-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OgCuZaj7uo10hIBJoKdZD5M5N9fQ7DfAcGZ/ICpTsqekH6aARgbrR1dYmctDRgDp IkUHq0WwDm+4IAQ8+kBoOg== 0000038723-97-000013.txt : 19970329 0000038723-97-000013.hdr.sgml : 19970329 ACCESSION NUMBER: 0000038723-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FRANKLIN FINANCIAL CORP CENTRAL INDEX KEY: 0000038723 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 580521233 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-27985 FILM NUMBER: 97567683 BUSINESS ADDRESS: STREET 1: 213 E TUGALO ST STREET 2: P O BOX 880 CITY: TOCCOA STATE: GA ZIP: 30577 BUSINESS PHONE: 4048867571 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN DISCOUNT CO DATE OF NAME CHANGE: 19840115 10-K 1 FORM 10-K PART I THRU SIGNATURE 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, 1996 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) 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ 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 1 of 2 pages) State the aggregate market value of the voting stock held by non- affiliated of the Registrant: Not Applicable. 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, 1997 ------------------------------------- -------------------------------- 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, 1996 are incorporated by reference into Parts I, II and IV of this Form 10-K. (Cover page 2 of 2 pages) 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, 1996 are incorporated herein by reference. Item 2. PROPERTIES: Map on inside front cover; paragraph 1 of The Company, Page 1; 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, 1996 are incorporated herein by reference. Item 3. LEGAL PROCEEDINGS: During recent months, the Company entered into settlement agreements with certain borrowers who had previously asserted claims against the Company. Although the Company and its employees deny that they are guilty of any wrongdoing or any breach of any legal obligation or duty to the Claimants, in recognition of the expense and uncertainty of litigation, Management felt it was in the best interest of the Company to dispose of these cases. The following cases previously reported have been disposed of: Carl J. White v. 1st Franklin Financial, et al.; Filed in the Circuit Court of Talladega County, Alabama, Civil Action No. CV-94-374; previously disclosed in the Company's Form 10-K for the period ended December 31, 1994. The case was settled on November 26, 1996. Princess Nobels, et al. v. 1st Franklin , et al.; Filed in the United States District Court for the Middle District of Alabama, Southern Division; Civil Action No. CV-94-T-699-N; previously disclosed in the Company's Form 10-K for the period ended December 31, 1994. The case was settled during February 1997. Annie Liptrot, et al. v. 1st Franklin Financial Corporation, et al.; Filed in the United States District Court for the Middle District of Alabama; Civil Action No. CV-95-T-1656-N; previously disclosed in the Company's Form 10-K for the period ended December 31, 1995. The case was settled during March 1997. Timothy Anthony and Sandrea M. Anthony vs 1st Franklin Financial Corporation,et al.; Filed in the United States District Court for the Middle District of Alabama, Northern Division, Civil Action No. CV-95-D-479-N; previously reported in the Company's Form 10-Q for the period ended September 30, 1995. The case was settled during March 1997. Dorothy McCurdy vs American General Finance, Inc.; et al. Filed in the U.S. District Court for the Middle District of Alabama, Northern Division, Civil Action No. 95-D-1291-N; previously reported in the Company's Form 10-Q for the period ended September 30, 1995. The case was settled during March 1997. Other than ordinary routine litigation incidental to the finance business, there are no other material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not applicable. -1- PART II Item 5. MARKET FOR THE 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, 1996 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, 1996 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, 1996 is incorporated herein by reference. 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, 1996 are incorporated herein by reference. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: Not applicable. - -------------------------- Forward Looking Statements: The statements contained herein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Market for the Registrant's Common Stock and Related Stockholders' Matters" and elsewhere in this Annual Report on Form 10-K 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, business the ability to manage cash flow and working capital, and other factors referenced elsewhere herein. -2- 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 ---------------- --- ---------------- ------------ W. Richard Acree (1)(2) 69 Since 1970; None When successor elected and qualified Ben F. Cheek, III (3)(4)(5) 60 Since 1967; Chairman of When successor Board elected and qualified Lorene M. Cheek (2)(4)(6) 87 Since 1946; None When successor elected and qualified Jack D. Stovall (1)(2) 61 Since 1983; None When successor elected and qualified Robert E. Thompson (1)(2) 65 Since 1970; None When successor elected and qualified _______________________________________________________________________ (1) Member of Audit Committee. (2) Mr. Acree is President of Acree Oil Company, a distributor of petroleum products in Northeast Georgia; 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. -3- EXECUTIVE OFFICERS Name, Age, Position and Family Relationship Business Experience - ----------------------- ------------------- Ben F. Cheek, III, 60 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, 60 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, 39 Joined the Company in 1983 and became Secretary Secretary in 1989. No Family Relationship A. Roger Guimond, 42 Joined the Company in 1976 as an accountant and Vice President and became Chief Accounting Officer in 1978, Chief Chief Financial Officer Financial Chief Financial Officer Officer in 1991 No Family Relationship and Vice President in 1992. Linda L. Sessa, 42 Joined the Company in 1984 and became Treasurer Treasurer in 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 bankruptcy, criminal proceedings or securities violation proceeding has occurred within the past 5 years with regard to any Director or Executive Officer of the Company. -4- 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 1996 252,000 217,932 3,431 98,366 Chairman and 1995 240,000 220,466 3,033 146,114 CEO 1994 228,000 189,693 2,760 34,268 T. Bruce Childs 1996 246,000 217,692 3,179 87,633 President 1995 228,000 219,986 4,236 130,447 1994 210,000 188,973 4,682 31,071 A. Roger Guimond 1996 132,000 74,362 1,650 29,589 Vice President 1995 120,000 74,816 1,650 40,959 and CFO 1994 108,000 62,174 1,650 17,945 * 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 $4,931 for 1996, $4,425 for 1995 and $3,816 for 1994. 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. -5- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: (a) Security Ownership of Certain Beneficial Owners as of January 1, 1997: 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 Toccoa, Georgia 30577 John Russell Cheek Voting Common 441 Shares - Direct 25.94% 181 Garland Road Toccoa, Georgia 30577 (b) Security Ownership of Management as of January 1, 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 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 for the Company. Because partnerships are ineligible as S Corporation shareholders, Cheek Investments, L.P. -6- 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 trust. Below is a recap of ownership in 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. Herring) 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 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 during the three year period ended December 31, 1996 related to these agreements was $63,800 per 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 $4,200 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1996, the Company maintained $2,300,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $1,609,087 in demand deposits with Liberty at December 31, 1996. -7- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) 1. Financial Statements: Incorporated by reference from the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1996: Report of Independent Public Accountants. Consolidated Statements of Financial Position at December 31, 1996 and 1995. Consolidated Statements of Income and Retained Earnings for the three years ended December 31, 1996. Consolidated Statements of Cash Flows for the three years ended December 31, 1996. 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 -8- 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.) (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. 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, 1996, 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, 1996. 