<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
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 2-27985
------------------------------
1st Franklin Financial Corporation
A Georgia Corporation I.R.S. Employer No. 58-0521233
213 East Tugalo Street
Post Office Box 880
Toccoa, Georgia 30577
(706) 886-7571
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1994
- - -------------------------------------- ----------------------------
Common Stock, par value $100 per share 1,700 Shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
The following financial statements required hereunder are
incorporated by reference from the Company's Quarterly Report to
Investors for the Six Months Ended June 30, 1994. See Exhibit 19
Consolidated Statements of Financial Position:
June 30, 1994 and December 31, 1993
Consolidated Statements of Income:
Quarters and Six Months ended June 30, 1994 and June 30, 1993
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1994 and June 30, 1993
Notes to Consolidated Financial Statements
ITEM 2. Managements' Discussion and Analysis of Financial Condition and
Results of Operations.
The information required hereunder is set forth under "Management's
Letter" of the Company's Quarterly Report to Investors for the Six
Months Ended June 30, 1994. See Exhibit 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On May 17, 1994, a complaint was filed in the Circuit Court of
Jefferson County, Alabama (CV-94-03629-W), against thirteen consumer
finance and insurance companies doing business in Alabama, including
the Company. The complaint was subsequently amended to add numerous
other consumer finance and insurance companies as defendants. The
complaint alleges that certain lending practices of the defendant
consumer finance companies violate the Alabama Consumer Finance Act
and other laws. The plaintiff borrowers assert that the defendant
consumer finance companies improperly charged fees for non-filing
insurance and credit property insurance, conspired with the
defendant insurance companies in connection therewith, failed to
refund unearned premiums with respect to such insurance, and
breached a duty to disclose to the plaintiff borrowers that
refinancing a loan is more expensive than obtaining a separate loan.
The complaint further alleges that such practices were fraudulent,
usurious and unconscionable. The plaintiffs have requested that the
Court certify the action as a national class action. The plaintiffs
have also requested that the Court void all of the loans made to the
plaintiffs by the defendant consumer finance companies, order
refunds of all payments on the loans, assess all penalties and other
damages provided by Alabama law, award compensatory and punitive
damages and provide declaratory and injunctive relief.
<PAGE>
On June 6, 1994, a complaint was filed in the U.S. District Court
for the Middle District of Alabama, Southern Division (94-T-699-N),
against eight consumer finance and insurance companies doing
business in Alabama, including the Company. The complaint was
subsequently amended to add numerous other consumer finance
companies and insurance companies as defendants. The complaint
alleges that certain lending practices of the defendants violated
the federal Truth-in-Lending Act and the federal Racketeer
Influenced and Corrupt Organizations Act. The plaintiffs assert
that the defendant consumer finance companies improperly excluded
fees for non-filing insurance from the "finance charge" and the
computation of the "annual percentage rate" disclosed in loans to
the plaintiff borrowers, and conspired with the defendant insurance
companies in connection therewith. The plaintiffs have requested
that the Court certify the action as a class action. The plaintiffs
have also requested treble damages, attorneys' fees, litigation
expenses and cost and other relief.
Both of these actions are in their early stages and their outcome
currently is not determinable. Management believes that these
actions are without merit as to the Company and intends to contest
these actions vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
19 Quarterly Report to Investors for the Six Months
Ended June 30, 1994.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended June 30,1994.
<PAGE>
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.
1st FRANKLIN FINANCIAL CORPORATION
-----------------------------------
Registrant
Ben F. Cheek, III
------------------
Chairman of Board
A. Roger Guimond
------------------
Vice President and
Chief Financial Officer
Date: August 12, 1994
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<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No. Page No.
19 Quarterly Report to Investors for the Six Months Ended
June 30, 1994 . . . . . . . . . . . . . . . . . . . . . 6
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
SIX MONTHS ENDED
JUNE 30, 1994
<PAGE>
MANAGEMENT'S LETTER
Net receivables (gross receivables less unearned finance charges)
increased $4,933,771 (4%) to $114,779,562 at June 30, 1994 from $109,845,791
at December 31, 1993. This growth in the loan portfolio was mainly due to
increases in consumer loan demand and business generated in new offices
opened in the prior year. Net earnings increased $901,404 (31%) during the
period just ended as compared to the same period a year ago. The Company
continued its expansion of operations with the opening of five new branch
offices during the first half of 1994, bringing the total number of branch
offices to 117.
