Exhibit 19
1st
FRANKLIN
FINANCIAL
CORPORATION
QUARTERLY
REPORT TO INVESTORS
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 2000
MANAGEMENT'S LETTER
Financial Condition:
-------------------
The Company experienced a sluggish third quarter with loan originations
falling below levels achieved during the previous quarter. As a result, the
Company was only able to record a marginal increase in its loan portfolio at
September 30, 2000 as compared to December 31, 1999. Management projects
loan originations to rise during the fourth quarter of fiscal year 2000 which
is typically when lending activity peaks in any given year.
Although growth in the loan portfolio was minimal, total assets rose $12.1
million (5%) during the current year as compared to December 31, 1999.
Increases in sales of the Company's debt securities and increases in loan
collections provided a $5.2 million (87%) increase in available cash and cash
equivalents. A $5.1 million (9%) growth in investment securities held by the
Company's insurance subsidiaries also contributed to the increase in total
assets.
Results of Operations:
---------------------
Revenues generated during the current year totaled $58.9 million as
compared to $53.3 million generated during the first nine months of 1999.
Irrespective of the increase in total revenues, net income declined $.8
million (37%) and $1.4 million (20%) for the quarter and nine months ended
September 30, 2000 as compared to the same periods a year ago, respectively,
mainly as a result of higher loan losses, increased borrowing costs and
increased other operating expenses as discussed in more detail in the
following narrative.
The Company experienced higher interest costs during the current year,
especially during the quarter just ended, due to higher borrowing cost
associated with the aforementioned increase in sales of its debt securities
and due to a slight upswing in borrowing rates. As such, its net interest
margin (the difference between interest income on loans and investments and
interest expense on debt) has been contracting over the past several months.
Although the spread between earning assets and borrowing costs narrowed, net
interest income rose $.3 million (3%) and $2.7 million (9%) during the quarter
and nine month period just ended as compared to the same periods a year ago,
respectively. The increases were due to a sizable increase in average net
receivables during the comparable periods.
Net insurance income increased $.6 million (13%) and $1.7 million (14%)
during the quarter and nine months just ended, respectively, as compared
to the same periods in 1999. Changes in insurance earnings generally
correspond to changes in the level of average net outstanding receivables. As
average net receivables increase, the Company typically sees an increase in
customers requesting credit insurance, thereby leading to higher levels of
insurance in-force.
The Company owns a life insurance policy on one of its executive officers.
During the current year, the insurance company that wrote the policy converted
from a mutual company to a stock company. This conversion resulted in
ordinary income of approximately $0.1 million, which was the reason for the
$0.1 million (35%) increase in other revenues this year.
Asset quality is commanding more of Management's attention during the
current year. Delinquent accounts 60 days or more past due rose to 8.2% of
loan receivables at September 30, 2000 as compared to 6.6% at December 31,
1999. Balances on accounts which have filed for bankruptcy increased
approximately $1.5 million or 11% during the same period. The Company had $6.0
million in net charge-offs during the nine months just ended as compared to
$4.6 million during the same period in 1999, representing a 29% increase. As
a direct result of the higher loan losses and Management's decision to
increase the allowance for losses to provide for probable future losses, the
Company's provision for loan losses increased $.5 million (22%) and $1.1
million (21%) during the quarter and nine months ended September 30, 2000 as
compared the same periods a year ago. Management continually reviews its
delinquency position with respect to the total loan portfolio and believes it
uses the best information available in setting the loan loss reserve. Future
adjustments to the allowance for loan losses will be made when deemed
necessary by Management.
Other operating expenses increased $1.1 million (11%) and $4.7 million
(16%) during the quarter and nine month period just ended as compared to the
same periods in 1999 predominately due to increases in personnel expense.
