EX-19 2 ffc_ex19.htm QUARTERLY REPORT TO INVESTORS Exhibit 19

Exhibit 19





1st

FRANKLIN

FINANCIAL

CORPORATION



QUARTERLY

REPORT TO INVESTORS

AS OF AND FOR THE

SIX MONTHS ENDED

JUNE 30, 2013





MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following narrative is Management’s discussion and analysis of the foremost factors that influenced 1st Franklin Financial Corporation’s and its consolidated subsidiaries’ (the “Company”, “our” or “we”) financial condition and operating results as of and for the three- and six-month periods ended June 30, 2013 and 2012.  This analysis and the accompanying unaudited condensed consolidated financial information should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company’s 2012 Annual Report.  Results achieved in any interim period are not necessarily reflective of the results to be expected for any other interim or full year period.


Forward-Looking Statements:


Certain information in this discussion, and other statements contained in this Quarterly Report which are not historical facts, may be forward-looking statements within the meaning of the federal securities laws.  Such forward-looking statements involve known and unknown risks and uncertainties.  The Company's 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 actual future results to differ from expectations include, but are not limited to, adverse general economic conditions, including changes in the interest rate environment, unexpected reductions in the size of or collectability of our loan portfolio, reduced sales or increased redemptions of our securities, unavailability of borrowings under our credit facility, federal and state regulatory changes affecting consumer finance companies, unfavorable outcomes in legal proceedings and adverse or unforeseen developments in any of the matters described under “Risk Factors” in our 2012 Annual Report, as well as other factors referenced elsewhere in our filings with the Securities and Exchange Commission from time to time.  The Company undertakes no obligation to update any forward-looking statements, except as required by law.


The Company:


We are engaged in the consumer finance business, primarily in making consumer loans to individuals in relatively small amounts for short periods of time.  Other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage real estate loans on real estate.  As of June 30, 2013, the Company’s business was operated through a network of 268 branch offices located in Alabama, Georgia, Louisiana, Mississippi, South Carolina and Tennessee.


We also offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance.  Customers may request credit life insurance coverage to help assure that any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance policies as an agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.


The Company's operations are subject to various state and federal laws and regulations.  We believe our operations are in compliance with applicable state and federal laws and regulations.


Financial Condition:


The Company's total assets increased $11.9 million (2%) to $530.2 million at June 30, 2013 compared to $518.3 million at December 31, 2012.  The increase was primarily driven by increases in our cash and investment portfolios. Positive cash flows from operations, investing and financing activities contributed to the increase in funds.



1



Cash and cash equivalents increased $19.3 million (69%) and investment securities increased $2.1 million (2%) at June 30, 2013 compared to December 31, 2012.  Investment of surplus funds generated by the operations of our insurance subsidiaries resulted in the increase in our investment portfolio.  The Company's investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  A portion of these investment securities have been designated as “available for sale” (74% as of June 30, 2013 and 73% as of December 31, 2012) with any unrealized gain or loss, net of deferred income taxes, accounted for as other comprehensive income in the Company’s Condensed Consolidated Statements of Comprehensive Income.  The remainder of the Company’s investment portfolio represents securities carried at amortized cost and designated as “held to maturity,” as Management does not intend to sell, and does not believe that it is more likely than not that it would be required to sell, such securities before recovery of the amortized cost basis.


The Company maintains funds in restricted accounts at its insurance subsidiaries in order to comply with certain requirements imposed on insurance companies by the State of Georgia and to meet the reserve requirements of its reinsurance agreements.  Restricted cash also includes escrow deposits held by the Company on behalf of certain mortgage real estate customers.  At June 30, 2013, restricted cash decreased $1.1 million (23%) compared to December 31, 2012.


Loan originations increased during the second quarter of 2013, offsetting a portion of the $20.1 million decline in the net loan portfolio reported in our Quarterly Report to Investors for the Three Months Ended March 31, 2013.  At June 30, 2013 our net loan portfolio was $334.6 million compared to $343.6 million at December 31, 2012.  We project growth in our net loan portfolio as the year progresses.  Included in our net loan portfolio is our allowance for loan losses which reflects Management’s estimate of the level of allowance adequate to cover probable losses inherent in the loan portfolio as of the date of the statement of financial position.  To evaluate the overall adequacy of our allowance for loan losses, we consider the level of loan receivables, historical loss trends, loan delinquency trends, bankruptcy trends and overall economic conditions.  Based on current trends, Managment added $.8 million to the allowance for loan losses at June 30, 2013.  See Note 2, “Allowance for Loan Losses,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for further discussion of the Company’s allowance for loan losses.  Management believes the allowance for loan losses is adequate to cover probable losses inherent in the portfolio at June 30, 2013; however, unexpected changes in trends or deterioration in economic conditions could result in additional  changs in the allowance.  Any additional increase could have a material adverse impact on our results of operations or financial condition in the future.


Other assets increased $.5 million (3%) at June 30, 2013 compared to December 31, 2012 mainly due to increases in prepaid expenses and an increase in refundable income taxes due to our insurance subsidiaries.


The aggregate amount of senior and subordinated debt outstanding at June 30, 2013 was $333.7 million compared to $318.8 million at December 31, 2012, representing a 5% increase.  Higher sales of the Company's senior debt securities was responsible for the increase.


Accrued expenses and other liabilities declined $6.2 million (27%) at June 30, 2013 compared to December 31, 2012 mainly due to disbursement of the 2012 incentive bonus in February 2013.  Also contributing to the decrease was lower accrued salary expenses at June  30, 2013.


Results of Operations:


Total revenues for the three- and six-month periods ended June 30, 2013 were $44.7 million and $90.1 million, respectively, compared to $41.7 million and $83.5 million during the same periods a year ago.  Higher interest and finance charge income earned on our loan and investment portfolios was the primary factor responsible for the increase in revenues.  Although revenue was higher, net income declined $.6 million (6%) and $.7 million (4%) during the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods during 2012 due to increases in the loan loss provision, increases in other operating expenses and higher income taxes.



2



Net Interest Income


Net interest income represents the difference between income on earning assets (loans and investments) and the cost of funds on interest bearing liabilities.  Our net interest income is affected by the size and mix of our loan and investment portfolios as well as the spread between interest and finance charges earned on the respective assets and interest incurred on our debt.  Average net receivables (gross receivables less unearned finance charges) were approximately $385.6 million during the six-month period ended June 30, 2013 compared to $355.2 million during the same period a year ago.  The higher level of average net receivables led to an increase in interest and finance charges earned of $2.3 million (8%) and $4.9 million (8%) during the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods in 2012.

 

There was minimal change in borrowing costs during the comparable periods and therefore no material affect on our net interest margin.  Although average borrowings increased $27.8 million during the six-month period ended June 30, 2013 compared to the same period in 2012, the lower interest rate environment resulted in interest expense closely approximating borrowing cost during the prior year period.  The Company's average borrowing rate decreased to 3.47% during the six-month period just ended compared to 3.76% during the same period a year ago.  


