<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
------------------------------
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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
(Exact name of registrant as specified in its charter)
Georgia 58-0521233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 East Tugalo Street
Post Office Box 880
Toccoa, Georgia 30577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 886-7571
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 ___
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant: Not Applicable.
(Cover page 1 of 2 pages)
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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 February 28, 1998
- ------------------------------------- --------------------------------
Common Stock, $100 Par Value 1,700 shares
Non-Voting Common Stock, No Par Value 168,300 Shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to security holders for the fiscal
year ended December 31, 1997 are incorporated by reference into Parts I, II and
IV of this Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
(Cover page 2 of 2 pages)
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PART I
Item 1. BUSINESS:
The Company, Page 1; Business, Pages 5 - 12; and Financial Statements,
Pages 17-30 of Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1997 are incorporated herein by
reference.
Item 2. PROPERTIES:
Map on inside front cover page; paragraph 1 of The Company, Page 1; and
Footnote 7 (Commitments) of Notes to Consolidated Financial Statements,
Page 28 of Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1997 are incorporated herein by
reference.
Item 3. LEGAL PROCEEDINGS:
Various legal proceedings are pending against 1st Franklin Financial
Corporation ("the Company") in Alabama and Georgia alleging violations
of consumer lending laws and violations in connection with the sale of
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS:
Source of Funds, Page 12 of Registrant's Annual Report to security
holders for the fiscal year ended December 31, 1997 is incorporated
herein by reference.
Item 6. SELECTED FINANCIAL DATA:
Selected Consolidated Financial Information, Page 4 of Registrant's
Annual Report to security holders for the fiscal year ended
December 31, 1997 is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Management's Discussion of Operations, Pages 13 - 16 of Registrant's
Annual Report to security holders for the fiscal year ended
December 31, 1997 is incorporated herein by reference.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Pages 17 - 30 of Registrant's Annual Report to security holders for
the fiscal year ended December 31, 1997 are incorporated herein by
reference.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
The Company has neither had any disagreements on accounting or
financial disclosures with its accountants nor changed such
accountants.
- --------------------------
Forward Looking Statements:
Certain statements contained or incorporated by reference herein under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Market for Registrant's Common Stock and Related
Stockholder Matters" and elsewhere in this Annual Report on Form 10-K may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance, or materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among
other things, the ability to manage cash flow and working capital, and other
factors referenced elsewhere herein.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
--------------------------------------------------
DIRECTORS
Director Since
and
Date on Which Position
Name of Director Age Term Will Expire With Company
---------------- --- ---------------- ------------
Ben F. Cheek, III (3)(4)(5) 61 Since 1967; Chairman of
When successor Board
elected and qualified
Lorene M. Cheek (2)(4)(6) 88 Since 1946; None
When successor
elected and qualified
Jack D. Stovall (1)(2) 62 Since 1983; None
When successor
elected and qualified
Robert E. Thompson (1)(2) 66 Since 1970; None
When successor
elected and qualified
__________________________________________________________________________
(1) Member of Audit Committee.
(2) Mrs. Cheek is an honorary member of the Board of Trustees of Tallulah
Falls School; Dr. Thompson is a physician at Toccoa Clinic; and Mr.
Stovall is President of Stovall Building Supplies, Inc. These
positions have been held by each respective Director for more than
five years.
(3) Reference is made to the business experience of executive officers of the
Company as detailed below.
(4) Member of Executive Committee.
(5) Son of Lorene M. Cheek.
(6) Mother of Ben F. Cheek, III.
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<PAGE>
EXECUTIVE OFFICERS
Name, Age, Position
and Family Relationship Business Experience
- ----------------------- -------------------------------------------------
Ben F. Cheek, III, 61 Joined the Company in 1961 as attorney and became
Chairman of Board Vice President in 1962, President in 1972 and
Chairman of Board in 1989.
T. Bruce Childs, 61 Joined the Company in 1958 and was named Vice
President President in charge of Operations in 1973 and
No Family Relationship President in 1989.
Lynn E. Cox, 40 Joined the Company in 1983 and became Secretary
Secretary in 1989.
No Family Relationship
A. Roger Guimond, 43 Joined the Company in 1976 as an accountant and
Vice President and became Chief Accounting Officer in 1978, Chief
Chief Financial Officer Financial in 1991 and Vice President in 1992.
No Family Relationship
Linda L. Sessa, 43 Joined the Company in 1984 and became Treasurer in
Treasurer 1989.
No Family Relationship
The term of office of each Executive Officer expires when a successor is
elected and qualified. There was no, nor is there presently any arrangement
or understanding between any officer and any other person (except directors
or officers of the registrant acting solely in their capacities as such)
pursuant to which the officer was selected.
No event such as a bankruptcy, criminal or securities violation proceeding
has occurred within the past 5 years with regard to any Director or
Executive Officer of the Company.
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<PAGE>
Item 11. EXECUTIVE COMPENSATION:
(b) Summary Compensation Table:
Other All
Name Annual Other
and Compen- Compen-
Principal Salary Bonus sation sation
Position Year $ $ $ $ *
-------- ---- ------- ------- ------- --------
Ben F. Cheek, III 1997 264,000 210,081 3,044 181,504
Chairman and 1996 252,000 217,932 3,431 98,336
CEO 1995 240,000 220,466 3,033 146,114
T. Bruce Childs 1997 264,000 210,081 3,459 163,878
President 1996 246,000 217,692 3,179 87,633
1995 228,000 219,986 4,236 130,447
A. Roger Guimond 1997 142,200 72,001 1,650 54,647
Vice President 1996 132,000 74,362 1,650 29,589
and CFO 1995 120,000 74,816 1,650 40,959
* Represents Company contributions to profit-sharing plan and reported
compensation from premiums on life insurance policies for the benefit of
Ben F. Cheek, III in the amount of $5,931 for 1997, $4,931 for 1996 and
$4,425 for 1995. Includes Company contributions to profit-sharing plan
for the benefit of T. Bruce Childs. Also represents contributions to
profit-sharing plan, and reported compensation from premiums on a life
insurance policy for the benefit of A. Roger Guimond in the amount of
$574 for 1995.
(g) Compensation of Directors:
Directors who are not employees of the Company receive $1,000 per year for
attending scheduled board meetings.
(k) Board Compensation Committee Report on Executive Compensation:
The Company has no official executive compensation committee.
Ben F. Cheek, III (Chairman of the Company) establishes the bases for
all executive compensation. The Company is a family owned business with
Ben F. Cheek, III being the majority stockholder.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners as of December 31, 1997:
Ownership listed below represents ownership in 1st Franklin Financial
Corporation with respect to any person (including any "group" as that
term is used in Section 13(d)(3) of the Exchange Act) who is known to
the Registrant to be the beneficial owner of more than five percent of
any class of the Registrant's voting securities.
Name and Address of Amount and Nature of Percent
Beneficial Owner Title of Class Beneficial Ownership Of Class
- ---------------------- -------------- --------------------- --------
Ben F. Cheek, III Voting Common 1,160 Shares - Direct 68.24%
225 Valley Drive Stock
Toccoa, Georgia 30577
John Russell Cheek Voting Common 441 Shares - Direct 25.94%
181 Garland Road Stock
Toccoa, Georgia 30577
(b) Security Ownership of Management as of December 31, 1997:
Ownership listed below represents ownership in 1st Franklin Financial
Corporation, of (i) Directors and named Executive Officers of the
Company and (ii) all Directors and Executive Officers of the Company as
a group:
Amount and Nature of Percent
Name Title of Class Beneficial Ownership Of Class
---- -------------- -------------------- --------
Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24%
Non-Voting Common Stock 114,840 Shares (1) 68.24%
T. Bruce Childs Voting Common Stock None None
Non-Voting Common Stock None None
A. Roger Guimond Voting Common Stock None None
Non-Voting Common Stock None None
__________________________________________
All Directors and
Executive Officers
as a Group Voting Common Stock 1,160 Shares - Direct 68.24%
Non-Voting Common Stock 114,840 Shares (1) 68.24%
(1) Effective January 1, 1997, the Company elected S Corporation status for
income tax reporting purposes. Because partnerships are ineligible to
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<PAGE>
be S Corporation shareholders, Cheek Investments, L.P. distributed its
shares of the Company to its eight partners (six trusts, Ben F.
Cheek, III and Elizabeth Cheek, wife of Ben F. Cheek, III). Ben F.
Cheek, III and Elizabeth Cheek are grantors of the trusts. Below is a
table of ownership of non-voting common stock attributable to
Ben F. Cheek, III:
No. of
Name Shares Percentage
---- ------ ----------
Ben F. Cheek, III 574 .34%
Elizabeth Cheek 574 .34%
Ben Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26%
Ben Cheek Trust B (f/b/o Virginia C. Herring) 18,949 11.26%
Ben Cheek Trust C (f/b/o David W. Cheek) 18,949 11.26%
Elizabeth Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26%
Elizabeth Cheek Trust B (f/b/o Virginia C. Herring) 18,948 11.26%
Elizabeth Cheek Trust C (f/b/o David W. Cheek) 18,948 11.26%
------- -----
114,840 68.24%
======= =====
(c) The Company knows of no contractual arrangements which may at a subsequent
date result in a change in control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The Company leases its Home Office building and print shop for a
total of $12,600 per month from Franklin Enterprises, Inc. under
leases which expire December 31, 2004. Franklin Enterprises, Inc.
is 66.67% owned by Ben F. Cheek, III, a Director and Executive
Officer of the Company. In Management's opinion, these leases are
at rates which approximate those obtainable from independent third
parties.
Beneficial owners of the Company are also beneficial owners of
Liberty Bank & Trust ("Liberty"). The Company and Liberty have
certain management and data processing agreements whereby the
Company provides certain administrative and data processing
services to Liberty for a fee. Annual income recorded by the
Company during the three year period ended December 31, 1997
related to these agreements was $63,800, which in Management's
opinion approximates the Company's actual cost of these services.
Liberty leases its office space and equipment from the Company for
$5,000 per month, which in Management's opinion is at a rate which
approximates that obtainable from independent third parties.
At December 31, 1997, the Company maintained $2,100,000 of
certificates of deposit with Liberty at market rates and terms. The
Company also had $1,724,229 in demand deposits with Liberty at
December 31, 1997.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. Financial Statements:
Incorporated by reference from Registrant's Annual Report to security
holders for the fiscal year ended December 31, 1997:
Report of Independent Public Accountants.
Consolidated Statements of Financial Position at December 31, 1997 and
1996.
Consolidated Statements of Income and Retained Earnings for the three
years ended December 31, 1997.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
None - Financial statement schedules are omitted because of the absence
of conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
3. Exhibits:
2. (a) Articles of Merger of 1st Franklin Corporation with and into
1st Franklin Financial Corporation dated December 31, 1994
(incorporated herein by reference to Exhibit 3(2)(a) from
Form 10-K for the fiscal year ended December 31, 1994).
3. (a) Restated Articles of Incorporation as amended January 26, 1996
(incorporated herein by reference to Exhibit 3(3)(a) from
Form 10-K for the fiscal year ended December 31, 1995).
