<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
-----------------------
Commission File Number 2-27985
-----------------------
1st Franklin Financial Corporation
A Georgia Corporation I.R.S. Employer No. 58-0521233
213 East Tugalo Street
Post Office Box 880
Toccoa, Georgia 30577
(706) 886-7571
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- --------------------------------------------- ----------------------------
Voting Common Stock, par value $100 per share 1,700 Shares
Non-Voting Common Stock, no par value 168,300 Shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
The following financial statements required hereunder are
incorporated by reference from the Company's Quarterly Report to
Investors for the Six Months Ended June 30, 1998. See Exhibit 19
Consolidated Statements of Financial Position:
June 30, 1998 and December 31, 1997
Consolidated Statements of Income:
Six Months Ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1998 and June 30, 1997
Notes to Consolidated Financial Statements
ITEM 2. Managements' Discussion and Analysis of Financial Condition and
Results of Operations.
The information required hereunder is set forth under "Management's
Letter" of the Company's Quarterly Report to Investors for the Six
Months Ended June 30, 1998. See Exhibit 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
19 Quarterly Report to Investors for the Six Months
Ended June 30, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended June 30,1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st FRANKLIN FINANCIAL CORPORATION
-----------------------------------
Registrant
s/ Ben F. Cheek, III
-----------------------------------
Chairman of Board
A. Roger Guimond
----------------------------------
Vice President, Chief Financial
Officer and Principal Accounting
Officer
Date: August 13, 1998
---------------
<PAGE>
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No. Page No.
- ---------- -------
19 Quarterly Report to Investors for the
Six Months Ended June 30, 1998 ...................... 4
27 Financial Data Schedule ............................. 13
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
SIX MONTHS ENDED
JUNE 30, 1998
<PAGE>
MANAGEMENT'S LETTER
Financial Condition:
- -------------------
During the first half of 1998, total assets of the Company grew $4.4
million to $205.6 million at June 30, 1998 from $201.2 million at
December 31, 1997. The primary area of growth was in the Company's cash
position. Surplus funds generated from operations and sales of the Company's
debt securities continue to provide surplus cash for future needs.
Loan volume began to pick up during the 3 months just ended following the
typical 1st quarter seasonal downswing in business activity.
Results of Operations:
- ---------------------
Total revenues for the six months ended June 30, 1998 were $32.0 million as
compared to $30.2 million during the same six month period in 1997. Pre-tax
earnings increased $.3 million (16%) and $1.7 million (51%) during the quarter
and six month periods just ended as compared to the same periods a year ago.
Earnings growth was driven by higher average net receivables outstanding
(gross receivables less unearned finance charges), expanding interest margins
and increased insurance income.
Average net receivables increased to $143.3 million during the current year
as compared to $135.1 million during the first half of 1997. Interest income
rose $.8 million (8%) and $1.3 million (6%) during the quarter and six-month
periods just ended as compared to the same periods a year ago, respectively,
as a direct result of the higher level of average net outstanding receivables.
Interest margins (the margins between the amounts the Company earns on loans
and investments and the amounts the Company pays on securities and other
borrowings) were further enhanced from by a slight decline in interest expense
during the comparable periods. Although average senior and subordinated debt
outstanding rose $1.2 million (1%) during the current year as compared to
1997, lower market rates of interest enabled the Company to lower overall
borrowing costs. The Company's average interest rate on borrowings declined
to 6.29% during first half of 1998 as compared to 6.38% during the same
period in 1997.
An increase in recoveries on loans previously charged off and lower loan
write-offs during the current year resulted in a $.2 million decline in the
Company's loan loss provision during the six month period just ended as
compared to the same period a year ago. The Company experienced a $.4 million
increase in the loss provision during the quarter just ended as compared to
the same quarter in 1997 mainly due to an increase in net receivables. Net
receivables increased during the second quarter, after a first quarter decline,
which resulted in an increase in the loan loss reserve.