Management projects that, based on historical results, average net receivables will continue to grow through the remainder of the year, and earnings are expected to increase accordingly.  However, a decrease in net receivables, or an increase in interest rates on outstanding borrowings could negatively impact our net interest margin.  


Insurance Income

 

Net insurance income increased $.3 million (3%) and $.6 million (4%) during the three- and six-month periods ended June 30, 2013 compared to the comparable periods a year ago.  The aforementioned increase in average net loans outstanding is directly attributable to the increase.  As average net receivables increase, the Company typically sees an increase in levels of insurance in-force as more loan customers opt for insurance coverage with their loan.  The increase in net insurance income during the six-month period just ended was partially offset by higher claims expense during the same period.

 

Provision for Loan Losses


The Company’s provision for loan losses is a charge against earnings to maintain the allowance for loan losses at a level that Management estimates is adequate to cover probable losses inherent as of the date of the statement of financial position.  


During the three- and six-month periods ended June 30, 2013, the Company’s loan loss provision increased $1.7 million (41%) and $3.1 million (37%) compared to the same periods in 2012, respectively.  Higher net charge offs contributed the increase in our provision.  Net charge offs increased $.8 million during the three-month comparable periods and $2.3 million during the six- month comparable periods.  Also contributing to the increase in the provision was Managment's decision to increase the allowance for loan losses $.8 million at June 30, 2013.


Determining a proper allowance for loan losses is a critical accounting estimate which involves Management’s judgment with respect to certain relevant factors, such as historical and expected loss trends, unemployment rates in various locales, current and expected net charge offs, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions.


Management continues to monitor unemployment rates, which have decreased slightly in recent periods, but remain higher than historical averages in the states in which we operate.  Volatility in gasoline prices is also being monitored.  These factors tend to adversely impact our customers which, in turn, could have an adverse impact on our allowance for loan losses. Based on present and expected overall economic conditions, however, Management believes the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of June 30, 2013.  However, continued high levels of unemployment and/or volatile market conditions could cause actual losses to vary materially from our estimated amounts.  Management may



3



determine it is appropriate to increase the allowance for loan losses in future periods, or actual losses could exceed allowances in any period, either of which events could have a material negative impact on our results of operations in the future.


Other Operating Expenses


Other operating expenses increased $1.3 million (6%) and $2.8 million (6%) during the three- and six-month periods ended June 30, 2013, respectively, compared to the same periods a year ago.  Increases in personnel expense was the primary cause of the overall increases during both periods.  


Annual merit salary increases, increases in the Company's incentive bonus accrual, increases in contributions to the Company's 401(k) plan and higher payroll taxes led to a $1.0 million (7%) increase in personnel cost during the three-month period ended June 30, 2013 compared to the same period in 2013.  These same factors also caused a $2.1 million (7%) increase in personnel cost during the six-month period just ended compared to the same six-month period a year ago.  


Higher maintenance costs on equipment, utilities expense, depreciation expense and increased rent expense caused occupancy expense to increase $.2 million (6%) and $.3 million (4%) during the three- and six-month periods just ended compared to the same periods in 2012.


During the three-and six-month periods ended June 30, 2013, miscellaneous other operating expenses increased $.1 million (2%) and $.5 million (4%) compared to the same periods in 2012.  The increases were mainly the result of higher bank service charges, increases in charitable contributions, increased computer expenses, and increases in travel expenses.  The increases were partially offset by decreases in advertising expenses, credit bureau expenses, legal and audit expenses and taxes and license expenses.


Income Taxes


The Company has elected to be, and is, treated as an S corporation for income tax reporting purposes.  Taxable income or loss of an S corporation is passed through to, and included in the individual tax returns of, the shareholders of the Company, rather then being taxed at the corporate level.  Notwithstanding this election, however, income taxes continue to be reported for, and paid by, the Company's insurance subsidiaries as they are not allowed to be treated as S corporations, and for the Company’s state taxes in Louisiana, which does not recognize S corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences.  


Effective income tax rates were 10% and 7% during the six-month periods ended June 30, 2013 and 2012, respectively.  During the three-month comparable periods, effective income tax rates were 10% and 8%, respectively.  The Company’s effective tax rates during the reporting periods were lower than statutory rates due to income at the S corporation level being passed to the shareholders of the Company for tax reporting purposes, whereas income earned at the insurance subsidiary level was taxed at the corporate level.  The tax rates of the Company’s insurance subsidiaries are below statutory rates due to investments in tax exempt bonds held by the Company’s property insurance subsidiary.  Certain benefits provided by law to small life insurance companies also contributed to the reduced effective tax rates during the three- and six-month periods ending June 30, 2012.  One of the conditons for the Company's life insurance subsidiary to be eligible for certain tax benefits was consolidated Company assets not in excess of $500.0 million.  Our consolidated assets exceeded this threshold during the latter part of 2012, therefore the benefit is no longer available to our life insurance subsidiary going forward.

 

Quantitative and Qualitative Disclosures About Market Risk:


Interest rates continued to be near historical low levels during the reporting period.  We currently expect only minimal fluctuations in market interest rates during the remainder of the year, thereby minimizing the expected impact on our net interest margin; however, no assurances can be given in this regard.  Please refer to the market risk analysis discussion contained in our



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2012 Annual Report on Form 10-K as of and for the year ended December 31, 2012 for a more detailed analysis of our market risk exposure.  There were no material changes in our risk exposures in the six months ended June 30, 2013 as compared to those at December 31, 2012.


Liquidity and Capital Resources:


As of June 30, 2013 and December 31, 2012, the Company had $47.5 million and $28.2 million, respectively, invested in cash and cash equivalents, the majority of which was held by the parent company.  

  

The Company’s investments in marketable securities can be readily converted into cash, if necessary.  State insurance regulations limit the use an insurance company can make of its assets.  Dividend payments to a parent company by its wholly-owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of policyholders’ surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  At December 31, 2012, Frandisco Property and Casualty Insurance Company (“Frandisco P&C”) and Frandisco Life Insurance Company (“Frandisco Life”), the Company’s wholly-owned insurance subsidiaries, had policyholders’ surpluses of $51.2 million and $51.4 million, respectively.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2013, without prior approval of the Georgia Insurance Commissioner, is approximately $10.3 million.  No dividends were paid during the six-month period ended June 30, 2013.


The majority of the Company’s liquidity requirements are financed through the collection of receivables and through the sale of short- and long-term debt securities.  The Company’s continued liquidity 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 its receivables and securities sales, the Company has an external source of funds available under a credit facility with Wells Fargo Preferred Capital, Inc. (the “credit agreement”).  The credit agreement provides for borrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company.  Available borrowings under the credit agreement were $100.0 million at June 30, 2013 and December 31, 2012, at an interest rate of 3.75%.  The credit agreement has a commitment maturity date of September 11, 2014.  The credit agreement contains covenants customary for financing transactions of this type.  At June 30, 2013, the Company was in compliance with all covenants.  Management believes this credit facility, when considered with the Company’s other expected sources of funds, should provide sufficient liquidity for the continued growth of the Company for the foreseeable future.