(b) Bylaws (incorporated herein by reference to Exhibit 3(3)(b)
from Form 10-K for the fiscal year ended December 31, 1995).
4. (a) Executed copy of Indenture dated October 31, 1984, covering the
Variable Rate Subordinated Debentures - Series 1 (incorporated
herein by reference from Registration Statement No. 2-94191,
Exhibit 4a).
(b) Modification of Indenture dated March 29, 1995 (incorporated
herein by reference to Exhibit 3(4)(b) from Form 10-K for the
fiscal year ended December 31, 1994).
9. Not applicable.
10. (a) Credit Agreement dated May, 1993 between the registrant and
SouthTrust Bank of Georgia, N.A.. (Incorporated herein by
reference from Form 10-K for the fiscal year ended
December 31, 1993.)
(b) Revolving Credit Agreement dated October 1, 1985 as amended
November 10, 1986; March 1, 1988; August 31, 1989 and May 1,
1990, among the registrant and the banks named therein
(Incorporated by reference to Exhibit 10 to the registrant's
Form SE dated November 9, 1990.)
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<PAGE>
(c) Fifth Amendment to Revolving Credit Agreement dated April 23,
1992. (Incorporated by reference to Exhibit 10(c) to the
Registrant's Form SE dated November 5, 1992.)
(d) Sixth Amendment to Revolving Credit Agreement dated July 20,
1992. (Incorporated by reference to Exhibit 10(d) to the
Registrant's Form SE dated November 5, 1992.)
(e) Seventh Amendment to Revolving Credit Agreement dated June 20,
1994. (Incorporated by reference to Exhibit 10(e) from
Form 10-K for the fiscal year ended December 31, 1994.)
(f) Merger of 1st Franklin Corporation with 1st Franklin
Financial Corporation Consent, Waiver and Eighth Amendment to
Revolving Credit and Term Loan Agreement. (Incorporated
herein by reference to Exhibit 10(f) from Form 10-K for the
fiscal year ended December 31, 1994.)
(g) Ninth Amendment to Revolving Credit Agreement and Term Loan
Agreement dated June 20, 1996. (Incorporated herein by
reference to Exhibit 10(g) from Form 10-K for the fiscal
year ended December 31, 1996.)
(h) Tenth Amendment to Revolving Credit Agreement and Term Loan
Agreement dated January 23, 1998. (Incorporated herein by
reference to Exhibit 10(h) from the registrant's Form S-2
Registration dated March 6, 1998.)
11. Computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings in the
Registrant's Annual Report to Security Holders for the fiscal year
ended December 31, 1997, incorporated by reference herein.
12. Ratio of Earnings to Fixed Charges.
13. Registrant's Annual Report to security holders for fiscal year ended
December 31, 1997.
18. Not applicable.
19. Not applicable.
21. Subsidiaries of Registrant.
22. Not applicable.
23. Consent of Independent Public Accountants.
24. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 30, 1998 By: s/ Ben F. Cheek, III
-------------- --------------------
Date Ben F. Cheek, III
Chairman of Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the dates indicated:
Signatures Title Date
---------- ----- ----
s/ Ben F. Cheek, III Chairman of Board March 30, 1998
---------------------- Chief Executive --------------
Ben F. Cheek, III Officer
s/ T. Bruch Childs President March 30, 1998
---------------------- --------------
T. Bruce Childs
s/ A. Roger Guimond Vice President; March 30, 1998
---------------------- Chief Financial --------------
A. Roger Guimond Officer
s/ Lorene M. Cheek Director March 30, 1998
---------------------- --------------
Lorene M. Cheek
s/ Jack D. Stovall Director March 30, 1998
---------------------- --------------
Jack D. Stovall
s/ Robert E. Thompson Director March 30, 1998
---------------------- --------------
Robert E. Thompson
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
(a) Except to the extent that the materials enumerated in (1) and/or
(2) below are specifically incorporated into this Form by reference
(in which case see Rule 12b-23b), every registrant which files an
annual report on this Form pursuant to Section 15(d) of the Act shall
furnish to the Commission for its information, at the time of filing
its report on this Form, four copies of the following:
(1) Any annual report to security holders covering the registrant's
last fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting
material sent to more than ten of the registrant's security
holders with respect to any annual or other meeting of security
holders.
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<PAGE>
(b) The foregoing material shall not be deemed to be "filed" with the
Commission or otherwise subject to the liabilities of Section 18 of
the Act, except to the extent that the registrant specifically
incorporates it in its annual report on this Form by reference.
(c) This Annual Report on Form 10-K incorporates by reference portions of
the Registrant's Annual Report to security holders for the fiscal year
ended December 31, 1997, which is filed as Exhibit 13 hereto. The
Registrant is a privately held corporation and therefore does not
distribute proxy statements or information statements.
-12-
<PAGE>
<PAGE>
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except ratio data)
Income Before Income Taxes. . . . $ 6,744 $ 8,418 $ 8,969 $10,319 $ 8,322
Interest on Indebtedness. . . . . 8,801 8,312 8,048 5,556 4,910
Portion of rents representative
of the interest factor. . . . . 603 518 449 419 362
------- ------- ------- ------- -------
Earnings as adjusted . . . . $16,148 $17,248 $17,466 $16,294 $13,594
======= ======= ======= ======= =======
Fixed Charges:
Interest on Indebtedness. . . . . $ 8,801 $ 8,312 $ 8,048 $ 5,556 $ 4,910
Portion of rents representative
of the interest factor. . . . . 603 518 449 419 362
------- ------- ------- ------- -------
Fixed Charges . . . . . . . $ 9,404 $ 8,830 $ 8,497 $ 5,975 $ 5,272
======= ======= ======= ======= =======
Ratio of Earnings
to Fixed Charges. . . . . . . . 1.72 1.95 2.06 2.73 2.58
==== ==== ==== ==== ====
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<PAGE>
Exhibit 13
1st FRANKLIN FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1997
FRONT COVER
(Photo of the Company Management Team Attending Annual Managers' Meeting)
<PAGE>
INSIDE FRONT COVER PAGE OF ANNUAL REPORT
(Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi and
South Carolina which is regional operating territory of Company and listing
of branch offices)
<TABLE>
<CAPTION>
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES
ALABAMA
-------
<S> <C> <C> <C> <C> <C>
Alexander City Birmingham Enterprise Hamilton Muscle Shoals Scottsboro
Andalusia Clanton Fayette Huntsville Opp Selma
Arab Cullman Florence Jasper Ozark Sylacauga
Athens Decatur Gadsden Madison Prattville Troy
Bessemer Dothan Geneva Moulton Russellville(2) Tuscaloosa
<CAPTION>
GEORGIA
-------
<S> <C> <C> <C> <C> <C>
Adel Calhoun Covington Greensboro Manchester Savannah
Albany Canton Cumming Griffin McDonough Statesboro
Alma Carrollton Dallas Hartwell McRae Swainsboro
Americus Cartersville Dalton Hawkinsville Milledgeville Sylvania
Arlington ** Cedartown Dawson Hazlehurst Monroe Sylvester
Athens (2) Chatsworth Douglas Hinesville Montezuma Thomaston
Bainbridge Clarkesville Douglasville Hogansville Monticello Thomson
Barnesville Claxton East Ellijay Jackson Moultrie Tifton
Baxley Clayton Eastman Jasper Nashville Toccoa
Blakely Cleveland Elberton Jefferson Newnan Valdosta
Blue Ridge Cochran Forsyth Jesup Perry Vidalia
Bremen Commerce Fort Valley LaGrange Richmond Hill Warner Robins
Brunswick Conyers Gainesville Lavonia Rome Washington
Buford Cordele Garden City Lawrenceville Royston Waycross
Butler Cornelia Georgetown Madison Sandersville Winder
Cairo
<CAPTION> LOUISIANA
---------
<S> <C> <C> <C> <C> <C>
Alexandria Jena Marksville Natchitoches Pineville
<CAPTION>
MISSISSIPPI
-----------
<S> <C> <C> <C> <C> <C>
Bay St. Louis Columbia Gulfport Jackson Pearl
Carthage Grenada Hattiesburg McComb ** Picayune
<CAPTION>
SOUTH CAROLINA
--------------
<S> <C> <C> <C> <C> <C>
Aiken Columbia Gaffney Lancaster Rock Hill York
Anderson Conway Greenville Laurens Seneca
Cayce Easley Greenwood Marion Spartanburg
Clemson Florence Greer Orangeburg Union
</TABLE>
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** Opened first quarter 1998
<PAGE>
TABLE OF CONTENTS
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Ben F. Cheek, Jr. Office of the Year . . . . . . . . . . . . . 2
Chairman's Letter . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Consolidated Financial Information . . . . . . . . . . 4
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion of Operations . . . . . . . . . . . . . 13
Management's Report . . . . . . . . . . . . . . . . . . . . . . 16
Report of Independent Public Accountants. . . . . . . . . . . . 17
Financial Statements. . . . . . . . . . . . . . . . . . . . . . 18
Directors and Executive Officers. . . . . . . . . . . . . . . . 32
Corporate Information . . . . . . . . . . . . . . . . . . . . . 32
THE COMPANY
1st Franklin Financial Corporation has been engaged in the consumer finance
business since 1941, particularly in direct cash loans and real estate
loans. The business is operated through 92 branch offices in Georgia, 31 in
Alabama, 21 in South Carolina, 10 in Mississippi and 5 in Louisiana. At
December 31, 1997, the Company had 596 employees.
As of December 31, 1997, the resources of the Company were invested
principally in loans which comprised 66% of the Company's assets. The
majority of the Company's revenues are derived from finance charges earned
on loans and other outstanding receivables. Remaining revenues are derived
from earnings on investment securities, insurance income and other
miscellaneous income.
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<PAGE>
JASPER, GEORGIA
1997 BEN F. CHEEK, JR. "OFFICE OF THE YEAR"
*********************
** PICTURE OF EMPLOYEES **
*********************
This award is presented annually in recognition of the office that represents
the highest overall performance within the Company. Congratulations to the
entire Jasper Staff for this significant achievement. The Friendly Franklin
Folks salute you!
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<PAGE>
TO OUR INVESTORS, EMPLOYEES AND FRIENDS:
As you review the enclosed report, I feel that you are going to find that
1997 was a year which contained both rewards and challenges for 1st Franklin
Financial. In many respects it was a year filled with contrasts: from the
thrill of achieving our long-term goal three years ahead of schedule - - to
the disappointment of increasing credit losses due primarily to the
continuing rise in personal bankruptcies. Certainly it was a year that kept
all of the "Friendly Franklin Folks" very busy.
Our goal of reaching $200 million in assets by the year 2000 was met and
exceeded on December 31, 1997. This was an exciting achievement for all of
us, as was the addition of thirteen new branch offices during the year: one
in Alabama, four in Louisiana, four in Mississippi and four in South
Carolina. We are expecting these new offices to make a very positive impact
on our earnings growth during the coming years as will those we are planning
for the new year 1998.
Solid growth continued in our Investment Center, with our overall
investments showing a 5% increase over 1996. Our investors are vital
members of the overall 1st Franklin team and we are grateful daily for the
confidence and support they express in our company.