Personnel expense increased $.4 million (4%) during the first six months of
1998, compared to the comparable period in 1997, mainly due to merit salary
increases effective January 1 and an increase in employees required to staff
17 new branch offices opened since the beginning of 1997. The increase would
have been higher, however, except that lower accruals for bonus and profit
sharing expenses offset some of the increase and actually resulted in a
decrease in personnel expense for the quarter just ended. A decline in
insurance claims filed under the Company's self-insured health insurance plan
also offset some of the increase.
The aforementioned increase in new office openings led to the $.1 million
(10%) and $.2 million (9%) increase in occupancy expense during the quarter
and six months ended June 30, 1998, respectively, as compared to the same
periods ended June 30, 1997. Increases in maintenance of equipment also
contributed to the increase during the current year.
Other operating expenses increased $.3 million during the comparable
quarterly periods also due to the new offices opened and due to increases in
advertising expenditures. However, other operating expenses declined during
the comparable six month periods due to a decrease in legal expenses. During
the first quarter of 1997, the Company reached settlement agreements with
certain borrowers who had previously asserted claims or had stated their
intention to file claims against the Company. The settlements and associated
legal fees caused legal expenses to be significantly higher during the six
months ended June 30, 1997 as compared to the six month period just ended.
<PAGE>
Effective January 1, 1997, the Company elected S corporation status for
income tax reporting purposes for the Parent Company. 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 electing to become an S corporation. Income taxes during the current
year reflect only the taxes of the Company's insurance subsidiaries which are
not S Corporations. Taxes of the Parent are now paid by the shareholders.
Liquidity:
- ---------
Liquidity requirements of the Company are financed through the collection
of receivables and through the issuance of public debt securities. 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. In addition to the securities program, the
Company has two external sources of funds through the use of two Credit
Agreements. One agreement provides for available borrowing of $21 million.
Available borrowings were $21 million at June 30, 1998 and December 31, 1997,
relating to this agreement. Another agreement provides for an additional
$2 million for general operating purposes. Available borrowings under this
agreement were $2 million at June 30, 1998 and December 31, 1997.
Liquidity was not adversely affected by delinquent accounts even as the
percentage of outstanding receivables 60 days or more past due increased to
6.5% of receivables at June 30, 1998 from 5.9% of receivables at December 31,
1997.
Legal Proceedings:
- -----------------
Two complaints were disposed of during the quarter just ended, one in
Alabama and one in Georgia. Neither had a material impact on the Company.
Other various legal proceedings are pending against the Company in Alabama
alleging different violations of consumer lending laws and violations in
connection with the sale of credit insurance and loan refinancing. Management
believes that the Company's operations are in compliance with applicable
regulations and that the actions are without merit, and the Company is
diligently contesting the remaining complaints. Based upon information
currently available to the Company, the Company does not believe that any of
currently pending legal proceedings would, individually or in the aggregate,
have a material adverse effect upon the Company, although there can be no
assurance thereof.
Year 2000:
- ---------
The Company's Year 2000 Committee continues to plan and monitor the
progress of Year 2000 compliance. Assessments have been made regarding all
areas of Company operations and testing plans are being finalized. The
Committee is communicating with major software vendors, utilities suppliers
and other service providers to insure compliance issues are resolved.
Contingency plans are also being formulated in case of service interruption.
Current plans are for the Company to have all testing completed as
of December 31, 1998. Management does not believe the Year 2000 compliance
cost will have a material adverse affect on the Company's financial position
or future results of operations.