The Company's investment portfolio consists mainly of U.S. Treasury bonds
and Government Agency bonds held by the Company's insurance subsidiaries.
Management has designated all investment securities as "available for sale".
Any unrealized gain or loss is accounted for in the Company's equity section,
net of deferred taxes. Although investment securities increased during the
first half of 1994 from additional funds invested by the insurance
subsidiaries, volatility in bond market values resulted in a $685,972
decrease, net of deferred taxes, in the portfolio's fair market value during
the period just ended as compared to December 31, 1993.
Total revenues increased 22% during the six months ended June 30, 1994 as
compared to the same period in 1993 primarily due to increases in net interest
income. Net interest income (representing the margin between the amount the
Company earns on loans and investments and the amount the Company pays on
securities and other borrowings) increased $1,136,654 (20%) and $2,646,812
(24%) during the quarter and six months just ended as compared to the same
periods in 1993 primarily due to higher levels of average net receivables.
Average net receivables were $110,819,103 during the six months ended
June 30, 1994 as compared to $95,032,487 during the same six months in 1993.
Lower borrowing rates also contributed to the increase in the interest income
margin. Although average borrowings increased, the lower borrowing rates
enabled the Company to keep the increase in interest expense to a minimum.
The higher level of average net receivables during the first half of 1994
also led to a $584,393 (25%) and $1,026,268 (22%) increase in net insurance
income for the quarter and six month comparable periods. Changes in net
insurance income generally correspond to changes in the level of average net
receivables outstanding. Increases in average net receivables normally lead
to higher levels of insurance in force which increases insurance income.
Net charge-offs increased $112,759 (26%) and $321,373 (42%) during the
quarter and six months just ended as compared to the same periods a year ago,
mainly due to the aforementioned increase in average receivables outstanding.
This increase in net charge-offs caused the Company's provision for loan
losses to increase $124,501 (21%) and $282,308 (30%) during the comparable
periods.
Additional personnel required to staff the new offices opened during the
current and prior year and annual cost-of-living and merit salary increases,
effective January 1 of each year, were the major factors causing the
$283,927 (8%) and $1,055,500 (15%) increase in personnel expense during the
comparable periods this year as compared to last year. Other factors
contributing to the increase were increases in accrued profit sharing
contribution expenses and employee incentive awards.
Occupancy expense increased $118,870 (15%) and $226,000 (14%) during
the comparable periods mainly due to rent expense related to new offices
opened and increased rent on leases renewed in existing branch offices.
Other additional overhead expenses related to new offices opened, such as
telephone, utilities and depreciation expense on fixed assets, also
contributed to the increase in occupancy expense.
Increases in advertising expenses, postage, computer expenses and taxes
and licenses were the main causes of the $315,277 (26%) and $547,694 (20%)
increase in Other Operating Expenses during the quarter and six months ended
June 30, 1994 as compared to the same periods a year ago.
Effective income tax rates were 30.8% and 23.3% for the quarters ended
June 30, 1994 and 1993 and 31.3% and 27.3% for the six months just ended as
compared to the same period a year ago, respectively. Certain tax benefits
provided by law to life insurance companies substantially reduce the life
insurance subsidiary's effective tax rate and thus decreases the Company's
consolidated tax rate below statutory rates. The increase in the effective
rates for the quarter and six months just ended was mainly due to the
Company and the property insurance subsidiary, which are taxed at higher
rates, earning a larger portion of pretax income as compared to the prior
year. During 1993, the utilization of loss carryforwards to offset capital
gains also contributed to the lower rates during that year.
Liquidity requirements of the Company are financed through the
collection of receivables and through the issuance of public debt securities.
