Exhibit 19 |
| |
| |
| |
| |
| |
| |
| |
1st |
FRANKLIN |
FINANCIAL |
CORPORATION |
| |
| |
QUARTERLY |
REPORT TO INVESTORS |
FOR THE |
NINE MONTHS ENDED |
SEPTEMBER 30, 2001 |
| |
| |
| |
<PAGE>1
Financial Condition:
A downturn in consumer-spending activity and increasing competition has resulted in only modest growth in the Company's loan portfolio during the current year. Net receivables (gross receivables less unearned finance charges) increased $4.0 million (2%) as of September 30, 2001 as compared to December 31, 2000. Management is currently formulating a five-year strategic plan for the Company, which may include new products and markets to promote receivables growth and meet the challenges of the highly competitive financial services industry.
Although the growth in the loan portfolio was marginal, the Company's financial position grew stronger as cash reserves rose $21.8 million (210%) during the nine-month period ended September 30, 2001 as compared to reserves on hand December 31, 2000. The Company obtains operating cash from sales of debt securities to the public and from customer payments on existing loans. During the nine-month period just ended, funds generated exceeded working capital needed for operations thereby creating a surplus of cash.
Other assets declined $2.6 million (22%) at September 30, 2001 as compared to the prior year-end mainly due to the reimbursement of premiums on insurance policies paid by the Company in previous years.
Increases in sales of the Company's debt securities during the current year resulted in senior and subordinated debt rising $17.1 million (11%)
Results of Operations:
Company pre-tax profits fell $.8 million (44%) and $3.6 million (51%) during the quarter and nine-month period ended September 30, 2001 as compared to the same periods in 2000, respectively. The softening economy and high debt ratios have caused consumers to curtail spending resulting in lower lending activity for the Company. Higher operating costs as discussed below also led to the lower pre-tax profits. The economic outlook for the remainder of 2001 remains unsettled due to rising unemployment and anticipated higher bankruptcy filings. With all the economic uncertainties, Management projects earnings will be suppressed for the remainder of the year.
The Company did experience improvement in its net interest margin (the difference between interest income on earning assets and interest expense on interest-bearing debt) during the current year, especially in the quarter just ended. During the quarter and nine-month period ended September 30, 2001, the net interest margin rose $.9 million (8%) and $1.1 million (3%), respectively. Interest income is the largest component making up the net interest margin and higher earnings on loans and investments added to the net margin during the comparable periods. Although interest expense has risen during the comparable periods, the impact on the net interest margin was lower in the third quarter. The Federal Reserve has lowered interest rates ten times during the current year in an attempt to stimulate the economy. Although sales of the Company's senior and subordinated debt increased, Management was able to reduce the borrowing rates on its debt during the third quarter and thereby keep th e increase in interest expense minimal. Management believes rates will continue to decline and projects a wider interest margin during the remainder of the year as the lower borrowing rates provide an additional cushion.
Overshadowing the increase in the Company's net interest margin was an increase in the provision for loan losses. Provision for loan losses increased $.9 million (34%) during the quarter ended September 30, 2001 as compared to the same quarter a year ago and $2.8 million (45%) during the nine month comparable period. A downturn in credit quality and an increase in bankruptcies continue to erode Company's profits. Personal bankruptcy filings across the nation continue to move toward a new annual record and the Company is experiencing the adverse effects thereof. Delinquent loans with payments 60 days or more past due increased to 8.3% of receivables outstanding at September 30, 2001 as compared to 8.1% at December 31, 2000. The Company has written off $7.3 million in non-performing loans during the nine-month period just ended as compared to $6.0 million during the same nine-month period a year ago, representing a $1.3 million (22%) increase. Higher than normal charge-offs are pro jected for the remainder of this year as Management has directed that all non-performing loans be closely reviewed
<PAGE>2
for collection potential. Also contributing to the increase in the provision was Management's decision to raise the loan loss allowance in order to provide adequate protection against probable future losses and the overall increase in the loan portfolio. Credit-worthiness of the loan portfolio is continuously monitored and Management may add to the reserve if deemed necessary.
Net insurance income rose $.3 million (6%) and $1.0 million (7%) during the quarter and nine-month period ended September 30, 2001 as compared to the same periods a year ago, respectively. The increase is due to higher levels of insurance in-force.
