,068
Cash Flows From Investing Activities
Net redemptions of Federal Home Loan Bank stock	808	1,180
Proceeds from maturities, calls and paydowns of securities available for sale	102,972	77,124
Proceeds from sales of securities available for sale	12,646	12,173
Purchases of securities available for sale	(98,196)	(222,984)
Proceeds from maturities and paydowns of securities held to maturity	3,566	5,843
Net decrease (increase) in loans	13,576	(7,371)
Purchases of office properties and equipment	(541)	(641)
Proceeds from sales of office properties and equipment	0	13
Capitalized improvements of other real estate owned	0	(46)
Proceeds from sales of other real estate owned	744	1,913
Net cash and cash equivalents provided (used) by investing activities	35,575	(132,796)
Cash Flows From Financing Activities
Net (decrease) increase in savings deposits	(416)	4,602
Net (decrease) increase in time deposits	(1,014)	11,350
Repurchase of common stock	(7,994)	0
Common stock purchased for equity incentive plan	(4,320)	0
Deferred Federal Home Loan Bank prepayment penalty	(18,308)	0
Proceeds from issuance of common stock, net of issuance costs	0	136,261
Stock purchased by ESOP	0	(11,442)
Net cash and cash equivalents (used) provided by financing activities	(32,052)	140,771
Net increase in cash and cash equivalents	15,124	18,043
Cash and cash equivalents at beginning of period	115,749	97,909
Cash and cash equivalents at end of period	130,873	115,952
Supplemental disclosures of cash flow information
Cash payments for interest	12,345	14,790
Cash payments for income taxes	4,104	2,400
Supplemental schedule of noncash investing and financing activities
Unrealized gains (losses) on securities available for sale	12,167	(119)
Transfer of loans to other real estate owned, net	4,058	2,454
Sales of other real estate owned financed by the Bank	$ 1,529	$ 2,841

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Consolidated Balance Sheets [Parenthetical] (USD $)	Jun. 30, 2012	Sep. 30, 2011
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorised	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorised	75,000,000	75,000,000
Common stock, shares issued	14,302,838	14,302,838
Common stock, shares outstanding	13,776,538	14,302,838
Common stock, held in trust outstanding	252,215	252,215

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Fair Value Measurements

9 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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.

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, 2012, 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 beginning 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.

Other real estate owned: Other real estate owned (“OREO”) is adjusted to net realizable value, which is equal to fair value less costs to sell, upon foreclosure. Subsequently, OREO 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 OREO. When the fair value of OREO 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 OREO 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 OREO is further impaired below the appraised value and there is no observable market price, the Company classifies the OREO as a Level 3 asset. Additionally, if the fair value of the OREO 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 OREO as a Level 3 asset.

Assets measured at fair value on a recurring basis as of June 30, 2012 are summarized below:

	Total		Level 1		Level 2		Level 3
Securities available for sale
States and political subdivisions	$	13,301	$	-	$	11,761	$	1,540
Agency mortgage-backed securities		39,652		-		39,652		-
Agency collateralized mortgage obligations		191,932		-		191,932		-
Corporate equity securities		23,446		23,446		-		-
Corporate debt securities		116,058		-		111,221		4,837
Total assets at fair value	$	384,389	$	23,446	$	354,566	$	6,377

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

Balance of Level 3 assets measured on a recurring basis at September 30, 2011	$	6,685
Principal payments in period		(320	)
Accretion (amortization) of premiums or discounts		(21	)
Other-than-temporary impairment charges included in noninterest income		(686	)
Increase (decrease) in unrealized gains or losses included in accumulated other comprehensive income		719
Balance of Level 3 assets measured on a recurring basis at June 30, 2012	$	6,377

Level 3 securities measured at fair value on a recurring basis at June 30, 2012 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 a combination of the observable market prices of similar securities based on their trading activity and broker quotes. Price estimates are then adjusted for liquidity discounts necessary to account for the lack of trading activity for each security. Changes in the liquidity discount applied could result in significantly higher or lower fair value measurements. During the nine months ended June 30, 2012, the Company recognized an other-than-temporary impairment charge on the municipal bond of $686,000, which is included in noninterest income (expense) in the income statement.

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, including held-to-maturity securities, impaired loans, and real estate owned. Held-to-maturity securities are measured at fair value in a period in which an other-than-temporary impairment charge is recognized. Impaired loans are measured at fair value when a change in the value of the underlying collateral or a change in the present value of estimated future cash flows result in a change in the specific allowance for such a loan. Real estate owned is measured at fair value in the period of foreclosure or in a period in which a change in net realizable value results in an impairment charge.

Assets measured at fair value on a non-recurring basis as of June 30, 2012 are included in the table below:

	Total		Level 1		Level 2		Level 3
Non-agency collateralized mortgage obligations	$	325	$	-	$	-	$	325
Impaired loans
One-to four-family		3,780		-		3,780		-
Other real estate owned		6,432		-		81		6,351
Total assets at fair value	$	10,537	$	-	$	3,861	$	6,676

In estimating the fair value of non-agency collateralized mortgage obligations (“CMOs”), the Company performs a discounted cash flow analysis that uses certain unobservable inputs, including delinquency and loss severity rates for the collateral underlying each security, cash flow estimates obtained from a third-party service, and the discount rate applied. Since there is no readily-available discount rate for each individual security, the Company begins with the rate of a seven-year corporate bond (which management believes mirrors the expected remaining life of these securities) with a credit rating of B as of the balance sheet date. The Company applies this rate as the discount rate on non-agency CMOs rated as “investment grade” by the major rating agencies and applies multiples of this rate to non-agency CMO’s of lower credit quality. For securities rated one level below investment grade, the Company applies this rate times a factor of two; for securities rated two levels below investment grade, the Company applies this rates times a factor of three; and for securities rate three or more levels below investment grade, the Company applies this rate times a factor of four. The following table provides information about unobservable inputs used in the valuation of non-agency CMOs at June 30, 2012:

	Range		Weighted Average
Delinquency rate		0.00% - 72.79%		16.55	%
Loss severity		9.55% - 81.87%		46.03	%
Discount rate		5.53% - 26.25%		18.40	%

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 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, as well as their classifications in the fair value hierarchy, at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	130,873	$	130,873	$	130,873	$	130,873	$	-	$	-	$	-	$	-
Securities available for sale		384,389		384,389		23,446		23,446		354,566		354,566		6,377		6,377
Securities held to maturity		21,801		22,368		-		-		10,413		11,219		11,388		11,149
Net loans		462,861		480,648		-		-		-		-		462,861		480,648
Loans held for sale		665		665		-		-		665		665		-		-
FHLB stock		10,206		10,206		10,206		10,206		-		-		-		-
Accrued interest receivable		4,268		4,268		4,268		4,268		-		-		-		-
Financial liabilities:
Deposits		647,324		654,342		-		-		647,324		654,342		-		-
FHLB borrowings		171,887		208,843		-		-		171,887		208,843		-		-
Accrued interest payable		927		927		927		927		-		-		-		-
Advance payments by borrowers for taxes and insurance		1,526		1,526		1,526		1,526		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		101,983		-		-		-		-		-		101,983		-
Standby letters of credit		501		6		-		-		-		-		501		6

	September 30, 2011
	Total				Level 1				Level 2				Level 3
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	115,749	$	115,749	$	115,749	$	115,749	$	-	$	-	$	-	$	-
Securities available for sale		396,809		396,809		21,673		21,673		368,451		368,451		6,685		6,685
Securities held to maturity		25,517		23,248		-		-		12,064		13,085		13,453		10,163
Net loans		478,423		497,084		-		-		-		-		478,423		497,084
Loans held for sale		922		922		-		-		922		922		-		-
FHLB stock		11,014		11,014		11,014		11,014		-		-		-		-
Accrued interest receivable		4,901		4,901		4,901		4,901		-		-		-		-
Financial liabilities:
Deposits		648,754		655,790		-		-		648,754		655,790		-		-
FHLB borrowings		190,000		223,240		-		-		190,000		223,240		-		-
Accrued interest payable		904		904		904		904		-		-		-		-
Advance payments by borrowers for taxes and insurance		2,335		2,335		2,335		2,335		-		-		-		-
Off-balance-sheet financial instruments:
Commitments to extend credit		55,702		-		-		-		-		-		55,702		-
Standby letters of credit		1,015		3		-		-		-		-		1,015		3