Personnel expense rose $.9 million (14%) and $3.5 million (19%) during the
comparable periods due to merit salary increases effective January 1, 2000 and
increases in accruals for incentive bonuses. In addition to the salary
increases awarded at the beginning of the year, additional compensation
adjustments were made at mid year to various employees whose levels may not
have been in line with comparable positions at other companies. In order to
retain its experienced and talented employees and attract new ones, Management
believes the Company must be competitive in the labor market. Medical claims
incurred by the Company's self-insured employees' health plan rose
significantly during the current year which also added to the increase in
personnel expense.
Occupancy expenses such as rent, utilities, telephone and maintenance
associated with nine new branch offices opened since September 30, 1999 were
also factors contributing to the increase in other operating expenses. Other
factors contributing were higher advertising expenditures, computer expenses,
insurance premiums, travel costs, stationary and supplies and various state
taxes and licenses.
Effective income tax rates were 26.1% and 16.1% for the quarters ended
September 30, 2000 and 1999 and 19.9% and 15.4% for the nine months ended
September 30, 2000 and 1999, respectively. Income taxes during the periods
reflect only the taxes of the Company's insurance subsidiaries which are not S
corporations for income tax reporting purposes. Federal and state income
taxes generated by the S corporation are paid by the shareholders, except in
states which do not recognize S corporation status. 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
general tax rate below statutory rates. Investments in tax exempt securities
by the Company's property and casualty insurance subsidiary also decreases
the effective tax rate. Rates rose during the current year due to the
subsidiaries earning a greater portion of the pretax income than the parent
company.
Market Risk:
-----------
It was necessary for the Company to contend with rising interest rates
during the past several months resulting in higher borrowing costs. Average
rates on borrowings have risen to 6.38% during the current year as compared
to 5.77% at December 31, 1999. The recent volatility in interest rates seems
to have leveled off and Management does not expect any significant change in
rates during the remainder of the year.
Liquidity:
---------
Liquidity requirements of the Company are financed through the collection
of receivables and through the issuance of public debt securities. Continued
liquidity of the Company is therefore dependent on the collection of its
receivables and the sale of debt securities that meet the investment
requirements of the public. In addition to the securities program, the
Company has two external sources of funds through the use of two Credit
Agreements. One agreement provides for available borrowing of $21.0 million.
Available borrowings were $21.0 million at September 30, 2000 and $20.0 at
December 31, 1999, relating to this agreement. Another agreement provides
for an additional $2.0 million for general operating purposes. Available
borrowings under this agreement were $2.0 million at September 30, 2000 and
December 31, 1999.
Year 2000 Readiness Disclosure:
------------------------------
The Company has not experienced any material malfunctions or errors in its
operations or business systems with regard to the Year 2000 issues ("Y2K").
Based on operations since January 1, 2000, Management does not foresee any
significant impact on its ongoing business as a result of Y2K. However, it is
possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. Any problems which might occur are expected to
be minor and correctable. Management continues to monitor applications of the
Company and third party suppliers.
Expenses related to Year 2000 readiness during the nine months just ended
were $9,033. No additional expenses are budgeted for the remainder of the
year.
Forward Looking Statements:
--------------------------
Certain information in the previous discussion and other statements
contained in the Quarterly Report which are not historical facts may be
forward-looking statements that involve risks and uncertainties. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements contained
herein. Possible factors which could cause future results to differ from
expectations are, but not limited to, adverse economic conditions including
the interest rate environment, federal and state regulatory changes, an
unfavorable outcome of litigation, Year 2000 issues and other factors
referenced elsewhere.
