<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 March 31, 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 April 30, 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 Three Months Ended March 31, 1997. See Exhibit 19
Consolidated Statements of Financial Position:
March 31, 1997 and December 31, 1996
Consolidated Statements of Income:
Quarters Ended March 31, 1997 and March 31, 1996
Consolidated Statements of Cash Flows:
Quarters Ended March 31, 1997 and March 31, 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 Three
Months Ended March 31, 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 Three Months
Ended March 31, 1997.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
March 31,1997.
<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
Ben F. Cheek, III
-----------------
Chairman of Board
A. Roger Guimond
----------------------------
Vice President and
Chief Financial Officer
Date: May 12, 1997
<PAGE>
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No. Page No.
19 Quarterly Report to Investors for the Three
Months Ended March 31, 1997 ............... 4
27 Financial Date Schedule ........................ 13
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
THREE MONTHS ENDED
MARCH 31, 1997
<PAGE>
CHAIRMAN'S LETTER
TO OUR INVESTORS:
As you read the enclosed 1st Franklin Financial Corporation financial
statement, you will note some differences. Under certain conditions
companies can be granted "S Corporation" status for income tax purposes.
Being an "S Corporation" eliminates one level of taxation. The corporation
ceases to be a taxpayer and the shareholders become responsible for all of
the taxes formerly paid by the corporation. 1st Franklin Financial
Corporation has been granted "S Corporation" status and we will no longer pay
taxes as a corporation but taxes will be paid by the five Cheek family
members who are shareholders. There will be some impact on the Balance Sheet
and Profit and Loss Statement portions of our financial statements for the
balance of this year. We will be using up a Prepaid Taxes asset on the
Balance Sheet by expending that reserve account against current earnings. No
cash will be involved in this transaction and it is a one time book
adjustment to properly reflect the fact that 1st Franklin Financial
Corporation is no longer subject to federal and certain state income taxes
since that responsibility is now shifted to the shareholders.
I might mention that our insurance subsidiary companies will still be
taxpayers, so when you see our consolidated balance sheet, there will be a
provision for taxes for the insurance companies but not for 1st Franklin
Financial Corporation, the Parent Company.
Should you have any questions about this matter or anything else, please
give us a call at 1-800-282-0709 or in Toccoa at 706-886-7571 and speak to
anyone in our Investment Center or ask for me. Better still, come by our
Investment Center if it is convenient for you to do so. Either way, we will
be delighted to hear from you.
Ben F. Cheek, III
Chairman of the Board
MANAGEMENT'S LETTER
Financial Condition:
- -------------------
Net receivables (gross receivables less unearned finance charges) declined
$5.0 million (6%) during the first three months of 1997 due to a slowdown in
new business generated. Historically, loan volume tends to be sluggish
during the first quarter of each new year due to a post-Christmas downswing
in business activity.
Total assets decreased $1.6 million (1%) during the same period mainly due
to the decrease in the loan portfolio and due to a one time non-recurring
charge of $3.6 million against the Company's provision for income taxes to
expense an accumulated prepaid tax asset. This $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 effective January 1, 1997.
See "Chairman's Letter" for further discussion regarding the Company's
election of "S corporation" status.
Although total assets declined, the Company's balance sheet remained
strong with significant concentrations of cash and investment securities.
Surplus funds generated from loan payments, sales of the Company's debt
securities and funds generated from the Company's insurance operations
resulted in a $5.4 million (23%) increase in investment securities at
March 31, 1997 as compared to December 31, 1996.
<PAGE>
Results of Operations:
- ---------------------
Total revenues were $14.3 million during the quarter ended March 31, 1997
as compared to $13.4 million during the same period ended March 31, 1996.
The increase in revenues resulted from interest income earned on higher
levels of average net outstanding receivables during the current quarter as
compared to the same quarter a year ago. Average net receivables increased
$8.5 million (6%) to $143.0 million at March 31, 1997 from $134.5 million at
March 31, 1996. Also contributing to the increase in revenues was growth in
investment income attributable to higher levels of investment securities
outstanding.
Although total revenues increased, earnings before income taxes declined
$1.2 million (47%) due to increased loan losses and increased other operating
expenses. The Company's loan loss provision increased $.3 million (33%) due
to escalating net chargeoffs. Losses due to bankruptcies continue to be the
major cause of mounting loan losses. Another factor contributing to the
increase in the loss provision was Management's decision to increase the
Company's loan loss reserve during the second half of 1996.
Increases in other operating expenses was also a major factor in pre-tax
earnings being lower during the period just ended as compared to the prior
year. Twenty-one new branch offices have been opened in the preceding seven
months and the additional overhead cost, particulary personnel and occupancy
expenses, associated with these openings have been the primary cause for
other operating expenses increasing $1.6 million (20%) during the comparable
periods. Annual merit increases and cost-of-living increases for personnel
was another factor contributing to the increase in other operating expenses.