Other:
- -----
The Company plans to expand its operational base into a sixth state during
the third quarter of this year. Preparations are being made to open two
branch offices in the state of North Carolina.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS. . . . . . . . . . $ 29,258,169 $ 25,122,077
------------ ------------
LOANS, net . . . . . . . . . . . . . . . . . 132,265,760 132,701,248
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at fair market value . 28,272,794 31,688,998
Held to Maturity, at amortized cost. . . . 4,667,119 1,252,757
------------ ------------
32,939,913 32,941,755
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . 11,108,368 10,400,492
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . $205,572,210 $201,165,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT. . . . . . . . . . . . . . . . . $100,045,799 $ 98,929,587
OTHER LIABILITIES. . . . . . . . . . . . . . 9,681,459 10,255,315
SUBORDINATED DEBT. . . . . . . . . . . . . . 37,064,877 37,246,521
------------ ------------
Total Liabilities . . . . . . . . . . . 146,792,135 146,431,423
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock. . . . . . . . . . . . . . -- --
Common Stock . . . . . . . . . . . . . . . 170,000 170,000
Accumulated Other Comprehensive Income . . 290,893 342,810
Retained Earnings. . . . . . . . . . . . . 58,319,182 54,221,339
------------ ------------
Total Stockholders' Equity. . . . . . . 58,780,075 54,734,149
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . $205,572,210 $201,165,572
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME . . . . . . . . $11,339,419 $10,527,491 $22,462,428 $21,165,635
INTEREST EXPENSE. . . . . . . . 2,144,587 2,187,304 4,322,442 4,325,532
----------- ----------- ----------- -----------
NET INTEREST INCOME . . . . . . 9,194,832 8,340,187 18,139,986 16,840,103
Provision for Loan Losses . . 1,681,654 1,324,121 2,409,634 2,580,727
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . 7,513,178 7,016,066 15,730,352 14,259,376
----------- ----------- ----------- -----------
NET INSURANCE INCOME . . . . . 3,603,305 3,340,387 7,223,685 6,824,920
----------- ----------- ----------- -----------
OTHER REVENUE . . . . . . . . . 118,056 119,272 236,570 248,161
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense . . . . . . 5,156,112 5,161,015 10,757,449 10,326,109
Occupancy . . . . . . . . . . 1,320,175 1,197,019 2,660,156 2,434,460
Other . . . . . . . . . . . . 2,272,782 1,982,751 4,592,540 5,129,875
----------- ----------- ----------- -----------
Total . . . . . . . . . . . 8,749,069 8,340,785 18,010,145 17,890,444
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES. . . 2,485,470 2,134,940 5,180,462 3,442,013
Provision for Income Taxes
Current Provision . . . . . 325,713 317,610 693,879 684,566
Deferred Tax
Provision (See Note 5) . 26,495 (7,862) 27,329 3,596,698
----------- ----------- ----------- -----------
352,208 309,748 721,208 4,281,264
----------- ----------- ----------- -----------
NET INCOME. . . . . . . . . . . 2,133,262 1,825,192 4,459,254 (839,251)
RETAINED EARNINGS,
Beginning of period . . . . . 56,547,331 50,536,325 54,221,339 53,200,768
Distributions on
Common Stock. . . . . . . . 361,411 474,635 361,411 474,635
----------- ----------- ----------- -----------
RETAINED EARNINGS,
End of period . . . . . . . . $58,319,182 $51,886,882 $58,319,182 $51,886,882
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Voting Common Stock;
1700 Shares outstanding
all periods. . . . . . . . $12.55 $8.85 $26.23 $(4.94)
====== ===== ====== ======
Non-Voting Common Stock;
168,300 Shares
outstanding all periods. . $12.55 $8.85 $26.23 $(4.94)