XML

Document And Entity Information	9 Months Ended
	Jun. 30, 2012	Aug. 01, 2012
Entity Registrant Name	Franklin Financial Corp
Entity Central Index Key	0001505823
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Trading Symbol	frnk
Entity Common Stock, Shares Outstanding		13,776,538
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012

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Stock Repurchase Program

9 Months Ended

Jun. 30, 2012

Stock Repurchase Program [Abstract]

Stock Repurchase Program [Text Block]

Note 11. Stock Repurchase Program

On May 3, 2012, the Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 715,141 shares, of its outstanding common stock either on the open market or through private transactions until October 31, 2012. Purchases will be conducted through an SEC Rule 10b5-1 repurchase plan with Sandler O’Neill & Partners, L.P. (“Sandler”) whereby Sandler will, from time to time and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, act as agent for the Company in purchasing shares based upon the parameters of the Rule 10b5-1 repurchase plan. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout period. During the three months ended June 30, 2012, the Company repurchased 526,300 shares of outstanding common stock for $8.0 million, or an average price of $15.19 per share.

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Consolidated Income Statements (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended			9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011		Jun. 30, 2012	Jun. 30, 2011
Interest and dividend income:
Interest and fees on loans	$ 7,558	$ 8,015		$ 23,173	$ 23,998
Interest on deposits in other banks	47	89		101	166
Interest and dividends on securities:
Taxable	3,022	3,564		9,663	10,036
Nontaxable	71	78		215	237
Total interest and dividend income	10,698	11,746		33,152	34,437
Interest expense:
Interest on deposits	1,934	2,547		5,944	7,984
Interest on borrowings	2,055	2,291		6,658	6,873
Total interest expense	3,989	4,838		12,602	14,857
Net interest income	6,709	6,908		20,550	19,580
Provision for loan losses	(390)	1,825		(542)	2,537
Net interest income after provision for loan losses	7,099	5,083		21,092	17,043
Noninterest (expense) income:
Service charges on deposit accounts	14	11		38	31
Other service charges and fees	167	87		781	240
Gains on sales of loans held for sale	65	40		206	255
(Losses) gains on sales of securities, net	(777)	0		(777)	265
Gains (losses) on sales of other real estate owned	711	(85)		1,336	(32)
Impairment of securities, net:
Impairment of securities	(2,005)	(1,157)		(4,884)	(1,943)
Less: Impairment recognized in other comprehensive income	53	96		(500)	(9)
Net impairment reflected in income	(2,058)	(1,253)		(4,384)	(1,934)
Increase in cash surrender value of bank-owned life insurance	323	321		965	956
Other operating income	214	264		439	414
Total noninterest (expense) income	(1,341)	(615)		(1,396)	195
Other noninterest expenses:
Personnel expense	2,665	2,270		6,743	6,097
Occupancy expense	227	209		667	617
Equipment expense	249	226		707	672
Advertising expense	46	53		156	125
Federal deposit insurance premiums	207	315		618	833
Charitable contributions to The Franklin Federal Foundation	0	5,555		0	5,555
Impairment of other real estate owned	611	58		611	839
Other operating expenses	1,060	901		2,729	2,346
Total other noninterest expenses	5,065	9,587		12,231	17,084
Income (loss) before provision for income taxes	693	(5,119)		7,465	154
Federal and state income tax expense (benefit)	1,047	(1,844)		3,536	(340)
Net (loss) income	$ (354)	$ (3,275)		$ 3,929	$ 494
Basic net (loss) income per common share (in dollar per share)	$ (0.03)	$ (0.25)	[1]	$ 0.30	$ 0.04	[1]
Diluted net (loss) income per common share (in dollars per share)	$ (0.03)	$ (0.25)	[1]	$ 0.30	$ 0.04	[1]

[1] Weighted - average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC's mutual-to-stock conversion, to June 30, 2011.

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Real Estate Owned

9 Months Ended

Jun. 30, 2012

Real Estate [Abstract]

Real Estate Owned [Text Block]

Note 5.   Other Real Estate Owned

Other real estate owned at June 30, 2012 and September 30, 2011 is summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Other real estate owned
Other real estate held for sale	$	2,063	$	1,545
Other real estate held for development and sale		8,506		7,082
Total other real estate owned	$	10,569	$	8,627

During the nine months ended June 30, 2012, the Company sold other real estate owned totaling $1.5 million. The Company recognized net gains on sales of other real estate owned of $711,000 and $1.3 million for the three and nine months ended June 30, 2012, respectively, compared with net losses of $85,000 and $32,000 for the three and nine months ended June 30, 2011, respectively. Gains on sales for the three months ended June 30, 2012 included the recognition of $95,000 in gains on properties sold in previous periods that had been deferred in accordance with GAAP because financing was provided by the Company and the sales did not meet either initial or continuing investment criteria to qualify for gain recognition. The total of such deferred gains recognized and included in gains on sales for the nine months ended June 30, 2012 was $598,000. At June 30, 2012, the Company had deferred gains on sales of other real estate owned of $239,000 compared to $771,000 at September 30, 2011. Impairment charges on other real estate owned of $611,000 were recognized for the three and nine months ended June 30, 2012 compared with impairment charges of $58,000 for the three months ended June 30, 2011 and $839,000 for the nine months ended June 30, 2011.

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Allowance for Loan Losses

9 Months Ended

Jun. 30, 2012

Allowance For Loan Losses Disclosure [Abstract]

Allowance For Loan Losses Disclosure [Text Block]

Note 4.   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 in each segment based on credit rating. Loans rated Excellent have no associated allowance. No loans were rated Excellent at June 30, 2012 or September 30, 2011. 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.

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 $34.2 million of loans classified as impaired at June 30, 2012, $28.7 million were considered “collateral dependent” and evaluated using the fair value of collateral method and $5.5 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:

	One-to			Multi-			Non-						Land and land
(Dollars in thousands)	four-family			family			residential			Construction			development			Other			Total
Balance, September 30, 2011	$	1,324		$	1,357		$	3,146		$	1,724		$	7,064		$	9		$	14,624
Provision		263			(188	)		(179	)		(539	)		105			(4	)		(542	)
Recoveries		5			-			-			5			8			-			18
Charge-offs		(68	)		-			-			(9	)		(3,217	)		-			(3,294	)
Balance, June 30, 2012	$	1,524		$	1,169		$	2,967		$	1,181		$	3,960		$	5		$	10,806

	One-to			Multi-		Non-						Land and land
(Dollars in thousands)	four-family			family		residential			Construction			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

During the three and nine months ended June 30, 2012, the Company recorded net charge-offs of $10,000 and $3.3 million, respectively, compared to net charge-offs of $317,000 and $2.5 million, respectively, in the three and nine months ended June 30, 2011. As a result of continued concerns regarding the valuations of collateral for land and land development loans, the Company recorded a provision for loan losses of $105,000 in the nine months ended June 30, 2012 for the portfolio of land and land development loans. The Company also recorded a provision for loan losses of $263,000 for its portfolio of one-to four-family loans due to an increase in historical charge-offs and nonaccrual loans in the Company’s portfolio of non-owner-occupied one-to four-family loans. These provisions were more than offset by decreases in the allowances for the Company’s multi-family, nonresidential, and construction loan portfolios. These decreases were partially the result of improving credit quality combined with decreased loan balances in the construction loan portfolio.

