<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 September 30, 1997
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 October 31, 1997
- --------------------------------------------- -------------------------------
Voting Common Stock, par value $100 per share 1,700 Shares
Non-Voting Common Stock, no par value 168,300 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 Nine Months Ended September 30, 1997.
See Exhibit 19
Consolidated Statements of Financial Position:
September 30, 1997 and December 31, 1996
Consolidated Statements of Income:
Quarters and Nine Months Ended September 30, 1997 and
September 30, 1996
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1997 and September 30, 1996
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 Nine
Months Ended September 30, 1997. See Exhibit 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
19 Quarterly Report to Investors for the Nine Months
Ended September 30, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30,1997.
<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
s/ Ben F. Cheek, III
-----------------------------------
Chairman of Board
s/ A. Roger Guimond
-----------------------------------
Vice President and
Chief Financial Officer
Date: November 14, 1997
<PAGE>
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No. Page No.
- ---------- -------
19 Quarterly Report to Investors for the
Nine Months Ended September 30, 1997 .......... 4
27 Financial Data Schedule ....................... 13
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 1997
<PAGE>
MANAGEMENT'S LETTER
Financial Condition:
- -------------------
Net receivables outstanding (gross receivables less unearned finance
charges) at September 30 1997 were virtually unchanged as compared to the
amount of net receivables outstanding at the beginning of the current year.
The slowdown in receivables growth is attributed to increased competition by
other consumer lenders and a decline in credit quality of the Company's
existing customer base. Higher delinquency rates and rising loan losses have
propelled Management to focus additional resources on collection efforts as
opposed to loan originations.
Although there was no growth in the loan portfolio, the Company's balance
sheet continued to strengthen during the current year with total assets of
the Company increasing by $6.4 million (3%) to $198.3 million at
September 30, 1997 as compared to $191.9 million at December 31, 1996.
Growth in the Company's investment portfolio was the primary reason for the
increase. Sales of the Company's senior and subordinated debt securities
continued to grow at a faster pace than the proceeds could be used by the
Company's loan operations, thereby creating a cash surplus. Management
invested these surplus funds into government bonds in an attempt to maximize
yields, resulting in investment securities increasing $7.2 million (30%)
during the nine months just ended.
Effective January 1, 1997, the Company booked a one time non-recurring
charge of $3.6 million in the Company's provision for income taxes to expense
an accumulated prepaid tax asset. This was the primary factor in the $.6
million (6%) decrease in other assets during the nine months ended
September 30, 1997. The $3.6 million expense of prepaid income taxes
(previously included in "Other Assets") resulted from a non-cash transaction
made in conjunction with the Company's election to become an "S corporation"
for income tax reporting purposes. That transaction was previously reported
in greater detail in our "Investors Newsletter for the Three Months Ended
March 31, 1997."
Overall liabilities increased $6.1 million (4%) as a direct result of the
increases in sales of the Company's senior and subordinated debt securities
sold to the public.
Results of Operations:
- ---------------------
Total revenues during the current year increased $2.1 million (5%) as
compared to the same period in 1996 primarily due to increases in interest
income. Average net receivables were $144.3 million during the nine months
ended September 30, 1997 as compared to $136.3 million during the same nine-
month period ended September 30, 1996. Interest income rose $.5 million (5%)
and $1.7 million (6%) during the quarter and nine-month period just ended as
compared to the same periods a year ago, respectively, as a result of the
higher level of average net outstanding receivables. Also contributing to
the increase in interest income was earnings generated from higher levels of
investment securities outstanding.
Increasing loan losses and operating expenses outpaced the increases in
total revenues, which resulted in earnings before income taxes declining
$.8 million (32%) and $1.8 million (25%) during the quarter and nine months
ended September 30, 1997, respectively, as compared to the same periods a
year ago. Declining credit quality and escalating bankruptcies caused net
charge-offs to increase $.4 million (29%) and $.9 million (27%) during the
three and nine periods of 1997 as compared to 1996.
Higher personnel expenses and occupancy expenses due to expansion of
branch office operations has had a major impact on other operating expenses
during the current year as compared to the same period in 1996. Twenty-six
new branch office locations have been opened in the twelve preceding months
and the additional overhead costs associated with these openings have been a
major factor in the $1.1 million (14%) and $2.9 million (12%) increase in
other operating expenses during the quarter and nine month periods just
ended as compared to the same periods in 1996, respectively.
