<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, 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 July 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 Six Months Ended June 30, 1997. See Exhibit 19
Consolidated Statements of Financial Position:
June 30, 1997 and December 31, 1996
Consolidated Statements of Income:
Quarters and Six Months Ended June 30, 1997 and
June 30, 1996
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1997 and June 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 Six Months Ended June 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 Six
Months Ended June 30, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended June 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: August 13, 1997
<PAGE>
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No. Page No.
---------- -------
19 Quarterly Report to Investors for the
Six Months Ended June 30, 1997 ....... 4
27 Financial Data Schedule .................. 13
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
SIX MONTHS ENDED
JUNE 30, 1997
<PAGE>
MANAGEMENT'S LETTER
Financial Condition:
- -------------------
Total assets of the Company were $195.9 million as of June 30, 1997,
representing a $4.0 million (2%) increase as compared to 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 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 $11.2 million (47%) during the first half of
1997. Cash and cash equivalents decreased $6.4 million (23%) as an offset to
the increase in investment securities.
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 $1.6
million (15%) decrease in other assets during the six months ended June 30,
1997. The $3.6 million expense of prepaid income taxes (previously included
in "Other Assets") was a non-cash transaction made in conjunction with the
Company's election to become an "S corporation" for income tax reporting
purposes. See "Investors Newsletter for the Three Months Ended March 31,
1997" for further discussion regarding the Company's election of
"S corporation" status.
Overall liabilities increased $5.3 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:
- ---------------------
During the current year total revenues increased $1.7 million (6%) as
compared to the same period in 1996 primarily due to increases in interest
income. Average net receivables were $145.9 million during the six months
ended June 30, 1997 as compared to $137.7 million during the same six-month
period ended June 30, 1996. Interest income rose $.6 million (6%) and $1.2
million (6%) during the quarter and six-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.
Earnings before income taxes increased $.2 million (13%) during the quarter
ended June 30, 1997 as compared to the same quarter a year ago. The Company
experienced only modest increases in loan losses and other operating expenses
during the second quarter as compared to the same quarter a year ago. These
modest increases were more than offset by the increase in interest income
thereby resulting in the increase in earnings before income taxes for the
quarter. Unfortunately, these same expenses were much higher during the
first quarter of this year causing earnings before income taxes to decline
$.9 million (21%) during the six month year-to-date period ended June 30,
1997 as compared to the same period a year ago.
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-two
new branch office locations have been opened in the ten preceding months and
the additional overhead cost associated with these openings have been a major
factor in the $1.8 million (12%) increase in other operating expenses during
the six month comparable periods.
<PAGE>
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.
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 quarter and six months just ended
skews the effective tax rate for the respective periods. 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 taxpayers, therefore a provision for taxes will be
included in the financial statements.
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 $9.9 million and collections on loans increasing $5.1 million as
compared to the same six 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 June 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 June 30, 1997
and December 31, 1996.
Liquidity was not adversely affected by delinquent accounts even as the
percentage of outstanding receivables 60 days or more past due decreased to
5.9% of receivables at June 30, 1997 from 6.4% of receivables at
December 31, 1996.