Legal expenses incurred with the Alabama lawsuits added to the increase in
other operating expenses during the current quarter. The Company reached
settlement agreements on four proceedings during the quarter just ended and
has accrued for the disbursement thereof. 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. However, in recognition of the expense and
uncertainty of litigation, Management 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
reporting purposes and the related non-recurring transaction to expend the
Company's accumulated prepaid tax asset during the quarter just ended skews
the effective tax rate for the quarter. 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.
Liquidity:
- ---------
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 borrowing, increased
$7.2 million during the quarter just ended as compared to the same quarter a
year ago, liquidity was not adversely affected as the Company maintained a
strong cash position and collections on loans increased $4.0 million during
the comparable periods. 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 $21.0 million. Available
borrowings were $21.0 million at March 31, 1997 and December 31, 1996,
relating to this agreement. Another agreement provides for an additional
$2.0 million for general operating purposes. Available borrowings under this
agreement were $2.0 million at March 31, 1997 and December 31, 1996.
Liquidity was not adversely affected by delinquent accounts as the
percentage of outstanding receivables 60 days or more past due decreased to
5.8% of receivables at March 31, 1997 from 6.4% of receivables at
December 31, 1996.
<PAGE>
Other:
- -----
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
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS . . . . . . . . . . $ 26,564,699 $ 27,432,705
------------ ------------
LOANS, net . . . . . . . . . . . . . . . . . 125,897,226 129,684,119
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at market value . . . . 26,245,642 20,783,883
Held to Maturity, at amortized cost . . . . 2,947,730 2,946,099
------------ ------------
29,193,372 23,729,982
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . 8,604,317 11,057,544
------------ ------------
TOTAL ASSETS . . . . . . . . . . . $190,259,614 $191,904,350
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT. . . . . . . . . . . . . . . . . . $ 95,507,924 $ 94,739,841
OTHER LIABILITIES. . . . . . . . . . . . . . . 8,643,602 8,807,990
SUBORDINATED DEBT . . . . . . . . . . . . . . 35,622,533 34,942,463
------------ ------------
Total Liabilities . . . . . . . . . . 139,774,059 138,490,294
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value. . . . . . . -- --
Common Stock:
Voting Shares $100 par value;
2,000 shares authorized;
1,700 shares outstanding . . . . . . . 170,000 170,000
Non-Voting Shares; no par value;
198,000 shares authorized;
168,300 shares outstanding . . . . . . -- --
Net Unrealized Gain (Loss) on
Investment Securities Available for Sale . (220,770) 43,288
Retained Earnings. . . . . . . . . . . . . . 50,536,325 53,200,768
------------ ------------
Total Stockholders' Equity . . . . . . 50,485,555 53,414,056
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . $190,259,614 $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
Three Months Ended
March 31
--------------------------
(Unaudited)
1997 1996
----------- -----------
INTEREST INCOME. . . . . . . . . . . . . . . . $10,638,144 $ 9,999,822
INTEREST EXPENSE . . . . . . . . . . . . . . . 2,138,228 2,047,541
----------- -----------
NET INTEREST INCOME. . . . . . . . . . . . . . 8,499,916 7,952,281
Provision for Loan Losses . . . . . . . . . 1,256,606 948,374
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES . . . . . . . . . 7,243,310 7,003,907
----------- -----------
NET INSURANCE INCOME . . . . . . . . . . . . . 3,484,533 3,298,831
----------- -----------
OTHER REVENUE. . . . . . . . . . . . . . . . . 128,889 112,498
----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense . . . . . . . . . . . . . 5,165,094 4,692,503
Occupancy . . . . . . . . . . . . . . . . . 1,237,441 1,049,066
Other . . . . . . . . . . . . . . . . . . . 3,147,124 2,185,488
----------- -----------
Total. . . . . . . . . . . . . . . . . . 9,549,659 7,927,057
----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . 1,307,073 2,488,179
Provision for Income Taxes:
Current Provision. . . . . . . . . . . . 366,956 654,436
Deferred Tax Provision (See Note 5). . . 3,604,560 49,599
----------- -----------
3,971,516 704,035
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . (2,664,443) 1,784,144
RETAINED EARNINGS, beginning of period . . . . 53,200,768 47,325,758
----------- -----------
RETAINED EARNINGS, end of period . . . . . . . $50,536,325 $49,109,902
=========== ===========
EARNINGS PER SHARE:
Voting Common Stock; 1700 Shares
Outstanding all periods . . . . . . . . . $ (15.67) $ 10.49
======== =======
Non-Voting Common Stock; 168,201 Shares
Outstanding March 31, 1996. . . . . . . . $ (15.67) $ 10.49
======== =======
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
Three Months Ended
March 31