====== ===== ====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
June 30
-------------------------
(Unaudited)
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . $ 4,459,254 $ (839,251)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for Loan Losses . . . . . . . . . . 2,409,634 2,580,727
Depreciation and Amortization . . . . . . . . 623,021 577,068
Deferred Income Taxes . . . . . . . . . . . . 27,329 3,596,698
Other, net. . . . . . . . . . . . . . . . . . 4,196 3,208
Increase in Miscellaneous assets. . . . . . . (847,946) (697,546)
Decrease in Accounts Payable and
Accrued Expenses . . . . . . . . . . . . . . (587,625) (1,505,057)
----------- -----------
Net Cash Provided by Operating Activities . 6,087,863 3,715,847
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased . . . . . . . . . . (55,314,479) (56,381,621)
Loan Payments . . . . . . . . . . . . . . . . . . 53,340,333 52,979,585
Purchases of marketable debt securities . . . . . (11,426,110) (13,997,448)
Principal payments on securities . . . . . . . . 299,213 149,863
Sales of marketable securities. . . . . . . . . . 66,658 325,000
Redemptions of securities . . . . . . . . . . . . 10,985,000 2,270,000
Other, net. . . . . . . . . . . . . . . . . . . . (475,543) (417,657)
----------- -----------
Net Cash Used in Investing Activities . . . (2,524,928) (15,072,278)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Senior Debt . . . . . . . . . . . . . 1,116,212 4,403,309
Subordinated Debt Issued. . . . . . . . . . . . . 2,952,816 3,810,403
Subordinated Debt redeemed. . . . . . . . . . . . (3,134,460) (2,792,299)
Distributions Paid. . . . . . . . . . . . . . . . (361,411) (474,635)
----------- -----------
Net Cash Provided by Financing Activities . 573,157 4,946,778
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . . 4,136,092 (6,409,653)
CASH AND CASH EQUIVALENTS, beginning . . . . . . . 25,122,077 27,432,705
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . . . $29,258,169 $21,023,052
=========== ===========
Cash Paid during the period for: Interest . . . . $ 4,344,548 $ 4,235,876
Income Taxes . . 721,440 937,636
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
-NOTES-
1. The accompanying interim financial information of 1st Franklin
Financial Corporation and subsidiaries (the Company) should be read in
conjunction with the annual financial statements and notes thereto as
of December 31, 1997 and for the years then ended included in the
Company's December 31, 1997 Annual Report.
2. In the opinion of Management of the Company, the accompanying
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
Company's financial position as of June 30, 1998 and December 31, 1997
and the results of its operations and its cash flows for the six months
ended June 30, 1998 and 1997. While certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, the Company believes that the
disclosures herein are adequate to make the information presented not
misleading.
3. The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full
fiscal year.
4. The computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings.
5. Deferred tax provision for June 30, 1997 includes a $3.6 million one
time non-recurring charge to expense accumulated prepaid tax as of
January 1, 1997 as a result of the Company electing "S corporation"
status for income tax reporting purposes.
6. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". The Company had comprehensive income (loss), which is
comprised of net income and unrealized gains or losses on securities
held as available for sale, of $2,130,009 and $2,088,080 for the
quarters ended June 30, 1998 and 1997 and $4,407,337 and ($840,241) for
the six month comparable periods, respectively.