Details of the allowance for loan losses by portfolio segment and impairment methodology at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	104,129	$	1,149	$	4,154	$	375	$	108,283	$	1,524		1.41	%		14.1	%
Multi-family		69,526		1,169		12,676		-		82,202		1,169		1.42			10.8
Nonresidential		207,040		2,967		5,498		-		212,538		2,967		1.40			27.5
Construction		24,272		1,181		44		-		24,316		1,181		4.86			10.9
Land and land development		37,416		3,960		11,805		-		49,221		3,960		8.05			36.7
Other		547		5		-		-		547		5		0.91			-
Total allowance	$	442,930	$	10,431	$	34,177	$	375	$	477,107	$	10,806		2.26			100.0	%

	September 30, 2011
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	110,047	$	1,192	$	4,900	$	132	$	114,947	$	1,324		1.15	%		9.1	%
Multi-family		66,347		1,145		12,759		212		79,106		1,357		1.71			9.2
Nonresidential		180,895		3,146		9,852		-		190,747		3,146		1.65			21.5
Construction		43,903		1,697		89		27		43,992		1,724		3.92			11.8
Land and land development		40,500		4,070		26,549		2,994		67,049		7,064		10.54			48.3
Other		650		9		-		-		650		9		1.40			0.1
Total allowance	$	442,342	$	11,259	$	54,149	$	3,365	$	496,491	$	14,624		2.95			100.0	%

Details regarding classified loans and impaired loans at June 30, 2012 and September 30, 2011 are as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Special mention
One-to four-family	$	2,892	$	5,372
Nonresidential		3,127		-
Construction		666		3,142
Land and land development		11,953		7,944
Total special mention loans		18,638		16,458
Substandard
One-to four-family		4,491		4,347
Multi-family		249		253
Nonresidential		2,064		3,156
Construction		675		166
Land and land development		6,993		623
Total substandard loans		14,472		8,545
Impaired
One-to four-family		4,154		4,900
Multi-family		12,676		12,759
Nonresidential		5,498		9,852
Construction		44		90
Land and land development		11,805		26,548
Total impaired loans		34,177		54,149
Total rated loans	$	67,287	$	79,152

The increase in special mention and substandard loans at June 30, 2012 compared to September 30, 2011 was primarily the result of the reclassification of certain loans classified as impaired at September 30, 2011 to special mention or substandard.

Included in impaired loans are troubled debt restructurings of $8.2 million and $10.6 million at June 30, 2012 and September 30, 2011, respectively that had related allowance balances of $0 and $239,000, respectively. Troubled debt restructurings that were performing in accordance with modified terms were $5.5 million and $0 at June 30, 2012 and September 30, 2011, respectively.

Troubled Debt Restructurings

During the nine months ended June 30, 2012, the Company modified five loans in troubled debt restructurings, including two construction loans to one borrower, one nonresidential loan, and two land and land development loans. The restructuring of the construction loans, which had an outstanding balance of $44,000 at June 30, 2012, involved the reduction in the loan’s interest rate floor and monthly principal payment requirement to accommodate cash flow difficulties being experienced by the borrower. A discounted cash flows analysis revealed that no specific allowance was required for these two loans. The loans remained on accrual status as the borrower was current at June 30, 2012. The nonresidential loan modification consisted of further principal payment reductions and an extension of the call date on a loan previously recognized as a troubled debt restructuring. This loan, which had an outstanding balance of $5.5 million at June 30, 2012, was returned to accrual status during the nine months ended June 30, 2012 as it had remained current on restructured payment requirements for over nine months, and the Company believes that the borrower has the intent and ability to keep the loan current. The two land and land development loans restructured share the same collateral and had been previously identified as impaired loans. These loans, which had an outstanding balance of $1.8 million at June 30, 2012, have matured, and the restructurings consisted of forbearance agreements extending the maturity dates of the loans in order to provide the borrowers more time to sell the collateral. Interest recognized on a cash basis on restructured loans was not material for the three and nine months ended June 30, 2012.

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.

Loans and the related allowance for loan losses summarized by loan type and credit rating at June 30, 2012 are as follows:

							Watch		Special
(Dollars in thousands)	Total		Good		Satisfactory		List		Mention		Substandard		Impaired		Not Rated
Loans
One-to four-family(1)	$	108,283	$	-	$	24,927	$	1,443	$	1,999	$	2,781	$	4,154	$	72,979
Multi-family		82,202		13,993		41,247		2,037		-		249		12,676		12,000
Nonresidential		212,538		93,595		103,144		-		3,127		2,064		5,498		5,110
Construction		24,316		-		13,074		513		666		675		44		9,344
Land and land development		49,221		-		15,829		-		11,953		6,993		11,805		2,641
Other		547		-		-		-		-		-		-		547
Total loans	$	477,107	$	107,588	$	198,221	$	3,993	$	17,745	$	12,762	$	34,177	$	102,621

							Watch		Special
(Dollars in thousands)	Total		Good		Satisfactory		List		Mention		Substandard		Impaired		Not Rated
Allowance for loan losses
One-to four-family(1)	$	1,524	$	-	$	399	$	35	$	64	$	133	$	375	$	518
Multi-family		1,169		28		825		61		-		15		-		240
Nonresidential		2,967		215		2,352		-		143		141		-		116
Construction		1,181		-		582		34		59		90		-		416
Land and land development		3,960		-		990		-		1,494		1,311		-		165
Other		5		-		-		-		-		-		-		5
Total allowance for loans losses	$	10,806	$	243	$	5,148	$	130	$	1,760	$	1,690	$	375	$	1,460

⁽¹⁾ Owner-occupied one-to four-family loans are considered “Not Rated” in the calculation of the allowance for loan losses.

Details regarding the delinquency status of the Company’s loan portfolio at June 30, 2012 are as follows:

					31-60		61-90		91-120		121-150		151-180		180+
(Dollars in thousands)	Total		Current		Days		Days		Days		Days		Days		Days
One-to four-family	$	108,283	$	101,559	$	505	$	-	$	542	$	163	$	349	$	5,165
Multi-family		82,202		76,127		-		-		-		-		-		6,075
Nonresidential		212,538		210,474		2,064		-		-		-		-		-
Construction		24,316		24,150		-		-		-		-		-		166
Land and land development		49,221		36,183		2,999		-		-		-		20		10,019
Other		547		547		-		-		-		-		-		-
Total	$	477,107	$	449,040	$	5,568	$	-	$	542	$	163	$	369	$	21,425

The following is a summary of information pertaining to impaired and non-accrual loans at June 30, 2012 and September 30, 2011:

	June 30, 2012				September 30, 2011
(Dollars in thousands)	Amount		Allowance		Amount		Allowance
Impaired loans with a specific allowance
One-to four-family	$	4,154	$	375	$	2,328	$	132
Multi-family		-		-		1,265		212
Construction		-		-		90		28
Land and land development		-		-		9,879		2,993
Total impaired loans with a specific allowance	$	4,154	$	375	$	13,562	$	3,365
Impaired loans for which no specific allowance
is necessary
One-to four-family	$	-	$	-	$	2,572	$	-
Multi-family		12,676		-		11,494		-
Nonresidential		5,498		-		9,852		-
Construction		44		-		-		-
Land and land development		11,805		-		16,669		-
Total impaired loans for which no specific
allowance is necessary	$	30,023	$	-	$	40,587	$	-

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Nonaccrual loans
One-to four-family	$	9,158	$	9,879
Multi-family		6,075		6,103
Nonresidential		-		12,572
Construction		166		255
Land and land development		11,871		13,396
Total non-accrual loans	$	27,270	$	42,205

There were no loans past due ninety days or more and accruing at June 30, 2012 or September 30, 2011. The weighted average balance of impaired loans was $31.7 million and $40.8 million for the three months ended June 30, 2012 and 2011, respectively, and $46.8 million and $34.8 million for the nine months ended June 30, 2012 and 2011, respectively. Accrued interest on impaired loans was not material at June 30, 2012 or September 30, 2011. Interest recognized on a cash basis on impaired loans was $299,000 and $249,000 for the three months ended June 30, 2012 and 2011, respectively, and $792,000 and $647,000 for the nine months ended June 30, 2012 and 2011, respectively. Interest recognized on a cash basis on nonaccrual loans, including loans classified as impaired, was $394,000 and $342,000 for the three months ended June 30, 2012 and 2011, respectively, and $821,000 and $1.1 million for the nine months ended June 30, 2012 and 2011, respectively.