Legal Proceedings:
- -----------------
Other various legal proceedings are pending against the Company in Alabama
and Georgia alleging different 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.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS. . . . . . . . . . . $ 21,023,052 $ 27,432,705
------------ ------------
LOANS, net . . . . . . . . . . . . . . . . . . 130,505,428 129,684,119
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at fair market value. . 32,769,033 20,783,883
Held to Maturity, at amortized cost . . . . 2,199,526 2,946,099
------------ ------------
34,968,559 23,729,982
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . 9,424,287 11,057,544
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . $195,921,326 $191,904,350
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT. . . . . . . . . . . . . . . . . . $ 99,143,150 $ 94,739,841
OTHER LIABILITIES. . . . . . . . . . . . . . . 8,718,609 8,807,990
SUBORDINATED DEBT. . . . . . . . . . . . . . . 35,960,567 34,942,463
------------ ------------
Total Liabilities . . . . . . . . . . . . 143,822,326 138,490,294
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock. . . . . . . . . . . . . . . . 170,000 170,000
Net Unrealized Gain on Investment
Securities Available for Sale . . . . . . 42,118 43,288
Retained Earnings . . . . . . . . . . . . . 51,886,882 53,200,768
------------ ------------
Total Stockholders' Equity. . . . . . . . 52,099,000 53,414,056
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . $195,921,326 $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 Six Months Ended
June 30 June 30
------------------------ -----------------------
(Unaudited) (Unaudited)
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME. . . . . . $10,527,491 $ 9,951,526 $21,165,635 $19,951,348
INTEREST EXPENSE . . . . . 2,187,304 2,016,241 4,325,532 4,063,782
----------- ----------- ----------- -----------
NET INTEREST INCOME. . . . 8,340,187 7,935,285 16,840,103 15,887,566
Provision for
Loan Losses. . . . . 1,324,121 1,226,282 2,580,727 2,174,656
----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION
FOR LOAN LOSSES . . . 7,016,066 6,709,003 14,259,376 13,712,910
----------- ----------- ----------- -----------
NET INSURANCE INCOME . . . 3,340,387 3,209,815 6,824,920 6,508,646
----------- ----------- ----------- -----------
OTHER REVENUE. . . . . . . 119,272 92,416 248,161 204,914
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense. . . . 5,161,015 5,025,388 10,326,109 9,717,891
Occupancy. . . . . . . . 1,197,019 1,067,787 2,434,460 2,116,853
Other. . . . . . . . . . 1,982,751 2,023,349 5,129,875 4,208,837
----------- ----------- ----------- -----------
Total . . . . . . . . 8,340,785 8,116,524 17,890,444 16,043,581
----------- ----------- ----------- -----------
INCOME BEFORE
INCOME TAXES . . . . . . 2,134,940 1,894,710 3,442,013 4,382,889
Provision for Income Taxes:
Current Provision. . . 317,610 444,908 684,566 1,099,344
Deferred Tax
Provision (See Note 5) (7,862) 35,976 3,596,698 85,575
----------- ----------- ----------- -----------
309,748 480,884 4,281,264 1,184,919
----------- ----------- ----------- -----------
NET INCOME . . . . . . . . 1,825,192 1,413,826 (839,251) 3,197,970
RETAINED EARNINGS, begin . 50,536,325 49,109,902 53,200,768 47,325,758
Dividends / Distributions
on Common Stock . . . 474,635 90,686 474,635 90,686
----------- ----------- ----------- -----------
RETAINED EARNINGS, ending. $51,886,882 $50,433,042 $51,886,882 $50,433,042
=========== =========== =========== ===========
EARNINGS PER SHARE:
Voting Common Stock;
1700 Shares outstanding
all periods). . . . . . $ 10.74 $ 8.32 $ (4.94) $ 18.81
======= ====== ======= =======
Non-Voting Common Stock;
168,300 Shares Outstanding
June 30, 1997 . . . . . $ 10.74 $ 8.32 $ (4.94) $ 18.81
======= ====== ======= =======
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)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . $ (839,251) $ 3,197,970
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for Loan Losses . . . . . . . . . . 2,580,727 2,174,656
Depreciation and Amortization . . . . . . . . 577,068 543,831
Deferred Income Taxes . . . . . . . . . . . . 3,596,698 85,575
Other, net. . . . . . . . . . . . . . . . . . 3,208 (28,960)
(Increase) in Miscellaneous assets. . . . . . (697,546) (196,312)
(Decrease) in Accounts Payable and
Accrued Expenses . . . . . . . . . . . . . (1,505,057) (1,298,825)
----------- -----------
Net Cash Provided
by Operating Activities. . . . . . . 3,715,847 4,477,935