Revenue generated from sales of utility trailers during the quarter and nine-month period just ended was responsible for the $.1 million and $.2 million increase in other revenue as compared to the same periods a year ago, respectively. The Company became a sales representative for a manufacturer of utility trailers during the fourth quarter of 2000 and test marketed the trailers from then until June 30, 2001. Sales did not reach desired levels and Management has decided to discontinue sales after the Company's inventory is depleted. Other revenue would have been higher during the nine month comparison, however receipt of approximately $.1 million of non-recurring income during second quarter of 2000 attributable to an executive insurance policy owned by the Company offset some of the current year-to-date increase. During the prior year, the insurance company, which had written the policy, converted from a mutual company to a stock company resulting in the additional income.
Overhead costs relating to the opening of eight new branch offices since September 30, 2000 was one cause of the $1.2 million (10%) and $3.0 million (9%) increase in other operating expenses during the quarter and nine-month periods ended September 30, 2001 as compared to the same periods in 2000, respectively. Merit salary increases effective February 1, 2001 and increases in medical claims incurred by the Company's self-insured employee health plan also contributed to the rise in operating expenses. Other factors contributing to the increase were higher miscellaneous expenses such as computer expenses, legal and audit expenses, travel costs and postage. Cost of goods sold, associated with the aforementioned utility trailer sales, was an additional operating expense the Company did not have in the prior year.
Effective income tax rates were 52% and 26% for the quarters ended September 30, 2001 and 2000 and 44% and 20% for the nine-month comparable periods, respectively. Certain tax benefits provided by law to life insurance companies substantially reduced the effective tax rate of the Company's life insurance subsidiary and thus decreased the Company's overall tax rate below statutory rates in the 2000 periods. Investments in tax-exempt securities also allowed the Company's property and casualty insurance subsidiary to reduce its effective tax rate below statutory rates. Many of the benefits were offset in 2001, however, by an increase in the effective tax rates during the current year due to the insurance subsidiaries earning a much higher share of pre-tax profits than the parent company. The parent company is an S Corporation for tax reporting purposes and taxable income is included in the individual tax returns of the shareholders of the Company.
Quantitive and Qualitative Disclosures about Market Risk:
As previously discussed, interest expense was higher during the nine months just ended as compared to the same period a year ago, in part due to higher borrowing cost. Volatility in market rates during the final quarter of the 2000 forced the Company to raise the rates offered on its debt securities in order to stay competitive in the market place. Recent moves by the Federal Reserve have caused market rates to decline over the past several months. The Company's Management believes that the decline in interest rates should allow it to lower the Company's overall borrowing rates during the remainder of the current year.
Liquidity and Capital Resources:
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 had two external sources of funds through the use of two credit agreements at June 30, 2001. One agreement provided for available borrowing of $21.0 million. Available borrowings were $21.0 million at June 30, 2001 and December 31, 2000, relating to this agreement. This agreement matured on July 31, 2001. Effective September 25, 2001, the Company
<PAGE>3
entered into a new 1-year credit agreement, which provides for an unsecured line of credit of $21.0 million, all of, which was available at September 30, 2001. 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, 2001 and December 31, 2000. Due to the Company's strong cash position, Management does not anticipate the need for borrowings under any lines of credit in the near future.
Other:
The tragic events of September 11, 2001 have deeply touched all of us. Our hearts go out to the families who have lost loved ones. In honor of those who have lost their lives, the Company has made a $25,000 donation to the New York Firefighters 9-11 Disaster Relief Fund. These funds are designated to go directly to the families of the fallen firefighters and EMS personnel in New York City.
Forward Looking Statements:
Certain information in the previous discussion and other statements contained in this Quarterly Report, which are not historical facts, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may involve known and unknown risks and uncertainties. The Company's 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, unfavorable outcome of litigation, and other factors referenced elsewhere.