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Allowance for Loan Losses (Tables)

9 Months Ended

Jun. 30, 2012

Allowance For Loan Losses Disclosure [Abstract]

Allowance for Credit Losses on Financing Receivables [Table Text Block]

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

	One-to			Multi-			Non-						Land and land
(Dollars in thousands)	four-family			family			residential			Construction			development			Other			Total
Balance, September 30, 2011	$	1,324		$	1,357		$	3,146		$	1,724		$	7,064		$	9		$	14,624
Provision		263			(188	)		(179	)		(539	)		105			(4	)		(542	)
Recoveries		5			-			-			5			8			-			18
Charge-offs		(68	)		-			-			(9	)		(3,217	)		-			(3,294	)
Balance, June 30, 2012	$	1,524		$	1,169		$	2,967		$	1,181		$	3,960		$	5		$	10,806

	One-to			Multi-		Non-						Land and land
(Dollars in thousands)	four-family			family		residential			Construction			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

Schedule Of Allowance For Loan Losses By Portfolio Segment and Impairment Methodology [Table Text Block]

Details of the allowance for loan losses by portfolio segment and impairment methodology at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	104,129	$	1,149	$	4,154	$	375	$	108,283	$	1,524		1.41	%		14.1	%
Multi-family		69,526		1,169		12,676		-		82,202		1,169		1.42			10.8
Nonresidential		207,040		2,967		5,498		-		212,538		2,967		1.40			27.5
Construction		24,272		1,181		44		-		24,316		1,181		4.86			10.9
Land and land development		37,416		3,960		11,805		-		49,221		3,960		8.05			36.7
Other		547		5		-		-		547		5		0.91			-
Total allowance	$	442,930	$	10,431	$	34,177	$	375	$	477,107	$	10,806		2.26			100.0	%

	September 30, 2011
	General Allowance				Specific Allowance											Allowance as
									Total		Total					% of total
(Dollars in thousands)	Balance		Allowance		Balance		Allowance		Balance		Allowance		Coverage			allowance
One-to four-family	$	110,047	$	1,192	$	4,900	$	132	$	114,947	$	1,324		1.15	%		9.1	%
Multi-family		66,347		1,145		12,759		212		79,106		1,357		1.71			9.2
Nonresidential		180,895		3,146		9,852		-		190,747		3,146		1.65			21.5
Construction		43,903		1,697		89		27		43,992		1,724		3.92			11.8
Land and land development		40,500		4,070		26,549		2,994		67,049		7,064		10.54			48.3
Other		650		9		-		-		650		9		1.40			0.1
Total allowance	$	442,342	$	11,259	$	54,149	$	3,365	$	496,491	$	14,624		2.95			100.0	%

Schedule Of Financing Receivable Recorded Investment Credit Quality Indicator [Table Text Block]

Details regarding classified loans and impaired loans at June 30, 2012 and September 30, 2011 are as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Special mention
One-to four-family	$	2,892	$	5,372
Nonresidential		3,127		-
Construction		666		3,142
Land and land development		11,953		7,944
Total special mention loans		18,638		16,458
Substandard
One-to four-family		4,491		4,347
Multi-family		249		253
Nonresidential		2,064		3,156
Construction		675		166
Land and land development		6,993		623
Total substandard loans		14,472		8,545
Impaired
One-to four-family		4,154		4,900
Multi-family		12,676		12,759
Nonresidential		5,498		9,852
Construction		44		90
Land and land development		11,805		26,548
Total impaired loans		34,177		54,149
Total rated loans	$	67,287	$	79,152

Financing Receivable Credit Quality Indicators [Table Text Block]

Loans and the related allowance for loan losses summarized by loan type and credit rating at June 30, 2012 are as follows:

(Dollars in thousands)	Total		Good		Satisfactory		Watch List		Special Mention		Substandard		Impaired		Not Rated
Loans
One-to four-family(1)	$	108,283	$	-	$	24,927	$	1,443	$	1,999	$	2,781	$	4,154	$	72,979
Multi-family		82,202		13,993		41,247		2,037		-		249		12,676		12,000
Nonresidential		212,538		93,595		103,144		-		3,127		2,064		5,498		5,110
Construction		24,316		-		13,074		513		666		675		44		9,344
Land and land development		49,221		-		15,829		-		11,953		6,993		11,805		2,641
Other		547		-		-		-		-		-		-		547
Total loans	$	477,107	$	107,588	$	198,221	$	3,993	$	17,745	$	12,762	$	34,177	$	102,621

(Dollars in thousands)	Total		Good		Satisfactory		Watch List		Special Mention		Substandard		Impaired		Not Rated
Allowance for loan losses
One-to four-family(1)	$	1,524	$	-	$	399	$	35	$	64	$	133	$	375	$	518
Multi-family		1,169		28		825		61		-		15		-		240
Nonresidential		2,967		215		2,352		-		143		141		-		116
Construction		1,181		-		582		34		59		90		-		416
Land and land development		3,960		-		990		-		1,494		1,311		-		165
Other		5		-		-		-		-		-		-		5
Total allowance for loans losses	$	10,806	$	243	$	5,148	$	130	$	1,760	$	1,690	$	375	$	1,460

⁽¹⁾ Owner-occupied one-to four-family loans are considered “Not Rated” in the calculation of the allowance for loan losses.

Past Due Financing Receivables [Table Text Block]

Details regarding the delinquency status of the Company’s loan portfolio at June 30, 2012 are as follows:

					31-60		61-90		91-120		121-150		151-180		180+
(Dollars in thousands)	Total		Current		Days		Days		Days		Days		Days		Days
One-to four-family	$	108,283	$	101,559	$	505	$	-	$	542	$	163	$	349	$	5,165
Multi-family		82,202		76,127		-		-		-		-		-		6,075
Nonresidential		212,538		210,474		2,064		-		-		-		-		-
Construction		24,316		24,150		-		-		-		-		-		166
Land and land development		49,221		36,183		2,999		-		-		-		20		10,019
Other		547		547		-		-		-		-		-		-
Total	$	477,107	$	449,040	$	5,568	$	-	$	542	$	163	$	369	$	21,425

Impaired Financing Receivables [Table Text Block]

The following is a summary of information pertaining to impaired and non-accrual loans at June 30, 2012 and September 30, 2011:

	June 30, 2012				September 30, 2011
(Dollars in thousands)	Amount		Allowance		Amount		Allowance
Impaired loans with a specific allowance
One-to four-family	$	4,154	$	375	$	2,328	$	132
Multi-family		-		-		1,265		212
Construction		-		-		90		28
Land and land development		-		-		9,879		2,993
Total impaired loans with a specific allowance	$	4,154	$	375	$	13,562	$	3,365
Impaired loans for which no specific allowance
is necessary
One-to four-family	$	-	$	-	$	2,572	$	-
Multi-family		12,676		-		11,494		-
Nonresidential		5,498		-		9,852		-
Construction		44		-		-		-
Land and land development		11,805		-		16,669		-
Total impaired loans for which no specific
allowance is necessary	$	30,023	$	-	$	40,587	$	-

Schedule of Financing Receivables, Non Accrual Status [Table Text Block]

June 30,			September 30,
(Dollars in thousands)	2012			2011
Nonaccrual loans
One-to four-family	$	9,158		$	9,879
Multi-family		6,075			6,103
Nonresidential		-			12,572
Construction		166			255
Land and land development		11,871			13,396
Total non-accrual loans	$	27,270		$	42,205

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Subsequent Events

9 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

Subsequent Events [Text Block]

Note 12. Subsequent Events

There are two types of subsequent events as defined by U.S. generally accepted accounting principles. The first are recognized subsequent events, which include events or transactions that provide additional evidence about conditions that existed as of the balance sheet date, including the estimates inherent in the process of preparing financial statements. The second are unrecognized subsequent events, which include events or transactions that provide evidence about conditions that did not exist as of the balance sheet date but arose after that date. The Company is required to disclose material subsequent events that arise after the balance sheet date and before the financial statements are available to be issued to prevent the financial statements from being misleading.