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased. . . . . . . . . . (56,381,621) (52,690,333)
Loan Payments. . . . . . . . . . . . . . . . . . 52,979,585 47,885,751
Purchases of marketable debt securities. . . . . (13,997,448) (3,045,570)
Principal payments on securities . . . . . . . . 149,863 72,386
Sales of marketable securities . . . . . . . . . 325,000 768,750
Redemptions of securities. . . . . . . . . . . . 2,270,000 2,750,000
Other, net . . . . . . . . . . . . . . . . . . . (417,657) (469,767)
----------- -----------
Net Cash Provided by
Operating Activities . . . . . . . . (15,072,278) (4,728,783)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Senior Debt . . . . . . . 4,403,309 (6,844,273)
Subordinated Debt Issued . . . . . . . . . . . . 3,810,403 4,312,036
Subordinated Debt redeemed . . . . . . . . . . . (2,792,299) (1,932,627)
Dividends / Distributions Paid . . . . . . . . . (474,635) (90,686)
----------- -----------
Net Cash Provided by
Financing Activities . . . . . . . . 4,946,778 (4,555,550)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . (6,409,653) (4,806,398)
CASH AND CASH EQUIVALENTS, beginning . . . . . . . 27,432,705 30,513,593
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . . . $21,023,052 $25,707,195
=========== ===========
Cash Paid during the period for: Interest . . . . $ 4,235,876 $ 4,040,969
Income Taxes . . 937,639 992,000
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 June 30, 1997 and December 31, 1996
and the results of its operations and its cash flows for the six months
ended June 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 six months ended June 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 June 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 Judy Landon Judy Paul
Susie Cantrell Tommon Lennon Ed Pulsifer
Donald Carter Jeff Lee Henrietta Reathford
Jimmy Davis Mike Lyles Timothy Schmotz
Tony Ellison Johnny McEntyre Bob Seawright
Donald Floyd Dianne Moore Barbara Sims
Jack Hobgood Melvin Osley Gaines Snow
Bruce Hooper Dale Palmer Marc Thomas
Janice Hyde Darryl Parker
OFFICES
Alabama Offices: Georgia Offices: Georgia Offices: Georgia Offices:
- --------------- --------------- --------------- ---------------
Alexander City Blue Ridge Hawkinsville Waycross
Andalusia Bremen Hazlehurst Winder
Arab Brunswick Hinesville
Athens Buford Hogansville Louisiana Offices:
Bessemer Butler Jackson -----------------
Birmingham Cairo Jasper Jena
Clanton Calhoun Jefferson Marksville
Cullman Canton Jesup Pineville
Decatur Carrollton LaGrange
Dothan Cartersville Lavonia Mississippi Offices:
Enterprise Cedartown Lawrenceville -------------------
Fayette Chatsworth Madison Carthage
Florence Clarkesville Manchester Columbia
Gadsden Claxton McDonough Grenada
Geneva Clayton McRae Gulfport
Hamilton Cleveland Milledgeville Hattiesburg
Huntsville Cochran Monroe Jackson
Jasper Commerce Montezuma Pearl
Madison Conyers Monticello Picayune
Moulton Cordele Moultrie
Muscle Shoals Cornelia Nashville South Carolina Offices:
Opp Covington Newnan ----------------------
Ozark Cumming Perry Aiken
Prattville Dallas Richmond Hill Anderson
Russellville Dalton Rome Cayce
Scottsboro Dawson Royston Clemson
Selma Douglas Sandersville Columbia
Sylacauga Douglasville Savannah Conway
Troy Eastman Statesboro Easley
Tuscaloosa Elberton Swainsboro Florence
Ellijay Sylvania Gaffney
Georgia Offices: Forsyth Sylvester Greenville
- --------------- Fort Valley Thomaston Greenwood
Adel Gainesville Thomson Greer
Albany Garden City Tifton Lancaster
Alma Georgetown Toccoa Laurens
Americus Greensboro Valdosta Orangeburg
Athens Griffin Vidalia Rock Hill
Bainbridge Hartwell Warner Robins Seneca
Barnesville Washington Spartanburg
Baxley Union
Blakely York
<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
INVESTMENT CENTER
-----------------
Lynn E. Cox
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 LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,023,052
<SECURITIES> 34,968,559
<RECEIVABLES> 136,298,958
<ALLOWANCES> 5,793,530
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,296,221
<DEPRECIATION> 6,995,321
<TOTAL-ASSETS> 195,921,326
<CURRENT-LIABILITIES> 107,861,759
<BONDS> 134,886,955
<COMMON> 170,000
0
0
<OTHER-SE> 51,929,000
<TOTAL-LIABILITY-AND-EQUITY> 195,921,326
<SALES> 0
<TOTAL-REVENUES> 30,223,716
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,890,444
<LOSS-PROVISION> 2,580,727
<INTEREST-EXPENSE> 4,325,532
<INCOME-PRETAX> 3,442,013
<INCOME-TAX> 4,281,264
<INCOME-CONTINUING> (839,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (839,251)
<EPS-PRIMARY> (4.94)
<EPS-DILUTED> 0
</TABLE>