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
2000 1999
------------ -----------
(Unaudited) (Audited)
ASSETS
CASH AND CASH EQUIVALENTS .................. $ 11,070,381 $ 5,914,535
------------ ------------
LOANS, net ................................. 157,526,696 156,124,333
------------ ------------
INVESTMENT SECURITIES:
Available for Sale, at fair market value.. 53,114,693 47,127,780
Held to Maturity, at amortized cost ...... 5,863,418 6,734,286
------------ ------------
58,978,111 53,862,066
------------ ------------
OTHER ASSETS................................ 11,683,784 11,237,126
------------ ------------
TOTAL ASSETS .............. $239,258,972 $227,138,060
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT ................................ $114,685,879 $113,889,641
OTHER LIABILITIES .......................... 13,699,801 13,461,731
SUBORDINATED DEBT .......................... 42,377,612 35,246,639
------------ ------------
Total Liabilities ...................... 170,763,292 162,598,011
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value .......... -- --
Common Stock ............................. 170,000 170,000
Accumulated Other Comprehensive (Loss).... (319,753) (780,772)
Retained Earnings ........................ 68,645,433 65,150,821
------------ ------------
Total Stockholders' Equity ............. 68,495,680 64,540,049
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .. $239,258,972 $227,138,060
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
(Unaudited) (Unaudited)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME ......................... $13,736,217 $13,020,864 $40,760,996 $37,326,011
INTEREST EXPENSE ........................ 2,702,034 2,258,394 7,451,188 6,676,011
----------- ----------- ----------- -----------
NET INTEREST INCOME ..................... 11,034,183 10,762,470 33,309,808 30,650,000
Provision for Loan Losses ............. 2,808,655 2,307,237 6,283,255 5,193,715
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ............. 8,225,528 8,455,233 27,026,553 25,456,285
----------- ----------- ----------- -----------
NET INSURANCE INCOME .................... 4,886,120 4,333,932 14,164,128 12,451,286
----------- ----------- ----------- -----------
OTHER REVENUE ........................... 134,469 138,720 540,108 401,249
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Personnel Expense ..................... 7,201,089 6,324,600 21,865,913 18,406,268
Occupancy ............................. 1,577,256 1,481,321 4,602,584 4,228,695
Other ................................. 2,585,943 2,477,678 8,254,809 7,409,631
----------- ----------- ----------- -----------
Total................................ 11,364,288 10,283,599 34,723,306 30,044,594
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .............. 1,881,829 2,644,286 7,007,483 8,264,226
Provision for Income Taxes ............ 491,021 426,826 1,394,107 1,274,696
----------- ----------- ----------- -----------
NET INCOME .............................. 1,390,808 2,217,460 5,613,376 6,989,530
RETAINED EARNINGS, beginning of period .. 67,759,625 63,170,644 65,150,821 60,637,368
Distributions on Common Stock ......... 505,000 735,940 2,118,764 2,974,734
----------- ----------- ----------- -----------
RETAINED EARNINGS, end of period ........ $68,645,433 $64,652,164 $68,645,433 $64,652,164
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Voting Common Stock; 1,700 Shares
outstanding all periods ............. $8.18 $13.04 $33.01 $41.11
===== ====== ====== ======
Non-Voting Common Stock; 168,300
Shares outstanding all periods ...... $8.18 $13.04 $33.01 $41.11
===== ====== ====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
------------------------
(Unaudited)
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income....................................... $ 5,613,376 $ 6,989,530
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for Loan Losses ................... 6,283,255 5,193,715
Depreciation and Amortization ............... 938,396 918,339
Deferred Income Taxes ....................... 40,298 163,792
Other, net .................................. (31,731) 132,341
Increase in Miscellaneous assets ............ (801,264) (450,170)
(Increase) decrease in Accounts Payable and
Accrued Expenses .......................... 135,650 (152,365)
----------- -----------
Net Cash Provided ..................... 12,177,980 12,795,182
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans Originated or purchased ................... (98,409,225) (98,304,928)
Loan Payments ................................... 90,723,607 82,835,579
Purchases of marketable debt securities ......... (7,374,080) (20,892,594)
Principal payments on securities ................ 476,526 455,703
Sales of marketable securities .................. -- 3,477,753
Redemptions of securities ....................... 2,360,000 5,290,000
Other, net ...................................... (607,409) (798,074)
----------- -----------
Net Cash Used ......................... (12,830,581) (27,936,561)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Senior Debt ......................... 796,238 12,156,523
Subordinated Debt Issued ........................ 10,614,872 6,021,003
Subordinated Debt redeemed ...................... (3,483,899) (9,355,583)
Distributions Paid .............................. (2,118,764) (2,974,734)
----------- -----------
Net Cash Provided ..................... 5,808,447 5,847,209
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ....................... 5,155,846 (9,294,170)
CASH AND CASH EQUIVALENTS, beginning .............. 5,914,535 20,111,678
----------- -----------
CASH AND CASH EQUIVALENTS, ending ................. $11,070,381 $10,817,508
=========== ===========
Cash Paid during the period for: Interest ........ $ 7,227,334 $ 6,539,951
Income Taxes .... 1,508,340 1,237,543
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-NOTES-
1. The accompanying interim financial information of 1st Franklin
Financial Corporation and subsidiaries (the Company) should be read in
conjunction with the annual financial statements and notes thereto as
of December 31, 1999 and for the years then ended included in the
Company's December 31, 1999 Annual Report.