Legal expenses incurred with the Alabama lawsuits also added to the
current year-to-date increase in other operating expenses. The Company
reached settlement agreements on four proceedings during the first quarter of
this year. Although the Company and its employees deny that they are guilty
of any wrongdoing or any breach of any legal obligation or duty to the
claimants, Management, in recognition of the expense and uncertainty of
litigation, felt it was in the best interest of the Company to dispose of
those cases.
<PAGE>
The aforementioned election to be an "S Corporation" for income tax
purposes and the related non-recurring transaction to expend the Company's
accumulated prepaid tax asset during the nine months just ended substantially
increases the effective tax rate for the current year. Also the fact that as
an "S Corporation", income taxes for the Parent Company are paid by the
shareholders, a comparison of effective tax rates between the comparable
periods would be distorted. The Company's insurance subsidiaries will
continue to be taxable entities, therefore, a provision for taxes will be
included in the financial statements for their respective operations.
Liquidity:
- ---------
Liquidity requirements of the Company are financed through the collection
of receivables and through the issuance of public debt securities. During
the current year, the Company's working capital base was further enhanced
with net cash flows from financing activities, excluding bank borrowings,
increasing $3.7 million and collections on loans increasing $7.5 million as
compared to the same nine month period a year ago. 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
borrowing of $21 million. Available borrowings were $21 million at
September 30, 1997 and December 31, 1996, relating to this agreement.
Another agreement provides for an additional $2 million for general operating
purposes. Available borrowings under this agreement were $2 million at
September 30, 1997 and December 31, 1996.
Legal Proceedings:
- -----------------
Various legal proceedings are pending against the Company in Alabama and
Georgia alleging violations of consumer lending laws and violations in
connection with the sale of credit insurance and loan refinancing. The
financial condition and operating results of the Company could be materially
affected in the event of an unfavorable outcome. However, Management
believes that the Company's operations are in compliance with applicable
regulations and that the actions are without merit. The Company is
diligently contesting the remaining complaints.
New Accounting Standards:
- ------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", that specifies the computation,
presentation and disclosure requirements for earnings per share. The Company
will be required to adopt the new Standard in the 1997 fourth quarter. Based
on a preliminary evaluation of this Standard's requirements, the Company does
not expect the per share amounts reported under SFAS 128 to be materially
different from those calculated and presented under APB Opinion 15.
In June 1997, the FASB issued Financial Accounting Standard Number 130
(SFAS 130) "Reporting Comprehensive Income," effective for fiscal years
beginning after December 31, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Based on current accounting
standards, this new accounting statement is not expected to have a material
impact on the Company's consolidated financial statements. The Company will
adopt this accounting standard in 1998.
Also in June 1997, the FASB issued Financial Accounting Standard Number
131 (SFAS 131) "Disclosure about Segments of an Enterprise and Related
Information," effective for financial statements beginning after December 31,
1997. This statement requires companies to determine segments based on how
management makes decisions about allocating resources to segments and
measuring their performance. Disclosures for each segment are similar to
those required under current standard, with the addition of certain quarterly
disclosure requirements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company does not expect this statement to have a material
impact on the Company's consolidated financial statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS . . . . . . . . . . . $ 26,839,122 $ 27,432,705
------------ ------------
LOANS, net. . . . . . . . . . . . . . . . . . . 130,183,598 129,684,119
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at fair market value. . . 28,386,913 20,783,883
Held to Maturity, at amortized cost . . . . . 2,500,786 2,946,099
------------ ------------
30,887,699 23,729,982
------------ ------------
OTHER ASSETS. . . . . . . . . . . . . . . . . . 10,405,361 11,057,544
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . . $198,315,780 $191,904,350
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT . . . . . . . . . . . . . . . . . . $ 98,452,962 $ 94,739,841
OTHER LIABILITIES . . . . . . . . . . . . . . . 9,726,717 8,807,990
SUBORDINATED DEBT . . . . . . . . . . . . . . . 36,437,742 34,942,463
------------ ------------