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, 1996. -9- 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 27, 1997 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 27, 1997 - ---------------------- Chief Executive -------------- Ben F. Cheek, III Officer s/(T. Bruce Childs) President March 27, 1997 - ---------------------- -------------- T. Bruch Childs s/(A. Roger Guimond) Vice President; March 27, 1997 - ---------------------- Chief Financial -------------- A. Roger Guimond Officer s/(W. Richard Acree) Director March 27, 1997 - ---------------------- -------------- W. Richard Acree s/(Lorene M. Cheek) Director March 27, 1997 - ---------------------- -------------- Lorene M. Cheek s/(Jack D. Stovall) Director March 27, 1997 - ---------------------- -------------- Jack D. Stovall s/(Robert E. Thompson) Director March 27, 1997 - ---------------------- -------------- 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: -10- (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. (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, 1996, which is filed as Exhibit 13 hereto. The Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements. -11- EX-10 2 EXHIBIT 10(G) Exhibit 10(g) NINTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS NINTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT ("Ninth Amendment"), dated as of June 20, 1996, among 1st FRANKLIN FINANCIAL CORPORATION (formerly called "FRANKLIN DISCOUNT COMPANY"), a Georgia corporation, as Borrower (the "Company"), CORESTATES BANK, N.A.*, a national banking association (formerly called the Philadephia National Bank) ("PNB"), FLEET BANK, N.A. (formerly called National Westminster Bank USA), a national banking association ("Fleet"), SOUTHTRUST BANK OF GEORGIA, N.A., a national banking association , as assignee of First American Bank of Georgia, N.A. ("SouthTrust"), and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation ("Harris"), as lenders (collectively, the "Banks"), and CORESTATES BANK, N.A., a national banking association, as Agent for the Banks (in such capacity, the "Agent"), W I T N E S S E T H: WHEREAS the Company, PNB, Fleet, United States Trust Company of New York, a New York banking corporation ("U.S. Trust") and the Agent entered into a Revolving Credit and Term Loan Agreement dated as of October 1, 1985, as amended, by an Amendment to Revolving Credit and Term Loan Agreement dated as of November 10, 1986 pursuant to which each said bank agreed to make Loans to the Company as set forth therein; and WHEREAS, U.S. Trust sold and assigned all of its right, title and interest in and to its Loans under said Credit Agreement as so amended to Dai-Ichi Kangyo Bank, Ltd. which, pursuant to the Second Amendment, Assignment and Assumption Agreement dated March 1, 1988 to said Revolving Credit and Term Loan Agreement, sold, assigned and transferred all of its right, title and interest in its Loans under said Revolving Credit and Term Loan Agreement to First American Bank of Georgia, N.A. ("FAB Georgia"); and WHEREAS, SouthTrust is the assignee of FAB Georgia's right, title and interest in its Loans under said Revolving Credit and Term Loan Agreement; and WHEREAS, said Revolving Credit and Term Loan Agreement was further amended and extended by a Third Amendment to Revolving Credit and Term Loan Agreement dated as of August 31, 1989, a Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of May 1, 1990, a Fifth Amendment and Extension Agreement dated as of April 23, 1992 and a Sixth Amendment to Revolving Credit and Term Loan Agreement dated as of July 20, 1992 (the "Sixth Amendment"); and WHEREAS, Harris was added as a lender under said Revolving Credit and Term Loan Agreement pursuant to the Sixth Amendment (said Revolving Credit and Term Loan Agreement as amended and extended, being referred to herein as the "Credit Agreement"); and WHEREAS, the Company, the Banks and the Agent desire to make certain amendments to the Credit Agreement to extend the final termination date of the Credit Agreement and the Banks' Commitments all as more particularly set forth herein; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the Company, the Banks and the Agent hereby agree as follows: 1. All capitalized terms used herein and not otherwise defined herein shall have the meanings given such terms in the Credit Agreement. 2. The Company, the Banks and the Agent agree that, unless the Banks' Commitments are terminated sooner in accordance with Section 2.07 or Section 7.01 of the Credit Agreement, the termination date of the Credit Agreement and of all of the Banks' Commitments thereunder is hereby extended to the date which is three and one half years after the June 30 on which the majority in interest of the Banks exercise their option to terminate the Commitments of all the Banks pursuant to Section 2.07(a). To that end, the Credit Agreement is hereby amended as follows: (a) The defined term "Commitment Termination Date" set forth in Section 1.01 of the Credit Agreement, relating to Certain Defined Terms, is hereby amended to read in its entirety as follows: "Commitment Termination Date" shall mean June 30 in any year in which a written notice of termination is given as provided in Section 2.07. (b) Section 2.07(c) of the Credit Agreement is hereby amended to read in its entirety as follows: (c) Final Payment. Notwithstanding anything herein contained to the contrary, unless a Bank has exercised its right to withdraw from the credit pursuant to Section 2.07(b) or the Banks and the Company otherwise agree in writing, 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 established pursuant to Section 2.07(a). 3. The Company hereby agrees to execute and deliver to the Agent a Fourth Amended and Restated Revolving Credit Note substantially in the form of Exhibit A-1 hereto payable to the order of each of PNB, Fleet and SouthTrust and a Second Amended and Restated Revolving Credit Note substantially in the form of Exhibit A-2 hereto payable to the order of Harris, evidencing the Loans to be made by the Banks to the Company in the amount of the Commitment of each Bank and Harris, as amended hereby. The term "Notes" as defined and used in the Agreement and as used herein shall, from and after the date hereof, mean said Fourth Amended and Restated Revolving Credit Notes and said Second Amended and Restated Revolving Credit Note, as said Notes may from time to time be issued, amended, extended or supplemented. 4. To induce the Banks and the Agent to enter into this Ninth Amendment, the Company represents and warrants to each Bank and to the Agent as follows: (a) The Company has taken all corporate action necessary to authorize the execution, delivery and performance of this Ninth Amendment, the Fourth Amended Revolving Credit Notes payable to the order of PNB, Fleet and SouthTrust and the Second Amended and Restated Revolving Credit Note payable to the order of Harris. This Ninth Amendment and said Notes are, or when executed by the Company and delivered to the Agent will be, duly executed and constitute the valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The Company hereby ratifies and confirms the representations and warranties of the Company set forth in Article 3 of the Credit Agreement as being true and correct on the date hereof, as brought current pursuant to Section 10(a) of the Sixth Amendment; provided that the representations and warranties which refer to the Form 10-K shall be deemed to refer to the Company's most recent Form 10-K filed by the Company with the Security and Exchange Commission and the representations and warranties which refer to financial statements of the Company shall be deemed to refer to the most recent financial statements furnished by the Company to the Banks. 5. The effectiveness of this Ninth Amendment is subject to the fulfillment of the conditions precedent to all Loans set forth in Section 4.02 of the Credit Agreement and to the following conditions precedent: (a) The Agent shall have received from Messrs. Jones, Day, Reavis and Pogue, counsel to the Company, five executed copies of their opinion dated the date of this Ninth Amendment, addressed to each of the Banks in care of the Agent and substantially in the form annexed hereto as Exhibit B; (b) The Agent shall have received one Note (in the form of Exhibit A-1 hereto annexed) for each Bank except Harris and one Note (in the form of Exhibit A-2 hereto annexed) for Harris, all dated the date of this Ninth Amendment and duly executed by the Company; (c) The Agent shall have received five certified copies of resolutions of the Boards of Directors of the Company, respectively, authorizing the execution, delivery and performance by the Company of this Ninth Amendment and the Notes and the borrowings hereunder, which certificates shall state that said resolutions are in full force and effect without modification on the date of such certification. 6. All other terms and conditions of the Credit Agreement shall remain unchanged and are hereby ratified and confirmed. IN WITNESS WHEREOF, the undersigned have caused this Ninth Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written in several counterparts, each of which is an original and all of which are identical, and each of the counterparts hereof so executed shall for all purposes be deemed to be an original. 