SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to _________
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Commission File Number 2-27985
1st FRANKLIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Georgia | 58-0521233 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
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| 135 East Tugalo Street |
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| Post Office Box 880 |
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| Toccoa, Georgia | 30577 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (706) 886-7571
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
(Cover page 1 of 2 pages)
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Indicate by check mark whether registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer __ Accelerated Filer __ Non Accelerated Filer X
Smaller Reporting Company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter: $0.
| Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: | |
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| Class | Outstanding at February 29, 2016 |
| Common Stock, $100 Par Value | 1,700 Shares |
| Non-Voting Common Stock, No Par Value | 168,300 Shares |
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2015, included as Exhibit 13 hereto, are incorporated by reference into Parts I, II and IV of this Form 10-K.
(Cover page 2 of 2 pages)
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PART I
Item 1. BUSINESS:
The information under the headings Company, page 1 and Business, pages 4-10, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 2015 (the “Annual Report”) are incorporated herein by reference.
Item 1A. RISK FACTORS:
A potential investor should carefully consider the risks described below, as well as the other risks and information disclosed from time to time by 1st Franklin, before deciding whether to invest in the Company. Additional risks and uncertainties not described below, not presently known to us or that we currently do not consider to be material could also adversely affect us. If any of the situations described in the following risk factors actually occur, our business, financial condition or results of operations could be materially adversely affected. In any of these events, an investor may lose part or all of his or her investment.
Because we require a substantial amount of cash to service our debt, we may not be able to pay all of the obligations under our indebtedness.
To service our indebtedness, including paying interest and principal on outstanding debt securities and amounts due under our credit facility, we require a significant amount of cash. Our ability to generate cash depends on many factors, including our successful financial and operating performance. We cannot assure you that our business strategy will continue to be successful, or that we will achieve our anticipated or required financial results.
If we do not achieve our anticipated or required results, we may not be able to generate sufficient cash flow from operations or to obtain sufficient funding to satisfy all of our obligations. The failure to do this would result in a material adverse effect on our business.
Because we depend on liquidity to operate our business, a decrease in the sale of our debt securities, an increase in requests for their redemption or the unavailability of borrowings under our credit facility may make it more difficult for us to operate our business and pay our obligations in a timely manner.
Our liquidity depends on, and we fund our operations through, the sale of our debt securities, the collection of our receivables and the continued availability of borrowings under our credit facility. Numerous available investment alternatives have resulted in investors evaluating more critically their investment opportunities. We cannot assure you that our debt securities will offer interest rates and redemption terms which will generate sufficient sales to meet our liquidity requirements.
As described more fully elsewhere in this Annual Report, our senior demand notes can be redeemed at any time without penalty. Our variable rate subordinated debentures are subject to optional redemption by investors at various times prior to their stated maturity and holders may request that we redeem debentures during an interest adjustment period, although we are not obligated to accept such requests, and such requests are subject to interest penalties. It is possible that a significant number of redemption requests could adversely affect our liquidity.
Borrowings under our credit facility are subject to, among other things, a borrowing base. In the event we are not able to borrow amounts under our credit facility, whether as a result of having reached our maximum borrowing availability thereunder or otherwise, we may not be able to fund loans to customers, redeem securities when required or invest in our operations as needed.
Our failure to be able to obtain or maintain sufficient liquidity could have a material adverse effect on our business, financial condition and results of operations.
Because most of our loans are made to salaried people and other wage earners who generally depend upon their earnings to meet their repayment obligations, higher than
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historical average or further increased unemployment could adversely impact our liquidity, financial condition and results of operations.
Our business consists mainly of making loans to salaried people or other wage earners who generally depend on their earnings to meet their repayment obligations. As a result, the loss of employment by such borrowers is likely to make it more difficult for them to timely repay their obligations to the Company. Additionally, adverse general economic conditions, including high unemployment rates, often result in additional challenges for both the Company and potential customers, resulting in an increased number of bankruptcy filings and a lower number of qualified borrowers. Uncertain or worsening economic conditions could result in the Company’s liquidity, financial condition and results of operations being materially adversely impacted.
We establish an allowance for loan losses in our financial statements at a level considered adequate by management to absorb probable loan losses inherent in the loan portfolio as of the balance sheet date based on estimates and assumptions at that date. The amount of actual future loan losses is susceptible to changes in economic, operating and other conditions within our market, which may be beyond our control, and such losses may exceed current estimates. Although Management believes that the Company’s allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot estimate loan losses with certainty, and we cannot provide any assurances that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our financial condition and results of operations.