Total Liabilities. . . . . . . . . . . . . 144,617,421 138,490,294
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock. . . . . . . . . . . . . . . . . 170,000 170,000
Net Unrealized Gain on Investment
Securities Available for Sale . . . . . . . 243,867 43,288
Retained Earnings . . . . . . . . . . . . . . 53,284,492 53,200,768
------------ ------------
Total Stockholders' Equity . . . . . . . . 53,698,359 53,414,056
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . . $198,315,780 $191,904,350
============ ============
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 Nine Months Ended
September 30 September 30
----------------------- -----------------------
(Unaudited) (Unaudited)
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME. . . . . . . $10,785,402 $10,285,749 $31,951,037 $30,237,097
INTEREST EXPENSE . . . . . . 2,245,130 2,107,581 6,570,662 6,171,363
----------- ----------- ----------- -----------
NET INTEREST INCOME. . . . . 8,540,272 8,178,168 25,380,375 24,065,734
Provision for
Loan Losses. . . . . . . 1,673,320 1,638,581 4,254,047 3,813,237
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. 6,866,952 6,539,587 21,126,328 20,252,497
----------- ----------- ----------- -----------
NET INSURANCE INCOME . . . . 3,331,407 3,430,753 10,156,327 9,939,399
----------- ----------- ----------- -----------
OTHER REVENUE. . . . . . . . 114,880 118,320 363,041 323,234
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense. . . . . 5,265,584 4,618,551 15,591,693 14,336,442
Occupancy. . . . . . . . . 1,279,765 1,082,115 3,714,225 3,198,968
Other. . . . . . . . . . . 1,973,733 1,756,706 7,103,608 5,965,543
----------- ----------- ----------- -----------
Total . . . . . . . . . 8,519,082 7,457,372 26,409,526 23,500,953
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES . 1,794,157 2,631,288 5,236,170 7,014,177
Provision for Income Taxes
Current Provision. . . . 264,860 853,215 949,426 1,952,559
Deferred Tax Provision
(See Note 5) . . . . . 25,052 (122,011) 3,621,750 (36,436)
----------- ----------- ----------- -----------
289,912 731,204 4,571,176 1,916,123
----------- ----------- ----------- -----------
NET INCOME . . . . . . . . . 1,504,245 1,900,084 664,994 5,098,054
RETAINED EARNINGS, begin . . 51,886,882 50,433,042 53,200,768 47,325,758
Dividends / Distributions
on Common Stock. . . . . 106,635 90,685 581,270 181,371
----------- ----------- ----------- -----------
RETAINED EARNINGS, end . . . $53,284,492 $52,242,441 $53,284,492 $52,242,441
=========== =========== =========== ===========
EARNINGS PER SHARE:
Voting Common Stock; 1700
Shares outstanding all
periods) . . . . . . . . $ 8.85 $ 11.18 $ 3.91 $ 29.99
Non-Voting Common Stock;
168,300 Shares
Outstanding 9/30/97. . . $ 8.85 $ 11.18 $ 3.91 $ 29.99
====== ======= ====== =======
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
Nine Months Ended
September 30
----------------------------
(Unaudited)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ---- ----
Net Income. . . . . . . . . . . . . . . . . . $ 664,994 $ 5,098,054
Adjustments to reconcile net income to
net cash . provided by operating activities:
Provision for Loan Losses . . . . . . . . . 4,254,047 3,813,237
Depreciation and Amortization . . . . . . . 855,485 808,096
Deferred Income Taxes . . . . . . . . . . . 3,621,749 --
Other, net. . . . . . . . . . . . . . . . . (19,548) (71,975)
(Increase) in Miscellaneous assets. . . . . (609,653) (1,286,232)
(Decrease) Increase in Accounts Payable
and Accrued Expenses. . . . . . . . . . . (586,334) 54,487
----------- -----------
Net Cash Provided by
Operating Activities. . . . . . . . 8,180,740 8,415,667
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased . . . . . . . . (83,450,261) (80,240,730)
Loan Payments . . . . . . . . . . . . . . . . 78,696,735 71,158,192
Purchases of marketable debt securities . . . (19,275,084) (7,345,008)
Principal payments on securities . . . . . . 270,865 407,347
Sales of marketable securities. . . . . . . . 325,000 768,750
Redemptions of securities . . . . . . . . . . 11,770,000 3,200,000
Other, net. . . . . . . . . . . . . . . . . . (1,738,708) (660,682)
----------- -----------
Net Cash Provided by
Operating Activities . . . . . . . . (13,401,453) (12,712,131)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Senior Debt. . . . . . 3,713,121 (2,101,594)
Subordinated Debt Issued. . . . . . . . . . . 5,150,100 6,335,536
Subordinated Debt redeemed. . . . . . . . . . (3,654,821) (2,709,588)
Dividends / Distributions Paid. . . . . . . . (581,270) (181,371)
----------- -----------
Net Cash Provided by
Financing Activities. . . . . . . . . 4,627,130 1,342,983
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . (593,583) (2,953,481)
CASH AND CASH EQUIVALENTS, beginning . . . . . 27,432,705 30,513,593
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . $26,839,122 $27,560,112
=========== ===========
Cash Paid during the period for: Interest. . . $ 6,443,532 $ 6,109,841
Income Taxes. $ 1,280,958 $ 1,679,197
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, 1996 and for the years then ended included in the Company's December
31, 1996 Annual Report.