2. In the opinion of Management of the Company, the accompanying
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
Company's financial position as of September 30, 2000 and December 31,
1999 and the results of its operations and its cash flows for the nine
months ended September 30, 2000 and 1999. While certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission, the Company believes that the
disclosures herein are adequate to make the information presented not
misleading.
3. The results of operations for the quarter and nine months ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the full fiscal year.
4. The computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings.
5. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". The Company had comprehensive income, which is comprised of
net income and unrealized gains or losses on securities held as
available for sale, of $1,783,597 and $2,137,664 for the quarters ended
September 30, 2000 and 1999 and $6,074,395 and $5,971,637 for the nine
month comparable periods, respectively.
6. The following tables summarize assets, revenues and profit by business
segment. A reconcilement to consolidated net income is also provided.
All segment revenues result from transactions with third parties.
There has been no differences from the 1999 Annual Report from the
basis of segmentation or the basis of measurement of segment profit.
Division Division Division
I II III Total
-------- -------- -------- --------
(In Thousands)
Segment Revenues:
Three Months ended 9/30/00 ..... $ 5,868 $ 6,106 $ 6,159 $ 18,133
Three Months ended 9/30/99 ..... 5,242 5,541 5,983 16,766
Nine Months ended 9/30/00 ...... 17,198 18,012 18,646 53,856
Nine Months ended 9/30/99 ...... 14,926 16,244 16,958 48,128
Segment Profit:
Three Months ended 9/30/00 ..... $ 1,769 $ 2,368 $ 962 $ 5,099
Three Months ended 9/30/99 ..... 1,822 2,112 1,733 5,667
Nine Months ended 9/30/00 ...... 5,930 7,276 4,321 17,527
Nine Months ended 9/30/99 ...... 5,311 6,522 5,195 17,028
Segment Assets:
9/30/00 ........................ $93,111 $105,135 $41,416 $239,662
9/30/99 ........................ 87,427 98,222 39,604 225,253
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
9/30/00 9/30/99 9/30/00 9/30/99
------- -------- -------- --------
Reconcilement (In Thousands)
Profit:
Profit per segments .......... $ 5,099 $ 5,667 $17,527 $ 17,028
Corporate earnings
not allocated .............. 624 727 1,609 2,051
Corporate expenses
not allocated .............. (3,841) (3,750) (12,129) (10,814)
Income taxes not
allocated .................. (491) (427) (1,394) (1,275)
------- -------- ------- --------
$ 1,391 $ 2,217 $ 5,613 $ 6,990
======= ======== ======= ========
BRANCH OPERATIONS
-----------------
Isabel Vickery Youngblood ............. Senior Vice President
A. Jarrell Coffee ..................... Vice President
Jack R. Coker ......................... Vice President
Robert J. Canfield .................... Area Vice President
J. Michael Culpepper .................. Area Vice President
Ronald F. Morrow ..................... Area Vice President
<TABLE>
<CAPTION>