Hopefully, many of you were able to attend the opening of our expanded Home
Office building and Toccoa branch office during the fall of 1997. The
addition of this new facility has allowed us to concentrate all of the Home
Office support into one tight geographic location. It also provides our
Toccoa branch office customers with a newer and more convenient location.
We feel this will enable us to deliver better and quicker service to our
branches and to our loan customers as we continue to grow in the years
ahead.
As previously mentioned, our primary challenge during the year was the ever
increasing number of personal bankruptcies in the southeastern United
States. This, of course, resulted in the Company sustaining higher credit
losses. These increased losses, along with the planned for and expected
start-up costs associated with the new branches, reduced our pre-tax
earnings for the year by 20%. We are now aggressively reviewing our own
company procedures in order to be sure that we are continuing to extend
credit in a thoughtful and careful manner.
The greatest pleasure I receive each year in writing this letter is the
opportunity to express my sincere thanks to those of you our customers,
employees, investors, bankers and other friends who make each year memorable
and successful. 1998 is going to be a great year with your continued help
and support.
Very sincerely yours,
s/ Ben F. Cheek, III
--------------------
Ben F. Cheek, III
Chairman of the Board
-3-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below is selected consolidated financial data of the Company.
This information should be read in conjunction with "Management's Discussion
of Operations" and the more detailed financial statements and notes thereto
included herein.
Year Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In 000's, except ratio data)
Selected Income Statement Data:
Revenues . . . . . . . . . . .$ 61,498 $ 58,415 $ 55,157 $ 49,334 $ 41,625
Net Interest Income. . . . . . 34,470 32,534 30,147 28,111 23,449
Interest Expense . . . . . . . 8,801 8,312 8,048 5,556 4,910
Provision for
Loan Losses. . . . . . . . . 6,916 6,266 4,631 3,238 2,407
Income Before
Income Taxes . . . . . . . . 6,744 8,418 8,969 10,319 8,322
Net Income . . . . . . . . . . 1,816 6,238 6,507 7,165 5,891
Ratio of Earnings to
Fixed Charges. . . . . . . . 1.72 1.95 2.06 2.73 2.58
Selected Balance Sheet Data:
Loans, Net . . . . . . . . . .$132,701 $129,684 $120,763 $108,667 $ 97,485
Total Assets . . . . . . . . . 201,166 191,904 182,084 136,468 123,661
Senior Debt. . . . . . . . . . 98,930 94,740 95,541 66,677 60,540
Subordinated Debt. . . . . . . 37,247 34,942 30,617 21,603 20,875
Stockholders' Equity . . . . . 54,734 53,414 47,747 40,605 34,678
Ratio of Total Liabilities
to Stockholders' Equity. . . 2.68 2.59 2.81 2.36 2.57
-4-
<PAGE>
BUSINESS
The Company is engaged in the consumer finance business, particularly in
making consumer loans to individuals in relatively small amounts for
relatively short periods of time and in making first and second mortgage
loans on real estate in larger amounts and for longer periods of time. The
Company also purchases sales finance contracts from various retail dealers.
At December 31, 1997, direct cash loans comprised 74% of the Company's
outstanding loans, real estate loans 19% and sales finance contracts 7%.
In connection with this business, the Company writes credit insurance as
an agent for a nonaffiliated company specializing in such insurance. Two
wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco
Property and Casualty Insurance Company, reinsure the life, the accident and
health and the property insurance so written.
The following table shows the sources of the Company's earned finance
charges over each of the past five periods:
Year Ended December 31
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Direct Cash Loans. . . . . . . $30,566 $28,440 $25,898 $22,962 $18,618
Real Estate Loans . . . . . . 7,196 7,238 7,058 7,284 6,722
Sales Finance Contracts. . . . 2,268 2,417 2,757 2,472 2,249
------- ------- ------- ------- -------
Total Finance Charges . . . $40,030 $38,095 $35,713 $32,718 $27,589
======= ======= ======= ======= =======
Direct cash loans are made primarily to people who need money for some
unusual or unforeseen expense or for the purpose of paying off an
accumulation of small debts or for the purchase of furniture and appliances.
These loans are repayable in 6 to 48 monthly installments and generally do
not exceed $5,000 in principal amount. The loans are generally secured by
personal property, motor vehicles and/or real estate. Interest and fees
charged on these loans are in compliance with applicable federal and state
laws.
First and second mortgage loans on real estate are made to homeowners
who wish to improve their property or who wish to restructure their
financial obligations. They are generally made in amounts from $3,000 to
$50,000 on maturities of 35 to 180 months. Interest and fees charged on
these loans are in compliance with applicable federal and state laws.
Sales finance contracts are purchased from retail dealers. These
contracts have maturities that range from 3 to 48 months and generally do
not individually exceed $5,000 in principal amount. The interest rates
charged on these contracts are in compliance with applicable federal and
state laws.
Prior to the making of a loan, a credit investigation is undertaken to
determine the income, existing indebtedness, length and stability of
employment, and other relevant information concerning the customer. In
granting the loan, the Company is granted a security interest in real or
personal property of the borrower. In making direct cash loans, emphasis is
placed upon the customer's ability to repay rather than upon the potential
resale value of the underlying security. In making real estate and sales
finance loans, however, more emphasis is placed upon the marketability and
value of the underlying collateral.
-5-
<PAGE>
The Company competes with several national and regional finance
companies, as well as a variety of local finance companies in the
communities which it serves. The Company believes it competes effectively
in the market place primarily based on its emphasis on customer service.
The business of the Company consists mainly of the making of loans to
salaried people and wage earners who depend on their earnings to make their
repayments. The continued profitable operation of the Company will
therefore depend to a large extent on the continued employment of these
people and their ability to meet their obligations as they become due. In
the event of a sustained recession or a significant downturn in business
with consequent unemployment or continued increases in the number of
personal bankruptcies among the Company's typical customer base, the
Company's collection ratios and profitability could be detrimentally
affected.
The average annual yield on loans made by the Company (the % of finance
charges earned to average net outstanding balance) has been as follows:
Year Ended December 31
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Direct Cash Loans. . . . . . . . 30.25% 30.75% 31.26% 31.76% 31.81%
Real Estate Loans. . . . . . . . 21.76 21.53 22.73 24.37 22.70
Sales Finance Contracts. . . . . 20.97 20.77 22.28 21.27 20.47
Information regarding the Company's operations:
As of December 31
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Number of Branch Offices . . . . 157 144 128 117 112
Number of Employees . . . . . . 596 575 527 473 456
Average Total Loans
Outstanding Per
Branch ( in 000's) . . . . . . $1,064 $1,138 $1,208 $1,202 $1,124
Average Number of Loans
Outstanding Per Branch . . . . 644 701 765 814 778
-6-
<PAGE>
DESCRIPTION OF LOANS
Year Ended December 31
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
DIRECT CASH LOANS:
- -----------------
Number of Loans Made
to New Borrowers . . . . . 28,656 27,636 25,840 26,616 24,978
Number of Loans Made
to Former Borrowers. . . . 14,626 14,410 14,740 13,185 11,710
Number of Loans Made
to Present Borrowers . . . 65,096 63,329 61,304 60,014 54,311
Total Number of Loans
Made . . . . . . . . . . . 108,378 105,375 101,884 99,815 90,999
Total Volume of Loans
Made (in 000's). . . . . . $180,541 $173,196 $164,034 $150,658 $127,103
Average Size of
Loans Made . . . . . . . . $ 1,666 $ 1,644 $ 1,610 $ 1,509 $ 1,397
Number of Loans
Outstanding. . . . . . . . 83,264 80,733 76,549 72,993 66,209
Total of Loans
Outstanding (in 000's) . . $123,039 $117,141 $107,960 $ 96,620 $ 82,595
Percent of Total Loans . . . 74% 72% 70% 69% 66%
Average Balance on
Outstanding Loans. . . . . $ 1,478 $ 1,451 $ 1,410 $ 1,324 $ 1,247
REAL ESTATE LOANS:
- -----------------
Total Number of Loans
Made . . . . . . . . . . . 2,155 2,240 2,674 2,264 2,315
Total Volume of Loans
Made (in 000's). . . . . . $ 22,921 $ 22,398 $ 22,379 $ 18,755 $ 20,330
Average Size of
Loans Made . . . . . . . . $ 10,636 $ 9,999 $ 8,369 $ 8,284 $ 8,782
Number of Loans
Outstanding. . . . . . . . 4,101 4,214 4,188 3,811 3,930
Total of Loans
Outstanding (in 000's) . . $ 32,630 $ 33,507 $ 32,653 $ 29,150 $ 30,174
Percent of Total Loans . . . 19% 20% 21% 21% 24%
Average Balance on
Outstanding Loans . . . . $ 7,957 $ 7,951 $ 7,797 $ 7,649 $ 7,678
SALES FINANCE CONTRACTS:
- -----------------------
Number of Contracts
Purchased. . . . . . . . . 14,662 17,499 19,195 21,744 20,726
Total Volume of Contracts
Purchased (in 000's) . . . $ 15,034 $ 17,150 $ 18,885 $ 20,489 $ 18,770
Average Size of Contracts
Purchased. . . . . . . . . $ 1,025 $ 980 $ 984 $ 942 $ 906
Number of Contracts
Outstanding. . . . . . . . 13,801 15,941 17,151 18,395 17,020
Total of Contracts
Outstanding (in 000's) . . $ 11,334 $ 13,201 $ 13,955 $ 14,806 $ 13,099
Percent of Total Loans . . . 7% 8% 9% 10% 10%
Average Balance on
Outstanding Contracts. . . $ 821 $ 828 $ 814 $ 805 $ 770
-7-
<PAGE>
LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING
Year Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
LOANS ACQUIRED
DIRECT CASH LOANS. . . . . . $177,844 $169,825 $164,034 $150,217 $127,084
REAL ESTATE LOANS. . . . . . 21,532 20,971 22,000 17,916 19,485
SALES FINANCE CONTRACTS. . . 13,943 16,131 17,676 19,386 17,759
NET BULK PURCHASES . . . . . 5,177 5,818 1,588 2,383 1,875
-------- -------- -------- -------- --------
TOTAL LOANS ACQUIRED . . . . $218,496 $212,745 $205,298 $189,902 $166,203
======== ======== ======== ======== ========
LOANS LIQUIDATED
DIRECT CASH LOANS. . . . . . $174,643 $164,016 $152,694 $136,633 $110,068
REAL ESTATE LOANS. . . . . . 23,798 21,544 18,876 19,779 18,327
SALES FINANCE CONTRACTS. . . 16,901 17,904 19,736 18,782 17,724
-------- -------- -------- -------- --------
TOTAL LOANS LIQUIDATED . . . $215,342 $203,464 $191,306 $175,194 $146,119
======== ======== ======== ======== ========
LOANS OUTSTANDING
DIRECT CASH LOANS. . . . . . $123,039 $117,141 $107,960 $ 96,620 $ 82,595
REAL ESTATE LOANS. . . . . . 32,630 33,507 32,653 29,150 30,174
SALES FINANCE CONTRACTS. . . 11,334 13,201 13,955 14,806 13,099
-------- -------- -------- -------- --------
TOTAL LOANS OUTSTANDING. . . $167,003 $163,849 $154,568 $140,576 $125,868
======== ======== ======== ======== ========
UNEARNED FINANCE CHARGES
DIRECT CASH LOANS. . . . . . $ 16,062 $ 16,270 $ 17,030 $ 16,114 $ 14,125
REAL ESTATE LOANS. . . . . . 84 -- 12 43 65
SALES FINANCE CONTRACTS. . . 1,504 1,829 2,007 2,140 1,832
-------- -------- -------- -------- --------
TOTAL UNEARNED
FINANCE CHARGES. . . . . . $ 17,650 $ 18,099 $ 19,049 $ 18,297 $ 16,022
======== ======== ======== ======== ========
-8-
<PAGE>
DELINQUENCIES
Delinquent accounts are classified at the end of each month according to
the number of installments past due at that time, based on the original or
extended terms of the contract. When 80% of an installment has been paid,
it is not considered delinquent for the purpose of this classification.