1st FRANKLIN FINANCIAL CORPORATION By: s/A. Roger Guimond ---------------------- Vice President and CFO CORESTATES BANK, N.A. as SOUTHTRUST BANK OF GEORGIA, N.A. a Bank and as Agent By: s/William E. Musselman By: William E. Reid III ---------------------- ------------------- V.P V.P. FLEET BANK, N.A. HARRIS TRUST AND SAVINGS BANK By: s/Christine Montagna By: s/Jerome P. Crokin -------------------- ------------------- V.P V.P. EXHIBIT A-1 Fourth Amended and Restated Revolving Credit Note $___________________ Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of [_______________________] (the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in immediately available funds, on the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of ____________ Million Dollars ($______________) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Ninth Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $_______________________ Third Amended and Restated Revolving Credit Note dated July 20, 1994 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By ______________________________ Title Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- EXHIBIT A-2 Second Amended and Restated Revolving Credit Note $5,000,000 Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in Immediately Available Funds, on the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of Five Million Dollars ($5,000,000) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Seventh Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $5,000,000 Revolving Credit Note dated July 20, 1992 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By ______________________________ Title Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- Fourth Amended and Restated Revolving Credit Note $6,000,000 Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of CORESTATES BANK, N.A., a national banking association (the "Bank"), at the office of CoreStates Bank, N.A., as Agent, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in Immediately Available Funds, on the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of Six Million Dollars ($6,000,000) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Seventh Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $6,000,000 Revolving Credit Note dated July 20, 1992 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By: s/A. Roger Guimond ------------------------ Vice President and CFO Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- Fourth Amended and Restated Revolving Credit Note $5,000,000 Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of SOUTHTRUST BANK OF GEORGIA, N.A., a national banking association (as assignee of First American Bank of Georgia, N.A.)(the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in Immediately Available Funds, on the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of Five Million Dollars ($5,000,000) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Ninth Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $5,000,000 Revolving Credit Note dated July 20, 1992 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By: s/ A. Roger Guimond ------------------------ Vice President and CFO Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- Fourth Amended and Restated Revolving Credit Note $5,000,000 Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of FLEET BANK, N.A.(the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in Immediately Available Funds, on the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of Five Million Dollars ($5,000,000) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Ninth Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $5,000,000 Revolving Credit Note dated July 20, 1992 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By: s/ A. Roger Guimond ---------------------- Vice President and CFO Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- Second Amended and Restated Revolving Credit Note $5,000,000 Philadelphia, Pennsylvania June 20, 1996 FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation (the "Company"), promises to pay to the order of HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the United States of America, in Immediately Available Funds, on the first to occur of December 31, 1999 or the January 1 following a "Commitment Termination Date" as defined in the Agreement hereinafter referred to, the sum of Five Million Dollars ($5,000,000) or the amount outstanding on said date of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as conclusively evidenced by written endorsement with respect thereto by an officer of the Bank upon the Schedule hereto annexed, whichever is less. The Company shall also pay to the Bank interest (computed on the basis of the actual number of days elapsed in a year of 360 days) on the unpaid principal amount hereof in like money, on the last business day of each June, September, December and March, in each year, commencing on the first of such dates after the date hereof, and at maturity until payment in full at a rate per annum, determined daily, equal to one quarter of one percentage point above the rate of interest for loans established and publicly announced in Philadelphia from time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate"). Interest shall be payable on any overdue amount of principal at a rate per annum equal to two percentage points above the Prime Rate. Each change in the rate of interest hereon due to a change in the Prime Rate shall be effective on the effective date of such change in the Prime Rate, but in no event shall interest be payable at a rate higher than that permitted by applicable law. The undersigned also agrees to pay the Facility Service Fee and the Agents's fee described in the Agreement hereinafter referred to. The outstanding principal balance of this Note may be prepaid by the Company, in whole or in part, at any time or from time to time, but any partial prepayment shall not be less than the minimum amount provided in Section 2.01(a) of the Agreement hereinafter referred to. As used herein, the term "business day" shall mean a day other than a Saturday, Sunday or legal bank holiday under the laws of the States of Pennsylvania or New York, and the term "Immediately Available Funds" shall mean funds which are available for immediate use by the Bank at the Bank's office hereinabove set forth not later that the due date of such payment. This Note is one of the Notes issued pursuant to Paragraph 3 of a certain Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June 20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A., Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which amends a certain Credit Agreement dated as of October 1, 1985 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National Westminster Bank USA), United States Trust Company of New York (predecessor by way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank, N.A., as Agent, as amended (herein, together with said Ninth Amendment, all other prior amendments thereto and any amendments which may hereafter be made thereto, called the "Agreement"). Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note may be declared to be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, and the Company shall be further obligated to reimburse the holder hereof for all reasonable out-of-pocket expenses of the holder in enforcing or attempting to enforce this Note, all as provided in the Agreement. This Note replaces and supersedes but does not extinguish the Company's liabilities and outstanding obligations under the Company's $5,000,000 Revolving Credit Note dated July 20, 1992 to the order of the Bank. This Note and all rights and obligations hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 1st FRANKLIN FINANCIAL CORPORATION By: s/ A. Roger Guimond ---------------------- Vice President and CFO Schedule of Loans and Principal Payments ---------------------------------------- Name of Unpaid Person Amount of Amount of Principal Making Date Loan Principal Paid Balance Notation ---- ---- -------------- ------- -------- EX-12 3 EXHIBIT 12 Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31 ------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except ratio data) Income Before Income Taxes . . $ 8,418 $ 8,969 $10,319 $ 8,322 $ 6,177 Interest on Indebtedness . . . 8,312 8,048 5,556 4,910 4,423 Portion of rents representative of the interest factor. . 518 449 419 362 304 ------- ------- ------- ------- ------- Earnings as adjusted. . . . $17,248 $17,466 $16,294 $13,594 $10,904 ======= ======= ======= ======= ======= Fixed Charges: Interest on Indebtedness . . . $ 8,312 $ 8,048 $ 5,556 $ 4,910 $ 4,423 Portion of rents representative of the interest factor. . 518 449 419 362 304 ------- ------- ------- ------- ------- Fixed Charges. . . . . . . $ 8,830 $ 8,497 $ 5,975 $ 5,272 $ 4,727 ======= ======= ======= ======= ======= Ratio of Earnings to Fixed Charges. . . . . 