Net cash flows from financing activities, excluding bank borrowings,
increased $4,323,818 during the first half of 1994 as compared to the same
period a year ago and collections on loans increased $7,236,553 over the
same period. In addition to the securities program, the Company has two
external sources of funds through the use of two Credit Agreements. One
agreement provides for available borrowings of $21,000,000. Available
borrowings were $15,298,606 and $8,800,000 at June 30, 1994 and December 31,
1993, respectively, relating to this agreement. Another agreement provides
for an additional $2,000,000 for general operating purposes, all of which was
available June 30, 1994 and December 31, 1993. The Company had previously
had a third credit agreement for $1,500,000 which matured during June 1994.
Management believes the existing cash flow generated by operations, proceeds
from the sale of investment securities and borrowings under the two current
credit agreements will be adequate to meet the Company's funding requirements
for the foreseeable future. It therefore chose not to renew the $1,500,000
credit agreement when it matured.
Liquidity was not adversely affected by delinquent accounts as the
percentage of outstanding receivables 60 days or more past due decreased to
3.6% of receivables at June 30, 1994 from 4.0% of receivables at
December 31, 1993.
During the month of July, some areas of south Alabama and south Georgia
where the Company operates experienced devastating floods as a result of
rains from tropical storm Alberto. Although no branch offices were damaged,
some of the Company's loan customers suffered losses. Management projects
the Company's property insurance subsidiary will experience approximately
$100,000 in property claims filed by the Company's customers whom had
purchased credit property insurance with their loans. These losses should
not have any significant impact on liquidity as the insurance subsidiary
maintains sufficient loss reserves to cover possible future losses.
On May 17, 1994, a complaint was filed in the Circuit Court of Jefferson
County, Alabama (CV-94-03629-W), against thirteen consumer finance and
insurance companies doing business in Alabama, including the Company. The
complaint was subsequently amended to add numerous other consumer finance
and insurance companies as defendants. The complaint alleges that certain
lending practices of the defendant consumer finance companies violate the
Alabama Consumer Finance Act and other laws. The plaintiff borrowers assert
that the defendant consumer finance companies improperly charged fees for
non-filing insurance and credit property insurance, conspired with the
defendant insurance companies in connection therewith, failed refund
unearned premiums with respect to such insurance, and breached a duty to
disclose to the plaintiff borrowers that refinancing a loan is more epensive
than obtaining a separate loan. The complaint further alleges that such
practices were fraudulent, usurious and unconscionable. The plaintiffs have
requested that the Court certify the action as a national class action. The
plaintiffs have also requested that the Court void all of the loans made to
the plaintiffs by the defendant consumer finance companies, order refunds
of all payments on the loans, assess all penalties and other damages
provided by Alabama law, award compensatory and punitive damages and
provide declaratory and injunctive relief.
On June 6, 1994, a complaint was filed in the U.S. District Court for
the Middle District of Alabama, Southern Division (94-T-699-N), against
eight consumer finance and insurance companies doing business in Alabama,
including the Company. The complaint was subsequently amended to add
numerous other consumer finance companies and insurance companies as
defendants. The complaint alleges that certain lending practices of the
defendants violated the federal Truth-in-Lending Act and the federal
Racketeer Influenced and Corrupt Organizations Act. The plaintiffs assert
that the defendant consumer finance companies improperly excluded fees for
non-filing insurance from the "finance charge" and the computation of the
"annual percentage rate" disclosed in loans to the plaintiff borrowers, and
conspired with the defendant insurance companies in connection therewith.
The plaintiffs have requested that the Court certify the action as a class
action. The plaintiffs have also requested treble damages, attorneys' fees,
litigation expenses and cost and other relief.