At the time the consolidated financial statements were available to be issued on August 7, 2012, there were no material recognized or unrecognized subsequent events.

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Employee Benefit Plans

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Compensation and Employee Benefit Plans [Text Block]

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 who were employed on or before July 31, 2011. The Bank froze the Pension Plan to new participants effective August 1, 2011, and, therefore, employees hired after July 31, 2011 are not eligible to participate in the Pension Plan. Retirement benefits under this plan are generally based on the employee’s years of service and compensation during the five consecutive 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, 2012, 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.

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, 2012 and 2011 are as follows:

	Three months ended						Nine months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Service cost	$	150		$	143		$	451		$	429
Interest cost		166			161			498			485
Expected return on plan assets		(203	)		(217	)		(609	)		(652	)
Recognized net actuarial loss		58			17			173			49
Net periodic benefit cost	$	171		$	104		$	513		$	311

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

Equity Incentive Plan

On February 21, 2012, the Company adopted the Franklin Financial Corporation 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”), which provides for awards of restricted stock and stock options to key officers and outside directors. The cost of the 2012 Equity Incentive Plan is based on the fair value of restricted stock and stock option awards on their grant date.

The vesting of the restricted stock awards is contingent upon service, performance, and market conditions. Performance conditions consist of the achievement of certain benchmarks regarding tangible book value per share, while market conditions consist of provisions that allow for partial vesting of shares in the event that certain share price targets are met even if performance criteria are not fully met. The fair value of restricted stock is determined based upon management’s assumptions regarding the achievement of performance and market conditions stipulated for each award. For awards with performance conditions, fair value is based upon the price of the Company’s stock on the grant date. For awards with both performance and market conditions, fair value is based on a Monte Carlo analysis incorporating the closing price of the Company’s stock on the grant date along with assumptions related to the Company’s stock price given the achievement of certain performance criteria. Restricted stock awards may not be disposed of or transferred during the vesting period but carry with them the right to receive dividends. The cost of restricted stock awards will be recognized using the graded-vesting method over the five-year vesting period during which participants are required to provide services in exchange for the awards.

The vesting of stock options is contingent only upon meeting service conditions. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option terms. These assumptions are based on judgments regarding future events, are subjective in nature, and cannot be determined with precision. Since stock option awards contain only service conditions, management has elected to recognize the cost of stock option awards on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.

Shares of common stock issued under the 2012 Equity Incentive Plan may be authorized unissued shares or, in the case of restricted stock awards, may be shares repurchased on the open market. As of June 30, 2012, the Company, through an independent trustee, had repurchased 284,600 shares on the open market for $4.3 million, or an average cost of $15.18 per share.

The maximum number of shares that may be awarded under the plan is 2,002,398, including 1,430,284 for option exercises and 572,114 restricted stock shares. Share-based compensation related to stock options and restricted stock recognized for the three and nine months ended June 30, 2012 was $700,000 and $717,000, respectively, and the related income tax benefit was $266,000 and $273,000, respectively.

The table below presents stock option activity for the nine months ended June 30, 2012:

			Weighted-		Remaining		Aggregate
			average		contractual life		intrinsic
(Dollars in thousands, except per share amounts)	Options		exercise price		(years)		value
Options outstanding at September 30, 2011		-		N/A		N/A		N/A
Granted		1,152,000	$	13.42		10.00	$	12
Exercised		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Options outstanding at June 30, 2012		1,152,000	$	13.42		9.75	$	3,491

Expected volatility – Based on the historical volatility of the Company’s stock.

Risk-free interest rate – Based on the U.S. Treasury yield curve and the expected life of the options at the time of grant.

Expected dividends – The Company has not declared a dividend, and therefore no dividends are assumed.

Expected life – Based on a weighted-average of the five-year vesting period and the 10-year contractual term of the stock option plan.

Grant price for the stock options – Based on the closing price of the Company’s stock on the grant date.

The fair value of the Company’s stock option grants in 2012 was determined using the Black-Scholes option pricing formula, which resulted in a fair value of $3.76 per option. The following assumptions were used in the formula:

Expected volatility		24.39	%
Risk-free interest rate		1.43	%
Expected dividends		0.00	%
Expected life (in years)		6.5
Grant price for the stock options	$	13.42

At June 30, 2012, the Company had $2.9 million of unrecognized compensation expense related to 805,484 stock options expected to vest. No shares were vested as of June 30, 2012. The table below presents information about stock options expected to vest over the five-year vesting period at June 30, 2012:

(Dollars in thousands, except per share amounts)
Options expected to vest at period end		805,484
Weighted-average exercise price	$	13.42
Remaining contractual life (years)		9.75
Aggregate intrinsic value	$	2,441

The table below presents restricted stock award activity for the nine months ended June 30, 2012:

			Weighted-
	Restricted		average grant
	stock awards		date fair value
Non-vested at September 30, 2011		-		N/A
Granted		464,500	$	13.42
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2012		464,500	$	13.42

At June 30, 2012, unrecognized compensation expense adjusted for expected forfeitures was $3.8 million related to 324,728 shares of restricted stock expected to vest over the five-year vesting period. The weighted-average period over which compensation cost related to non-vested awards is expected to be recognized was five years at June 30, 2012.

Employee Stock Ownership Plan

In connection with the Company’s stock conversion completed in April 2011, the Bank established an employee stock ownership plan (“ESOP”) for the benefit of all of its eligible employees. Employees at the date of conversion and employees of the Bank hired after the conversion 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.

Unearned ESOP shares are shown as a reduction of stockholders’ equity. Dividends on unearned 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 expense related to the ESOP for the three and nine months ended June 30, 2012 was $215,000 and $637,000, respectively, compared to $176,000 for the three and nine months ended June 30, 2011. The fair value of unearned ESOP shares, using the closing quoted market price per share of the Company’s stock, was $17.4 million at June 30, 2012. A summary of ESOP share allocation for the nine months ended June 30, 2012 is as follows:

Shares allocated at September 30, 2011	35,987
Shares allocated during the period	49,673
Shares distributed during the period	-
Allocated shares held by the ESOP trust at June 30, 2012	85,660
Unearned shares at June 30, 2012	1,058,567
Total ESOP shares	1,144,227

Stock-Based Deferral Plan

In connection with the Company’s stock conversion completed in April 2011, 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 and 6,432 thereafter. 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 consolidated balance sheet in accordance with GAAP.