1.95 2.06 2.73 2.58 2.31 ==== ==== ==== ==== ==== EX-13 4 EXHIBIT 13 Exhibit 13 1st FRANKLIN FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1996 Photo of the Park in front of the Corporate Office. (Park in foreground and building in background) 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) 1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES Alabama Offices: Georgia Offices: Georgia Offices: --------------- --------------- --------------- Alexander City Chatsworth Rome Andalusia Clarkesville Royston Arab Claxton Sandersville Athens Clayton Savannah Bessemer Cleveland Statesboro Birmingham Cochran Swainsboro Clanton Commerce Sylvania Cullman Conyers Sylvester Decatur Cordele Thomaston Dothan Cornelia Thomson Enterprise Covington Tifton Fayette Cumming Toccoa Florence Dallas Valdosta Gadsden Dalton Vidalia Geneva Dawson Warner Robins Hamilton Douglas Washington Huntsville Douglasville Waycross Jasper East Ellijay Winder Moulton Eastman Muscle Shoals Elberton Louisiana Office: Opp Forsyth ---------------- Ozark Fort Valley Pineville Prattville Gainesville Russellville Garden City Mississippi Offices: Scottsboro Georgetown ------------------- Selma Greensboro Grenada Sylacauga Griffin Gulfport Troy Hartwell Hattiesburg Tuscaloosa Hawkinsville Jackson Hazlehurst Pearl Georgia Offices: Hinesville --------------- Hogansville South Carolina Offices: Adel Jackson ---------------------- Albany Jasper Aiken Alma Jefferson Anderson Americus Jesup Cayce Athens Lagrange Clemson Bainbridge Lavonia Columbia Barnesville Lawrenceville Easley Baxley Madison Florence Blakely Manchester Gaffney Blue Ridge McDonough Greenville Bremen McRae Greenwood Brunswick Milledgeville Lancaster Buford Monroe Laurens Butler Montezuma Orangeburg Cairo Monticello Rock Hill Calhoun Moultrie Seneca Canton Nashville Union Carrollton Newnan York Cartersville Perry Cedartown Richmond Hill 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 91 branch offices in Georgia, 30 in Alabama, 17 in South Carolina, 5 in Mississippi and 1 in Louisiana. As of December 31, 1996, the resources of the Company were invested principally in loans which comprise 68% 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. On the basis of total capital funds employed (common stockholder's equity and subordinated debt), American Banker recently ranked the Company as the 70th largest finance company in the United States. -1- ADEL, GEORGIA 1996 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 Adel Staff for this significant achievement. The Friendly Franklin Folks salute you! -2- TO OUR INVESTORS, EMPLOYEES AND FRIENDS: With the economy in the southeastern United States in good condition and with inflation fairly stable at 2 1/2% - 3%, our company decided early in 1996 that the time for new branch office expansion was now. We realized that the start-up costs of the new branches would be rather substantial but we felt better now than when the economy begins to slow. So during the year, we opened 16 new offices with 6 of the offices in states new to 1st Franklin - - Mississippi and Louisiana. With these additional offices, our 1st Franklin family is now composed of 575 men and women working in 145 offices including our Home Office and we are in 5 southeastern states. While growing in number of branch offices, we also continued our growth in net loan and sales finance receivables. You will notice in the financial information that follows, that over $10 million was added during the year which represented an 8% increase over year-end 1995. This pushed our year-end assets to almost $192 million leaving us only $8 million dollars short of our goal of $200 million in assets by the year 2000. Hopefully, our growth in 1997 will allow us to reach our goal three years ahead of schedule. Our Investment Center had another excellent year during 1996 and continues to be the primary source for funding our receivables growth. We now have 6,333 investors and supporters that provide our company with almost $130 million with which to build and grow. None of what we have been able to accomplish could have been done without them and we will always be grateful for their support and encouragement. The nationwide epidemic of personal bankruptcies impacted our company's earnings just as it did many other finance and credit card companies. Since this problem doesn't appear to have an immediate solution in the form of legislation making bankruptcy less attractive, we are trying to find ways to improve the work we do prior to granting a request for credit. Hopefully, by working closely with our customers that become overextended, we can reduce the impact that this growing national problem is having on all of us. I am always grateful that this letter in our Annual Report gives me the chance to express my heartfelt thanks to all of the people that contribute to the success of 1st Franklin Financial. To our employees, our investors, our bankers, our customers and our many friends - - - THANKS! Thanks for your help and support in the past and thanks in advance for your continued interest and confidence in our company in the future as we strive to continue our efforts to build the premier consumer finance company in the Southeast. Very sincerely yours, s/Ben F. Cheek, III --------------------- Chairman of the Board -3- SELECTED CONSOLIDATED FINANCIAL INFORMATION Set forth below is selected financial data of the Company. This information should be read in conjunction with the more detailed financial statements and notes thereto included elsewhere herein. Year Ended December 31 -------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In 000's, except ratio data) Selected Income Statement Data: Revenues . . . . . . . . . . .$ 58,415 $ 55,157 $ 49,334 $ 41,625 $ 34,613 Net Interest Income. . . . . . 32,534 30,147 28,111 23,449 19,461 Interest Expense . . . . . . . 8,312 8,048 5,556 4,910 4,423 Provision for Loan Losses. . . . . . . . . 6,266 4,631 3,238 2,407 2,209 Income Before Income Taxes . . . . . . . . 8,418 8,969 10,319 8,322 6,177 Net Income . . . . . . . . . . 6,238 6,507 7,165 5,891 4,498 Ratio of Earnings to Fixed Charges. . . . . . . . 1.95 2.06 2.73 2.58 2.31 Selected Balance Sheet Data: Loans, Net . . . . . . . . . .$129,684 $120,763 $108,667 $ 97,485 $ 82,820 Total Assets . . . . . . . . . 191,904 182,084 136,468 123,661 105,812 Senior Debt. . . . . . . . . . 94,740 95,541 66,677 60,540 47,822 Subordinated Debt. . . . . . . 34,942 30,617 21,603 20,875 21,455 Stockholders' Equity . . . . . 53,414 47,747 40,605 34,678 28,718 Ratio of Total Liabilities to Stockholders' Equity. . . 2.59 2.81 2.36 2.57 2.68 -4- BUSINESS The Company is engaged in the business of making consumer loans to individuals in relatively small amounts and 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, 1996 direct cash loans comprised 72% of the Company's outstanding loans, real estate loans 20% and sales finance contracts 8%. 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 ------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands) Direct Cash Loans. . . . . . . $28,440 $25,898 $22,962 $18,618 $14,669 Real Estate Loans . . . . . . 7,238 7,058 7,284 6,722 6,587 Sales Finance Contracts . . . 2,417 2,757 2,472 2,249 1,825 ------- ------- ------- ------- ------- Total Finance Charges. . . . $38,095 $35,713 $32,718 $27,589 $23,081 ======= ======= ======= ======= ======= 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 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 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 takes 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- The Company is in competition with several national and regional finance companies, as well as a variety of local finance companies in the communities which it serves. The Company 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, 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 ------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Direct Cash Loans. . . . . . . . 30.75% 31.26% 31.76% 31.81% 31.87% Real Estate Loans. . . . . . . . 21.53 22.73 24.37 22.70 23.42 Sales Finance Contracts. . . . . 20.77 22.28 21.27 20.47 20.66 Information regarding the Company's operations: As of December 31 ------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Number of Branch Offices . . . . 144 128 117 112 102 Number of Employees . . . . . . 575 527 473 456 390 Average Total Loans Outstanding Per Branch ( in 000's) . . . . . . $1,138 $1,208 $1,202 $1,124 $1,037 Average Number of Loans Outstanding Per Branch . . . . 701 765 814 778 761 -6- DESCRIPTION OF LOANS Year Ended December 31 ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- DIRECT CASH LOANS: - ----------------- Number of Loans Made to New Borrowers . . . . . 27,636 25,840 26,616 24,978 23,479 Number of Loans Made to Former Borrowers. . . . 14,410 14,740 13,185 11,710 9,639 Number of Loans Made to Present Borrowers . . . 63,329 61,304 60,014 54,311 44,866 Total Number of Loans Made . . . . . . . . . . . 