Both of these actions are in their early stages and their outcome
currently is not determinable. Management believes that these actions are
without merit as to the Company and intends to contest these actions
vigorously.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
1994 1993
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS. . . . . . . $ 5,901,836 $ 5,826,065
LOANS, net . . . . . . . . . . . . . . 102,407,645 97,485,170
INVESTMENT SECURITIES. . . . . . . . . 13,008,020 12,764,567
OTHER ASSETS . . . . . . . . . . . . . 9,586,277 9,396,368
------------ ------------
TOTAL ASSETS. . . . . . . . . $130,903,778 $125,472,170
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
SENIOR DEBT. . . . . . . . . . . . . . $ 64,322,771 $ 60,147,877
OTHER LIABILITIES. . . . . . . . . . . 5,874,596 7,495,036
SUBORDINATED DEBT. . . . . . . . . . . 20,615,468 20,855,733
------------ ------------
Total Liabilities . . . . . . . . 90,812,835 88,498,646
------------ ------------
STOCKHOLDER'S EQUITY:
Common Stock . . . . . . . . . . . . 170,000 170,000
Net Unrealized Gain (Loss) on
Investment Securities Available
for Sale. . . . . . . . . . . . . (399,067) 286,905
Retained Earnings. . . . . . . . . . 40,320,010 36,516,619
------------ ------------
Total Stockholder's Equity. . . . 40,090,943 36,973,524
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY. . . $130,903,778 $125,472,170
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30 June 30
------- -------
(Unaudited) (Unaudited)
1994 1993 1994 1993
---- ---- ---- ----
INTEREST INCOME. . . . . . . $8,175,137 $6,898,375 $16,551,701 $13,619,614
INTEREST EXPENSE . . . . . . 1,348,968 1,208,860 2,661,423 2,376,148
---------- ---------- ----------- -----------
NET INTEREST INCOME. . . . . 6,826,169 5,689,515 13,890,278 11,243,466
Provision for Loan Losses. 706,243 581,742 1,228,185 945,877
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,119,926 5,107,773 12,662,093 10,297,589
---------- ---------- ----------- -----------
NET INSURANCE INCOME . . . . 2,948,332 2,363,939 5,791,679 4,765,411
---------- ---------- ----------- -----------
OTHER REVENUE. . . . . . . . 61,124 86,291 136,506 149,949
---------- ---------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense. . . . . 3,942,627 3,658,700 7,958,432 6,902,932
Occupancy. . . . . . . . . 935,652 816,782 1,809,621 1,583,621
Other . . . . . . . . . . 1,518,152 1,202,875 3,282,738 2,735,044
---------- ---------- ----------- -----------
Total . . . . . . . . . 6,396,431 5,678,357 13,050,791 11,221,597
---------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES . 2,732,951 1,879,646 5,539,487 3,991,352
Provision for
Income Taxes . . . . 842,234 437,312 1,736,096 1,089,365
---------- ---------- ----------- -----------
NET INCOME . . . . . . . . . $1,890,717 $1,442,334 $ 3,803,391 $ 2,901,987
========== ========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
June 30
-----------------------
(Unaudited)
1994 1993
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . $ 3,803,391 $ 2,901,987
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for Loan Losses . . . . . . . . . . . 1,228,185 945,877
Depreciation and Amortization . . . . . . . . . 471,699 430,864
Other, net. . . . . . . . . . . . . . . . . . . (16,375) (285,427)
Decrease in Miscellaneous assets. . . . . . . . (7,832) (549,397)
(Decrease) in Accounts Payable and
Accrued Expenses . . . . . . . . . . . . . . (1,620,440) (1,227,791)
----------- -----------
Net Cash Provided by Operating Activities . 3,858,628 2,216,113
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased . . . . . . . . . . (46,202,410)(39,440,180)
Loan Payments . . . . . . . . . . . . . . . . . . 40,051,750 32,815,197
Purchases of marketable debt securities . . . . . (1,465,543) (8,522,067)
Sales of marketable securities. . . . . . . . . . 103,897 5,649,565
Redemptions of securities . . . . . . . . . . . . 300,000 --
Principal payments on securities. . . . . . . . . -- 47,660
Other, net. . . . . . . . . . . . . . . . . . . . (505,180) (441,407)
----------- -----------
Net Cash Provided by Operating Activities . (7,717,486) (9,891,232)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Senior Debt . . . . . . . . . . . . . 4,174,894 6,358,457
Subordinated Debt Issued. . . . . . . . . . . . . 2,526,305 2,559,515
Subordinated Debt redeemed. . . . . . . . . . . . (2,766,570) (2,167,862)
----------- -----------
Net Cash Provided by Financing Activities . 3,934,629 6,750,110
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . . 75,771 (925,009)
CASH AND CASH EQUIVALENTS, beginning . . . . . . . . 5,826,065 8,573,140
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . . . . $ 5,901,836 $ 7,648,131
=========== ===========
Cash Paid during the period for: Interest. . . . . $ 2,497,955 $ 2,346,660
Income Taxes. . . 1,726,144 1,203,201
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
-NOTES-
1. The accompanying interim financial information of 1st Franklin Financial
Corporation and subsidiaries (the Company) should be read in conjunction
with the annual financial statements and notes thereto as of December 31,
1993 and for the years then ended included in the Company's December 31,
1993 Annual Report. The Company is a wholly owned subsidiary of
1st Franklin Corporation and therefore earnings per share is not shown.