When three installments are past due, the account is classified as being 60-
89 days past due; when four or more installments are past due the account is
classified as being 90 days or more past due.
The table below shows the amount of certain classifications of
delinquencies and the ratio such delinquencies bear to related outstanding
loans.
As of December 31
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS:
60-89 Days Past Due. . . . . . $2,593 $2,404 $1,914 $1,353 $1,120
Percentage of Outstanding. . . 2.11% 2.05% 1.77% 1.40% 1.36%
90 Days or More Past Due . . . $5,137 $5,419 $3,286 $2,482 $1,781
Percentage of Outstanding. . . 4.18% 4.63% 3.04% 2.57% 2.16%
REAL ESTATE LOANS:
60-89 Days Past Due. . . . . . $ 432 $ 426 $ 254 $ 299 $ 439
Percentage of Outstanding. . . 1.33% 1.27% .78% 1.03% 1.46%
90 Days or More Past Due . . . $932 $1,334 $1,196 $ 919 $1,206
Percentage of Outstanding. . . 2.86% 3.98% 3.66% 3.15% 4.00%
SALES FINANCE CONTRACTS:
60-89 Days Past Due. . . . . . $ 285 $ 339 $ 295 $ 281 $ 195
Percentage of Outstanding. . . 2.52% 2.57% 2.11% 1.90% 1.49%
90 Days or More Past Due . . . $439 $ 602 $ 463 $ 293 $ 298
Percentage of Outstanding. . . 3.87% 4.56% 3.32% 1.98% 2.27%
-9-
<PAGE>
LOSS EXPERIENCE
Net losses (charge-offs less recoveries) and their percentage to the
average net loans (loans less unearned finance charges) and to the
liquidations (payments, refunds, renewals and charge-offs of customer's
loans) are shown in the following table:
Year Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS
Average Net Loans. . . . . . $101,051 $ 92,489 $ 82,847 $ 72,298 $ 58,538
Liquidations . . . . . . . . $174,643 $164,016 $152,694 $136,633 $110,068
Net Losses . . . . . . . . . $ 5,992 $ 4,617 $ 3,753 $ 2,475 $ 1,582
Net Losses as % of Average
Net Loans. . . . . . . . . 5.93% 4.99% 4.53% 3.42% 2.70%
Net Losses as % of
Liquidations . . . . . . . 3.43% 2.81% 2.46% 1.81% 1.44%
REAL ESTATE LOANS
Average Net Loans. . . . . . $ 33,066 $ 33,614 $ 31,050 $ 29,889 $ 29,608
Liquidations . . . . . . . . $ 23,798 $ 21,544 $ 18,876 $ 19,779 $ 18,327
Net Losses . . . . . . . . . $ 141 $ 49 $ 22 $ 43 $ 20
Net Losses as % of Average
Net Loans. . . . . . . . . .43% .15% .07% .14% .07%
Net Losses as % of
Liquidations . . . . . . . .59% .23% .12% .22% .11%
SALES FINANCE CONTRACTS
Average Net Loans. . . . . . $ 10,817 $ 11,640 $ 12,377 $ 11,623 $ 10,984
Liquidations . . . . . . . . $ 16,901 $ 17,904 $ 19,736 $ 18,782 $ 17,724
Net Losses . . . . . . . . . $ 714 $ 478 $ 434 $ 353 $ 272
Net Losses as % of Average
Net Loans. . . . . . . . . 6.60% 4.11% 3.51% 3.04% 2.48%
Net Losses as % of
Liquidations . . . . . . . 4.22% 2.67% 2.20% 1.88% 1.53%
ALLOWANCE FOR LOAN LOSSES
The Allowance for Loan Losses is determined based on the Company's
previous loss experience, a review of specifically identified potentially
uncollectible loans and management's evaluation of the inherent risks and
change in the composition of the Company's loan portfolio. Such allowance
is, in the opinion of management, sufficient to provide adequate protection
against possible loan losses on the current loan portfolio. The allowance
is maintained out of income except in the case of bulk purchases when it is
provided in the allocation of the purchase price.
-10-
<PAGE>
CREDIT INSURANCE
- ----------------
When authorized to do so by the borrowers, the Company writes various
credit insurance products in connection with its loans. The Company writes
such insurance as an agent for a non-affiliated insurance company.
Frandisco Life Insurance Company and Frandisco Property and Casualty
Insurance Company, wholly owned subsidiaries of the Company, reinsure the
insurance written from the non-affiliated insurance company.
REGULATION AND SUPERVISION
- --------------------------
State laws require that each office in which a small loan business is
conducted be licensed by the state and that the business be conducted
according to the applicable statutes and regulations. The granting of a
license depends on the financial responsibility, character and fitness of
the applicant, and, where applicable, the applicant must show finding of a
need through convenience and advantage documentation. As a condition to
obtaining such license, the applicant must consent to state regulation and
examination and to the making of periodic reports to the appropriate
governing agencies. Licenses are revocable for cause, and their continuance
depends upon compliance with the law and regulations issued pursuant
thereto. The Company has never had any of its licenses revoked.
All lending operations are carried on under the provisions of the
Federal Consumer Credit Protection Act ("Truth-in-Lending Act"), the Fair
Credit Reporting Act and the Federal Real Estate Settlement Procedures Act.
The Truth-in-Lending Act requires disclosure to the customer of the finance
charge, the annual percentage rate, the total of payments and other
information on all loans.
A Federal Trade Commission ruling prevents the Company and other
consumer lenders from using certain household goods as collateral on direct
cash loans. The Company collateralizes such loans with non-household goods
such as automobiles, boats and other exempt items.
The Company is also subject to state regulations governing insurance
agents in the states in which it sells credit insurance. State insurance
regulations require that insurance agents be licensed and limit the premium
amount charged for such insurance.
-11-
<PAGE>
SOURCE OF FUNDS
- ---------------
The sources of the Company's funds stated as a % of total liabilities
and stockholder's equity and the number of persons investing in the
Company's debt securities is as follows:
Year Ended December 31
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Bank Borrowings. . . . . . . . . -% -% -% 1% 10%
Public Senior Debt . . . . . . . 49 49 52 48 39
Public Subordinated Debt . . . . 19 18 17 16 17
Other Liabilities. . . . . . . . 5 5 5 5 6
Stockholders' Equity . . . . . . 27 28 26 30 28
--- --- --- --- ---
Total. . . . . . . . . . . . . 100% 100% 100% 100% 100%
=== === === === ===
Number of Investors. . . . . . . 6,732 6,333 5,925 5,486 4,400
All of the Company's outstanding common stock is held by five related
individuals and is not traded in an established public trading market.
The Company's average interest rate on borrowings, computed by dividing
the interest paid by the average indebtedness outstanding, has been as
follows:
Year Ended December 31
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Senior Borrowings. . . . . . . . 6.12% 6.29% 6.97% 6.26% 6.24%
Subordinated Borrowings. . . . . 6.58 6.86 6.92 6.14 6.37
All Borrowings . . . . . . . . . 6.25 6.67 6.96 6.25 6.29
The Company's financial ratios relating to debt are as follows:
At December 31
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total Liabilities to
Stockholders' Equity . . . . . 2.68 2.59 2.81 2.36 2.57
Unsubordinated Debt to
Subordinated Debt plus
Stockholders' Equity . . . . . 1.19 1.17 1.32 1.19 1.23
-12-
<PAGE>
MANAGEMENT'S DISCUSSION OF OPERATIONS
Financial Condition:
- -------------------
Although the Company continued to strengthen its balance sheet, overall
revenues increased and the Company achieved a profit in 1997, the results of
the year failed to meet Management's objectives. Growth in receivables fell
below expectations, loan losses continued to increase and the Company did
not meet profit goals. Competitive pressures and escalating bankruptcies
among customers were just some of the factors negatively impacting the
outcome of 1997. In spite of the disappointments, there were objectives
successfully achieved. One highlight of 1997 was the achievement of a long
range goal set by the Company back in 1988. This goal was for the Company
to have $200 million in assets on or before the year 2000. At December 31,
1997, total assets were $201.2 million as compared to $191.9 million at
December 31, 1996, representing a $9.3 million (5%) increase during the
current year. Expansion goals were also met with the opening of 13 new
branch office locations. Management is optimistic about 1998. A renewed
emphasis on marketing strategies and penetration of new market areas should
get the Company back on track in meeting its short and long range goals.
The growth in assets was primarily due to a $9.2 million (39%) increase
in the Company's investment portfolio. Funding from sales of the Company's
debt securities exceeded funds required for operations, thereby creating a
surplus of cash. In an attempt to maximize yields, Management invested
these surplus funds in investment securities. The Company's investment
portfolio consists mainly of U.S. Treasury bonds, Government Agency bonds
and various Georgia municipal bonds. Management has designated a
significant portion of these investment securities as "available for sale"
with any unrealized gain or loss accounted for in the Company's equity
section, net of deferred taxes for those investments held by the Company's
insurance subsidiaries. Rising bond market values during the current year
also contributed to the increase in the investment portfolio. Increases in
bond market values resulted in a $.3 million increase, net of deferred taxes
for those investments held by the insurance subsidiaries, in the portfolio's
fair market value during the year. The remainder of the investment
portfolio represents securities carried at amortized cost and designated
"held to maturity," as Management has both the ability and intent to hold
these securities to maturity.
Other Assets, which represents fixed assets, prepaid expenses,
miscellaneous receivables and other miscellaneous assets, declined $.7
million (6%) during 1997 mainly as a result of two events. The Company
expanded its home office headquarters by renovating a building adjacent to
property on which the home office is located. At the same time, the Company
upgraded its in-house computer hardware and software systems. The
renovation and technology enhancements were the major cause of the $1.4
million (41%) increase in the category "Land, Buildings, Equipment and
Leasehold Improvements" under Other Assets. However, this increase was
offset and Other Assets actually declined due to the elimination of $3.6
million in accumulated prepaid/deferred tax assets as a result of election
of S Corporation status for income tax reporting purposes. See "Income
Taxes" for further details.