Critical Accounting Policies:


The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry. The Company’s critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves.  During the six months ended June 30, 2013, there were no material changes to the critical accounting policies or related estimates previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.


Allowance for Loan Losses


Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in our loan portfolio.  


The allowance for loan losses is established based on the determination of the amount of probable losses inherent in the loan portfolio as of the reporting date.  We review, among other things, historical charge off experience factors, delinquency reports, historical collection rates, economic trends such as unemployment rates, gasoline prices and bankruptcy filings and other information in order to make what we believe are the necessary judgments as to probable losses.  Assumptions regarding probable losses are reviewed periodically and may be impacted by our actual loss experience and changes in any of the factors discussed above.




5




Revenue Recognition


Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual account with precomputed charges to calculate income for those active accounts; however, state regulations often allow interest refunds to be made according to the Rule of 78’s method for payoffs and renewals.  Since the majority of the Company's accounts with precomputed charges are paid off or renewed prior to maturity, the result is that most of those accounts effectively yield on a Rule of 78's basis.


Precomputed finance charges are 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 effective interest method.  Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis.  Income is not accrued on any loan that is more than 60 days past due.


Loan fees and origination costs are deferred and recognized as adjustments to the loan yield over the contractual life of the related loan.  


The property and casualty credit insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums on these policies are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.


The credit life and accident and health insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life insurance policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health insurance policies are earned based on an average of the pro-rata method and the effective yield method.


Insurance Claims Reserves


Included in unearned insurance premiums and commissions on the Unaudited Condensed Consolidated Statements of Financial Position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries.  These reserves are established based on generally accepted actuarial methods.  In the event that the Company’s actual reported losses for any given period are materially in excess of the previously estimated amounts, such losses could have a material adverse effect on the Company’s results of operations.


Different assumptions in the application of any of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations.



Recent Accounting Pronouncements:


See “Recent Accounting Pronouncements” in Note 1 to the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of any applicable recently adopted accounting standards and the expected impact of accounting standards recently issued but not yet required to be adopted.  For pronouncements already adopted, any material impacts on the Company’s consolidated financial statements are discussed in the applicable section(s) of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the accompanying Notes to Unaudited Condensed Consolidated Financial Statements.




6




1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

 

June 30,

December 31,

 

2013

2012

ASSETS

 

 

 

CASH AND CASH EQUIVALENTS

$

47,506,748 

$

28,186,035

 

 

 

RESTRICTED CASH

3,612,968 

4,676,830

 

 

 

LOANS:

Direct Cash Loans

Real Estate Loans

Sales Finance Contracts



Less:

Unearned Finance Charges

Unearned Insurance Premiums and Commissions

  

Allowance for Loan Losses

Net Loans


397,153,531 

20,359,435 

21,334,451 

438,847,417 


50,685,163 

30,721,626 

22,810,085 

334,630,543 


408,691,403

20,658,498

20,982,941

450,332,842


53,036,201

31,713,036

22,010,085

343,573,520

 

 

 

INVESTMENT SECURITIES:

Available for Sale, at fair value

Held to Maturity, at amortized cost


93,737,032 

32,660,184 

126,397,216 


91,053,693

33,237,199

124,290,892

 

 

 

OTHER ASSETS

18,035,078 

17,561,428

 

 

 

TOTAL ASSETS

$

530,182,553 

$

518,288,705

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

SENIOR DEBT

$

291,532,399 

$

275,893,732

ACCRUED EXPENSES AND OTHER LIABILITIES

16,778,538 

22,943,164

SUBORDINATED DEBT

42,214,753 

42,917,976

Total Liabilities

350,525,690 

341,754,872

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 5)


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

Non-Voting Shares; no par value; 198,000 shares

authorized; 168,300 shares outstanding



170,000 


-- 



170,000


--

Accumulated Other Comprehensive Income (Loss)

(1,820,558)

2,098,618

Retained Earnings

181,307,421 

174,265,215

Total Stockholders' Equity

179,656,863 

176,533,833

 

 

 

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY


$

530,182,553 


$

518,288,705

 

See Notes to Unaudited Condensed Consolidated Financial Statements



7




1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

 INCOME AND RETAINED EARNINGS

(Unaudited)

 

 

 

 

 

 

Three Months Ended

Six Months Ended

 

June 30,

June 30,

 

2013

2012

2013

2012

 

 

 

 

 

INTEREST INCOME

$ 31,766,021

$ 29,510,088

$

64,619,394

$

59,682,404

INTEREST EXPENSE

2,856,764

2,858,656

5,698,023

5,647,895

NET INTEREST INCOME

28,909,257

26,651,432

58,921,371

54,034,509

 

 

 

 

 

Provision for Loan Losses

5,718,712

4,041,825

11,224,533

8,164,336

 

 

 

 

 

NET INTEREST INCOME AFTER

PROVISION FOR LOAN LOSSES


23,190,545


22,609,607


47,696,838


45,870,173

 

 

 

 

 

INSURANCE INCOME

Premiums and Commissions

Insurance Claims and Expenses

Total Net Insurance Income


11,008,766

2,422,674

8,586,092


10,335,399

2,021,895

8,313,504


22,150,709

4,694,059

17,456,650


20,742,753

3,904,579

16,838,174

 

 

 

 

 

OTHER REVENUE

1,950,289

1,830,178

3,297,884

3,117,975

 

 

 

 

 

OTHER OPERATING EXPENSES:

Personnel Expense

Occupancy Expense

Other

Total


15,711,779

3,064,962

5,557,292

24,334,033


14,708,039

2,902,623

5,426,863

23,037,525


31,653,518

6,085,418

11,200,086

48,939,022


29,528,550

5,829,456

10,741,314

46,099,320

 

 

 

 

 

INCOME BEFORE INCOME TAXES

9,392,893

9,715,764

19,512,350

19,727,002

 

 

 

 

 

Provision for Income Taxes

965,644

730,975

1,991,236

1,472,451

 

 

 

 

 

NET INCOME

8,427,249

8,984,789

17,521,114

18,254,551

 

 

 

 

 

RETAINED EARNINGS, Beginning

      of Period


181,595,632


160,547,656


174,265,215


151,277,894

 

 

 

 

 

Distributions on Common Stock

8,715,460

6,057,192

10,478,908

6,057,192

 

 

 

 

 

RETAINED EARNINGS, End of Period

$181,307,421

$163,475,253

$

181,307,421

$

163,475,253

 

 

 

 

 

BASIC EARNINGS PER SHARE:

170,000 Shares Outstanding for

All Periods (1,700 voting, 168,300

non-voting)