105,375 101,884 99,815 90,999 77,984 Total Volume of Loans Made (in 000's) . . . . . $173,196 $164,034 $150,658 $127,103 $100,176 Average Size of Loans Made . . . . . . . . $ 1,644 $ 1,610 $ 1,509 $ 1,397 $ 1,285 Number of Loans Outstanding. . . . . . . . 80,733 76,549 72,993 66,209 57,458 Total of Loans Outstanding (in 000's) . . $117,141 $107,960 $ 96,620 $ 82,595 $ 65,560 Percent of Total Loans . . . 72% 70% 69% 66% 62% Average Balance on Outstanding Loans. . . . . $ 1,451 $ 1,410 $ 1,324 $ 1,247 $ 1,141 REAL ESTATE LOANS: - ----------------- Total Number of Loans Made . . . . . . . . . . . 2,240 2,674 2,264 2,315 1,886 Total Volume of Loans Made (in 000's). . . . . . $ 22,398 $ 22,379 $ 18,755 $ 20,330 $ 15,366 Average Size of Loans Made . . . . . . . . $ 9,999 $ 8,369 $ 8,284 $ 8,782 $ 8,147 Number of Loans Outstanding. . . . . . . . 4,214 4,188 3,811 3,930 3,796 Total of Loans Outstanding (in 000's) . . $ 33,507 $ 32,653 $ 29,150 $ 30,174 $ 28,171 Percent of Total Loans . . . 20% 21% 21% 24% 27% Average Balance on Outstanding Loans. . . . . $ 7,951 $ 7,797 $ 7,649 $ 7,678 $ 7,421 SALES FINANCE CONTRACTS: - ----------------------- Number of Contracts Purchased. . . . . . . . . 17,499 19,195 21,744 20,726 20,507 Total Volume of Contracts Purchased (in 000's) . . . $ 17,150 $ 18,885 $ 20,489 $ 18,770 $ 17,512 Average Size of Contracts Purchased. . . . . . . . . $ 980 $ 984 $ 942 $ 906 $ 854 Number of Contracts Outstanding. . . . . . . . 15,941 17,151 18,395 17,020 16,405 Total of Contracts Outstanding (in 000's) . . $ 13,201 $ 13,955 $ 14,806 $ 13,099 $ 12,053 Percent of Total Loans . . . 8% 9% 10% 10% 11% Average Balance on Outstanding Contracts. . . $ 828 $ 814 $ 805 $ 770 $ 735 -7- LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING Year Ended December 31 ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands) LOANS ACQUIRED DIRECT CASH LOANS. . . . . $169,825 $164,034 $150,217 $127,084 $ 98,488 REAL ESTATE LOANS. . . . . 20,971 22,000 17,916 19,485 13,779 SALES FINANCE CONTRACTS. . 16,131 17,676 19,386 17,759 15,814 NET BULK PURCHASES . . . . 5,818 1,588 2,383 1,875 4,973 -------- -------- -------- -------- -------- TOTAL LOANS ACQUIRED . . $212,745 $205,298 $189,902 $166,203 $133,054 ======== ======== ======== ======== ======== LOANS LIQUIDATED DIRECT CASH LOANS. . . . . $164,016 $152,694 $136,633 $110,068 $ 85,643 REAL ESTATE LOANS. . . . . 21,544 18,876 19,779 18,327 15,583 SALES FINANCE CONTRACTS. . 17,904 19,736 18,782 17,724 14,555 -------- -------- -------- -------- -------- TOTAL LOANS LIQUIDATED . $203,464 $191,306 $175,194 $146,119 $115,781 ======== ======== ======== ======== ======== LOANS OUTSTANDING DIRECT CASH LOANS. . . . . $117,141 $107,960 $ 96,620 $ 82,595 $ 65,560 REAL ESTATE LOANS. . . . . 33,507 32,653 29,150 30,174 28,171 SALES FINANCE CONTRACTS. . 13,201 13,955 14,806 13,099 12,053 -------- -------- -------- -------- -------- TOTAL LOANS OUTSTANDING. $163,849 $154,568 $140,576 $125,868 $105,784 ======== ======== ======== ======== ======== UNEARNED FINANCE CHARGES DIRECT CASH LOANS. . . . . $ 16,270 $ 17,030 $ 16,114 $ 14,125 $ 10,959 REAL ESTATE LOANS. . . . . -- 12 43 65 133 SALES FINANCE CONTRACTS. . 1,829 2,007 2,140 1,832 1,691 -------- -------- -------- -------- -------- TOTAL UNEARNED FINANCE CHARGES . . . . $ 18,099 $ 19,049 $ 18,297 $ 16,022 $ 12,783 ======== ======== ======== ======== ======== -8- 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 ------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except % data) DIRECT CASH LOANS: 60-89 Days Past Due. . . . . . $ 2,404 $ 1,914 $ 1,353 $ 1,120 $ 850 Percentage of Outstanding. . . 2.05% 1.77% 1.40% 1.36% 1.30% 90 Days or More Past Due . . . $ 5,419 $ 3,286 $ 2,482 $ 1,781 $ 1,524 Percentage of Outstanding. . . 4.63% 3.04% 2.57% 2.16% 2.32% REAL ESTATE LOANS: 60-89 Days Past Due. . . . . . $ 426 $ 254 $ 299 $ 439 $ 364 Percentage of Outstanding. . . 1.27% .78% 1.03% 1.46% 1.29% 90 Days or More Past Due . . . $ 1,334 $ 1,196 $ 919 $ 1,206 $ 1,551 Percentage of Outstanding. . . 3.98% 3.66% 3.15% 4.00% 5.51% SALES FINANCE CONTRACTS: 60-89 Days Past Due. . . . . . $ 339 $ 295 $ 281 $ 195 $ 165 Percentage of Outstanding. . . 2.57% 2.11% 1.90% 1.49% 1.37% 90 Days or More Past Due . . . $ 602 $ 463 $ 293 $ 298 $ 265 Percentage of Outstanding. . . 4.56% 3.32% 1.98% 2.27% 2.20% -9- 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 -------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except % data) DIRECT CASH LOANS Average Net Loans. . . . . . $ 92,489 $ 82,847 $ 72,298 $ 58,538 $ 46,026 Liquidations . . . . . . . . $164,016 $152,694 $136,633 $110,068 $ 85,643 Net Losses . . . . . . . . . $ 4,617 $ 3,753 $ 2,475 $ 1,582 $ 1,388 Net Losses as % of Average Net Loans . . . . . . . . . 4.99% 4.53% 3.42% 2.70% 3.02% Net Losses as % of Liquidations. . . . . . . . 2.81% 2.46% 1.81% 1.44% 1.62% REAL ESTATE LOANS Average Net Loans. . . . . . $ 33,614 $ 31,050 $ 29,889 $ 29,608 $ 28,124 Liquidations . . . . . . . . $ 21,544 $ 18,876 $ 19,779 $ 18,327 $ 15,583 Net Losses . . . . . . . . . $ 49 $ 22 $ 43 $ 20 $ 7 Net Losses as % of Average Net Loans . . . . . . . . . .15% .07% .14% .07% .02% Net Losses as % of Liquidations. . . . . . . . .23% .12% .22% .11% .04% SALES FINANCE CONTRACTS Average Net Loans. . . . . . $ 11,640 $ 12,377 $ 11,623 $ 10,984 $ 8,833 Liquidations . . . . . . . . $ 17,904 $ 19,736 $ 18,782 $ 17,724 $ 14,555 Net Losses . . . . . . . . . $ 478 $ 434 $ 353 $ 272 $ 196 Net Losses as % of Average Net Loans . . . . . . . . . 4.11% 3.51% 3.04% 2.48% 2.22% Net Losses as % of Liquidations. . . . . . . . 2.67% 2.20% 1.88% 1.53% 1.35% 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- CREDIT INSURANCE - ---------------- When authorized to do so by the borrowers, the Company writes life, accident and health, property and automobile insurance in connection with its loans. Non-filing insurance is written on direct cash loans where the security instrument is not recorded in States where this is permitted. 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 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. On real estate secured loans, the Truth-in-Lending Act requires that customers be provided a three-day right of rescission and certain disclosures. A Federal Trade Commission ruling prevents the Company and other consumer lenders from using 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- 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 ------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Bank Borrowings. . . . . . . . . -% -% 1% 10% 12% Public Senior Debt . . . . . . . 49 52 48 39 33 Public Subordinated Debt . . . . 18 17 16 17 20 Other Liabilities. . . . . . . . 5 5 5 6 7 Stockholders' Equity . . . . . . 28 26 30 28 28 --- --- --- --- --- Total . . . . . . . . . . . . . 100% 100% 100% 100% 100% === === === === === Number of Investors. . . . . . . 6,333 5,925 5,486 4,400 4,195 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 ------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Senior Borrowings. . . . . . . . 6.29% 6.97% 6.26% 6.24% 6.52% Subordinated Borrowings. . . . . 6.86 6.92 6.14 6.37 7.25 All Borrowings . . . . . . . . . 6.67 6.96 6.25 6.29 6.82 The Company's financial ratios relating to debt are as follows: At December 31 ------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total Liabilities to Stockholders' Equity . . . . . 2.59 2.81 2.36 2.57 2.68 Unsubordinated Debt to Subordinated Debt plus Stockholders' Equity . . . . . 1.17 1.32 1.19 1.23 1.11 -12- MANAGEMENT'S DISCUSSION OF OPERATIONS Financial Condition: - ------------------- The Company continued on its goal of reaching $200 million in assets on or before the year 2000 with the addition of $9.8 million in assets during 1996. Net receivables (gross receivables less unearned finance charges) was the predominate area of asset growth increasing $10.2 million (8%) to $145.7 million outstanding at December 31, 1996 from $135.5 million outstanding at December 31, 1995. Geographic expansion of the Company's operational base also continued with the opening of 16 new branch offices during the year, 6 of which were in new states. During the fourth quarter of 1996, Louisiana and Mississippi were added to the states of Alabama, Georgia and South Carolina as the Company's regional operating territory. Funding of the aforementioned increases in the loan portfolio and branch office expansion resulted in a $3.1 million (10%) decrease in cash and cash equivalents. Management's effort to transfer surplus funds from cash and cash equivalents into higher yielding bonds in order to maximize yields also contributed to the decrease in the Company's cash position. This portion of the decrease however, was offset by a $1.3 million (6%) increase in the Company's investment portfolio. 