<PAGE>
BRANCH OPERATIONS
-----------------
Isabel Vickery Youngblood . . . . Senior Vice President
A. Jarrell Coffee . . . . . . . . Vice President
Jack R. Coker . . . . . . . . . . Vice President
Robert J. Canfield. . . . . . . . Area Vice President
J. Michael Culpepper. . . . . . . Area Vice President
Ronald F. Morrow. . . . . . . . . Area Vice President
<TABLE>
<CAPTION>
SUPERVISORS
-----------
<S> <C> <C> <C>
Regina Bond Bruce Hooper Johnny McEntyre Darryl Parker
Ronald Byerly Janice Hyde Brian McSwain Henrietta Reathford
Susie Cantrell Judy Landon Dianne Moore Tami Settlemyer
Donald Carter Jeff Lee Harriet Moss Timothy Schmotz
Donald Floyd Tommy Lennon Melvin Osley Gaines Snow
Sandi Gray Mike Lyles Dale Palmer Marc Thomas
Jack Hobgood
<CAPTION>
OFFICES
-------
<S> <C> <C> <C>
Alabama Offices: Georgia Offices: Georgia Offices: Louisiana Offices:
- --------------- --------------- --------------- -----------------
Alexander City Blue Ridge Hogansville Jena
Andalusia Bremen Jackson Leesville
Arab Brunswick Jasper Marksville
Athens Buford Jefferson Natchitoches
Bessemer Butler Jesup Pineville
Birmingham Cairo LaGrange
Clanton Calhoun Lavonia Mississippi Offices:
Cullman Canton Lawrenceville -------------------
Decatur Carrollton Madison Bay St. Louis
Dothan Cartersville Manchester Carthage
Enterprise Cedartown McDonough Columbia
Fayette Chatsworth McRae Grenada
Florence Clarkesville Milledgeville Gulfport
Gadsden Claxton Monroe Hattiesburg
Geneva Clayton Montezuma Jackson
Hamilton Cleveland Monticello McComb
Huntsville Cochran Moultrie Pearl
Jasper Commerce Nashville Picayune
Madison Conyers Newnan
Moulton Cordele Perry South Carolina Offices:
Muscle Shoals Cornelia Richmond Hill ----------------------
Opp Covington Rome Aiken
Ozark Cumming Royston Anderson
Prattville Dallas Sandersville Cayce
Russellville Dalton Savannah Clemson
Scottsboro Dawson Statesboro Columbia
Selma Douglas Swainsboro Conway
Sylacauga Douglasville Sylvania Easley
Troy Eastman Sylvester Florence
Tuscaloosa Elberton Thomaston Gaffney
Ellijay Thomson Greenville
Georgia Offices: Forsyth Tifton Greenwood
- --------------- Fort Valley Toccoa Greer
Adel Gainesville Valdosta Lancaster
Albany Garden City Vidalia Laurens
Alma Georgetown Warner Robins Marion
Americus Greensboro Washington Newberry
Arlington Griffin Waycross Orangeburg
Athens Hartwell Winder Rock Hill
Bainbridge Hawkinsville Seneca
Barnesville Hazlehurst Louisiana Offices: Spartanburg
Baxley Hinesville ----------------- Union
Blakely Alexandria York
</TABLE>
<PAGE>
DIRECTORS
---------
Ben F. Cheek, III
Chairman and Chief Executive Officer
1st Franklin Financial Corporation
Lorene M. Cheek
Homemaker
Jack D. Stovall
President, Stovall Building Supplies, Inc.
Dr. Robert E. Thompson
Physician, Toccoa Clinic
EXECUTIVE OFFICERS
------------------
Ben F. Cheek, III
Chairman and Chief Executive Officer
T. Bruce Childs
President and Chief Operating Officer
A. Roger Guimond
Vice President and Chief Financial Officer
Lynn E. Cox
Secretary
Linda L. Sessa
Treasurer
COUNSEL
-------
Jones, Day, Reavis & Pogue
3500 One Peachtree Center
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
AUDITORS
--------
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,258,169
<SECURITIES> 32,939,913
<RECEIVABLES> 165,539,674
<ALLOWANCES> 5,934,586
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,617,945
<DEPRECIATION> 7,869,344
<TOTAL-ASSETS> 205,572,210
<CURRENT-LIABILITIES> 109,727,258
<BONDS> 136,943,914
<COMMON> 170,000
0
0
<OTHER-SE> 58,610,075
<TOTAL-LIABILITY-AND-EQUITY> 205,572,210
<SALES> 0
<TOTAL-REVENUES> 31,982,798
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,010,145
<LOSS-PROVISION> 2,409,634
<INTEREST-EXPENSE> 4,322,442
<INCOME-PRETAX> 5,180,462
<INCOME-TAX> 721,208
<INCOME-CONTINUING> 4,459,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,459,254
<EPS-PRIMARY> 26.23
<EPS-DILUTED> 0
</TABLE>