SUPERVISORS
-----------
<S> <C> <C> <C>
Bryan Cook Bruce Hooper Dianne Moore Henrietta Reathford
Ronald Byerly Janice Hyde Harriet Moss Tami Settlemyer
Donald Carter Judy Landon Mike Olive Timothy Schmotz
Donald Floyd Jeff Lee Melvin Osley Gaines Snow
Shelia Garrett Tommy Lennon Dale Palmer Marc Thomas
Renee Hebert Mike Lyles Darryl Parker Jason Yates
Jack Hobgood Brian McSwain Hilda Phillips
OFFICES
-------
Alabama Offices: Georgia Offices: Georgia Offices: Louisiana Offices:
--------------- --------------- --------------- -----------------
Alexander City Butler Manchester Pineville
Andalusia Cairo McDonough
Arab Calhoun McRae Mississippi Offices:
Athens Canton Milledgeville -------------------
Bessemer Carrollton Monroe Bay St. Louis
Birmingham Cartersville Montezuma Carthage
Clanton Cedartown Monticello Columbia
Cullman Chatsworth Moultrie Grenada
Decatur Clarkesville Nashville Gulfport
Dothan Claxton Newnan Hattiesburg
Enterprise Clayton Perry Hazlehurst
Fayette Cleveland Pooler Jackson
Florence Cochran Richmond Hill Kosciusko
Gadsden Commerce Rome Magee
Geneva Conyers Royston McComb
Hamilton Cordele Sandersville Pearl
Huntsville Cornelia Savannah Picayune
Jasper Covington Statesboro
Madison Cumming Stockbridge North Carolina Offices:
Moulton Dallas Swainsboro ----------------------
Muscle Shoals Dalton Sylvania Monroe
Opp Dawson Sylvester Pineville
Ozark Douglas Thomaston
Pelham Douglasville (2) Thomson South Carolina Offices:
Prattville Eastman Tifton ----------------------
Russellville (2) Elberton Toccoa Aiken
Scottsboro Ellijay Valdosta (2) Anderson
Selma Forsyth Vidalia Cayce
Sylacauga Fort Valley Warner Robins Chester
Troy Gainesville Washington Clemson
Tuscaloosa Garden City Waycross Columbia
Wetumka Georgetown Waynesboro Conway
Glennville Winder Easley
Georgia Offices: Greensboro Florence
--------------- Griffin (2) Louisiana Offices: Gaffney
Adel Hartwell ----------------- Greenville
Albany Hawkinsville Alexandria Greenwood
Alma Hazlehurst Crowley Greer
Americus Hinesville (2) DeRidder Lancaster
Arlington Hogansville Franklin Laurens
Athens (2) Jackson Jena Lexington
Bainbridge Jasper Lafayette Lugoff
Barnesville Jefferson Leesville Marion
Baxley Jesup Marksville Newberry
Blakely LaGrange Morgan City Orangeburg
Blue Ridge Lavonia Natchitoches Rock Hill
Bremen Lawrenceville New Iberia Seneca
Brunswick Madison Opelousas Spartanburg
Buford Union
York
</TABLE>
DIRECTORS
---------
Ben F. Cheek, III
Chairman and Chief Executive Officer
1st Franklin Financial Corporation
Lorene M. Cheek
Homemaker
Jack D. Stovall
President, Stovall Building Supplies, Inc.
Dr. Robert E. Thompson
Physician, Toccoa Clinic
EXECUTIVE OFFICERS
------------------
Ben F. Cheek, III
Chairman and Chief Executive Officer
T. Bruce Childs
President and Chief Operating Officer
A. Roger Guimond
Vice President and Chief Financial Officer
Lynn E. Cox
Secretary
Linda L. Sessa
Treasurer
LEGAL COUNSEL
-------------
Jones, Day, Reavis & Pogue
3500 Sun Trust Plaza
303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
AUDITORS
--------
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