$49.57




$52.85




$103.07




$107.38

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


 

Three Months Ended

Six Months Ended

 

June 30,

June 30,

June 30,

June 30,

 

2013

2012

2013

2012

 

 

 

 

 

Net Income

$

8,427,249

$

8,984,789

$

17,521,114

$

18,254,551

 





Other Comprehensive Income (Loss):

 

 

 

 

Net changes related to available-for-sale

 

 

 

 

Securities:

 

 

 

 

Unrealized gains (losses)

(4,649,168)

85,055

(5,321,714)

(59,477)

Income tax benefit (expense)

1,191,220

(22,928)

1,451,465

137,008

Net unrealized (losses) gains

(3,457,948)

62,127

(3,870,249)

77,531

 

 

 

 

 

Less reclassification of gain to

 

 

 

 

net income (1)

-

3,242

48,927

3,242

 

 

 

 

 

Total Other Comprehensive

 

 

 

 

(Loss) Income

(3,457,948)

58,885

(3,919,176)

74,289

 

 

 

 

 

Total Comprehensive Income

$

4,969,301

$

9,043,674

$

13,601,938

$

18,328,840

 

 

 

 

 

 



(1)

Reclassified $68,608 to other operating expenses and $19,067 to provision for income taxes

on the Condensed Consolidated Statements of Income and Retained Earnings (Unaudited)   for the six months ended June 30, 2013.


Reclassified $3,684 to other operating expenses and $442 to provision for income taxes

on the Condensed Consolidated Statements of Income and Retained Earnings (Unaudited)   for the  three and six months ended June 30, 2012.






See Notes to Unaudited Condensed Consolidated Financial Statements



9




1ST FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

Six Months Ended

 

June 30,

 

2013

2012

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

Net Income

 $ 17,521,114 

 $ 18,254,551 

Adjustments to reconcile net income to net cash

provided by operating activities:

Provision for loan losses

Depreciation and amortization

Provision for deferred income taxes

Other

Decrease in miscellaneous other assets

Decrease in other liabilities

Net Cash Provided



  11,224,533 

  1,429,834 

  (61,572)  498,001 

  (660,995)

  (4,485,515)

  25,465,400 



  8,164,336 

  1,353,803 

  54,386   546,331 

  (703,594)

  (3,576,097)

  24,093,716 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

Loans originated or purchased

Loan payments

Decrease in restricted cash

Purchases of marketable debt securities

Sales of marketable debt securities

Redemptions of marketable debt securities

Fixed asset additions, net

Net Cash Used

  (148,118,081)  145,836,526 

  1,063,862 

  (15,886,955)  916,406 

6,949,909 

  (1,362,890)

  (10,601,223)

  (137,348,697)  129,344,642 

  708,049 

  (16,124,706)

  - 

6,068,250 

  (1,010,718)

  (18,363,180)

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

Net increase (decrease) in senior demand notes

Advances on credit line

Payments on credit line

Commercial paper issued

Commercial paper redeemed

Subordinated debt securities issued

Subordinated debt securities redeemed

Dividends / Distributions

Net Cash Provided

3,676,308   

  264,790 

  (264,790)

  26,688,967   (14,726,608)

  4,886,662 

  (5,589,885)

  (10,478,908)

  4,456,536 

 (874,365)   

  266,179 

  (266,179)

  32,693,571   (13,774,110)

  4,158,673 

  (7,726,398)

  (6,057,192)

  8,420,179 

 

 

 

NET INCREASE CASH AND CASH EQUIVALENTS

  19,320,713 

  14,150,715 

 

 

 

CASH AND CASH EQUIVALENTS, beginning

  28,186,035 

  16,351,141 

 

 

 

CASH AND CASH EQUIVALENTS, ending

 $ 47,506,748 

 $ 30,501,856 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest

Income Taxes

 $ 5,726,812 

  2,179,000 

 $ 5,597,275 

  1,840,400 

Non-cash Exchange of Investment Securities

819,908 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements



10



-NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-


Note 1 – Basis of Presentation


The accompanying unaudited condensed consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the "Company") should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto as of December 31, 2012 and for the year then ended included in the Company's 2012 Annual Report filed with the Securities and Exchange Commission.


In the opinion of Management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 2013 and December 31, 2012, and its consolidated results of operations, comprehensive income and consolidated cash flows for the three and six month periods ended June, 2013 and 2012. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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.


The Company’s financial condition and results of operations as of and for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.  The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities at and as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.


The computation of earnings per share is self-evident from the accompanying Unaudited Condensed Consolidated Statements of Income and Retained Earnings.  The Company has no dilutive securities outstanding.


Recent Accounting Pronouncements:


In February 2013, the FASB issued ASU 2013-02, "Reporting Out of Accumulated Other Comprehensive Income".  The guidance adds new disclosure requirements for items reclassified out of accumulated other comprehensive income.  This update requires that companies present either in a single note, or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification.  If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information.  This update was effective for the Company beginning in the first quarter of 2013 and its adoption did not have a material impact on the consolidated financial statements.



Note 2 – Allowance for Loan Losses


The allowance for loan losses is based on Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Management’s approach to estimating and evaluating the allowance for loan losses is on a total portfolio level based on historical loss trends, bankruptcy trends, the level of receivables at the balance sheet date, payment patterns and economic conditions primarily including, but not limited to, unemployment levels and gasoline prices.  Historical loss trends are tracked on an on going basis.  The trend analysis includes statistical analysis of the correlation between loan date and charge off date, charge off statistics by the total loan portfolio, and charge off statistics by branch, division and state.  Delinquency and bankruptcy filing trends are also tracked.  If trends indicate an adjustment to the allowance for loan losses is warranted, Management will make what it considers to be



11



appropriate adjustments.  The level of receivables at the balance sheet date is reviewed and adjustments to the allowance for loan losses are made if Management determines increases or decreases in the level of receivables warrants an adjustment.  The Company uses monthly unemployment statistics, and various other monthly or periodic economic statistics, published by departments of the U.S. government and other economic statistics providers to determine the economic component of the allowance for loan losses.  Such allowance is, in the opinion of Management, sufficiently adequate for probable losses in the current loan portfolio.  As the estimates used in determining the loan loss reserve are influenced by outside factors, such as consumer payment patterns and general economic conditions, there is uncertainty inherent in these estimates.  Actual results could vary based on future changes in significant assumptions.


Management does not disaggregate the Company’s loan portfolio by loan class when evaluating loan performance.  The total portfolio is evaluated for credit losses based on contractual delinquency and other economic conditions. The Company classifies delinquent accounts at the end of each month according to the number of installments past due at that time, based on the then-existing terms of the contract.  Accounts are classified in delinquency categories based on the number of days past due.  When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due, we classify the account as being 90 days or more past due.  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, Management considers factors such as pending insurance, bankruptcy status and other indicators of collectability. In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid. In connection with any bankruptcy court-initiated repayment plan and as allowed by state regulatory authorities, the Company effectively resets the delinquency rating of each account to coincide with the court initiated repayment plan. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.