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. Declining bond market values during the current year offset a portion of the aforementioned increase in the investment portfolio. Volatility in bond market values resulted in a $.2 million decrease, net of deferred taxes, 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. Increases in sales of the Company's public debt securities caused subordinated debt to increase $4.3 million (14%) during the year just ended as compared to the prior year. Results of Operations: - --------------------- Gross revenues were $58.4 million during 1996 as compared to $55.2 million and $49.3 million during 1995 and 1994, respectively. This upward trend is primarily due to earnings generated from higher levels of average net outstanding receivables. Average net receivables increased $11.5 million (9%) to $137.7 million at December 31, 1996 as compared to $126.3 at December 31, 1995 due to increased consumer loan demand and the contribution from new branch offices opened during the prior two years. Although revenues increased, profit declined during the last two fiscal years as a result of higher loan loss provisions and increased costs associated with expansion of branch office locations. Net Interest Income 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) increased $2.4 million (8%) during 1996 as compared to 1995 and $2.0 million (7%) during 1995 as compared to 1994. 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. Interest expense had a lesser affect on the current year's margin as compared to the prior year. Although average senior and subordinated debt outstanding increased $14.1 million (12%) during the current year, lower -13- market rates of interest enabled the Company to reduce average borrowing cost to 6.67% as compared to 6.96% during 1995. During 1995, average senior and subordinated debt outstanding increased $26.9 million (31%) as compared to 1994 and average borrowing cost increased approximately .71% resulting in a much higher increase in interest expense. Net Insurance Income Net insurance income increased $.3 million (2%) and $1.2 million (10%) during the comparable periods mainly due to the aforementioned increase in average net receivables. Changes in net insurance income generally correspond to changes in the level of average net outstanding receivables. As average net receivables increase, the Company typically sees an increase in the number of loan customers requesting credit insurance, thereby leading to higher levels of insurance in-force. Higher levels of insurance in-force results in higher insurance income. Premium rates charged on the credit insurance offered by the Company, as agent for a non-affiliated insurance company, are governed by the insurance departments in the various states in which the Company operates. Rate reductions and term restrictions adopted by some states on various credit insurance products during previous years have affected the Company's insurance income. These rate reductions and term restrictions were significant factors in the current year's percentage increase in insurance income being lower than prior years. An increase in claims during 1996 also had a negative impact on the current year's insurance income. Provision for Loan Losses Rising loan delinquencies and increases in personal bankruptcy filings continue to have a deteriorating impact on the credit quality of the Company's loan receivables. Net charge-offs increased $.9 million (22%) during 1996 as compared to 1995 and $1.3 million (47%) during 1995 as compared to 1994. Management is carefully monitoring the upward trend in delinquencies and bankruptcy filings 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 year just ended. This increase and the increases in net charge-offs led to the $1.6 million (35%) increase in the Company's Provision for Loan Losses during 1996. Increases in net charge-offs during 1995 also caused the $1.4 million (43%) increase in the Company's Provision for Loan Losses during that year. Higher levels of average net outstanding receivables also contributed to the increases. Other Operating Expenses Start-up cost and additional overhead incurred from the expansion of branch operations were major factors responsible for general operating expenses increasing $1.7 million (6%) and $3.2 million (12%) during 1996 and 1995, 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. During 1996, Management implemented a new marketing program which assists in expanding the customer base in existing locations and development of future markets. The initial setup cost of this program and the ongoing cost to maintain was also a significant factor contributing to the increase in general operating expenses during the current year. Other miscellaneous expenses decreased during the current year as compared to the prior year mainly due to a decrease in legal fees. Legal expenses incurred with the Alabama lawsuits (see legal proceedings) during 1995 was a significant factor contributing to the increase in miscellaneous expenses during that year as compared to 1994. -14- Income Taxes Effective income tax rates for the years ended December 31, 1996, 1995 and 1994 were 25.9%, 27.5% and 30.6%, respectively. 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 have declined during the two year period ended December 31, 1996 due to the fact that the Company's 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, 1996 and 1995 relating to this agreement. The Company has an additional $2.0 million credit agreement (all of which was available at December 31, 1996 and 1995) for general operating purposes. Liquidity was not adversely affected by delinquent accounts even though the percentage of outstanding receivables 60 days or more past due increased to 6.4% of receivables at December 31, 1996 from 4.8% at December 31, 1995. 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 1996 indicated a need to increase the allowance for loan losses to provide adequate protection against increasing loan losses. The increase in the allowance did not affect liquidity as the allowance is maintained out of income, however, earnings could further be impacted if loss rates continue at the current level. Legal Proceedings: - ----------------- The litigious legal environment in the State of Alabama continues to be a challenge for the Company. Various legal proceedings are pending against the Company in Alabama alleging different violations of Alabama consumer lending laws and violations in connection with the sale of credit insurance and loan refinancing. During 1995 and 1996, 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 Company reached settlement agreements on four additional proceedings during the first quarter of 1997 and has begun accruing for disbursement thereof during said quarter. Although the Company and its employees deny that they are guilty of any wrongdoing or any breach of any legal obligation or duty to the claimants and recognition of the expense and uncertainty of litigation, Management felt it was in the best interest of the Company to dispose of those cases. All remaining actions are still in their early stages and their outcome is not determinable. 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 that the remaining actions are without merit. The Company is diligently contesting the remaining complaints. -15- Other: - ----- Management is aggressively seeking and evaluating potential new market areas as part of its expansion plans. The Company plans to open ten to twelve new offices during 1997. These openings will not have an adverse affect on liquidity, however, expansion could have a impact on earnings. Subsequent Event: - ---------------- 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. Over the years the Parent has 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. The payment of these prepaid taxes has resulted in an accumulation of net deferred tax assets of approximately $3.6 million on the Company's balance sheet. Election of S Corporation status requires elimination of all such accumulated prepaid/deferred tax assets and liabilities. Accordingly, deferred income tax assets and liabilities will be eliminated and no provisions for current and deferred income taxes will be made by the Parent other than amounts related to prior years when the Parent was a taxable entity. 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 will take 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. No cash transaction is involved, however the Company's income will be negatively impacted. 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- 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. s/ Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP Atlanta, Georgia February 21, 1997 -17- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 ------------ ------------ CASH AND CASH EQUIVALENTS: Cash and Due From Banks. . . . . . . . . . . . $ 1,795,448 $ 1,453,244 Short-term Investments, $300,000 in trust in 1996 and 1995 (Note 4) . . . . . . . . . . . . . 25,637,257 29,060,349 ------------ ------------ 27,432,705 30,513,593 ------------ ------------ LOANS (Note 2): Direct Cash Loans. . . . . . . . . . . . . . . 117,140,840 107,960,069 First Mortgage Real Estate Loans . . . . . . . 27,037,348 25,738,140 Second Mortgage Real Estate Loans. . . . . . . 6,469,154 6,914,255 Sales Finance Contracts. . . . . . . . . . . . 13,201,453 13,955,296 ------------ ------------ 163,848,795 154,567,760 Less: Unearned Finance Charges . . . . . . . . 