<PAGE> 4
1st FRANKLIN FINANCIAL CORPORATION |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION |
| | |
| | |
| September 30, | December 31, |
| 2001 | 2000 |
| (Unaudited) | (Audited) |
ASSETS |
|
CASH AND CASH EQUIVALENTS | $ 32,192,369 | $ 10,369,709 |
|
LOANS, net | 164,913,238 | 162,330,404 |
|
INVESTMENT SECURITIES: | | |
| Available for Sale, at fair market | 48,491,999 | 54,813,866 |
| Held to Maturity, at amortized cost | 10,406,512 | 5,590,026 |
| 58,898,511 | 60,403,892 |
|
OTHER ASSETS | 9,502,387 | 12,121,941 |
|
| TOTAL ASSETS | $265,506,505 | $245,225,946 |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
SENIOR DEBT | $126,030,717 | $114,514,095 |
OTHER LIABILITIES | 14,196,215 | 13,754,691 |
SUBORDINATED DEBT | 52,884,834 | 47,300,737 |
| Total Liabilities | 193,111,766 | 175,569,523 |
|
STOCKHOLDERS' EQUITY: | | |
| Preferred Stock; $100 par value | -- | -- |
| Common Stock | 170,000 | 170,000 |
| Accumulated Other Comprehensive Income | 1,213,369 | 400,072 |
| Retained Earnings | 71,011,370 | 69,086,351 |
| Total Stockholders' Equity | 72,394,739 | 69,656,423 |
|
| TOTAL LIABILITIES AND | | |
| STOCKHOLDERS' EQUITY | $265,506,505 | $245,225,946 |
|
|
|
The accompanying Notes to Consolidated Financial Statements are |
an integral part of these statements |
|
<PAGE> 5 |
1st FRANKLIN FINANCIAL CORPORATION |
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS |
| | | | | | | | | | | | |
| | | | | Quarter Ended | | Nine Months Ended |
| | | | | September 30 | | September 30 |
| | | | | (Unaudited) | | (Unaudited) |
| | | | | 2001 | | 2000 | | 2001 | | 2000 |
| | | | | | | | | | | |
INTEREST INCOME | $14,787,699 | $13,736,217 | $43,279,068 | $40,760,996 |
INTEREST EXPENSE | | 2,894,188 | | 2,702,034 | | 8,844,790 | | 7,451,188 |
NET INTEREST INCOME | | 11,893,511 | | 11,034,183 | | 34,434,278 | | 33,309,808 |
| | | | | | | | | | | |
| Provision for Loan Losses | | 3,752,758 | | 2,808,655 | | 9,101,626 | | 6,283,255 |
| | | | | | | | | | | |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | | 8,140,753 | | 8,225,528 | | 25,332,652 | | 27,026,553 |
| | | | | | | | | | | |
NET INSURANCE INCOME | | 5,201,813 | | 4,886,120 | | 15,116,711 | | 14,164,128 |
OTHER REVENUE | | 246,823 | | 134,469 | | 685,270 | | 540,108 |
| | | | | | | | | | | |
OTHER OPERATING EXPENSES: |
| Personnel Expense | | 7,702,159 | | 7,201,089 | | 23,626,652 | | 21,865,913 |
| Occupancy | | 1,617,407 | | 1,577,256 | | 4,874,097 | | 4,602,584 |
| Other | | 3,211,591 | | 2,585,943 | | 9,192,216 | | 8,254,809 |
| Total | | 12,531,157 | | 11,364,288 | | 37,692,965 | | 34,723,306 |
| | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | 1,058,232 | | 1,881,829 | | 3,441,668 | | 7,007,483 |
| Provision for Income Taxes | | 549,976 | | 491,021 | | 1,502,589 | | 1,394,107 |
NET INCOME | | 508,256 | | 1,390,808 | | 1,939,079 | | 5,613,376 |
| | | | | | | | | | | |
RETAINED EARNINGS,begin of period | | 70,503,114 | | 67,759,625 | | 69,086,351 | | 65,150,821 |
| Distributions on Common Stock | | - | | 505,000 | | 14,060 | | 2,118,764 |
RETAINED EARNINGS, end of period | $71,011,370 | $68,645,433 | $71,011,370 | $68,645,433 |
| | | | | | | | | | | |
BASIC EARNINGS PER SHARE: |
| | Voting Common Stock; 1,700 Shares outstanding all periods | | $2.99 | | $8.18 | | $11.41 | | $33.02 |
| | Non-Voting Common Stock; 168,300 shares outstanding all periods | | $2.99 | | $8.18 | | $11.41 | | $33.02 |
| | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are |
An integral part of these statements |
| | | | | | | | | | | | |
<PAGE> 6 |
| | | | | | | | | | | | |
1st FRANKLIN FINANCIAL CORPORATION |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| |