The aforementioned increases in sales of the Company's public debt
securities caused senior debt to increase $4.2 million (4%) and
subordinated debt to increase $2.3 million (7%) during 1997 as compared to
1996.
Results of Operations:
- ---------------------
Although growth in the Company's loan portfolio did not meet desired
levels, average net receivables (gross receivables less unearned finance
charges) did post gains of $3.6 million (2%) during 1997 as compared to
1996. During 1996 average net receivables increased $11.5 million (9%) as
compared to 1995. This growth was mainly due to the 29 branch facilities
opened during the two years just ended. The Company's primary source of
revenue was and continues to be interest income generated from loan
receivables and higher levels of average net receivables generally lead to
higher revenues. Gross revenues were $61.5 million during 1997 as compared
to $58.4 million and $55.2 million during 1996 and 1995, respectively.
Increased interest expense, higher loan losses and increased costs
associated with expansion of branch office locations counteracted the
increases in gross revenues during the last two years resulting in a
-13-
<PAGE>
downward trend in profits. Income before income taxes was $6.7 million,
$8.4 million and $9.0 million for the years ended December 31, 1997, 1996
and 1995, respectively.
Net Interest Income
Being a financial institution, the principal source of earnings revolves
around the Company's net interest margin (the margin between the amount the
Company earns on loans and investments and the amount the Company pays on
securities and other borrowings). The margin is affected by various factors
such as the volume, mix and maturity of earning assets as compared to
interest-bearing liabilities; volatility of market rates of interest; and
asset quality. Net interest income increased $1.9 million (6%) during 1997
as compared to 1996 and $2.4 million (8%) during 1996 as compared to 1995.
These increases in the margin spreads were primarily due to the interest
income earned on the aforementioned higher levels of average net outstanding
receivables and due to higher investment income.
Average senior and subordinated debt outstanding increased $9.8 million
(8%) during 1997 as compared to 1996 and $14.1 million (12%) during 1996 as
compared to 1995. Although average borrowings increased, lower market rates
of interest enabled the Company to reduce average borrowing costs thereby
keeping increases in interest expense to nominal amounts. The Company's
average interest rate on borrowings declined to 6.25% during 1997 as
compared to 6.67% and 6.96% during 1996 and 1995, respectively.
Provision for Loan Losses
Data released by the Administrative Office of the U.S. Courts showed
more Americans filed for bankruptcy in 1997 than ever before, with some 1.35
million individuals filing during the year just ended as compared to 1.2
million filing during the prior year. The Company and the industry as a
whole continue to experience repercussions from this upward trend in
bankruptcy filings. Rising bankruptcies and increased loan write-offs are
having a deteriorating impact on the credit quality of the Company's loan
receivables. Net charge-offs increased $1.7 million (33%) during 1997 as
compared to 1996 and $.9 million (22%) during 1996 as compared to 1995.
Management is carefully monitoring the upward trend in bankruptcy filings in
addition to problem delinquencies and historically has been conservative in
regards to the amount of the Company's loan loss reserve. As a result, the
Company increased the reserve during the each of the two years just ended.
The increase in the reserve and the increases in net charge-offs led to the
$.6 million (10%) increase in the Company's Provision for Loan Losses during
1997 as compared to 1996 and to the $1.6 million increase during 1996 as
compared to 1995.
Other Operating Expenses
Management believes expansion of the Company's geographic base is vital
for continued growth. However, development of new branch offices is costly.
New offices typically require 12 to 24 months to become established and
begin contributing to the profits of the Company. Start-up costs and
additional overhead incurred from the expansion of branch operations during
the two years just ended were major factors responsible for general
operating expenses increasing $3.4 million (11%) and $1.7 million (6%)
during 1997 and 1996, respectively. Other factors which contributed were
increases in employee compensation based on cost-of-living and/or merit
salary raises, increases in other accrued employee benefits, higher computer
expenses, higher collection expenses and increased supervision expenses.
A new marketing program implemented by the Company in 1996 continued to
be expanded and fine tuned during 1997 targeting potential market segments.
The initial setup cost in 1996 and the ongoing cost to maintain the program
also contributed to the increase in general operating expenses during the
two year period just ended.
Legal expenses incurred in connection with the Alabama lawsuits was
another factor adding to the increase in other operating expenses during
1997 and 1996. Settlement agreements were reached with certain borrowers
who had previous asserted claims or had stated their intention to file
claims against the Company. Although the Company and its employees deny
that they are guilty of any wrongdoing or any breach of a 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.
-14-
<PAGE>
Income Taxes
Effective income tax rates for the years ended December 31, 1997, 1996
and 1995 were 73.1%, 25.9% and 27.5%, respectively. The rate was higher
during 1997 as a result of the Company electing S Corporation status for
income tax reporting purposes for 1st Franklin Financial Corporation, the
parent company (the "Parent"). The taxable income or loss of an S
Corporation is includable in the individual tax returns of the stockholders
of the Company. Over the years the Parent had prepaid federal and state
income taxes due to certain temporary differences between reported income
and expenses for financial statement purposes and for income tax purposes.
Election of S Corporation status required elimination of all accumulated
prepaid/deferred tax assets and liabilities. Accordingly, deferred income
tax assets and liabilities were eliminated and no provisions for current and
deferred income taxes were made by the Parent other than amounts related to
prior years when the Parent was a taxable entity. Deferred income tax
assets and liabilities continue to be recognized and provisions for current
and deferred income taxes continue to be made by the Company's
subsidiaries. The Company took a one-time charge of approximately $3.6
million during the first quarter of 1997 to expense the previously paid
income taxes which it was not permitted to expense prior to election of
becoming an S Corporation.
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 overall tax rate below statutory rates. Rates
declined during the period ended December 31, 1996 due to the fact that the
Company's life insurance subsidiary earned a higher portion of the
consolidated taxable income.
Liquidity:
- ---------
Liquidity is the ability of the Company to meet short-term financial
obligations, either through the collection of receivables or by generating
additional funds through liability management. Continued liquidity of the
Company is therefore dependent on the collection of its receivables and the
sale of debt securities that meet the investment requirements of the public
and the continued availability of unused bank credit from its lenders. The
previously discussed increases in net cash flows during the current year
provided a positive effect on liquidity.
Most of the Company's loan portfolio is financed through public debt
securities which, because of redemption features, have a shorter average
maturity than the loan portfolio. The difference in maturities may adversely
affect liquidity if the Company does not continue to sell debt securities at
interest rates and terms that are responsive to the demands of the
marketplace or maintain sufficient unused bank borrowings.
In addition to the debt securities program, the Company has two external
sources of funds through the use of two Credit Agreements. One agreement
provides for available borrowings of $21.0 million. Available borrowings
were $21.0 million at December 31, 1997 and 1996 relating to this agreement.
The Company has an additional $2.0 million credit agreement (all of which
was available at December 31, 1997 and 1996) for general operating purposes.
Liquidity was not adversely affected by the aforementioned increase in
loan losses during 1997. Management continually reviews potentially
uncollectible loans and evaluates the inherent risks and change in the
composition of the Company's loan portfolio. Loss rates during 1997 and
1996 indicated a need to increase the allowance for loan losses to provide
adequate protection against increasing loan losses. The increases in the
allowance did not affect liquidity as the allowance is maintained out of
income; however, earnings could be further impacted if loss rates continue
at the current level.
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.
-15
<PAGE>
Year 2000 Date Conversion:
- -------------------------
During the last two years the Company has been identifying and
evaluating the impact of the Year 2000 issue. This issue affects computer
systems that have time-sensitive programs that may not properly recognize
the date codes for the year 2000. This could result in major system
failures or miscalculations. During the technology upgrades made in 1997,
the Company was careful to ensure Year 2000 compliance. Management has
already received compliance certificates from some of the major software
vendors with which it does business. Others are in the process of making
the required changes. In addition, the Company is communicating with
service bureaus it outsources with to ensure they are addressing the Year
2000 issue. The Company expects to be fully compliant and tested during
1998. If necessary modifications and conversions are not completed in a
timely manner, the Year 2000 issue could have a material adverse effect on
the operations of the Company.
New Accounting Standards:
- ------------------------
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings per Share", that specifies the computation,
presentation and disclosure requirements for earnings per share. The
Company adopted the new Standard in the quarter ended December 31, 1997.
Per share amounts reported under SFAS No. 128 were the same as 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 15, 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 15,
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 standards, 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 will adopt this accounting standard in 1998.
MANAGEMENT'S REPORT
The accompanying financial statements were prepared in accordance with
generally accepted accounting principles by the management of 1st Franklin
Financial Corporation who assumes responsibility for their integrity and
reliability.
The Company maintains a system of internal accounting controls which is
supported by a program of internal audits with appropriate management
follow-up action. The integrity of the financial accounting system is based
on careful selection and training of qualified personnel, on organizational
arrangements which provide for appropriate division of responsibilities and
on the communication of established written policies and procedures.
The financial statements of the Company have been audited by Arthur
Andersen LLP, independent public accountants. Their report expresses their
opinion as to the fair presentation of the financial statements and is based
upon their independent audit conducted in accordance with generally accepted
auditing standards.
The Audit Committee, comprised solely of outside directors, meets
periodically with the independent public accountants, the internal auditors
and representatives of management to discuss auditing and financial
reporting matters. The independent public accountants have free access to
meet with the Audit Committee without management representatives present to
discuss the scope and results of their audit and their opinions on the
quality of financial reporting.