18,099,070 19,049,034 Unearned Insurance Premiums and Commissions. . . . . . . . . . . 10,312,385 10,244,033 Allowance for Loan Losses. . . . . . . . 5,753,221 4,511,826 ------------ ------------ Net Loans . . . . . . . . . . . . 129,684,119 120,762,867 ------------ ------------ MARKETABLE DEBT SECURITIES (Note 3): Available for Sale, at fair market value . . . 20,783,883 17,194,375 Held to Maturity, at amortized cost. . . . . . 2,946,099 5,186,492 ------------ ------------ 23,729,982 22,380,867 ------------ ------------ OTHER ASSETS: Land, Buildings, Equipment and Leasehold Improvements, less accumulated depreciation and amortization of $6,480,263 and $5,668,721 in 1996 and 1995, respectively (Note 5) . . . . . . . . . . . 3,457,902 2,828,801 Prepaid Income Taxes, net (Note 9) . . . . . . 2,173,802 1,763,108 Due from Nonaffiliated Insurance Company . . . 710,752 827,908 Miscellaneous. . . . . . . . . . . . . . . . . 4,715,088 3,006,844 ------------ ------------ 11,057,544 8,426,661 ------------ ------------ TOTAL ASSETS . . . . . . . . . . . . . . $191,904,350 $182,083,988 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -18- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1996 AND 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------ ------------ SENIOR DEBT (Note 5): Senior Demand Notes, including accrued interest . . . . . . . . . . . . $ 45,535,956 $ 42,304,779 Commercial Paper. . . . . . . . . . . . . . 48,962,123 52,944,123 Notes Payable to Banks. . . . . . . . . . . 241,762 291,762 ------------ ------------ 94,739,841 95,540,664 ------------ ------------ ACCOUNTS PAYABLE AND ACCRUED EXPENSES . . . . 8,807,990 8,179,506 ------------ ------------ SUBORDINATED DEBT (Note 6). . . . . . . . . . 34,942,463 30,616,915 ------------ ------------ Total Liabilities. . . . . . . . . . . . . 138,490,294 134,337,085 ------------ ------------ 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, 1996; no shares outstanding as of December 31, 1995 . . -- -- Net Unrealized Gains (Losses) on Marketable Debt Securities Available for Sale. . . . . . . . . . . . 43,288 251,145 Retained Earnings . . . . . . . . . . . . . 53,200,768 47,325,758 ------------ ------------ Total Stockholders' Equity . . . . . 53,414,056 47,746,903 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $191,904,350 $182,083,988 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -19- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 INTEREST INCOME: ---- ---- ---- Finance Charges. . . . . . . . $ 38,094,669 $ 35,713,283 $ 32,718,152 Investment Income. . . . . . . 2,751,712 2,481,604 949,404 ------------ ------------ ------------ 40,846,381 38,194,887 33,667,556 ------------ ------------ ------------ INTEREST EXPENSE: Senior Debt. . . . . . . . . . 5,774,336 5,915,519 4,057,682 Subordinated Debt. . . . . . . 2,537,655 2,132,393 1,498,616 ------------ ------------ ------------ 8,311,991 8,047,912 5,556,298 ------------ ------------ ------------ NET INTEREST INCOME. . . . . . . 32,534,390 30,146,975 28,111,258 PROVISION FOR LOAN LOSSES (Note 2) . . . . . 6,266,201 4,630,853 3,238,479 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . 26,268,189 25,516,122 24,872,779 ------------ ------------ ------------ NET INSURANCE INCOME: Premiums and Commissions . . . 17,078,994 16,533,388 15,262,466 Insurance Claims and Expenses. (3,816,991) (3,584,222) (3,518,988) ------------ ------------ ------------ 13,262,003 12,949,166 11,743,478 ------------ ------------ ------------ OTHER REVENUE (Note 8) . . . . . 490,078 428,959 404,477 ------------ ------------ ------------ OPERATING EXPENSES (Note 8): Personnel Expense. . . . . . . 18,850,308 17,299,383 16,147,362 Occupancy Expense. . . . . . . 4,519,937 3,981,624 3,705,288 Other Expense. . . . . . . . . 8,231,915 8,644,323 6,849,283 ------------ ------------ ------------ 31,602,160 29,925,330 26,701,933 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES . . . 8,418,110 8,968,917 10,318,801 PROVISION FOR INCOME TAXES (Note 9). . . . . 2,180,358 2,462,307 3,154,184 ------------ ------------ ------------ NET INCOME . . . . . . . . . . . 6,237,752 6,506,610 7,164,617 RETAINED EARNINGS, beginning . . 47,325,758 41,128,936 34,220,868 Dividends on Common Stock. . . (362,742) (309,788) (256,549) ------------ ------------ ------------ RETAINED EARNINGS, ending. . . . $ 53,200,768 $ 47,325,758 $ 41,128,936 ============ ============ ============ EARNINGS PER SHARE Voting Common Stock; 1,700 Shares Outstanding all periods. . . . . . . . . . $ 36.69 $ 38.27 $ 42.14 Non-Voting Common Stock; ========= ========= ========= 168,300 Shares Outstanding December 31, 1996. . . . . $ 36.69 $ 38.27 $ 42.14 ========= ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -20- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Increase (Decrease) in Cash and Cash Equivalents 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . $ 6,237,752 $ 6,506,610 $ 7,164,617 Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses. . . . . 6,266,201 4,630,853 3,238,479 Depreciation and Amortization. . . 1,126,296 1,074,992 994,896 Prepaid Income Taxes . . . . . . . (364,809) (275,826) (10,925) Gain on sale of marketable securities and equipment. . . . (22,711) (86,366) (47,754) Increase in Miscellaneous Assets . (1,591,088) (616,373) (95,653) Increase in Other Liabilities. . . 628,484 596,673 13,737 ------------ ------------ ----------- Net Cash Provided . . . . . . 12,280,125 11,830,563 11,257,397 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased. . . (110,117,402) (104,735,608) (96,816,742) Loan payments. . . . . . . . . . . 94,929,949 88,009,063 82,396,258 Purchases of marketable securities (12,339,320) (8,981,373) (2,162,283) Sales of marketable securities . . 3,251,608 510,000 103,897 Redemptions of marketable securities. . . . . . 7,000,000 725,000 300,000 Principal payments on marketable securities. . . . . . 472,366 -- -- Capital expenditures . . . . . . . (1,759,762) (1,159,373) (851,351) Proceeds from sale of equipment. . 39,565 57,931 25,568 ------------ ------------ ----------- Net Cash Used . . . . . . . . (18,522,996) (25,574,360) (17,004,653) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in Notes Payable to Banks and Senior Demand Notes. . . . . . . 3,181,177 8,693,829 (5,497,262) Commercial Paper issued. . . . . . 25,319,703 44,230,224 24,041,798 Commercial Paper redeemed. . . . . (29,301,703) (24,060,678) (12,406,886) Subordinated Debt issued . . . . . 7,999,461 12,877,336 5,175,292 Subordinated Debt redeemed . . . . (3,673,913) (3,863,077) (4,447,341) Dividends Paid . . . . . . . . . . (362,742) (309,788) (256,549) ------------ ------------ ----------- Net Cash Provided . . . . . . 3,161,983 37,567,846 6,609,052 ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . (3,080,888) 23,824,049 861,796 CASH AND CASH EQUIVALENTS, beginning 30,513,593 6,689,544 5,827,748 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS, ending. . $ 27,432,705 $ 30,513,593 $ 6,689,544 ============ ============ =========== Cash paid during the year for: Interest. . . . . . . . . . . . . $ 8,343,828 $ 7,965,756 $ 5,488,335 Income Taxes. . . . . . . . . . . $ 2,344,697 $ 2,682,221 $ 3,301,461 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -21- 1st FRANKLIN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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 144 branch offices. 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 premise 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- 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 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: The Company and its insurance subsidiaries have certain temporary differences between reported income and expenses for financial statement purposes and for income tax purposes. Deferred income taxes are provided where applicable. 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- 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, 1996 and 1995 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 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 that 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. 2. LOANS There were $10,523,911 and $7,408,981 of loans in a non-accrual status at December 31, 1996 and 1995, 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, 1996 is as follows: 1st Mortgage 2nd Mortgage Sales Due In Direct Cash Real Estate Real Estate Finance Calendar Year Loans Loans Loans Contracts ------------- ----- ----- ----- --------- 1997. . . . . . 72.17% 19.67% 17.96% 73.62% 1998. . . . . . 24.56 17.28 18.66 21.46 1999. . . . . . 2.26 15.97 18.02 4.35 2000. . . . . . .42 12.52 15.16 .31 2001. . . . . . .19 9.31 10.31 .26 2002 & later .40 25.25 19.89 -- ------ ------ ------ ------ 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, 1996 and 1995, cash collections applied to principal of loans totaled $94,929,949 and $88,009,063, respectively, and the ratios of these cash collections to average net receivables were 68.92% and 69.70%, respectively. -24- 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, 1996, 1995 and 1994 is shown in the following table: 1996 1995 1994 ---------- ---------- ---------- Beginning Balance. . . . . . . $4,511,826 $4,069,881 $3,653,121 Provision for Loan Losses . . 