| | Nine Months Ended |
| | September 30 |
| | (Unaudited) |
| | 2001 | 2000 |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| | Net Income | $ 1,939,079 | $ 5,613,376 |
| | Adjustments to reconcile net income to net cash | | |
| | provided by operating activities: | | |
| | Provision for Loan Losses | 9,101,626 | 6,283,255 |
| | Depreciation and Amortization | 1,006,322 | 938,396 |
| | Deferred Income Taxes | 140,515 | 40,298 |
| | Other, net | 67,308 | (31,731) |
| | Decrease (Increase) in miscellaneous assets | 2,203,875 | (801,264) |
| | Decrease in Accounts Payable and Accrued Expenses | 108,867 | 135,650 |
| | Net Cash Provided | 14,567,592 | 12,177,980 |
| |
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | Loans Originated or purchased | (105,050,641) | (98,409,225) |
| | Loan Payments | 93,366,181 | 90,723,607 |
| | Purchases of marketable debt securities | (14,252,540) | (7,374,080) |
| | Principal payments on securities | 251,777 | 476,526 |
| | Redemptions of securities | 16,458,448 | 2,360,000 |
| | Other, net | (604,816) | (607,409) |
| | Net Cash Used | (9,831,591) | (12,830,581) |
| |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | Increase in Senior Debt | 11,516,622 | 796,238 |
| | Subordinated Debt issued | 9,997,729 | 10,614,872 |
| | Subordinated Debt redeemed | (4,413,632) | (3,483,899) |
| | Distributions Paid | (14,060) | (2,118,764) |
| | Net Cash Provided | 17,086,659 | 5,808,447 |
| |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 21,822,660 | 5,155,846 |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS, beginning | 10,369,709 | 5,914,535 |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS, ending | $ 32,192,369 | $ 11,070,381 |
| | | | | | | | | |
| | | | | | | | | |
Cash Paid during the period for: | Interest | $ 8,818,215 | $ 7,227,3334 |
| | | | Income Taxes | 1,549,000 | 1,508,340 |
| | | | | | | | | |
| | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are |
an integral part of these statements. |
| |
<PAGE> 7 |
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, 2000 and for the years then ended included in the Company's December 31, 2000 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, 2001 and December 31, 2000 and the results of its operations and its cash flows for the nine months ended September 30, 2001 and 2000. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 nine months ended September 30, 2001 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. | The following tables summarize assets, revenues and profit by business segment. A reconcilement to consolidated net income is also provided. Effective July 1, 2001, Management realigned its business segments with its geographic regions. Due to the significant changes implemented in the management reporting system with regard to business segment reporting, it is not practicable to conform prior year financial data for the new business segments nor current year financial data for the prior business segments for reporting. |
| Division | Division | Division | Division | Division | |
| I | II | III | IV | V | Total |
| (In Thousands) |
Segment Revenues: |
| | Nine Months ended 9/30/01 | $ 6,669 | $ 19,909 | $ 19,291 | $ 5,869 | $ 4,351 | $ 56,089 |
Segment Profit: |
| | Nine Months ended 9/30/01 | $ 989 | $ 6,977 | $ 6,630 | $ (102) | $ 158 | $ 14,652 |
Segment Assets: |
| | 9/30/01 | $ 20,683 | $142,996 | $112,505 | $ 22,975 | $ 13,494 | $312,653 |
| |
| | 9 Months | |
| | Ended | |
| | 9/30/01 | |
| | (In 000's) | |
Reconcilement of Profit: |
| | Profit per segments | $ 14,652 | |
| | Corporate earnings not allocated | 2,993 | |