In either event, any reduced liquidity could negatively impact our ability to be able to fund loans, or to pay the principal and interest on any of our outstanding debt securities at any time, including when due.
All of our offers and sales of securities must comply with applicable securities laws, or we could be liable for damages, which could impact our ability to make payments on our outstanding debt securities.
Offers and sales of all of our securities must comply with all applicable federal and state securities laws, including Section 5 of the Securities Act of 1933. If any of our offers, including those deemed made pursuant to newspaper or radio advertisements, or sales are found not to be in compliance with any of these laws, we could be liable to certain purchasers of the security, could be required to offer to repurchase the security, or could be liable for damages or other penalties. If we are required to repurchase any of our securities other than in the ordinary course of our business as a result of any such violation, or otherwise are found to be liable for any damages or penalties as a result of any such violation, our financial condition could be materially adversely affected. Any such adverse effect on our financial condition could materially impair our ability to fund loans in the ordinary course of business or pay principal and interest on our outstanding debt securities.
Continued uncertain economic conditions could negatively affect our results and profitability.
Increases in unemployment levels and other factors indicative of recessionary economic cycles could affect our investors’, customers’, and potential investors’ and customers’ disposable income, confidence, and spending patterns and preferences, which in turn could negatively impact the making of loans, our cost of loans, our sales of investment securities and our customers’ ability to repay their obligations to us.
An increase in the interest we pay on our debt and borrowings could materially and adversely affect our net interest margin.
Net interest margin represents the difference between the amount that we earn on loans and investments and the amount that we pay on debt securities and other borrowings. The loans we make in the ordinary course of our business are subject to interest rate and regulatory provisions of each applicable state's lending laws and are made at fixed rates which are not
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adjustable during the term of the loan. Since our loans are made at fixed interest rates and are made using the proceeds from the sale of our fixed and variable rate securities, we may experience a decrease in our net interest margin because increased interest costs cannot be passed on to all of our loan customers. A reduction in our net interest margin could adversely affect our liquidity, including our ability to make payments on our outstanding debt securities.
Neither the Company nor any of its debt securities are or will be rated by any nationally recognized statistical rating agency, and this may increase the risk of your investment.
Neither 1st Franklin nor any of its debt securities are, or are expected to be, rated by any nationally recognized statistical rating organization. Typically, credit ratings assigned by such organizations are based upon an assessment of a company’s creditworthiness and are often a measure used in establishing the interest rate that a company offers on debt securities it issues. Without any such rating, it is possible that fluctuations in general economic, or industry specific, business conditions, changes in results of operations, or other factors that affect the creditworthiness of a debt issuer may not be fully reflected in the interest rate on any outstanding indebtedness of that issuer. Investors in the Company’s securities must depend solely on their own evaluation of the creditworthiness of 1st Franklin for the payment of principal and interest on those securities. In the absence of any third party credit rating, it is possible that the interest rates offered by the Company on its debt securities may not represent the credit risk that an investor assumes in purchasing any of these securities.
Consumer finance companies and other companies that offer and sell securities to the public such as the Company are subject to an increasing number of laws and government regulations, and if we fail to comply with these laws or regulations, our business may suffer and our ability to pay our obligations may be impaired.
Our operations are subject to increasing focus by federal, state and local government authorities and state attorneys general and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on certain lending practices by companies in the consumer finance industry, sometimes referred to as "predatory lending" practices. These requirements and restrictions, among other things:
• require that we obtain and maintain certain licenses and qualifications;
• limit the interest rates, fees and other charges that we are allowed to charge;
• require specified disclosures to borrowers;
• limit or prescribe other terms of our loans;
• govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and
• define our rights to repossess and sell collateral.
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which was enacted in 2010 has significantly increased the regulation of financial institutions and the financial services industry. The Dodd-Frank Act established the Bureau of Consumer Financial Protection as an independent entity given the authority to promulgate additional consumer protection regulations applicable to all entities offering consumer financial services or products such as the Company. Many of the requirements in the Dodd-Frank Act are being implemented over time and are subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which various expected provisions of the Dodd-Frank Act have been and are expected to continue to be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations remains unclear; however, these regulations have increased and are expected to further increase our cost of doing business and time spent by Management on regulatory matters which may have a material adverse effect on the Company’s operations and results.