-16-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 1st FRANKLIN FINANCIAL CORPORATION:
We have audited the accompanying Consolidated Statements of Financial
Position of 1ST FRANKLIN FINANCIAL CORPORATION (a Georgia corporation) AND
SUBSIDIARIES as of December 31, 1997 and 1996, and the related Consolidated
Statements of Income and Retained Earnings and Consolidated Statements of
Cash Flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 1st Franklin
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 26, 1998
-17-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
CASH AND CASH EQUIVALENTS:
Cash and Due From Banks. . . . . . . . . . . $ 1,894,366 $ 1,795,448
Short-term Investments, $300,000
in trust in 1997 and 1996 (Note 4) . . . . 23,227,711 25,637,257
------------ ------------
25,122,077 27,432,705
------------ ------------
LOANS (Note 2):
Direct Cash Loans. . . . . . . . . . . . . . 123,038,889 117,140,840
First Mortgage Real Estate Loans . . . . . . 26,730,352 27,037,348
Second Mortgage Real Estate Loans. . . . . . 5,899,901 6,469,154
Sales Finance Contracts. . . . . . . . . . . 11,333,638 13,201,453
------------ ------------
167,002,780 163,848,795
Less: Unearned Finance Charges . . . . . . . 17,649,653 18,099,070
Unearned Insurance Premiums
and Commissions. . . . . . . . . . . . 10,683,061 10,312,385
Allowance for Loan Losses. . . . . . . 5,968,818 5,753,221
------------ ------------
Net Loans . . . . . . . . . . . . 132,701,248 129,684,119
------------ ------------
MARKETABLE DEBT SECURITIES (Note 3):
Available for Sale, at fair market value . . 31,688,998 20,783,883
Held to Maturity, at amortized cost. . . . . 1,252,757 2,946,099
------------ ------------
32,941,755 23,729,982
------------ ------------
OTHER ASSETS:
Land, Buildings, Equipment and Leasehold
Improvements, less accumulated
depreciation and amortization of
$7,427,927 and $6,480,263 in 1997 and
1996, respectively (Note 5) . . . . . . . 4,888,671 3,457,902
Prepaid Income Taxes, net (Note 9) . . . . . -- 2,173,802
Due from Nonaffiliated Insurance Company . . 915,387 710,752
Miscellaneous. . . . . . . . . . . . . . . . 4,596,434 4,715,088
------------ ------------
10,400,492 11,057,544
------------ ------------
TOTAL ASSETS . . . . . . . . . . . $201,165,572 $191,904,350
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-18-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
SENIOR DEBT (Note 5):
Senior Demand Notes, including
accrued interest. . . . . . . . . . . . . . . $ 50,877,380 $ 45,535,956
Commercial Paper . . . . . . . . . . . . . . . 47,860,445 48,962,123
Notes Payable to Banks . . . . . . . . . . . . 191,762 241,762
------------ ------------
98,929,587 94,739,841
------------ ------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. . . . . . 10,255,315 8,807,990
------------ ------------
SUBORDINATED DEBT (Note 6) . . . . . . . . . . . 37,246,521 34,942,463
------------ ------------
Total Liabilities . . . . . . . . . . . . . 146,431,423 138,490,294
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value, 6,000
shares authorized; no shares outstanding . . -- --
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
as of December 31, 1997 and 1996. . . . . . -- --
Net Unrealized Gains on Marketable
Debt Securities Available for Sale. . . . . 342,810 43,288
Retained Earnings . . . . . . . . . . . . . . . 54,221,339 53,200,768
------------ ------------
Total Stockholders' Equity. . . . . . . . 54,734,149 53,414,056
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . $201,165,572 $191,904,350
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-19-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
INTEREST INCOME: ---- ---- ----
Finance Charges . . . . . . . . $40,030,163 $38,094,669 $35,713,283
Investment Income . . . . . . . 3,241,054 2,751,712 2,481,604
----------- ----------- -----------
43,271,217 40,846,381 38,194,887
----------- ----------- -----------
INTEREST EXPENSE:
Senior Debt . . . . . . . . . . 6,128,495 5,774,336 5,915,519
Subordinated Debt . . . . . . . 2,672,987 2,537,655 2,132,393
----------- ----------- -----------
8,801,482 8,311,991 8,047,912
----------- ----------- -----------
NET INTEREST INCOME . . . . . . . 34,469,735 32,534,390 30,146,975
PROVISION FOR
LOAN LOSSES (Note 2). . . . . . 6,915,794 6,266,201 4,630,853
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES . . . 27,553,941 26,268,189 25,516,122
----------- ----------- -----------
NET INSURANCE INCOME:
Premiums and Commissions. . . . 17,655,350 17,078,994 16,533,388
Insurance Claims and Expenses . (4,077,775) (3,816,991) (3,584,222)
----------- ----------- -----------
13,577,575 13,262,003 12,949,166
----------- ----------- -----------
OTHER REVENUE (Note 8). . . . . . 571,837 490,078 428,959
----------- ----------- -----------
OPERATING EXPENSES (Note 8):
Personnel Expense . . . . . . . 20,330,220 18,850,308 17,299,383
Occupancy Expense . . . . . . . 5,084,344 4,519,937 3,981,624
Other Expense . . . . . . . . . 9,544,449 8,231,915 8,644,323
----------- ----------- -----------
34,959,013 31,602,160 29,925,330
----------- ----------- -----------
INCOME BEFORE INCOME TAXES. . . . 6,744,340 8,418,110 8,968,917
PROVISION FOR
INCOME TAXES (Note 9) . . . . . 4,928,030 2,180,358 2,462,307
----------- ----------- -----------
NET INCOME. . . . . . . . . . . . 1,816,310 6,237,752 6,506,610
RETAINED EARNINGS, beginning. . . 53,200,768 47,325,758 41,128,936
Dividends on Common Stock . . . (795,739) (362,742) (309,788)
----------- ----------- -----------
RETAINED EARNINGS, ending . . . . $54,221,339 $53,200,768 $47,325,758
=========== =========== ===========
EARNINGS PER SHARE
Voting Common Stock;
1,700 Shares Outstanding
all periods . . . . . . . . . $ 10.68 $ 36.69 $ 38.27
Non-Voting Common Stock; ======= ======= =======
168,300 Shares
Outstanding all periods . . . $ 10.68 $ 36.69 $ 38.27
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-20-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Increase (Decrease) in Cash and Cash Equivalents
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . .$ 1,816,310 $ 6,237,752 $ 6,506,610
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for Loan Losses . . . . . 6,915,794 6,266,201 4,630,853
Depreciation and Amortization . . . 1,202,836 1,126,296 1,074,992
Prepaid Income Taxes. . . . . . . . 3,661,156 (364,809) (275,826)
Gain on sale of marketable
securities and equipment. . . . . (12,492) (22,711) (86,366)
Increase in Miscellaneous Assets. . (285,244) (1,591,088) (616,373)
Increase in Other Liabilities . . . 67,560 628,484 596,673
------------ ------------ ------------
Net Cash Provided . . . . . . . 13,365,920 12,280,125 11,830,563
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased. . . .(114,175,268) (110,117,402) (104,735,608)
Loan payments. . . . . . . . . . . . 104,242,345 94,929,949 88,009,063
Purchases of marketable securities . (28,845,752) (12,339,320) (8,981,373)
Sales of marketable securities . . . -- 3,251,608 510,000
Redemptions of
marketable securities. . . . . . . 19,645,000 7,000,000 725,000
Principal payments on
marketable securities. . . . . . . 365,678 472,366 --
Capital expenditures . . . . . . . . (2,677,986) (1,759,762) (1,159,373)
Proceeds from sale of equipment. . . 71,370 39,565 57,931
------------ ------------ ------------
Net Cash Used . . . . . . . . . (21,374,613) (18,522,996) (25,574,360)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Notes Payable to
Banks and Senior Demand Notes . . . 5,291,424 3,181,177 8,693,829
Commercial Paper issued. . . . . . . 29,816,406 25,319,703 44,230,224
Commercial Paper redeemed. . . . . . (30,918,084) (29,301,703) (24,060,678)
Subordinated Debt issued . . . . . . 6,877,593 7,999,461 12,877,336
Subordinated Debt redeemed . . . . . (4,573,535) (3,673,913) (3,863,077)
Dividends / Distributions Paid . . . (795,739) (362,742) (309,788)
------------ ------------ ------------
Net Cash Provided . . . . . . . 5,698,065 3,161,983 37,567,846
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS. . . . . . (2,310,628) (3,080,888) 23,824,049
CASH AND CASH EQUIVALENTS, beginning . 27,432,705 30,513,593 6,689,544
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ending. . .$ 25,122,077 $ 27,432,705 $ 30,513,593
============ ============ ============
Cash paid during the year for:
Interest . . . . . . . . . . . . . .$ 8,670,194 $ 8,343,828 $ 7,965,756
Income Taxes . . . . . . . . . . . .$ 1,550,958 $ 2,344,697 $ 2,682,221
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-21-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
1st Franklin Financial Corporation (the "Company") is a consumer finance
company which acquires and services direct cash loans, real estate loans and
sales finance contracts through 157 branch offices. (See inside front cover
for branch office locations.)
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Fair Values of Financial Instruments:
The following methods and assumptions are used by the Company in
estimating fair values for financial instruments:
Cash and Cash Equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the relatively short period
of time between the origination of the instruments and their expected
realization.
Loans. The fair value of the Company's direct cash loans and sales
finance contracts have been reported at book value since the estimated
life, assuming prepayments, is short-term in nature. The fair value
of the Company's real estate loans have been reported at book value
since the rate charged by the Company approximates market.
Marketable Debt Securities. The fair values for marketable debt
securities are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using market prices
for similar securities. See Note 3 for the fair value of marketable
debt securities.
Senior Debt. The carrying value of the Company's senior debt
approximates fair value due to the relatively short period of time
between the origination of the instruments and their expected payment.
Subordinated Debt. The carrying value of the Company's subordinated
debt approximates fair value due to the repricing frequency of the
debt.
Other significant assets and liabilities, which are not considered financial
instruments and for which fair values have not been estimated, include
premises and equipment and deferred taxes.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates, however, in the opinion of Management, such variances would not
be material.
-22-
<PAGE>
Income Recognition:
Although generally accepted accounting principles require other methods
to be used for income recognition, the Company uses the Rule of 78's method
to recognize interest and insurance income on loans which have precomputed
charges. Since the majority of these loans are paid off or renewed in less
than one year and because the interest and insurance charges are
contractually rebated using the Rule of 78's method, the results obtained by
using the Rule of 78's closely approximate those that would be obtained if
other generally accepted methods were used.
Finance charges are precomputed and included in the gross amount of
certain direct cash loans, sales finance contracts and certain real estate
loans. These precomputed charges are deferred and recognized as income on
an accrual basis using the Rule of 78's (which approximates the interest
method). Finance charges on the other direct cash loans and real estate
loans are recognized as income on a simple interest accrual basis. Income
is not accrued on a loan that is more than 60 days past due.
When material, the Company defers loan fees and recognizes them as an
adjustment to yield over the contractual life of the related loan. The
Company's method of accounting for such fees does not materially differ from
generally accepted accounting principles for such fees.
The property and casualty credit insurance policies written by the
Company are reinsured by the property and casualty insurance subsidiary.
The premiums are deferred and earned on a Rule of 78's basis (which
approximates the pro-rata method).
The credit life and accident and health policies written by the Company
are reinsured by the life insurance subsidiary. The premiums are deferred
and earned using the pro-rata method for level-term life policies, the Rule
of 78's (which approximates the pro-rata method) for decreasing-term life
policies and an average of the pro-rata method and Rule of 78's for accident
and health policies.
Claims of the insurance subsidiaries are expensed as incurred and
reserves are established for incurred but not reported (IBNR) claims.
Policy acquisition costs of the insurance subsidiaries are deferred and
amortized to expense over the life of the policies on the same methods used
to recognize premium income.
Depreciation and Amortization:
Office machines, equipment and company automobiles are recorded at cost
and depreciated on a straight-line basis over a period of three to ten
years. Leasehold improvements are amortized over seven years using the
double declining method for book and tax.
Income Taxes:
No provision for income taxes has been made for the Company since it
elected S Corporation status in 1997. The Company's insurance subsidiaries
remain taxable and deferred income taxes are provided where applicable.
(Note 9)
Collateral Held for Resale:
When the Company takes possession of the collateral which secures a
loan, the collateral is recorded at the lower of its estimated resale value
or the loan balance. Any losses incurred at that time are charged against
the Allowance for Loan Losses.
Bulk Purchases:
A bulk purchase is a group of loans purchased by the Company from
another lender. Bulk purchases are recorded at the outstanding loan balance
and an allowance for losses is established in accordance with management's
evaluation of the specific loans purchased and their comparability to
similar type loans in the Company's existing portfolio.