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Fair Value Measurements (Details 3) (Non Agency Collateralized Mortgage Obligations [Member])	9 Months Ended
	Jun. 30, 2012
Weighted Average [Member]
Delinquency rate	16.55%
Loss severity	46.03%
Discount rate	18.40%
Minimum [Member]
Delinquency rate	0.00%
Loss severity	9.55%
Discount rate	5.53%
Maximum [Member]
Delinquency rate	72.79%
Loss severity	81.87%
Discount rate	26.25%

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Borrowings

9 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 6.   Borrowings

During the three months ended June 30, 2012, the Company exchanged nine FHLB borrowings totaling $160.0 million for new advances of the same amount. In connection with these exchanges, the Company paid prepayment penalties totaling $18.3 million. The new advances were not considered to be substantially different from the original advances in accordance with ASC 470-50, Debt – Modifications and Exchanges, and as a result the prepayment penalties have been treated as a discount on the new debt and are being amortized over the life of the new advances as an adjustment to rate. Details regarding these exchanges are as follows (dollars in thousands):

						Effective			Reduced
						Rate of			Expense Over
		Advance		Prepayment		New			the Next
Terms of Original Advance	Terms of New Advance	Amount		Penalty		Advance			Twelve Months
Interest payable monthly at a fixed rate of 3.49%, principal due and payable on December 5, 2013	Interest payable quarterly at a fixed rate of 1.30%, principal due and payable on April 25, 2017	$	10,000	$	476		2.25	%	$	124
Interest payable monthly at a fixed rate of 3.44%, principal due and payable on December 10, 2013	Interest payable quarterly at a fixed rate of 1.06%, principal due and payable on April 25, 2016		10,000		470		2.23	%		121
Interest payable quarterly at a fixed rate of 3.72%, principal due and payable on June 9, 2015	Interest payable quarterly at a fixed rate of 3.04%, principal due and payable on May 4, 2018		25,000		*		3.04	%		170
Interest payable quarterly at a fixed rate of 5.58%, principal due and payable on May 16, 2016	Interest payable quarterly at a fixed rate of 4.31%, principal due and payable on May 9, 2022		25,000		*		4.31	%		316
Interest payable monthly at a fixed rate of 5.36%, principal due and payable on November 1, 2016	Interest payable quarterly at a fixed rate of 2.28%, principal due and payable on May 4, 2021		25,000		4,710		4.41	%		239
Interest payable quarterly at a fixed rate of 5.07%, principal due and payable on October 23, 2017	Interest payable quarterly at a fixed rate of 4.49%, principal due and payable on May 21, 2032		10,000		*		4.49	%		58
Interest payable monthly at a fixed rate of 3.90%, principal due and payable on April 18, 2018	Interest payable quarterly at a fixed rate of 2.44%, principal due and payable on May 16, 2022		5,000		687		3.85	%		5
Interest payable monthly at a fixed rate of 5.85%, principal due and payable on September 17, 2018	Interest payable quarterly at a fixed rate of 3.69%, principal due and payable on May 3, 2032		25,000		6,411		5.03	%		204
Interest payable monthly at a fixed rate of 5.05%, principal due and payable on January 21, 2020	Interest payable quarterly at a fixed rate of 3.56%, principal due and payable on May 17, 2032		25,000		5,554		4.72	%		82
		$	160,000	$	18,308				$	1,319

 *The prepayment penalty is embedded in the rate for the new advance.

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Earnings per Share

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

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, 2012.

	Three months ended						Nine months ended
	June 30,			June 30,			June 30,		June 30,
(Amounts in thousands, except per share data)	2012			2011			2012		2011
Numerator:
Net (loss) income available to common stockholders	$	(354	)	$	(3,275	)	$	3,929	$	494
Denominator:
Weighted-average common shares outstanding		13,029			13,166			13,152		13,166
Effect of dilutive securities		21			-			7		-
Weighted-average common shares outstanding - assuming dilution		13,050			13,166			13,159		13,166
Earnings per common share	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)
Earnings per common share - assuming dilution	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)

⁽¹⁾ Weighted-average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC’s mutual-to-stock conversion, to June 30, 2011.

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Financial Instruments with Off-Balance-Sheet Risk

9 Months Ended

Jun. 30, 2012

Financial Instruments With Off Balance Sheet Risk [Abstract]

Financial Instruments With Off Balance Sheet Risk [Text Block]

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 $102.0 million and $55.7 million at June 30, 2012 and September 30, 2011, respectively.

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, 2012 and September 30, 2011, respectively. The amount of standby letters of credit was $501,000 and $1.0 million at June 30, 2012 and September 30, 2011, respectively. The Company believes that the likelihood of having to perform on standby letters of credit is remote based on the financial condition of the guarantors and the Company’s historical experience.

At June 30, 2012, the Company had rate lock commitments to originate mortgage loans amounting to $400,000 and mortgage loans held for sale of $665,000 compared to $3.8 million and $922,000, respectively, at September 30, 2011. At June 30, 2012, the Company had corresponding commitments outstanding of $1.1 million to sell loans on a best-efforts basis compared to $4.7 million at September 30, 2011. 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.

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Stock Repurchase Program (Details Textual) (USD $)	1 Months Ended	3 Months Ended	9 Months Ended
	May 03, 2012	Jun. 30, 2012	Jun. 30, 2012
Percentage Of Stock Approved Under Stock Repurchase Program	5.00%
Stock Repurchase Program, Number of Shares Authorized to be Repurchased	715,141
Stock Repurchased During Period, Shares		526,300
Stock Repurchased During Period, Value			$ (7,994,000)
Stock Repurchased Average Price Per Share		$ 15.19
Employee Service Share Based Compensation Value Of Shares Repurchased In Period			$ 4,300,000

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Loans (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011	Jun. 30, 2011	Sep. 30, 2010
Loans
One-to four-family	$ 108,283	$ 114,947
Multi-family	82,202	79,106
Nonresidential	212,538	190,747
Construction	24,316	43,992
Land and land development	49,221	67,049
Other	547	650
Total loans	477,107	496,491
Deferred loan fees	3,440	3,444
Loans, net of deferred loan fees	473,667	493,047
Allowance for loan losses	10,806	14,624	13,432	13,419
Net loans	$ 462,861	$ 478,423

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Employee Benefit Plans (Details 2) (USD $)	9 Months Ended
	Jun. 30, 2012
Expected volatility	24.39%
Risk-free interest rate	1.43%
Expected dividends	0.00%
Expected life (in years)	6 years 6 months
Grant price for the stock options	$ 13.42

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Securities (Tables)

9 Months Ended

Jun. 30, 2012

Securities Available For Sale and Held To Maturity Disclosures [Abstract]

Schedule Of Amortized Cost, Gross Unrealized Gains and Losses, and Estimated Fair Value Of Securities [Table Text Block]

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
States and political subdivisions	$	12,186	$	-	$	12,186	$	1,159	$	44	$	13,301
Agency mortgage-backed securities		38,627		-		38,627		1,030		5		39,652
Agency collateralized mortgage obligations		190,134		-		190,134		2,134		336		191,932
Corporate equity securities		21,050		-		21,050		2,611		215		23,446
Corporate debt securities		109,996		-		109,996		6,386		324		116,058
Total	$	371,993	$	-	$	371,993	$	13,320	$	924	$	384,389

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Available for sale:
U.S. government and agency securities	$	7,500	$	-	$	7,500	$	1	$	-	$	7,501
States and political subdivisions		18,143		-		18,143		765		735		18,173
Agency mortgage-backed securities		23,561		-		23,561		1,259		25		24,795
Agency collateralized mortgage obligations		207,123		-		207,123		2,497		917		208,703
Corporate equity securities		28,735		-		28,735		442		7,504		21,673
Corporate debt securities		110,289		1,230		111,519		5,854		1,409		115,964
Total	$	395,351	$	1,230	$	396,581	$	10,818	$	10,590	$	396,809

	June 30, 2012
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	4,904	$	-	$	4,904	$	180	$	-	$	5,084
Agency collateralized mortgage obligations		5,509		-		5,509		626		-		6,135
Non-agency collateralized mortgage obligations		11,388		1,125		12,513		1,253		2,617		11,149
Total	$	21,801	$	1,125	$	22,926	$	2,059	$	2,617	$	22,368