When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status.  At such time, the accrual of any additional finance charges is discontinued.  Finance charges are then only recognized to the extent there is a loan payment received or when the account qualifies for return to accrual status.  Nonaccrual loans return to accrual status when the loan becomes less than 60 days past due.  There were no loans past due 60 days or more and still accruing interest at June 30, 2013 or December 31, 2012.  The Company’s principal balances on non-accrual loans by loan class as of June 30, 2013 and December 31, 2012 are as follows:


Loan Class

June 30,

 2013

December 31, 2012

 

 

 

Consumer Loans

$

31,451,362

$

31,936,076

Real Estate Loans

861,718

1,113,624

Sales Finance Contracts

729,071

862,952

Total

$

33,042,151

$

33,912,652


An age analysis of principal balances on past due loans, segregated by loan class, as of June 30, 2013 and December 31, 2012 follows:




June 30, 2013


30-59 Days

Past Due


60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

 

 

 

 

 

Consumer Loans

$

12,110,196

$

6,367,881

$

11,739,386

$

30,217,463

Real Estate Loans

406,408

299,691

502,385

1,208,484

Sales Finance Contracts

316,810

171,966

331,153

819,929

Total

$

12,833,414

$

6,839,538

$

12,572,924

$

32,245,876





12






December 31, 2012


30-59 Days

Past Due


60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

 

 

 

 

 

Consumer Loans

$

11,265,415

$

5,928,748

$

12,984,546

$

30,178,709

Real Estate Loans

479,103

201,442

603,585

1,284,130

Sales Finance Contracts

455,619

208,323

389,533

1,053,475

Total

$

12,200,137

$

6,338,513

$

13,977,664

$

32,516,314


In addition to the delinquency rating analysis, the ratio of bankrupt accounts to the total loan portfolio is also used as a credit quality indicator.  The ratio of bankrupt accounts outstanding to total principal loan balances outstanding at June 30, 2013 and December 31, 2012 was 2.79% and 2.64%, respectively.


Nearly our entire loan portfolio consists of small homogeneous consumer loans (of the product types set forth in the table below).  



June 30, 2013


Principal

Balance


%

Portfolio

6 Months

Net

Charge Offs

%

Net

Charge Offs

 

 

 

 

 

Consumer Loans

$

393,797,177

90.5%

$

10,231,467

98.2

Real Estate Loans

20,004,441

4.6   

(4,606)

(.1)  

Sales Finance Contracts

21,178,763

4.9   

197,672

1.9  

Total

$

434,980,381

100.0%

$

10,424,533

100.0%





June 30, 2012


Principal

Balance


%

Portfolio

6 Months

Net

Charge Offs

%

Net

Charge Offs

 

 

 

 

 

Consumer Loans

$

369,048,342

89.7%

$

7,934,802

96.1%

Real Estate Loans

21,354,249

5.2   

38,594

.4   

Sales Finance Contracts

21,215,634

5.1   

190,940

3.5   

Total

$

411,618,225

100.0%

$

8,164,336

100.0%


Sales finance contracts are similar to consumer loans in nature of loan product, terms, customer base to whom these products are marketed, factors contributing to risk of loss and historical payment performance, and together with consumer loans, represented approximately 95% of the Company’s loan portfolio at June 30, 2013 and 2012.  As a result of these similarities, which have resulted in similar historical performance, consumer loans and sales finance contracts represent substantially all loan losses.  Real estate loans and related losses have historically been insignificant, and, as a result, we do not stratify the loan portfolio for purposes of determining and evaluating our loan loss allowance.  Due to the composition of the loan portfolio, the Company determines and monitors the allowance for loan losses on a collectively evaluated, single portfolio segment basis.  Therefore, a roll forward of the allowance for loan loss activity at the portfolio segment level is the same as at the total portfolio level.  We have not acquired any impaired loans with deteriorating quality during any period reported.  The following table provides additional information on our allowance for loan losses based on a collective evaluation:


 

Three Months Ended

Six Months Ended

 

June 30, 2013

June 30, 2012

June 30, 2013

June 30, 2012

Allowance for Credit Losses:

 

 

 

 

Beginning Balance

$

22,010,085 

$

21,360,085 

$

22,010,085 

$

21,360,085 

Provision for Loan Losses

5,718,712 

4,041,825 

11,224,533 

8,164,336 

Charge-offs

(7,115,137)

(6,193,309)

(15,193,489)

(12,919,626)

Recoveries

2,196,425 

2,151,484 

4,768,956 

4,755,290 

Ending Balance

$

22,810,085 

$

21,360,085 

$

22,810,085 

$

21,360,085 

 

 

 

 

 

Ending balance; collectively

evaluated for impairment


$

22,810,085 


$

21,360,085 


$

22,810,085 


$

21,360,085 



13




 

Three Months Ended

Six Months Ended

 

June 30, 2013

June 30, 2012

June 30, 2013

June 30, 2012

Finance receivables:

 

 

 

 

Ending balance

$

434,980,381 

$

411,618,225 

$

434,980,381 

$

411,618,225 

Ending balance; collectively

evaluated for impairment


$

434,980,381 


$

411,618,225 


$

434,980,381 


$

411,618,225 


Troubled Debt Restructings ("TDR's") represent loans on which the original terms of the loans have been modified as a result of the following conditions: (i) the restructuring constitutes a concession and (ii) the borrower is experiencing financial difficulties. Loan modifications by the Company involve payment alterations, interest rate concessions and/ or reductions in the amount owed by the borrower.  The following table presents a summary of loans that were restructured during the three months ended June 30, 2013.


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

983

$

3,058,427

$

2,827,409

Real Estate Loans

20

148,861

146,559

Sales Finance Contracts

49

95,620

87,831

Total

1,052

$

3,302,908

$

3,061,799



The following table presents a summary of loans that were restructured during the three months ended June 30, 2012.

 

Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

953

$

2,981,324

$

2,712,205

Real Estate Loans

23

161,312

133,214

Sales Finance Contracts

68

130,261

120,905

Total

1,044

$

3,272,897

$

2,966,324



The following table presents a summary of loans that were restructured during the six months ended June 30, 2013.

 

Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

1,738

$

5,450,143

$

5,030,488

Real Estate Loans

32

242,804

238,501

Sales Finance Contracts

86

170,361

158,863

Total

1,856

$

5,863,308

$

5,427,852



The following table presents a summary of loans that were restructured during the six months ended June 30, 2012.

 

Number

Of

Loans

Pre-Modification

Recorded

Investment

Post-Modification

Recorded

Investment

 

 

 

 

Consumer Loans

1,852

$

5,697,814

$

5,240,351

Real Estate Loans

38

303,899

270,609

Sales Finance Contracts

121

274,140

253,782

Total

2,011

$

6,275,853

$

5,764,742






14





TDRs that occurred during the previous twelve months and subsequently defaulted during the three months ended June 30, 2013 are listed below.  