6,266,201 4,630,853 3,238,479 Bulk Purchase Accounts. . . . 118,365 20,317 49,120 Charge-Offs . . . . . . . . . (6,348,280) (5,085,216) (3,648,948) Recoveries . . . . . . . . . . 1,205,109 875,991 778,109 ---------- ---------- ---------- Ending Balance . . . . . . . . $5,753,221 $4,511,826 $4,069,881 ========== ========== ========== 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, 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 =========== ======== ========= =========== December 31, 1995: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . . $ 7,872,928 $ 86,713 $ (2,481) $ 7,957,160 Obligations of states and political subdivisions. . . . 8,467,242 233,751 (6,373) 8,694,620 Corporate Securities. . . . . . 526,051 19,413 (2,869) 542,595 ----------- -------- --------- ----------- $16,866,221 $339,877 $ (11,723) $17,194,375 =========== ======== ========= =========== -25- 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, 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 =========== ========= ======= =========== December 31, 1995: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 4,731,712 $ 94,860 $(2,666) $ 4,823,906 Obligations of states and political subdivisions . . 454,780 17,197 -- 471,977 ----------- --------- ------- ----------- $ 5,186,492 $ 112,057 $(2,666) $ 5,295,883 =========== ========= ======= =========== The amortized cost and estimated fair market values of marketable debt securities at December 31, 1996, 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 . . $ 324,991 $ 325,763 $ 2,248,602 $ 2,267,266 Due after one year through five years. . . . 4,831,973 4,862,807 697,497 714,347 Due after five years through ten years . . . . 12,490,908 12,542,207 -- -- Due after ten years . . . . 3,061,599 3,053,106 -- -- ----------- ----------- ----------- ----------- $20,709,471 $20,783,883 $ 2,946,099 $ 2,981,613 =========== =========== =========== =========== 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. Proceeds from sales of investments in debt securities available for sale during 1995 were $510,000. Gross gains of $16,240 and gross losses of $(-0-) were realized on these sales. 4. PLEDGED ASSETS At December 31, 1996, 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- 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, 1997. 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 ----------- ------- ----------- ----------- ----------- 1996 (In thousands, except % data) ---- 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 1994: ---- Bank. . . . . . . . . 7.41% $12,714 $ 4,966 6.56% Senior Notes. . . . . 6.28 34,595 31,930 6.07 Commercial Paper. . . 7.39 33,095 26,454 6.67 All Categories. . 6.84 67,650 63,350 6.36 -27- 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 ------------------------ ------------------------ 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- 6.81% 7.41% 6.54% 7.03% 7.28% 6.36% Maturity information on the Company's Subordinated Debt at December 31, 1996 is as follows: Amount Maturing --------------------------------------- Based on Maturity Based on Interest Date Adjustment Period ----------------- ----------------- 1997 . . . . . . . . . . $ 4,449,800 $27,405,943 1998 . . . . . . . . . . 5,169,534 4,145,510 1999 . . . . . . . . . . 13,824,734 2,508,637 2000 . . . . . . . . . . 11,498,395 882,373 ----------- ----------- $34,942,463 $34,942,463 =========== =========== 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 $1,531,183, $1,346,606 and $1,257,977 for the years ended December 31, 1996, 1995 and 1994, respectively. Under the existing noncancelable leases, the Company's minimum aggregate rental commitment at December 31, 1996, amounts to $1,597,157 for 1997, $1,364,880 for 1998, $1,013,396 for 1999, $728,645 for 2000, $406,263 for 2001 and $567,217 for the year 2002 and beyond. The total commitment is $5,677,558. The Company is defendant in several lawsuits arising in the course of its normal business activities in the state of Alabama. Each of the -28- 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 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 1996, 1995 and 1994 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 $4,200 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1996, the Company maintained $2,300,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $1,609,087 in demand deposits with Liberty at December 31, 1996. 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 The Provision for Income Taxes for the years ended December 31, 1996, 1995 and 1994 is made up of the following components: 1996 1995 1994 ---- ---- ---- Current - Federal . . . . $ 2,353,773 $ 2,481,300 $ 2,786,238 Current - State . . . . . 191,394 256,833 378,871 ----------- ----------- ----------- Total Current . . . . . 2,545,167 2,738,133 3,165,109 ----------- ----------- ----------- Prepaid - Federal . . . . (309,371) (226,199) 38,652 Prepaid - State . . . . . (55,438) (49,627) (49,577) ----------- ----------- ----------- Total Prepaid . . . . . (364,809) (275,826) (10,925) ----------- ----------- ----------- Total Provision. . . $ 2,180,358 $ 2,462,307 $ 3,154,184 =========== =========== =========== -29- Temporary differences create deferred federal tax assets and liabilities which are detailed below for December 31, 1996 and 1995: Deferred Tax Assets (Liabilities) ------------------- 1996 1995 ----- ---- Depreciation . . . . . . . . . . $ (69,428) $ (113,895) Provision for Loan Losses. . . . 2,141,474 1,701,311 Insurance Commissions . . . . . (596,196) (639,585) Unearned Premium Reserves. . . . 489,892 616,758 Unrealized Gains on Marketable Debt Securities . . (31,124) (77,009) Other. . . . . . . . . . . . . . 239,184 275,528 ---------- ---------- $2,173,802 $1,763,108 ========== ========== The Company's effective tax rate for the years ended December 31, 1996, 1995 and 1994 is analyzed as follows: 1996 1995 1994 ---- ---- ---- Statutory Federal income tax rate . . . 34.0% 34.0% 34.0% State income tax, net of Federal tax effect. . . . . . . . . . . . . . 1.1 1.5 2.1 Net tax effect of IRS regulations on life insurance subsidiary. . . . . (7.9) (6.8) (4.9) Other items . . . . . . . . . . . . . . (1.3) (1.2) (.6) ---- ---- ---- Effective Tax Rate . . . . . . . . . 25.9% 27.5% 30.6% ==== ==== ==== 10. SUBSEQUENT EVENT 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 will be eliminated and no provisions for current and deferred income taxes will be made by the Parent other than amounts related to prior years when the Parent was a taxable entity. 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 estimates that a charge of approximately $3.6 million will be required to recognize the effect of the S Corporation election during the year ending December 31, 1997. -30- 1st FRANKLIN FINANCIAL CORPORATION *********** PHOTO *********** (Two children wearing FirsTimers Club baseball caps) Saving money is fun, just ask our FirsTimers Club members! -31- DIRECTORS AND EXECUTIVE OFFICERS Directors Principal Occupation, Has Served as a Name Title and Company Director Since ---- -------------------- -------------- W. Richard Acree President, Acree Oil Company, 1970 Toccoa, Georgia 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- 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 Michael D. Lyles, Supervisor J. Michael Culpepper, Area Vice Melvin L. Osley, Supervisor President Virginia K. Palmer, Supervisor Susan C. Cantrell, Supervisor Edward T. Pulsifer, Supervisor Tony E. Ellison, Supervisor Timothy M. Schmotz, Supervisor Jack L. Hobgood, Supervisor Barbara W. Sims, Supervisor Terry E. Honeycutt, Supervisor Stewart C. York, Supervisor Johnny M. McEntyre, Supervisor Barbara W. Sims, Supervisor R. Darryl Parker, Supervisor Stewart C. York, Supervisor Julia A. Paul, Supervisor Henrietta R. Reathford, Supervisor Division II David N. Reynolds, Supervisor - ----------- Bobby T. Seawright, Supervisor Central & South Georgia: R. Gaines Snow, Supervisor A. Jarrell Coffee, Vice President Donald C. Carter, Supervisor James E. Davis, Supervisor ADMINISTRATION Judy A. Landon, Supervisor -------------- Jeffrey C. Lee, Supervisor Ben F. Cheek, IV, Statistics & Thomas C. Lennon, Supervisor Planning Dianne H. Moore, Supervisor Lynn E. Cox, Investment Center Marcus C. Thomas, Supervisor Samuel P. Greer, Internal Audit Phoebe P. Martin, Human Resources & Marketing Pamela S. Rickman, Operations Coordinator Linda L. Sessa, Data Processing EX-21 5 EXHIBIT 21 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. EX-23 6 EXHIBIT 23 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 27, 1997 EX-27 7 ART. 5 FDS FOR 1996 FORM 10-K
5 1 YEAR DEC-31-1996 DEC-31-1996 27,432,705 23,729,982 135,437,340 5,753,221 0 0 9,938,165 6,480,263 191,904,350 103,547,831 129,440,542 170,000 0 0 53,244,056 191,904,350 0 58,415,453 0 0 31,602,160 6,266,201 8,311,991 8,418,110 2,180,358 6,237,752 0 0 0 6,237,752 36.69 0
-----END PRIVACY-ENHANCED MESSAGE-----