	September 30, 2011
	Adjusted		OTTI				Gross		Gross
	amortized		recognized		Amortized		unrealized		unrealized		Estimated
(Dollars in thousands)	cost		in AOCI		cost		gains		losses		fair value
Held to maturity:
Agency mortgage-backed securities	$	5,512	$	-	$	5,512	$	187	$	-	$	5,699
Agency collateralized mortgage obligations		6,552		-		6,552		835		1		7,386
Non-agency collateralized mortgage obligations		13,453		835		14,288		908		5,033		10,163
Total	$	25,517	$	835	$	26,352	$	1,930	$	5,034	$	23,248

Investments Classified by Contractual Maturity Date [Table Text Block]

The amortized cost and estimated fair value of securities at June 30, 2012, 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	$	15,223	$	15,587	$	-	$	-
Due after one year through five years		53,787		56,072		-		-
Due after five years through ten years		19,695		21,627		-		-
Due after ten years		33,477		36,073		-		-
Total non-mortgage debt securities		122,182		129,359		-		-
Mortgage-backed securities		38,627		39,652		4,904		5,084
Collateralized mortgage obligations		190,134		191,932		18,022		17,284
Corporate equity securities		21,050		23,446		-		-
Total securities	$	371,993	$	384,389	$	22,926	$	22,368

Schedule Of Temporarily Impaired Securities [Table Text Block]

 

The following tables present information regarding temporarily impaired securities as of June 30, 2012 and September 30, 2011:

	June 30, 2012
	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:
State and political subdivisions	$	1,540	$	44	$	-	$	-	$	1,540	$	44
Agency mortgage-backed securities		-		-		2,901		5		2,901		5
Agency collateralized mortgage obligations		21,491		13		19,656		323		41,147		336
Corporate equity securities		6,738		211		21		4		6,759		215
Corporate debt securities		23,796		255		1,931		69		25,727		324
Total available for sale		53,565		523		24,509		401		78,074		924
Held to maturity:
Non-agency collateralized mortgage obligations		224		109		9,459		2,508		9,683		2,617
Total held to maturity		224		109		9,459		2,508		9,683		2,617
Total temporarily impaired securities	$	53,789	$	632	$	33,968	$	2,909	$	87,757	$	3,541

	September 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:
States and political subdivisions	$	1,715	$	735	$	-	$	-	$	1,715	$	735
Agency mortgage-backed securities		4,592		25		-		-		4,592		25
Agency collateralized mortgage obligations		50,933		901		3,097		16		54,030		917
Corporate equity securities		17,982		7,504		-		-		17,982		7,504
Corporate debt securities		17,816		1,191		11,783		218		29,599		1,409
Total available for sale		93,038		10,356		14,880		234		107,918		10,590
Held to maturity:
Agency collateralized mortgage obligations		-		-		116		1		116		1
Non-agency collateralized mortgage obligations		845		259		7,530		4,774		8,375		5,033
Total held to maturity		845		259		7,646		4,775		8,491		5,034
Total temporarily impaired securities	$	93,883	$	10,615	$	22,526	$	5,009	$	116,409	$	15,624

Other than Temporary Impairment, Credit Losses Recognized in Earnings [Table Text Block]

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, 2011	$	79
Additions for credit losses on securities not previously recognized		29
Additional credit losses on securities previously recognized as impaired		47
Reductions for increases in expected cash flows		(81	)
Balance of credit losses at June 30, 2012	$	74

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Earnings per Share (Tables)

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

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, 2012.

	Three months ended						Nine months ended
	June 30,			June 30,			June 30,		June 30,
(Amounts in thousands, except per share data)	2012			2011			2012		2011
Numerator:
Net (loss) income available to common stockholders	$	(354	)	$	(3,275	)	$	3,929	$	494
Denominator:
Weighted-average common shares outstanding		13,029			13,166			13,152		13,166
Effect of dilutive securities		21			-			7		-
Weighted-average common shares outstanding - assuming dilution		13,050			13,166			13,159		13,166
Earnings per common share	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)
Earnings per common share - assuming dilution	$	(0.03	)	$	(0.25	)(1)	$	0.30	$	0.04	(1)

⁽¹⁾ Weighted-average shares used in the calculation of basic and diluted earnings per share were calculated from April 27, 2011, the date of Franklin Financial Corporation MHC’s mutual-to-stock conversion, to June 30, 2011.

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Employee Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Service cost	$ 150	$ 143	$ 451	$ 429
Interest cost	166	161	498	485
Expected return on plan assets	(203)	(217)	(609)	(652)
Recognized net actuarial loss	58	17	173	49
Net periodic benefit cost	$ 171	$ 104	$ 513	$ 311

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Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Impaired loans with a specific allowance, Amount	$ 4,154	$ 13,562
Impaired loans with a specific allowance, Allowance	375	3,365
Impaired loans for which no specific allowance is necessary, Amount	30,023	40,587
One To Four Family [Member]
Impaired loans with a specific allowance, Amount	4,154	2,328
Impaired loans with a specific allowance, Allowance	375	132
Impaired loans for which no specific allowance is necessary, Amount	0	2,572
Multi Family [Member]
Impaired loans with a specific allowance, Amount	0	1,265
Impaired loans with a specific allowance, Allowance	0	212
Impaired loans for which no specific allowance is necessary, Amount	12,676	11,494
Nonresidential [Member]
Impaired loans for which no specific allowance is necessary, Amount	5,498	9,852
Construction [Member]
Impaired loans with a specific allowance, Amount	0	90
Impaired loans with a specific allowance, Allowance	0	28
Impaired loans for which no specific allowance is necessary, Amount	44	0
Land and Land Development [Member]
Impaired loans with a specific allowance, Amount	0	9,879
Impaired loans with a specific allowance, Allowance	0	2,993
Impaired loans for which no specific allowance is necessary, Amount	$ 11,805	$ 16,669

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Consolidated Statements of Comprehensive Income and Changes in Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Common Stock [Member]	Additional Paid-In Capital [Member]	Unearned ESOP Shares [Member]	Undistributed Stock Based Deferral Plan Shares [Member]	Unearned Equity Incentive Plan Shares [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at Sep. 30, 2010	$ 0	$ 0	$ 0	$ 0	$ 0	$ 124,339	$ 2,430	$ 126,769
Issuance of common stock	143	142,885	0	0	0	0	0	143,028
Common stock issuance costs	0	(2,602)	0	0	0	0	0	(2,602)
Shares purchased by ESOP	0	0	(11,442)	0	0	0	0	(11,442)
Stock-based compensation expense	0	2,533	0	(2,533)	0	0	0	0
ESOP shares allocated	0	29	147	0	0	0	0	176
Net income	0	0	0	0	0	494	0	494
Other comprehensive income:
Net unrealized holding gains (losses) arising during the period, net of income tax benefit (expense)	0	0	0	0	0	0	(831)	(831)
Reclassification adjustment for losses included in net income, net of income tax benefit	0	0	0	0	0	0	334	334
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax benefit (expense)	0	0	0	0	0	0	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	0	0	0	0	0	0	639	639
Comprehensive income								767
Balance at Jun. 30, 2011	143	142,845	(11,295)	(2,533)	0	124,833	2,703	256,696
Balance at Sep. 30, 2011	143	142,882	(11,082)	(2,533)	0	125,770	(5,622)	249,558
Stock-based compensation expense	0	717	0	0	0	0	0	717
ESOP shares allocated	0	141	496	0	0	0	0	637
Repurchase of common stock	(5)	(7,989)	0	0	0	0	0	(7,994)
Common Stock Purchased For Equity Incentive Plan	0	0	0	0	(4,320)	0	0	(4,320)
Net income	0	0	0	0	0	3,929	0	3,929
Other comprehensive income:
Net unrealized holding gains (losses) arising during the period, net of income tax benefit (expense)	0	0	0	0	0	0	6,052	6,052
Reclassification adjustment for losses included in net income, net of income tax benefit	0	0	0	0	0	0	4,323	4,323
Other-than-temporary impairment of held-to-maturity securities related to factors other than credit, net of amortization, net of income tax benefit (expense)	0	0	0	0	0	0	(180)	(180)
Amortization of previously recognized other-than-temporary impairment of available-for-sale securities related to factors other than credit, net of income tax expense	0	0	0	0	0	0	763	763
Comprehensive income								14,887
Balance at Jun. 30, 2012	$ 138	$ 135,751	$ (10,586)	$ (2,533)	$ (4,320)	$ 129,699	$ 5,336	$ 253,485

