<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 April 30, 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 Three Months Ended March 31, 1998. See Exhibit 19
Consolidated Statements of Financial Position:
March 31, 1998 and December 31, 1997
Consolidated Statements of Income:
Quarters Ended March 31, 1998 and March 31, 1997
Consolidated Statements of Cash Flows:
Quarters Ended March 31, 1998 and March 31, 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 Three Months Ended March 31, 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 Three
Months Ended March 31, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended March 31,1998.
<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
s/ A. Roger Guimond
-----------------------------------
Vice President,
Chief Financial Officer,
and Principal Accounting Officer
Date: May 14, 1998
<PAGE>
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit Page
No. No.
------- ----
19 Quarterly Report to Investors for the Three Months Ended
March 31, 1998 .......................................... 4
27 Financial Data Schedule ................................. 13
<PAGE>
<PAGE>
Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
THREE MONTHS ENDED
MARCH 31, 1998
<PAGE>
MANAGEMENT'S LETTER
Financial Condition:
- -------------------
Business activity during the first quarter of 1998 followed the historical
downward trend of first quarters in previous years. Post-Christmas declines
in loan demand caused net receivables (gross receivables less unearned finance
charges) to decline $5.6 million (4%) during the quarter just ended as
compared to the amount outstanding at December 31, 1997. As a result of the
decrease in the loan portfolio, overall assets declined $2.0 million (1%)
during the quarter just ended.
The Company's investment portfolio consists mainly of U.S. Treasury bonds,
Government Agency bonds and various Georgia municipal bonds, many of which
have various call provisions for early redemptions. Early redemptions due to
call provisions being exercised by various issues of bonds resulted in a $3.6
million (11%) decrease in investment securities during the first three months
of 1998. These funds were transferred to cash and cash equivalents for
reinvestment in short-term interest bearing accounts.
Cash and cash equivalents increased $6.8 million (27%) during the same
period due to the aforementioned redemptions of investment securities.
Surplus funds generated from loan payments also contributed to the increase.
Disbursement of the prior year's accrued incentive bonus in February, 1998
and the annual contribution to the Company's employee profit sharing plan were
the primary causes of the $1.5 million (15%) decrease in other liabilities
during the quarter just ended as compared to the prior year-end.
Results of Operations:
- ---------------------
Pre-tax income rose $1.4 million (106%) during the 3 months ended March
31, 1998 as compared to the same period in 1997. Gross revenues rose $.7
million (5%) during the comparable periods and overall expenses declined by
approximately the same amount. The primary source of revenue for the Company
is interest income generated from the loan portfolio. The rise in revenues
resulted from increased interest income earned on higher levels of average
net outstanding receivables during the current quarter as compared to the same
quarter a year ago. Average net receivables increased $2.4 million (2%) to
$145.5 million at March 31, 1998 from $143.0 million at March 31, 1997.
Although average debt securities outstanding increased to $136.1 million
during the current year from $131.4 during the same period a year ago, the
favorable interest rate environment enabled Management to keep increases in
interest expense to a minimal amount.
A decline in the Company's loan loss provision and lower other operating
expenses are the two primary factors responsible for the overall decrease in
expenses during the quarter ended March 31, 1998 as compared to the same
quarter a year ago. Lower loan charge offs during the quarter just ended and
higher collections on loans previously charged off resulted in the Company's
loan loss provision declining $.5 million (42%) during the comparable periods.
Other operating expenses such as personnel expenses and occupancy expenses
increased 8% during the comparable periods mainly due to merit salary
increases effective January 1 and the opening of 15 new branch offices during
the past 13 months. However, overall other operating expenses declined 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
expense to be significantly higher during the quarter ended March 31,1997 as
compared to the quarter just ended.
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 election of becoming 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 $21.0 million.
Available borrowings were $21.0 million at March 31, 1998 and December 31,
1997, relating to this agreement. Another agreement provides for an
additional $2.0 million for general operating purposes. Available borrowings
under this agreement were $2.0 million at March 31, 1998 and December 31,
1997.
Liquidity was not adversely affected by delinquent accounts as the
percentage of outstanding receivables 60 days or more past due remained at
6.4% at March 31, 1998 as compared to December 31, 1997.