2. In the opinion of Management of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position as of June 30, 1994, and December 31, 1993, and the results of
its operations and its cash flows for the three months ended June 30,
1994 and 1993. While certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, the Company believes that the disclosures herein are adequate
to make the information presented not misleading.
3. The results of operations for the three months ended June 30, 1994, are
not necessarily indicative of the results to be expected for the full
fiscal year.
<PAGE>
BRANCH OPERATIONS
Jarrell Coffee. . . . Vice President
Jack Coker. . . . . . Vice President
Isabel Vickery. . . . Vice President
SUPERVISORS
Richard Asmussen Donald Floyd Melvin Osley
Robert Canfield Jack Hobgood Joe Seale
Robert Carnes Judy Landon Bob Seawright
Donald Carter Tommy Lennon Timothy Schmotz
Mike Culpepper Steve Maze Gaines Snow
Jimmy Davis Dianne Moore Rick Woods
Tony Ellison Ronnie Morrow
OFFICES
Alabama Offices: Georgia Offices: Georgia Offices:
- - --------------- --------------- ---------------
Alexander City Carrollton McRae
Arab Cartersville Milledgeville
Athens Cedartown Monroe
Bessemer Chatsworth Montezuma
Birmingham Clarkesville Monticello
Clanton Claxton Moultrie
Cullman Clayton Nashville
Decatur Cleveland Newnan
Dothan Cochran Perry
Enterprise Commerce Richmond Hill
Eufaula Conyers Rome
Florence Cordele Royston
Gadsden Cornelia Savannah
Huntsville Covington Statesboro
Jasper Cumming Swainsboro
Ozark Dallas Sylvania
Prattville Douglas Sylvester
Russellville Douglasville Thomaston
Scottsboro Eastman Thomson
Selma Elberton Tifton
Sylacauga Ellijay Toccoa
Troy Forsyth Valdosta
Tuscaloosa Fort Valley Vidalia
Gainsville Warner Robins
Georgia Offices: Garden City Washington
- - --------------- Greensboro Winder
Adel Griffin
Albany Hartwell South Carolina
Alma Hawkinsville Offices:
Americus Hazlehurst --------------
Athens Hinesville Aiken
Barnesville Hogansville Anderson
Baxley Jackson Cayce
Blue Ridge Jasper Clemson
Bremen Jefferson Easley
Brunswick Jesup Greenwood
Buford Lavonia Laurens
Butler Lawrenceville Orangeburg
Cairo Madison Seneca
Calhoun Manchester Union
Canton McDonough York
<PAGE>
DIRECTORS
W. Richard Acree
President, Acree Oil Company
Ben F. Cheek, III
Chairman and Chief Executive Officer
1st Franklin Financial Corporation
Lorene M. Cheek
Homemaker
Jack D. Stovall
President, Stovall Building Supplies, Inc.
Dr. Robert E. Thompson
Physician, Toccoa Clinic
EXECUTIVE OFFICERS
Ben F. Cheek, III
Chairman and Chief Executive Officer
T. Bruce Childs
President and Chief Operating Officer
A. Roger Guimond
Vice President and Chief Financial Officer
Lynn E. Cox
Secretary
Linda L. Sessa
Treasurer
INVESTMENT CENTER
Lynn E. Cox
Account Executive
Phoebe P. Martin
Account Executive
Sandra N. Oliver
New Accounts
COUNSEL
Jones, Day, Reavis & Pogue
3500 One Peachtree Center
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
AUDITORS
Arthur Andersen & Co.
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
<PAGE>