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

208

$

363,313

Real Estate Loans

3

8,206

Sales Finance Contracts

5

4,560

Total

216

$

376,079


TDRs that occurred during the twelve months ended June 30, 2012 and subsequently defaulted during the three months ended June 30, 2012 are listed below.


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

197

$

372,053

Real Estate Loans

1

5,351

Sales Finance Contracts

-

-

Total

198

$

377,404


TDRs that occurred during the previous twelve months and subsequently defaulted during the six months ended June 30, 2013 are listed below.


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

335

$

607,329

Real Estate Loans

3

8,206

Sales Finance Contracts

12

13,502

Total

350

$

629,037



TDRs that occurred during the twelve months ended June 30, 2012 and subsequently defaulted during the six months ended June 30, 2012 are listed below.


 

Number

Of

Loans

Pre-Modification

Recorded

Investment

 

 

 

Consumer Loans

351

$

658,713

Real Estate Loans

1

5,351

Sales Finance Contracts

21

28,742

Total

373

$

692,806




The level of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance of loan losses.




15



Note 3 – Investment Securities


Debt securities available-for-sale are carried at estimated fair value. Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity.  The amortized cost and estimated fair values of these debt securities were as follows:


 

 

As of

June 30, 2013

As of

December 31, 2012

 

 


Amortized

Cost

Estimated

Fair

Value


Amortized

Cost

Estimated

Fair

Value

 

Available-for-Sale:

Obligations of states and

political subdivisions

Corporate securities



$

96,166,094

130,316

$

96,296,410



$

93,385,425

351,607

$

93,737,032



$

88,092,434

130,316

$

88,222,750



$

90,755,420

298,273

$

91,053,693


Held to Maturity:

Obligations of states and

political subdivisions



$

32,660,184



$

33,147,474



$

33,237,199



$

34,406,278


Gross unrealized losses on investment securities totaled $4,340,575 and $189,558 at June 30, 2013 and December 31, 2012, respectively.  The following table provides an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of June 30, 2013 and December 31, 2012:


 

Less than 12 Months

12 Months or Longer

Total

June 30, 2013

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Available for Sale:

 

 

 

 

 

 

Obligations of states and

political subdivisions


$ 46,041,304 


$ 4,189,048 


$ 994,532 


$ 32,571 


$ 47,035,836 


$ 4,221,619 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

Obligations of states and

political subdivisions


 3,802,540 


 76,112 


 1,182,225 


 42,844 


 4,984,765 


 118,956 

 

 

 

 

 

 

 

Overall Total

$

49,843,844 

$ 4,265,160 

$ 2,176,757 

$ 75,415 

$52,020,601 

$ 4,340,575 



 

Less than 12 Months

12 Months or Longer

Total

December 31, 2012

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Available for Sale:

 

 

 

 

 

 

Obligations of states and

political subdivisions


$ 9,789,632 


$ 145,814 


$ - 


$ - 


$   9,789,632 


$ 145,814 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

Obligations of states and

political subdivisions


 3,321,640 


 43,744 


 - 


 - 


 3,321,640 


 43,744 

 

 

 

 

 

 

 

Overall Total

$

13,111,272 

$ 189,558 

$ - 

$ - 

$ 13,111,272 

$ 189,558 


The previous two tables represent 89 and 19 investments held by the Company at June 30, 2013 and December 31, 2012, respectively, the majority of which are rated “AA” or higher by Standard & Poor’s.  The unrealized losses on the Company’s investments listed in the above table were primarily the result of interest rate and market fluctuations.  The total impairment was less than approximately 8.35% and 1.45% of the fair value of the affected investments at June 30, 2013 and December 31, 2012, respectively.  Based on the credit ratings of these investments, along with the consideration of whether the Company has the intent to sell or will be more likely than not required to sell the applicable investment before recovery of amortized cost basis, the Company does not consider the impairment of any of these investments to be other-than-temporary at June 30, 2013 and December 31, 2012.


The Company’s insurance subsidiaries internally designate certain investments as restricted to cover their policy reserves and loss reserves.  Funds are held in separate trusts for each insurance subsidiary at US Bank National Association ("US Bank").  US Bank serves as trustee for a trust agreement which includes the Company's property and casualty insurance company



16



subsidiary ("Frandisco P&C") as grantor and Voyager Indemnity Insurance Company as the beneficiary.  On June 30, 2013, the trust for Frandisco P&C held $17.6 million in available-for-sale investment securities at market value and $9.9 million in held-to-maturity investment securities at amortized cost.  US Bank also serves as trustee for a trust agreement which includes the Company's life insurance subsidiary (“Frandisco Life”) as grantor and American Bankers Life Assurance Company as beneficiary.  On June 30, 2013, the trust for Frandisco Life held $.3 million in available-for-sale investment securities at market value and $.2 million in held-to-maturity investment securities at amortized cost.  The amounts required in to be in each Trust change as required reserves change.  All earnings on assets in the trusts are remitted to Frandisco P&C and Frandisco Life.  Any charges associated with the trust are paid by the beneficiaries of each trust.


Note 4 – Fair Value


Under ASC No. 820, fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following fair value hierarchy is used in selecting inputs used to determine the fair value of an asset or liability, with the highest priority given to Level 1, as these are the most transparent or reliable.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurements.


Level 1 - Quoted prices for identical instruments in active markets.


Level 2 - Quoted prices for similar instruments in active markets; quoted prices for

identical or similar instruments in markets that are not active; and model-derived   valuations in which all significant inputs are observable in active markets.


Level 3 - Valuations derived from valuation techniques in which one or more significant

inputs are unobservable.


The following methods and assumptions are used by the Company in estimating fair values of its financial instruments:


Cash and Cash Equivalents:  Cash includes cash on hand and with banks.  Cash equivalents are short-term highly liquid investments with original maturities of three months or less.   The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between origination of the instruments and their expected realization.  The estimate of fair value of cash and cash equivalents is classified as  Level 1 in the fair value hierarchy.


Loans:  The carrying value of the Company’s direct cash loans and sales finance contracts approximates the fair value since the estimated life, assuming prepayments, is short-term in nature.  The fair value of the Company’s real estate loans approximate the carrying value since the interest rate charged by the Company approximates market rate.  The estimate of fair value of loans is classified as Level 3 in the fair value hierarchy.


Marketable Debt Securities:  The fair value of marketable debt securities is based on quoted market prices, when available.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  The estimate of fair value of held-to-maturity marketable debt securities is classified as Level 2 in the fair value hierarchy.  See additional information, including the table below, regarding fair value under ASC No. 820, and the  fair value measurement of available-for-sale marketable debt securities.


Senior Debt Securities:  The carrying value of the Company’s senior debt securities approximates fair value due to the relatively short period of time between the origination of the instruments and their expected repayment.  The estimate of fair value of senior debt securities is classified as Level 2 in the fair value hierarchy.