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Loans

9 Months Ended

Jun. 30, 2012

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3. Loans

Loans held for investment at June 30, 2012 and September 30, 2011 are summarized as follows:

	June 30,		September 30,
(Dollars in thousands)	2012		2011
Loans
One-to four-family	$	108,283	$	114,947
Multi-family		82,202		79,106
Nonresidential		212,538		190,747
Construction		24,316		43,992
Land and land development		49,221		67,049
Other		547		650
Total loans		477,107		496,491
Deferred loan fees		3,440		3,444
Loans, net of deferred loan fees		473,667		493,047
Allowance for loan losses		10,806		14,624
Net loans	$	462,861	$	478,423

The Company pledges certain loans as collateral for its FHLB borrowings. Loans collateralizing FHLB borrowings had a carrying value of $295.4 million at June 30, 2012 compared to $252.9 million at September 30, 2011.

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Fair Value Measurements (Details 1) (USD $)	9 Months Ended
	Jun. 30, 2012
Balance of Level 3 assets measured on a recurring basis at September 30, 2011	$ 6,685
Principal payments in period	(320)
Accretion (amortization) of premiums or discounts	(21)
Other-than-temporary impairment charges included in noninterest income	(686)
Increase (decrease) in unrealized gains or losses included in accumulated other comprehensive income	719
Balance of Level 3 assets measured on a recurring basis at June 30, 2012	$ 6,377

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Employee Benefit Plans (Tables)

9 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Schedule of Net Benefit Costs [Table Text Block]

Components of net periodic benefit cost for the three and nine months ended June 30, 2012 and 2011 are as follows:

	Three months ended						Nine months ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Service cost	$	150		$	143		$	451		$	429
Interest cost		166			161			498			485
Expected return on plan assets		(203	)		(217	)		(609	)		(652	)
Recognized net actuarial loss		58			17			173			49
Net periodic benefit cost	$	171		$	104		$	513		$	311

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

The table below presents stock option activity for the nine months ended June 30, 2012:

			Weighted-		Remaining		Aggregate
			average		contractual life		intrinsic
(Dollars in thousands, except per share amounts)	Options		exercise price		(years)		value
Options outstanding at September 30, 2011		-		N/A		N/A		N/A
Granted		1,152,000	$	13.42		10.00	$	12
Exercised		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Options outstanding at June 30, 2012		1,152,000	$	13.42		9.75	$	3,491

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

The fair value of the Company’s stock option grants in 2012 was determined using the Black-Scholes option pricing formula, which resulted in a fair value of $3.76 per option. The following assumptions were used in the formula:

Expected volatility		24.39	%
Risk-free interest rate		1.43	%
Expected dividends		0.00	%
Expected life (in years)		6.5
Grant price for the stock options	$	13.42

Schedule of Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding [Table Text Block]

The table below presents information about stock options expected to vest over the five-year vesting period at June 30, 2012:

(Dollars in thousands, except per share amounts)
Options expected to vest at period end		805,484
Weighted-average exercise price	$	13.42
Remaining contractual life (years)		9.75
Aggregate intrinsic value	$	2,441

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

The table below presents restricted stock award activity for the nine months ended June 30, 2012:

			Weighted-
	Restricted		average grant
	stock awards		date fair value
Non-vested at September 30, 2011		-		N/A
Granted		464,500	$	13.42
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2012		464,500	$	13.42

Schedule Of Employee Stock Ownership Plan (ESOP) Share Allocation [Table Text Block]

A summary of ESOP share allocation for the nine months ended June 30, 2012 is as follows:

Shares allocated at September 30, 2011	35,987
Shares allocated during the period	49,673
Shares distributed during the period	-
Allocated shares held by the ESOP trust at June 30, 2012	85,660
Unearned shares at June 30, 2012	1,058,567
Total ESOP shares	1,144,227

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Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Sep. 30, 2011
Rated Loans Receivable	$ 67,287	$ 79,152
Special Mention [Member]
Rated Loans Receivable	18,638	16,458
Substandard [Member]
Rated Loans Receivable	14,472	8,545
Impaired Loans [Member]
Rated Loans Receivable	34,177	54,149
One To Four Family [Member] | Special Mention [Member]
Rated Loans Receivable	2,892	5,372
One To Four Family [Member] | Substandard [Member]
Rated Loans Receivable	4,491	4,347
One To Four Family [Member] | Impaired Loans [Member]
Rated Loans Receivable	4,154	4,900
Multi Family [Member] | Substandard [Member]
Rated Loans Receivable	249	253
Multi Family [Member] | Impaired Loans [Member]
Rated Loans Receivable	12,676	12,759
Nonresidential [Member] | Special Mention [Member]
Rated Loans Receivable	3,127	0
Nonresidential [Member] | Substandard [Member]
Rated Loans Receivable	2,064	3,156
Nonresidential [Member] | Impaired Loans [Member]
Rated Loans Receivable	5,498	9,852
Construction [Member] | Special Mention [Member]
Rated Loans Receivable	666	3,142
Construction [Member] | Substandard [Member]
Rated Loans Receivable	675	166
Construction [Member] | Impaired Loans [Member]
Rated Loans Receivable	44	90
Land and Land Development [Member] | Special Mention [Member]
Rated Loans Receivable	11,953	7,944
Land and Land Development [Member] | Substandard [Member]
Rated Loans Receivable	6,993	623
Land and Land Development [Member] | Impaired Loans [Member]
Rated Loans Receivable	$ 11,805	$ 26,548

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Nature of Business and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Jun. 30, 2012

Accounting Policies [Abstract]

Organisation and Description Of Business Accounting [Policy Text Block]

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 consolidated 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 consolidated 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 the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 (“2011 Form 10-K”).  These interim consolidated 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, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012 or any other future period. The consolidated balance sheet as of September 30, 2011 was derived from the Company’s audited annual consolidated financial statements in the 2011 Form 10-K.

Consolidation, Policy [Policy Text Block]

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, Policy [Policy Text Block]

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, valuation of stock-based compensation, and the analysis of securities for other-than-temporary impairment.

Finance, Loans and Leases Receivable, Policy [Policy Text Block]

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.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

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.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation — The Company issues restricted stock and stock options under the Franklin Financial Corporation 2012 Equity Incentive Plan to key officers and outside directors. In accordance with the requirements of ASC 718, Compensation – Stock Compensation, the Company has adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.

Income Tax, Policy [Policy Text Block]

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.

Reclassification, Policy [Policy Text Block]

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

Concentration Risk, Credit Risk, Policy [Policy Text Block]

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 2 “Securities” and note 3 “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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

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 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. See note 10 of the notes to the unaudited consolidated financial statements for disclosures about fair value measurements.

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.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11: Disclosures about Offsetting Assets and Liabilities. The eligibility criteria for offsetting are different in International Financial Reporting Standards (“IFRS”) and GAAP. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRS, GAAP allows companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. To allow investors to better compare financial statements prepared in accordance with IFRS or GAAP, the Boards have issued common disclosure requirements related to offsetting arrangements in ASU No. 2011-11. The amendments to the Codification in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact of ASU No. 2011-11 on its consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (discussed above), so that entities will not be required to comply with the presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. In order to defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of ASU No. 2011-12 on its consolidated financial statements.