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 September 30, 1997 and December 31,
1996 and the results of its operations and its cash flows for the nine
months ended September 30, 1997 and 1996. 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 nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the
full fiscal year.
4. The computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings.
5. Deferred tax provision for September 30, 1997 includes a $3.6 million
one time non-recurring charge to expense accumulated prepaid tax
January 1, 1997 as a result of the Company electing "S corporation"
status for income tax reporting purposes.
<PAGE>
BRANCH OPERATIONS
-----------------
Isabel Vickery Youngblood . . . . . Senior Vice President
A. Jarrell Coffee . . . . . . . . . Vice President
Jack R. Coker . . . . . . . . . . . Vice President
Robert J. Canfield . . . . . . . . Area Vice President
J. Michael Culpepper . . . . . . . Area Vice President
Ronald F. Morrow . . . . . . . . . Area Vice President
SUPERVISORS
-----------
Regina Bond Jack Hobgood Mike Lyles Darryl Parker
Ronald Byerly Bruce Hooper Johnny McEntyre Henrietta Reathford
Susie Cantrell Janice Hyde Brian McSwain Timothy Schmotz
Donald Carter Judy Landon Dianne Moore Barbara Sims
Tony Ellison Jeff Lee Melvin Osley Gaines Snow
Donald Floyd Tommy Lennon Dale Palmer Marc Thomas
OFFICES
-------
Alabama Offices: Georgia Offices: Georgia Offices: Louisiana Offices:
- --------------- --------------- --------------- -----------------
Alexander City Blue Ridge Hinesville Jena
Andalusia Bremen Hogansville Marksville
Arab Brunswick Jackson Natchitoches
Athens Buford Jasper Pineville
Bessemer Butler Jefferson
Birmingham Cairo Jesup Mississippi Offices:
Clanton Calhoun LaGrange -------------------
Cullman Canton Lavonia Carthage
Decatur Carrollton Lawrenceville Columbia
Dothan Cartersville Madison Grenada
Enterprise Cedartown Manchester Gulfport
Fayette Chatsworth McDonough Hattiesburg
Florence Clarkesville McRae Jackson
Gadsden Claxton Milledgeville Pearl
Geneva Clayton Monroe Picayune
Hamilton Cleveland Montezuma
Huntsville Cochran Monticello South Carolina Offices:
Jasper Commerce Moultrie ----------------------
Madison Conyers Nashville Aiken
Moulton Cordele Newnan Anderson
Muscle Shoals Cornelia Perry Cayce
Opp Covington Richmond Hill Clemson
Ozark Cumming Rome Columbia
Prattville Dallas Royston Conway
Russellville Dalton Sandersville Easley
Scottsboro Dawson Savannah Florence
Selma Douglas Statesboro Gaffney
Sylacauga Douglasville Swainsboro Greenville
Troy Eastman Sylvania Greenwood
Tuscaloosa Elberton Sylvester Greer
Ellijay Thomaston Lancaster
Georgia Offices: Forsyth Thomson Laurens
- --------------- Fort Valley Tifton Orangeburg
Adel Gainesvile Toccoa Rock Hill
Albany Garden City Valdosta Seneca
Alma Georgetown Vidalia Spartanburg
Americus Greensboro Warner Robins Union
Athens Griffin Washington York
Bainbridge Hartwell Waycross
Barnesville Hawkinsville Winder
Baxley Hazlehurst
Blakely
<PAGE>
DIRECTORS
---------
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
COUNSEL
-------
Jones, Day, Reavis & Pogue
3500 One Peachtree Center
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
AUDITORS
--------
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,839,122
<SECURITIES> 30,887,699
<RECEIVABLES> 135,979,079
<ALLOWANCES> 5,795,481
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,509,282
<DEPRECIATION> 7,139,418
<TOTAL-ASSETS> 198,315,780
<CURRENT-LIABILITIES> 108,179,679
<BONDS> 134,686,442
<COMMON> 170,000
0
0
<OTHER-SE> 53,528,359
<TOTAL-LIABILITY-AND-EQUITY> 198,315,780
<SALES> 0
<TOTAL-REVENUES> 45,370,330
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,309,451
<LOSS-PROVISION> 4,254,047
<INTEREST-EXPENSE> 6,570,662
<INCOME-PRETAX> 5,236,170
<INCOME-TAX> 4,571,176
<INCOME-CONTINUING> 664,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664,994
<EPS-PRIMARY> 3.91
<EPS-DILUTED> 0
</TABLE>