---------------------------
(Unaudited)
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . $ (2,664,443) $ 1,784,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for Loan Losses . . . . . . 1,256,606 948,374
Depreciation and Amortization . . . . 300,144 270,656
Deferred Income Taxes . . . . . . . . 3,608,522 49,599
Other, net. . . . . . . . . . . . . . (405) (19,665)
Decrease in Miscellaneous assets. . . 186,056 17,138
(Decrease) in Accounts Payable and
Accrued Expenses. . . . . . . . . . . (1,524,301) (1,948,055)
------------ ------------
Net Cash Provided by Operating Activities 1,162,179 1,102,191
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased. . . . . . (25,425,571) (23,725,174)
Loan Payments. . . . . . . . . . . . . . 27,955,858 23,933,610
Purchases of marketable debt securities. (6,949,293) (2,544,281)
Principal payments on securities . . . . 68,498 6,586
Sales of marketable securities . . . . . 75,000 768,750
Redemptions of securities. . . . . . . . 1,000,000 1,000,000
Other, net . . . . . . . . . . . . . . . (202,830) (138,848)
------------ ------------
Net Cash Provided by Operating Activities (3,478,338) (699,357)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Senior Debt . . . 768,083 (6,604,194)
Subordinated Debt Issued . . . . . . . . 2,198,871 2,213,006
Subordinated Debt redeemed . . . . . . . (1,518,801) (1,319,702)
------------ ------------
Net Cash Provided by Financing Activities 1,448,153 (5,710,890)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. (868,006) (5,308,056)
CASH AND CASH EQUIVALENTS, beginning . . . 27,432,705 30,513,593
------------ ------------
CASH AND CASH EQUIVALENTS, ending. . . . . $ 26,564,699 $ 25,205,537
============ ============
Cash Paid during the period for: Interest . . . $ 2,012,581 $ 1,995,122
Income Taxes 229,000 62,000
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 March 31, 1997, and December 31, 1996, and the results of
its operations and its cash flows for the three months ended March 31,
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 three months ended March 31, 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 March 31, 1997 includes a $3.6 million one
time non-recurring charge to expense accumulated prepaid tax at
January 1, 1997 as a result of the Company electing "S Corporation"
status for income tax reporting purposes. See Chairman's Letter for
further discussion.
<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 Jeff Lee Ed Pulsifer
Susie Cantrell Tommy Lennon Henrietta Reathford
Donald Carter Mike Lyles Timothy Schmotz
Jimmy Davis Johnny McEntyre Bob Seawright
Tony Ellison Dianne Moore Barbara Sims
Donald Floyd Melvin Osley Gaines Snow
Jack Hobgood Dale Palmer Marc Thomas
Janice Hyde Darryl Parker Stewart York
Judy Landon Judy Paul
OFFICES
Alabama Offices: Georgia Offices: Georgia Offices
- --------------- --------------- ---------------
Alexander City Chatsworth Richmond Hill
Andalusia Clarkesville Rome
Arab Claxton Royston
Athens Clayton Sandersville
Bessemer Cleveland Savannah
Birmingham Cochran Statesboro
Clanton Commerce Swainsboro
Cullman Conyers Sylvania
Decatur Cordele Sylvester
Dothan Cornelia Thomaston
Enterprise Covington Thomson
Fayette Cumming Tifton
Florence Dallas Toccoa
Gadsden Dalton Valdosta
Geneva Dawson Vidalia
Hamilton Douglas Warner Robins
Huntsville Douglasville Washington
Jasper Eastman Waycross
Madison Elberton Winder
Moulton Ellijay
Muscle Shoals Forsyth Louisiana Offices:
Opp Fort Valley -----------------
Ozark Gainesville Jena
Prattville Garden City Marksville
Russellville Georgetown Pineville
Scottsboro Greensboro
Selma Griffin Mississippi Offices:
Sylacauga Hartwell -------------------
Troy Hawkinsville Columbia
Tuscaloosa Hazlehurst Grenada
Hinesville Gulfport
Georgia Offices: Hogansville Hattiesburg
- --------------- Jackson Jackson
Adel Jasper Pearl
Albany Jefferson Picayune
Alma Jesup
Americus LaGrange South Carolina Offices:
Athens Lavonia ----------------------
Bainbridge Lawrenceville Aiken
Barnesville Madison Anderson
Baxley Manchester Cayce
Blakely McDonough Clemson
Blue Ridge McRae Columbia
Bremen Milledgeville Easley
Brunswick Monroe Florence
Buford Montezuma Gaffney
Butler Monticello Greenville
Cairo Moultrie Greenwood
Calhoun Nashville Lancaster
Canton Newnan Laurens
Carrollton Perry Orangeburg
Cartersville Rock Hill
Cedartown Seneca
Union
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
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,564,699
<SECURITIES> 29,193,372
<RECEIVABLES> 157,158,314
<ALLOWANCES> 5,571,808
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,094,171
<DEPRECIATION> 6,729,638
<TOTAL-ASSETS> 190,259,614
<CURRENT-LIABILITIES> 104,151,526
<BONDS> 130,901,195
<COMMON> 170,000
0
0
<OTHER-SE> 50,315,555
<TOTAL-LIABILITY-AND-EQUITY> 190,259,614
<SALES> 0
<TOTAL-REVENUES> 15,178,367
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,476,460
<LOSS-PROVISION> 1,256,606
<INTEREST-EXPENSE> 2,138,228
<INCOME-PRETAX> 1,307,073
<INCOME-TAX> 3,971,516
<INCOME-CONTINUING> (2,664,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,664,443)
<EPS-PRIMARY> (15.67)
<EPS-DILUTED> 0
</TABLE>