Other:
- -----
Other 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. 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
the 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.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, December31,
1998 1997
---- ----
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS . . . . . . . . . . . $ 31,965,954 $ 25,122,077
------------ ------------
LOANS, net . . . . . . . . . . . . . . . . . . . 128,121,641 132,701,248
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at market value . . . . . 27,384,215 31,688,998
Held to Maturity, at amortized cost . . . . . 1,947,037 1,252,757
------------ ------------
29,331,252 32,941,755
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . 9,734,644 10,400,492
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . $199,153,491 $201,165,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT. . . . . . . . . . . . . . . . . . . $ 95,779,894 $ 98,929,587
OTHER LIABILITIES. . . . . . . . . . . . . . . . 8,714,326 10,255,315
SUBORDINATED DEBT . . . . . . . . . . . . . . . 37,647,794 37,246,521
------------ ------------
Total Liabilities. . . . . . . . . . 142,142,014 146,431,423
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value . . . . . . . -- --
Common Stock:
Voting Shares $100 par value; 2,000 shares
authorized; 1,700 shares outstanding. . . 170,000 170,000
Non-Voting Shares; no par value;
198,000 shares authorized;
168,300 shares outstanding . . . . . . -- --
Accumulated Other Comprehensive Income. . . . 294,146 342,810
Retained Earnings . . . . . . . . . . . . . . 56,547,331 54,221,339
------------ ------------
Total Stockholders' Equity. . . . . 57,011,477 54,734,149
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . $199,153,491 $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
Three Months Ended
March 31
-------------------------
(Unaudited)
1998 1997
---- ----
INTEREST INCOME. . . . . . . . . . . . . . . . . . $11,123,009 $10,638,144
INTEREST EXPENSE . . . . . . . . . . . . . . . . . 2,177,855 2,138,228
----------- -----------
NET INTEREST INCOME. . . . . . . . . . . . . . . . 8,945,154 8,499,916
Provision for Loan Losses . . . . . . . . . . . 727,980 1,256,606
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES . . . . . . . . . . . 8,217,174 7,243,310
----------- -----------
NET INSURANCE INCOME . . . . . . . . . . . . . . . 3,620,380 3,484,533
----------- -----------
OTHER REVENUE. . . . . . . . . . . . . . . . . . . 118,514 128,889
----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense . . . . . . . . . . . . . . . 5,601,337 5,165,094
Occupancy . . . . . . . . . . . . . . . . . . . 1,339,981 1,237,441
Other . . . . . . . . . . . . . . . . . . . . . 2,319,758 3,147,124
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . 9,261,076 9,549,659
----------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . 2,694,992 1,307,073
Provision for Income Taxes:
Current Provision . . . . . . . . . . . . . . 368,166 366,956
Deferred Tax Provision (See Note 5) . . . . . 834 3,604,560
----------- -----------
369,000 3,971,516
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . 2,325,992 (2,664,443)
RETAINED EARNINGS, beginning of period . . . . . . 54,221,339 53,200,768
----------- -----------
RETAINED EARNINGS, end of period . . . . . . . . . $56,547,331 $50,536,325
=========== ===========
EARNINGS PER SHARE:
Voting Common Stock; 1700 Shares
Outstanding all periods. . . . . . . . . . $ 13.68 $ (15.67)
Non-Voting Common Stock; 168,201 Shares ======= ========
Outstanding all periods . . . . . . . . . $ 13.68 $ (15.67)
======= ========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Three Months Ended
March 31
-------------------------
(Unaudited)
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . $ 2,325,992 $(2,664,443)
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for Loan Losses . . . . . . . . . 727,980 1,256,606
Depreciation and Amortization . . . . . . . 312,142 300,144
Deferred Income Taxes . . . . . . . . . . . 834 3,608,522
Other, net. . . . . . . . . . . . . . . . . 5,270 (405)
Decrease in Miscellaneous assets. . . . . . 475,258 186,056
(Decrease) in Accounts Payable and
Accrued Expenses . . . . . . . . . . . . (1,527,487) (1,524,301)
Net Cash Provided by ----------- -----------
Operating Activities . . . . . . . 2,319,989 1,162,179
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased. . . . . . . . . (23,431,680) (25,425,571)