17



Subordinated Debt Securities:  The carrying value of the Company’s variable rate subordinated debt securities approximates fair value due to the re-pricing frequency of the securities.  The estimate of fair value of subordinated debt securities is classified as Level 2 in the fair value hierarchy.



The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value.  The Company performs due diligence to understand the inputs and how the data was calculated or derived.  The Company employs a market approach in the valuation of its obligations of states, political subdivisions and municipal revenue bonds that are available-for-sale.  These investments are valued on the basis of current market quotations provided by independent pricing services selected by Management based on the advice of an investment manager.  To determine the value of a particular investment, these independent pricing services may use certain information with respect to market transactions in such investment or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. Quoted prices are subject to our internal price verification procedures.  We validate prices received using a variety of methods, including, but not limited to comparison to other pricing services or corroboration of pricing by reference to independent market data such as a secondary broker.  There was no change in this methodology during any period reported.


Assets measured at fair value as of June 30, 2013 and December 31, 2012 were available-for-sale investment securities which are summarized below:


 

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices

 

 

 

 

In Active

Significant

 

 

 

Markets for

Other

Significant

 

 

Identical

Observable

Unobservable

 

June 30,

Assets

Inputs

Inputs

Description

2013

(Level 1)

(Level 2)

(Level 3)

 

 

 

 

 

Corporate securities

Obligations of states and

     political subdivisions  

           Total

$

351,607


93,385,425

$

93,737,032

$

351,607


--

$

351,607

$

--


93,385,425

$

93,385,425

$

--


--

$

--



 

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices

 

 

 

 

In Active

Significant

 

 

 

Markets for

Other

Significant

 

 

Identical

Observable

Unobservable

 

December 31,

Assets

Inputs

Inputs

Description

2012

(Level 1)

(Level 2)

(Level 3)

 

 

 

 

 

Corporate securities

Obligations of states and

     political subdivisions  

           Total

$

298,273


90,755,420

$

91,053,693

$

298,273


--

$

298,273

$

--


90,755,420

$

90,755,420

$

--


--

$

--


Note 5 – Commitments and Contingencies


The Company is, and expects in the future to be, involved in various legal proceedings incidental to its business from time to time.  Management makes provisions in its financial statements for legal, regulatory, and other contingencies when, in the opinion of Management, a loss is probable and reasonably estimable.  At June 30, 2013, no such known proceedings or amounts, individually or in the aggregate, were expected to have a material impact on the Company or its financial condition or results of operations.




18



Note 6 – Income Taxes


Effective income tax rates were 10% and 7% during the six-month periods ended June 30, 2013 and 2012, respectively.  During the three-month comparable periods, effective income tax rates were 10% and 8%, respectively.  The Company has elected to be, and is, treated as an S corporation for income tax reporting purposes.  Taxable income or loss of an S corporation is passed through to, and included in the individual tax returns, of the shareholders of the Company, rather than being taxed at the corporate level.  Notwithstanding this election, income taxes are reported for, and paid by, the Company's insurance subsidiaries, as they are not allowed by law to be treated as S corporations, as well as for the Company in Louisiana, which does not recognize S corporation status.  The tax rates of the Company’s insurance subsidiaries are below statutory rates due to investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

  

 Note 7 – Credit Agreement


Effective September 11, 2009, the Company entered into a credit facility with Wells Fargo Preferred Capital, Inc. As amended to date, the credit agreement provides for borrowings of up to $100.0 million or 80% of the Company’s net finance receivables (as defined in the credit agreement), whichever is less.  The credit agreement has a commitment maturity date of September 11, 2014.  The credit agreement contains covenants customary for financing transactions of this type.  The Company was in compliance with all covenants at June 30, 2013.  Borrowings under the credit agreement are secured by the Company’s finance receivables.  Available borrowings under the credit agreement were $100.0 million at June 30, 2013 and December 31, 2012.


Note 8 – Related Party Transactions


The Company engages from time to time in transactions with related parties.  Please refer to the disclosure contained in Note 10 “Related Party Transactions” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2012 for additional information on such transactions.


Note 9 – Segment Financial Information


The Company has five reportable segments:  Division I through Division V.  Each segment consists of a number of branch offices that are aggregated based on vice president responsibility and geographic location.  Division I consists of offices located in South Carolina.  Offices in North Georgia comprise Division II, Division III consists of offices in South Georgia.  Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.  


Accounting policies of each of the segments are the same as those for the Company as a whole.  Performance is measured based on objectives set at the beginning of each year and include various factors such as segment profit, growth in earning assets and delinquency and loan loss management.  All segment revenues result from transactions with third parties.  The Company does not allocate income taxes or corporate headquarter expenses to the segments.




19



In accordance with the requirements of ASC 280, “Segment Reporting,” the following table summarizes revenues, profit and assets by business segment.  Also in accordance therewith, a reconciliation to consolidated net income is provided.  



 

Division

Division

Division

Division

Division

 

 

I

II

III

IV

V

Total

 

(in thousands)

Segment Revenues:

 

 

 

 

 

 

  3 Months ended 6/30/2013

$

5,602

$

10,147

$

9,743

$

8,501

$

7,611

$

41,604

  3 Months ended 6/30/2012

5,093

9,548

9,319

8,064

7,032

39,056

  6 Months ended 6/30/2013

$

11,413

$

20,591

$

19,791

$

17,177

$

15,491

$

84,463

  6 Months ended 6/30/2012

10,196

19,260

19,001

16,044

14,188

78,689

 

 

 

 

 

 

 

Segment Profit:

 

 

 

 

 

 

  3 Months ended 6/30/2013

$

2,069

$

5,225

$

4,688

$

3,523

$

2,989

$

18,494

  3 Months ended 6/30/2012

1,996

4,936

4,571

3,598

2,981

18,082

  6 Months ended 6/30/2013

$

4,079

$

10,477

$

9,484

$

6,963

$

6,264

$

37,267

  6 Months ended 6/30/2012

3,757

9,795

9,263

7,130

6,025

35,970


Segment Assets:

 

 

 

 

 

 

  06/31/2013

$

47,463

$

92,567

$

90,695

$

87,718

$

62,896

$

381,339

  12/31/2012

48,426

94,526

92,502

 

89,957

64,030

389,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3 Months

Ended

6/30/2013

(in Thousands)

3 Months

Ended

6/30/2012

(in Thousands)

6 Months

Ended

6/30/2013

(in Thousands)

6 Months

Ended

6/30/2012

(in Thousands)

Reconciliation of Profit:

 

 

 

 

 

 

Profit per segment

 

$

18,495 

$

18,082 

$

37,267 

$

35,970 

Corporate earnings not allocated

3,121 

2,619 

5,605 

4,854 

Corporate expenses not allocated

(12,223)

(10,985)

(23,360)

(21,097)

Income taxes not allocated

(966)