-23-
<PAGE>
For loans with precomputed charges, unearned finance charges are also
recorded based on the Rule of 78's (which approximates the interest method).
Any difference between the purchase price of the loans and their net balance
(outstanding balance less allowance for losses and unearned finance charges)
is amortized or accreted to income over the average life of the loans
purchased.
Marketable Debt Securities:
Management has designated a significant portion of the marketable debt
securities held in the Company's investment portfolio at December 31, 1997
and 1996 as being available-for-sale. This portion of the investment
portfolio is reported at fair market value with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of applicable taxes. The remainder of the investment portfolio
is carried at amortized cost and designated as held-to-maturity as
Management has both the ability and intent to hold these securities to
maturity.
Stock Dividend:
On January 26, 1996, the Company paid a stock dividend of 99 shares of
Non-Voting Common Stock for each outstanding share of Voting Common Stock.
The Non-Voting Common Stock has terms similar to the Company's Voting Common
Stock, other than its non-voting status. The consolidated financial
statements for prior periods have been adjusted to reflect the effect of
this dividend. All references to common shares and per share information
have been restated to reflect the stock dividend.
Earnings per Share Information:
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 adopted the new Standard in the quarter ended December 31, 1997.
Per share amounts reported under SFAS 128 were the same as those calculated
and presented under APB Opinion 15.
2. LOANS
There were $9,819,348 and $10,523,911 of loans in a non-accrual status
at December 31, 1997 and 1996, respectively.
Contractual Maturities of Loans:
An estimate of contractual maturities stated as a percentage of the loan
balances based upon an analysis of the Company's portfolio as of December
31, 1997 is as follows:
1st Mortgage 2nd Mortgage Sales
Due In Direct Cash Real Estate Real Estate Finance
Calendar Year Loans Loans Loans Contracts
------------- ----- ----- ----- ---------
1998. . . . . 72.38% 18.84% 20.17% 74.28%
1999. . . . . 24.09 17.70 19.63 21.23
2000. . . . . 2.22 16.10 18.59 3.63
2001. . . . . .60 12.63 14.87 .41
2002. . . . . .26 9.49 9.24 .20
2003 & later. .45 25.24 17.50 .25
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
Experience of the Company has shown that a majority of its loans will be
renewed many months prior to their final contractual maturity dates.
Accordingly, the above contractual maturities should not be regarded as a
forecast of future cash collections.
Cash Collections on Principal:
During the years ended December 31, 1997 and 1996, cash collections
applied to principal of loans totaled $104,242,345 and $94,929,949,
respectively, and the ratios of these cash collections to average net
receivables were 71.92% and 68.92%, respectively.
-24-
<PAGE>
Allowance for Loan Losses:
The Allowance for Loan Losses is based on the Company's previous loss
experience, a review of specifically identified potentially uncollectible
loans and Management's evaluation of the inherent risks and changes in the
composition of the Company's loan portfolio. Such allowance is, in the
opinion of Management, sufficient to provide adequate protection against
possible losses in the current loan portfolio. Specific provision for loan
losses is made for impaired loans based on a comparison of the recorded
carrying value in the loan to either the present value of the loan's
expected cash flow, the loan's estimated market price or the estimated fair
value of the underlying collateral.
When a loan becomes five installments past due, it is charged off unless
management directs that it be retained as an active loan. In making this
charge off evaluation, no installment is counted as being past due if at
least 80% of the contractual payment has been paid. The amount charged off
is the unpaid balance less the unearned finance charges and the unearned
insurance premiums.
An analysis of the allowance for the years ended December 31, 1997, 1996
and 1995 is shown in the following table:
1997 1996 1995
---------- ---------- ----------
Beginning Balance . . . . . . . $5,753,221 $4,511,826 $4,069,881
Provision for Loan Losses . . 6,915,794 6,266,201 4,630,853
Bulk Purchase Accounts. . . . 146,606 118,365 20,317
Charge-Offs . . . . . . . . . (8,257,856) (6,348,280) (5,085,216)
Recoveries. . . . . . . . . . 1,411,053 1,205,109 875,991
---------- ---------- ----------
Ending Balance. . . . . . . . . $5,968,818 $5,753,221 $4,511,826
========== ========== ==========
3. MARKETABLE DEBT SECURITIES
Debt securities available for sale are carried at estimated fair market
value. The amortized cost and estimated fair market values of these debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1997:
U.S. Treasury Securities and
obligations of U.S.
government corporations
and agencies . . . . . . . . $16,905,147 $ 48,754 $ (21,016) $16,932,885
Obligations of states and
political subdivisions . . . 13,372,979 430,307 (105) 13,803,181
Corporate Securities . . . . . 945,263 9,358 (1,689) 952,932
----------- -------- --------- -----------
$31,223,389 $488,419 $ (22,810) $31,688,998
=========== ======== ========= ===========
December 31, 1996:
U.S. Treasury Securities and
obligations of U.S.
government corporations
and agencies . . . . . . . . $ 9,946,819 $ 17,969 $(106,576) $ 9,858,212
Obligations of states and
political subdivisions . . . 10,236,993 191,644 (30,399) 10,398,238
Corporate Securities . . . . . 525,659 10,289 (8,515) 527,433
----------- -------- --------- -----------
$20,709,471 $219,902 $(145,490) $20,783,883
=========== ======== ========= ===========
-25-
<PAGE>
Debt securities designated as "Held to Maturity" are carried at
amortized cost based on Management's intent to hold such securities to
maturity. The amortized cost and estimated fair market values of these
debt securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1997:
U.S. Treasury Securities
and obligations of
U.S. government corporations
and agencies . . . . . . . . . $ 495,537 $ 4,072 $ -- $ 499,609
Obligations of states and
political subdivisions . . . . 757,220 8,225 -- 765,445
---------- ------- ------- ----------
$1,252,757 $12,297 $ -- $1,265,054
========== ======= ======= ==========
December 31, 1996:
U.S. Treasury Securities
and obligations of
U.S. government corporations
and agencies . . . . . . . . . $2,490,068 $23,057 $ -- $2,513,125
Obligations of states and
political subdivisions . . . . 456,031 12,457 -- 468,488
---------- ------- ------- ----------
$2,946,099 $35,514 $ -- $2,981,613
========== ======= ======= ==========
The amortized cost and estimated fair market values of marketable debt
securities at December 31, 1997, by contractual maturity, are shown below:
Available for Sale Held to Maturity
------------------------- ----------------------
Estimated Estimated
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less. . $ 1,000,552 $ 1,001,406 $ 495,742 $ 499,043
Due after one year
through five years . . . 14,972,460 15,090,920 757,015 766,011
Due after five years
through ten years. . . . 12,339,596 12,570,708 -- --
Due after ten years. . . . 2,910,781 3,025,964 -- --
----------- ----------- ---------- ----------
$31,223,389 $31,688,998 $1,252,757 $1,265,054
=========== =========== ========== ==========
Proceeds from redemptions of investment securities due to call
provisions and redemptions due to regular scheduled maturities during 1997
were $19,645,000. Gross gains of $2,837 and gross losses of $(3,782) were
realized on these redemptions. There were no proceeds generated due to
sales of investment securities.
Proceeds from sales of investments in debt securities available for sale
during 1996 were $3,251,608. Gross gains of $13,473 and gross losses of
$(14,544) were realized on these sales.
4. PLEDGED ASSETS
At December 31, 1997, certain Short-term Investments of the insurance
subsidiaries were on deposit with the Georgia Insurance Commissioner to meet
the deposit requirements of Georgia insurance laws.
-26-
<PAGE>
5. SENIOR DEBT
The Company has a Credit Agreement with four major banks which provides
for maximum borrowings of $21,000,000. All borrowings are on an unsecured
basis at 1/4% above the prime rate of interest. An annual facility fee is
paid quarterly based on 5/8% of the available line less the average
borrowings during the quarter. In addition, an agent fee equal to 1/8% per
annum of the total loan commitment is paid quarterly.
The Credit Agreement has a commitment termination date of June 30 in any
year in which written notice of termination is given by the banks. If
written notice is given in accordance with the agreement, the outstanding
balance of the loans shall be paid in full on the date which is three and
one half years after the commitment termination date. The banks also may
terminate the agreement upon the violation of any of the financial ratio
requirements or covenants contained in the agreement or in June of any
calendar year if the financial condition of the Company becomes
unsatisfactory to the banks. Such financial ratio requirements include a
minimum equity requirement, an interest expense coverage ratio and a minimum
debt to equity ratio.
The Company has an additional Credit Agreement for $2,000,000 which is
used for general operating purposes. This agreement provides for borrowings
on an unsecured basis at 1/8% above the prime rate of interest and has a
termination date of July 1, 1998.
A bank loan was entered into in 1986, which carries an interest rate of
70% of the prime rate of interest repayable in 180 monthly installments.
This loan is collateralized by land and a building.
The Senior Demand Notes are unsecured obligations which are payable on
demand. The interest rate payable on any Senior Demand Note is a variable
rate, compounded daily, established from time to time by the Company.
Commercial Paper is issued by the Company in amounts in excess of
$50,000, with maturities of less than 270 days and at negotiable interest
rates.
Additional data related to the Company's Senior Debt is as follows:
Weighted
Average Maximum Average Weighted
Interest Amount Amount Average
Year Ended Rate at end Outstanding Outstanding Interest Rate
December 31 of Year During Year During Year During Year
------------ ------- ----------- ----------- -----------
(In thousands, except % data)
1997:
Bank . . . . . . . . 5.95% $ 241 $ 217 5.95%
Senior Notes . . . . 5.92 52,383 47,814 5.92
Commercial Paper . . 6.52 53,372 50,164 6.52
All Categories . . 6.21 101,302 98,195 6.23
1996:
Bank . . . . . . . . 5.95% $ 291 $ 267 5.98%
Senior Notes . . . . 5.92 49,406 42,836 5.92
Commercial Paper . . 6.51 52,944 48,432 6.60
All Categories . . 6.22 95,541 91,535 6.28
1995:
Bank . . . . . . . . 6.30% $ 716 $ 346 6.32%
Senior Notes . . . . 5.92 47,068 37,661 6.14
Commercial Paper . . 6.80 57,175 46,022 7.50
All Categories . . 6.41 96,006 84,029 6.89
-27-
<PAGE>
6. SUBORDINATED DEBT
The payment of the principal and interest on the subordinated debt is
subordinate and junior in right of payment to all unsubordinated
indebtedness of the Company.
Subordinated debt consists of Variable Rate Subordinated Debentures
which mature four years after date of issue. The maturity date is
automatically extended for an additional four years unless the holder or the
Company redeems the debenture on its original maturity date. The debentures
have various minimum purchase amounts with varying interest rates and
interest adjustment periods for each respective minimum purchase amount.
Interest rates on the debentures are adjusted at the end of each adjustment
period. The debentures may be redeemed by the holder at the applicable
interest adjustment date without penalty. Redemptions at any other time are
subject to an interest penalty. The Company may redeem the debentures for a
price equal to 100% of the principal.