Loan Payments. . . . . . . . . . . . . . . . . 27,283,307 27,955,858
Purchases of marketable debt securities. . . . (4,458,986) (6,949,293)
Principal payments on securities . . . . . . . 31,220 68,498
Sales of marketable securities . . . . . . . . -- 75,000
Redemptions of securities. . . . . . . . . . . 7,970,000 1,000,000
Other, net . . . . . . . . . . . . . . . . . . (121,553) (202,830)
Net Cash Provided by ----------- -----------
Operating Activities . . . . . . . 7,272,308 (3,478,338)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Senior Debt . . . . . . (3,149,693) 768,083
Subordinated Debt Issued . . . . . . . . . . . 1,774,326 2,198,871
Subordinated Debt redeemed . . . . . . . . . . (1,373,053) (1,518,801)
Net Cash Provided ----------- -----------
by Financing Activities. . . . . . (2,748,420) 1,448,153
----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . 6,843,877 (868,006)
CASH AND CASH EQUIVALENTS, beginning . . . . . . 25,122,077 27,432,705
----------- -----------
CASH AND CASH EQUIVALENTS, ending. . . . . . . . $31,965,954 $26,564,699
=========== ===========
Cash Paid during the period for: Interest . . . $ 2,205,668 $ 2,012,581
Income Taxes . 18,940 229,000
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
-NOTES-
1. The accompanying interim financial information of 1st Franklin
Financial Corporation and subsidiaries (the Company) should be read in
conjunction with the annual financial statements and notes thereto as
of December 31, 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 March 31, 1998, and December 31,
1997, and the results of its operations and its cash flows for the
three months ended March 31, 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 three months ended March 31, 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 March 31, 1997 includes a $3.6 million one
time non-recurring charge to expense accumulated prepaid tax at January
1, 1997 as a result of the Company electing "S corporation" status for
income tax reporting purposes.
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 $2,277,328 and $(2,928,501) for the
three months ended March 31, 1998 and 1997, 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 Jack Hobgood Mike Lyles Darryl Parker
Ronald Byerly Bruce Hooper Johnny McEntyre Henrietta Reathford
Susie Cantrell Janice Hyde Brian McSwain Timonth Schmotz
Donald Carter Judy Landon Dianne Moore Barbara Sims
Rhonda Davis Jeff Lee Melvin Osley Gaines Snow
Donald Floyd Tommy Lennon Dale Palmer Marc Thomas
<CAPTION>
OFFICES
-------
<S> <C> <C> <C>
Alabama Offices: Georgia Offices: Georgia Offices: Louisiana Offices:
- --------------- --------------- --------------- -----------------
Alexander City Blue Ridge Hogansville Alexandria
Andalusia Bremen Jackson Jena
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 Pearl
Huntsville Cochran Moultrie Picayune
Jasper Commerce Nashville
Madison Conyers Newnan South Carolina Offices:
Moulton Cordele Perry ----------------------
Muscle Shoals Cornelia Richmond Hill Aiken
Opp Covington Rome Anderson
Ozark Cumming Royston Cayce
Prattville Dallas Sandersville Clemson
Russellville Dalton Savannah Columbia
Scottsboro Dawson Statesboro Conway
Selma Douglas Swainsboro Easley
Sylacauga Douglasville Sylvania Florence
Troy Eastman Sylvester Gaffney
Tuscaloosa Elberton Thomaston Greenville
Ellijay Thomson Greenwood
Georgia Offices: Forsyth Tifton Greer
- --------------- Fort Valley Toccoa Lancaster
Adel Gainesville Valdosta Laurens
Albany Garden City Vidalia Marion
Alma Georgetown Warner Robins Orangeburg
Americus Greensboro Washington Rock Hill
Arlington Griffin Waycross Seneca
Athens Hartwell Winder Spartanburg
Bainbridge Hawkinsville Union
Barnesville Hazlehurst York
Baxley Hinesville
Blakely
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 31,965,954
<SECURITIES> 29,331,252
<RECEIVABLES> 160,046,540
<ALLOWANCES> 5,744,340
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,405,130
<DEPRECIATION> 7,707,049
<TOTAL-ASSETS> 199,153,491
<CURRENT-LIABILITIES> 95,779,894
<BONDS> 133,248,426
<COMMON> 170,000
0
0
<OTHER-SE> 56,841,477
<TOTAL-LIABILITY-AND-EQUITY> 199,153,491
<SALES> 0
<TOTAL-REVENUES> 15,884,929
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,261,076
<LOSS-PROVISION> 727,980
<INTEREST-EXPENSE> 2,177,855
<INCOME-PRETAX> 2,694,992
<INCOME-TAX> 369,000
<INCOME-CONTINUING> 2,325,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,325,992
<EPS-PRIMARY> 13.68
<EPS-DILUTED> 0
</TABLE>