(731)

(1,991)

(1,472)

Net income

$

8,427 

$

8,985 

$

17,521 

$

18,255 



20




BRANCH OPERATIONS

 

 

Ronald F. Morrow

Vice President

Virginia K. Palmer

Vice President

J. Patrick Smith, III

Vice President

Marcus C. Thomas

Vice President

Michael J. Whitaker

Vice President

Joseph R. Cherry

Area Vice President

John B. Gray

Area Vice President

 

 


REGIONAL OPERATIONS DIRECTORS

 

 

 

 

Sonya Acosta

Jeremy Cranfield

Judy Landon

Brian McSwain

Michelle Rentz Benton

Joe Daniel

Sharon Langford

Marty Miskelly

Bert Brown

Loy Davis

Jeff Lee

Larry Mixson

Ron Byerly

Carla Eldridge

Tommy Lennon

Mike Olive

Keith Chavis

Shelia Garrett

Lynn Lewis

Hilda Phillips

Janice Childers

Brian Hill

Jimmy Mahaffey

Jennifer Purser

Rick Childress

David Hoard

John Massey

Mike Shankles

Bryan Cook

Gail Huff

Vicky McCleod

Harriet Welch

Richard Corirossi

Jerry Hughes

 

 

 

 

 

 


BRANCH OPERATIONS

 

ALABAMA

Adamsville

Bessemer

Enterprise

Huntsville (2)

Opp

Scottsboro

Albertville

Center Point

Fayette

Jasper

Oxford

Selma

Alexander City

Clanton

Florence

Moody

Ozark

Sylacauga

Andalusia

Cullman

Fort Payne

Moulton

Pelham

Troy

Arab

Decatur

Gadsden

Muscle Shoals

Prattville

Tuscaloosa

Athens

Dothan (2)

Hamilton

Opelika

Russellville (2)

Wetumpka

 

 

 

 

 

 

GEORGIA

Adel

Carrollton

Dalton

Gray

Madison

Statesboro

Albany

Cartersville

Dawson

Greensboro

Manchester

Stockbridge

Alma

Cedartown

Douglas (2)

Griffin

McDonough

Swainsboro

Americus

Chatsworth

Douglasville

Hartwell

Milledgeville

Sylvania

Athens (2)

Clarkesville

Dublin

Hawkinsville

Monroe

Sylvester

Bainbridge

Claxton

East Ellijay

Hazlehurst

Montezuma

Thomaston

Barnesville

Clayton

Eastman

Helena

Monticello

Thomson

Baxley

Cleveland

Eatonton

Hinesville (2)

Moultrie

Tifton

Blairsville

Cochran

Elberton

Hiram

Nashville

Toccoa

Blakely

Colquitt

Fayetteville

Hogansville

Newnan

Valdosta

Blue Ridge

Columbus

Fitzgerald

Jackson

Perry

Vidalia

Bremen

Commerce

Flowery Branch

Jasper

Pooler

Villa Rica

Brunswick

Conyers

Forsyth

Jefferson

Richmond Hill

Warner Robins

Buford

Cordele

Fort Valley

Jesup

Rome

Washington

Butler

Cornelia

Gainesville

LaGrange

Royston

Waycross

Cairo

Covington

Garden City

Lavonia

Sandersville

Waynesboro

Calhoun

Cumming

Georgetown

Lawrenceville

Savannah

Winder

Canton

Dahlonega

 

 

 

 




21




BRANCH OPERATIONS

(Continued)

 

LOUISIANA

Alexandria

DeRidder

Jena

Minden

Opelousas

Springhill

Bastrop

Eunice

Lafayette

Monroe

Pineville

Sulphur

Bossier City

Franklin

LaPlace

Morgan City

Prairieville

Thibodaux

Crowley

Hammond

Leesville

Natchitoches

Ruston

Winnsboro

Denham Springs

Houma

Marksville

New Iberia

Slidell

 

 

MISSISSIPPI

Batesville

Columbus

Hazlehurst

Magee

Oxford

Ripley

Bay St. Louis

Corinth

Hernando

McComb

Pearl

Senatobia

Booneville

Forest

Houston

Meridian

Philadelphia

Starkville

Brookhaven

Grenada

Iuka

New Albany

Picayune

Tupelo

Carthage

Gulfport

Jackson

Newton

Pontotoc

Winona

Columbia

Hattiesburg

Kosciusko

 

 

 

 

 

 

 

 

 

SOUTH CAROLINA

Aiken

Cheraw

Gaffney

Laurens

North Augusta

Spartanburg

Anderson

Chester

Georgetown

Lexington

North Charleston

Summerville

Batesburg-

   Leesvile

Columbia

Greenville

Manning

North Greenville

Sumter

Beaufort

Conway

Greenwood

Marion

Orangeburg

Union

Camden

Dillon

Greer

Moncks Corner

Rock Hill

Walterboro

Cayce

Easley

Hartsville

Myrtle Beach

Seneca

Winnsboro

Charleston

Florence

Lancaster

Newberry

Simpsonville

York

 

 

 

 

 

 

TENNESSEE

Alcoa

Cleveland

Elizabethton

Kingsport

Lenior City

Sparta

Athens

Crossville

Greenville

Knoxville

Madisonville

Winchester

Bristol

Dayton

Johnson City

LaFollette

Newport

 

 

 

 

 

 

 

 

 




22




DIRECTORS

 

 

Ben F. Cheek, III

Chairman and Chief Executive Officer

1st Franklin Financial Corporation

C. Dean Scarborough

Realtor

 

 

Ben F. Cheek, IV

Vice Chairman

1st Franklin Financial Corporation

Dr. Robert E. Thompson

Retired Physician

 

 

A. Roger Guimond

Executive Vice President and

Chief Financial Officer

1st Franklin Financial Corporation

Keith D. Watson

Vice President and Corporate Secretary

Bowen & Watson, Inc.

 

 

John G. Sample, Jr.

Senior Vice President and

Chief Financial Officer

Atlantic American Corporation

 


 

EXECUTIVE OFFICERS

 

Ben F. Cheek, III

Chairman and Chief Executive Officer

 

Ben F. Cheek, IV

Vice Chairman

 

Virginia C. Herring

President

 

A. Roger Guimond

Executive Vice President and Chief Financial Officer

 

J. Michael Culpepper

Executive Vice President and Chief Operating Officer

 

C. Michael Haynie

Executive Vice President - Human Resources

 

Kay S. Lovern

Executive Vice President – Strategic and Organization Development

 

Chip Vercelli

Executive Vice President – General Counsel

 

Lynn E. Cox

Vice President / Corporate Secretary and Treasurer

 

 

LEGAL COUNSEL

 

Jones Day

1420 Peachtree Street, N.E.

Suite 800

Atlanta, Georgia  30309-3053

 

AUDITORS

 

Deloitte & Touche LLP

191 Peachtree Street, N.E.

Atlanta, Georgia  30303




23