Interest rate information on the Subordinated Debt at December 31 is as
follows:
Weighted Average Rate at Weighted Average Rate
End of Year During Year
------------------------ ---------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
6.61% 6.81% 7.41% 6.68% 7.03% 7.28%
Maturity information on the Company's Subordinated Debt at
December 31, 1997 is as follows:
Amount Maturing
-------------------------------------
Based on Maturity Based on Interest
Date Adjustment Period
----------------- -----------------
1998. . . . . . . $ 4,695,854 $26,764,774
1999. . . . . . . 11,183,056 9,135,376
2000. . . . . . . 8,686,709 837,984
2001. . . . . . . 12,680,902 508,387
----------- -----------
$37,246,521 $37,246,521
=========== ===========
7. COMMITMENTS AND CONTINGENCIES
The Company's operations are carried on in locations which are occupied
under lease agreements. The lease agreements usually provide for a lease
term of five years with a renewal option for an additional five years. Rent
expense was $1,807,899, $1,531,183 and $1,346,606 for the years ended
December 31, 1997, 1996 and 1995, respectively. Under the existing
noncancelable leases, the Company's minimum aggregate rental commitment at
December 31, 1997, amounts to $1,805,303 for 1998, $1,462,825 for 1999,
$1,147,549 for 2000, $755,310 for 2001, $667,468 for 2002 and $106,720 for
the year 2003 and beyond. The total commitment is $5,945,175.
The Company is defendant in several lawsuits arising in the course of
its normal business activities in the state of Alabama. Each of the
complaints seek compensatory and punitive damages. During the current year,
the Company reached settlement agreements with certain borrowers who had
previously asserted claims or had stated their intention to file claims
against the Company. All remaining actions are still in their early stages
-28-
<PAGE>
and their outcome currently is not determinable. Management is vigorously
defending these actions. 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 Alabama operations
are in compliance with applicable regulations, and therefore that the suits
are without merit and that the resolutions of the suits should not have a
material effect on the Company.
8. RELATED PARTY TRANSACTIONS
Beneficial owners of the Company are also beneficial owners of Liberty
Bank & Trust ("Liberty"). The Company and Liberty have management and data
processing agreements whereby the Company provides certain administrative
and data processing services to Liberty for a fee. Income recorded by the
Company in 1997, 1996 and 1995 related to these agreements was $63,800 each
year, which in Management's opinion approximates the Company's actual cost
of these services.
Liberty leases its office space and equipment from the Company for
$5,000 per month, which in Management's opinion is at a rate which
approximates that obtainable from independent third parties.
At December 31, 1997, the Company maintained $2,100,000 of certificates
of deposit with Liberty at market rates and terms. The Company also had
$1,724,229 in demand deposits with Liberty at December 31, 1997.
The Company leases a portion of its properties (see Note 7) for an
aggregate of $13,250 per month from certain officers or stockholders. In
Management's opinion, these leases are at rates which approximate those
obtainable from independent third parties.
9. INCOME TAXES
Effective January 1, 1997, the Company elected S Corporation status for
income tax reporting purposes for the parent company (the "Parent"). The
taxable income or loss of an S Corporation is includable in the individual
tax returns of the stockholders of the Company. Accordingly, deferred
income tax assets and liabilities were eliminated and no provisions for
current and deferred income taxes were made by the Parent other than amounts
related to prior years when the Parent was a taxable entity and for amounts
attributable to state income taxes for the state of Louisiana, which does
not recognize S Corporation status for income tax reporting purposes.
Deferred income tax assets and liabilities will continue to be recognized
and provisions for current and deferred income taxes will be made by the
Company's subsidiaries. The Company took a one-time charge of $3.6 million
during 1997 in order to recognize the effect of the S Corporation election.
The Provision for Income Taxes for the years ended December 31, 1997,
1996 and 1995 is made up of the following components:
1997 1996 1995
----------- ----------- -----------
Current - Federal . . . . . . $ 1,251,502 $ 2,353,773 $ 2,481,300
Current - State . . . . . . . 15,371 191,394 256,833
----------- ----------- -----------
Total Current. . . . . . . 1,266,873 2,545,167 2,738,133
----------- ----------- -----------
Prepaid - Federal . . . . . . 3,343,020 (309,371) (226,199)
Prepaid - State . . . . . . . 318,137 (55,438) (49,627)
----------- ----------- -----------
Total Prepaid. . . . . . . 3,661,157 (364,809) (275,826)
----------- ----------- -----------
Total Provision. . . . $ 4,928,030 $ 2,180,358 $ 2,462,307
=========== =========== ===========
-29-
<PAGE>
Temporary differences create deferred federal tax assets and liabilities
which are detailed below for December 31, 1997 and 1996:
Deferred Tax
Assets (Liabilities)
----------------------------
1997 1996
----------- -----------
Depreciation . . . . . . . . . . . $ 14 $ (69,428)
Provision for Loan Losses. . . . . 37 2,141,474
Insurance Commissions . . . . . . (1,960,573) (596,196)
Unearned Premium Reserves. . . . . 523,446 489,892
Unrealized Gains on
Marketable Debt Securities . . . (122,799) (31,124)
Other. . . . . . . . . . . . . . . (19,127) 239,184
----------- -----------
$(1,579,030) $ 2,173,802
=========== ===========
The Company's effective tax rate for the years ended December 31, 1997,
1996 and 1995 is analyzed as follows:
1997 1996 1995
---- ---- ----
Statutory Federal income tax rate . . . 34.0% 34.0% 34.0%
State income tax, net of Federal
tax effect. . . . . . . . . . . . . . 3.3 1.1 1.5
Net tax effect of IRS regulations
on life insurance subsidiary. . . . . (8.9) (7.9) (6.8)
Tax effect of Company
electing S Corpation status . . . . . 53.7 -- --
Other items . . . . . . . . . . . . . . (9.0) (1.3) (1.2)
---- ---- ----
Effective Tax Rate. . . . . . . . . 73.1% 25.9% 27.5%
==== ==== ====
-30-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
***********
PHOTO
(INVESTMENT CENTER STAFF AND A VISITING PRE-SCHOOL CLASS AT HALLOWEEN)
-31-
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Principal Occupation, Has Served as a
Name Title and Company Director Since
---- ----------------- --------------
Ben F. Cheek, III Chairman of Board, 1967
1st Franklin Financial Corporation
Lorene M. Cheek Housewife 1946
Jack D. Stovall President, 1983
Stovall Building Supplies, Inc.
Robert E. Thompson Physician, Toccoa Clinic 1970
Executive Officers
Served in this
Name Position with Company Position Since
---- --------------------- --------------
Ben F. Cheek, III Chairman of Board 1989
T. Bruce Childs President 1989
Lynn E. Cox Secretary 1989
A. Roger Guimond Vice President
and Chief Financial Officer 1991
Linda L. Sessa Treasurer 1989
CORPORATE INFORMATION
Corporate Offices General Counsel Independent Accountants
- ----------------- --------------- -----------------------
P.O. Box 880 Jones, Day, Reavis & Pogue Arthur Andersen LLP
213 East Tugalo Street Atlanta, Georgia Atlanta, Georgia
Toccoa, Georgia 30577
(706) 886-7571
Information
Informational inquiries, including requests for a Prospectus describing
the Company's current securities offering or the Form 10-K annual report
filed with the Securities and Exchange Commission should be addressed to the
Company's Secretary.
-32-
<PAGE>
INSIDE BACK COVER PAGE OF ANNUAL REPORT
BRANCH OPERATIONS
Division I Division III
- ---------- ------------
Northeast Georgia & South Carolina: Alabama, Louisiana, Mississippi and
Isabel S. Vickery, Senior Vice President Northeast Georgia:
Ronald F. Morrow, Area Vice President Jack R. Coker, Vice President
Regina K. Bond, Supervisor Robert J. Canfield, Area Vice
K. Donald Floyd, Supervisor President
Brian L. McSwain, Supervisor J. Michael Culpepper, Area Vice
Michael D. Lyles, Supervisor President
Melvin L. Osley, Supervisor Susan C. Cantrell, Supervisor
Virginia K. Palmer, Supervisor Ronald E. Byerly, Supervisor
Timothy M. Schmotz, Supervisor Sandra S. Gray, Supervisor
Barbara W. Sims, Supervisor Jack L. Hobgood, Supervisor
Bruce S. Hooper, Supervisor
Janice B. Hyde, Supervisor
Johnny M. McEntyre, Supervisor
R. Darryl Parker, Supervisor
Division II Henrietta R. Reathford, Supervisor
- ----------- R. Gaines Snow, Supervisor
Central & South Georgia:
A. Jarrell Coffee, Vice President
Donald C. Carter, Supervisor
Judy A. Landon, Supervisor ADMINISTRATION
Jeffrey C. Lee, Supervisor --------------
Thomas C. Lennon, Supervisor Ben F. Cheek, IV, Statistics &
Dianne H. Moore, Supervisor Planning
Marcus C. Thomas, Supervisor Lynn E. Cox, Investment Center
Samuel P. Greer, Internal Audit
Phoebe P. Martin, Human Resources
& Marketing
Pamela S. Rickman, Operations
Coordinator
Linda L. Sessa, Data Processing
<PAGE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Franklin Securities, Inc., a Georgia company, was incorporated on
May 4, 1982, as a wholly owned subsidiary to handle securities transactions.
The subsidiary is currently in an inactive status.
Frandisco Property and Casualty Insurance Company, a Georgia company, was
incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure the
property and casualty insurance policies written by the Company in connection
with its credit transactions.
Frandisco Life Insurance Company of Georgia was incorporated on
August 7, 1989, as a wholly owned subsidiary to reinsure the life and the
accident and health insurance policies written by the Company in connection
with its credit transactions. Effective December 27, 1990, Frandisco Life
Insurance Company of Georgia was merged with Frandisco Life Insurance Company
of Arizona (incorporated on August 16, 1978 as a wholly owned subsidiary)
with Frandisco Life Insurance Company of Georgia becoming the surviving
Company.
<PAGE>
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-01007.
s/ Arthur Andersen LLP
----------------------
Arthur Andersen LLP
Atlanta, Georgia
March 30, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,122,077
<SECURITIES> 32,941,755
<RECEIVABLES> 138,670,066
<ALLOWANCES> 5,968,818
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,316,598
<DEPRECIATION> 7,427,927
<TOTAL-ASSETS> 201,165,572
<CURRENT-LIABILITIES> 109,184,902
<BONDS> 135,984,346
<COMMON> 170,000
0
0
<OTHER-SE> 54,564,149
<TOTAL-LIABILITY-AND-EQUITY> 201,165,572
<SALES> 0
<TOTAL-REVENUES> 61,498,404
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,036,788
<LOSS-PROVISION> 6,915,794
<INTEREST-EXPENSE> 8,801,482
<INCOME-PRETAX> 6,744,340
<INCOME-TAX> 4,928,030
<INCOME-CONTINUING> 1,816,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,816,310
<EPS-PRIMARY> 10.68
<EPS-DILUTED> 0
</TABLE>