| | Corporate expenses not allocated.. | (14,203) | |
| | Income Taxes not allocated. | (1,503) | |
| | | $ 1,939 | |
| |
| |
BRANCH OPERATIONS |
|
Jack R. Coker | Senior Vice President |
J.Michael Culpepper | Vice President |
Kay S. Lovern | Vice President |
Dianne Moore | Vice President |
Ronald F. Morrow | Vice President |
Michael J. Whitaker | Vice President |
SUPERVISORS |
| | | |
Bert Brown | Renee Hebert | Mike Lyles | Dale Palmer |
Ronald Byerly | Jack Hobgood | Roy Metzger | Darryl Parker |
Debbie Carter | Bruce Hooper | Jimmy Mchaffey | Hilda Phillips |
Donald Carter | Janice Hyde | Brian McSwain | Henrietta Reathford |
Bryan Cook | Judy Landon | Harriet Moss | Gaines Snow |
Donald Floyd | Jeff Lee | Mike Olive | Marc Thomas |
Shelia Garrett | Tommy Lennon | Melvin Osley | Jason Yates |
Brian Gray | | | |
BRANCH OPERATIONS |
| | | | | |
ALABAMA |
Alexander City | Clanton | Florence | Jasper | Ozark | Selma |
Andalusia | Cullman | Gadsden | Madison | Pelham | Sylacauga |
Arab | Decatur | Geneva | Moulton | Prattville | Troy |
Athens | Dothan | Hamilton | Muscle Shoals | Russellville (2) | Tuscaloosa |
Bessemer | Enterprise | Huntsville | Opp | Scottsboro | Wetumpka |
Birmingham | Fayette | | | | |
| | | | | |
GEORGIA |
Adel | Calhoun | Cumming | Griffin (2) | McRae | Stockbridge |
Albany | Canton | Dallas | Hartwell | Milledgeville | Swainsboro |
Alma | Carrollton | Dalton | Hawkinsville | Monroe | Sylvania |
Americus | Cartersville | Dawson | Hazlehurst | Montezuma | Sylvester |
Arlington | Cedartown | Douglas (2) | Hinesville (2) | Monticello | Thomaston |
Athens (2) | Chatsworth | Douglasville | Hogansville | Moultrie | Thomson |
Bainbridge | Clarkesville | East Ellijay | Jackson | Nashville | Tifton |
Barnesville | Claxton | Eastman | Jasper | Newnan | Toccoa |
Baxley | Clayton | Elberton | Jefferson | Perry | Valdosta (2) |
Blakely | Cleveland | Forsyth | Jesup | Pooler | Vidalia |
Blue Ridge | Cochran | Fort Valley | LaGrange | Richmond Hill | Villa Rica |
Bremen | Commerce | Gainesville | Lavonia | Rome | Warner Robins |
Brunswick | Conyers | Garden City | Lawrenceville | Royston | Washington |
Buford | Cordele | Georgetown | Madison | Sandersville | Waycross |
Butler | Cornelia | Glennville | Manchester | Savannah | Waynesboro |
Cairo | Covington | Greensboro | McDonough | Statesboro | Winder |
| | | | | |
LOUISIANA |
Alexandria | Franklin | Lafayette | Marksville | Natchitoches | Opelousas |
Crowley | Jena | Leesville | Morgan City | New Iberia | Pineville |
DeRidder | | | | | |
| | | | | |
MISSISSIPPI |
Bay St. Louis | Forest | Hattiesburg | Kosciusko | Newton | Picayune |
Carthage | Grenada | Hazlehurst | Magee | Pearl | |
Columbia | Gulfport | Jackson | McComb | | |
| | | | | | |
NORTH CAROLINA |
Monroe | Pineville | | | | |
| | | | | |
SOUTH CAROLINA |
Aiken | Columbia | Gaffney | Lancaster | Marion | Seneca |
Anderson | Conway | Greenville | Laurens | Newberry | Spartanburg |
Cayce | Easley | Greenwood | Lexington | Orangeburg | Union |
Chester | Florence | Greer | Lugoff | Rock Hill | York |
Clemson | | | | | |
<PAGE> 9 |
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 |
| |
Ben F. Cheek, IV |
Vice Chairman |
| |
Ginger C. Herring |
President |
| |
A. Roger Guimond |
Executive Vice President and Chief Financial Officer |
| |
A. Jarrell Coffee |
Executive Vice President and Chief Operating Officer |
| |
Phoebe P. Martin |
Executive Vice President - Human Resources |
| |
Lynn E. Cox |
Area Vice President and Corporate Secretary |
| |
Linda L. Moore |
Area Vice President and Corporate 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 |
Atlanta, Georgia 30303 |
| |
<PAGE> 10 |