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In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the loans we make and our related services. Although we believe that we are in compliance in all material respects with applicable federal, state and local laws, rules and regulations, there can be no assurance that a change in any of those laws, or in their interpretation, will not make our compliance therewith more difficult or expensive, restrict our ability to originate loans or other financial services, further limit or restrict the amount of interest and other charges we earn under such loans or services, or otherwise adversely affect our financial condition or business operations. The burdens of complying with these laws and regulations, and the possible sanctions if we do not so comply, are significant, and may result in a downturn in our business or our inability to carry on our business in a manner similar to how we currently operate.
If we experience unfavorable litigation results, our ability to timely meet our obligations may be impaired.
As a consumer finance company, in addition to being subject to stringent regulatory requirements, we may, from time to time, be subject to various consumer claims and litigation seeking damages and statutory penalties. The damages and penalties claimed by consumers and others can often be substantial. The relief may vary but generally is expected to include requests for compensatory, statutory and punitive damages. Unfavorable outcomes in any litigation or statutory proceedings could materially and adversely affect our results of operations, financial condition and cash flows and our ability to make payments on our outstanding obligations.
While we would expect to vigorously defend ourselves against any of these proceedings, there is a chance that our results of operations, financial condition and cash flows in any period could be materially and adversely affected by unfavorable outcomes which, in turn, could affect our ability to fund loans or make payments on, or repay, our outstanding obligations, any of which could materially adversely effect our business, results of operations and financial condition.
We operate in a highly competitive environment.
The financing industry is highly competitive. We compete with, among others, large national and regional finance companies. Increased competition could adversely affect our ability to attract and retain business and reduce the profits that would otherwise arise from operations.
We are exposed to the risk of technology failures.
Our daily operations depend heavily on our computer systems, data system networks and service providers to consistently provide efficient and reliable service. The Company may be subject to disruptions in its operating systems arising from events that are wholly or partially beyond its control, which in turn may give rise to disruption of service to our customers. If our systems were to become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could materially adversely impact our business operations and financial condition.
A data security breach with regard to personally identifiable information about our customers or employees could negatively affect operations and result in high costs.
In the ordinary course of business, we receive a significant amount of personally identifiable information (“PII”) about our customers. We also receive PII from our employees. Numerous state and federal regulations, as well as other vendor standards, govern the collection and maintenance of PII from consumers and other individuals. There are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties. Despite the security measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers,
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could be vulnerable to intentional or unintentional security breaches, computer viruses, lost or misplaced data, programming or human errors, scams, burglary, acts of vandalism, or other events. Alleged or actual data security breaches can increase costs of doing business, negatively affect customer satisfaction, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe upon our proprietary information. Any of these could significantly increase our costs of doing business and materially adversely affect our business and results of operations.
Our business could be adversely affected by the loss of one or more key employees.
We are heavily dependent upon our senior management and the loss of services of any of our senior executives could adversely affect our business. Our success has been, and will continue to be, dependent on our ability to retain the services of key employees. The loss of the services of key employees or senior management could adversely affect the quality and profitability of our business operations.
Item 1B. UNRESOLVED STAFF COMMENTS:
Not Applicable.
Item 2. PROPERTIES:
Paragraph 1 of “The Company”, page 1; paragraph 1 (and the accompanying table) of Footnote 9 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements, page 38; and map of branch offices, page 47 of the Annual Report are incorporated herein by reference.
Item 3. LEGAL PROCEEDINGS:
From time to time, the Company is involved in various claims and lawsuits incidental to its business. In the opinion of Management based on currently available facts, the ultimate resolution of any such known claims and lawsuits is not expected to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
Item 4. MINE SAFETY DISCLOSURES:
Not Applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES:
"Sources of Funds and Common Stock" page 11 of the Annual Report is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA:
"Selected Consolidated Financial Information" page 3 of the Annual Report is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" pages 12-19 of the Annual Report is incorporated herein by reference.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" Quantitative and Qualitative Disclosures About Market Risk sub-heading, page 16 of the Annual Report is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
"Report of Independent Registered Public Accounting Firm" and the Company’s Consolidated Financial Statements and Notes thereto, pages 20-43 of the Annual Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE:
Not applicable.
Item 9A. CONTROLS AND PROCEDURES:
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of December 31, 2015. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 were effective at December 31, 2015.
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:
The Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. An internal control system over financial reporting has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management recognizes that there are inherent limitations in the effectiveness of any internal control system. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
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become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this evaluation, Management believes that internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), was effective as of December 31, 2015.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding the effectiveness of internal controls over financial reporting. Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to certain rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report.
Item 9B. OTHER INFORMATION:
Not Applicable
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Forward Looking Statements:
Certain statements contained or incorporated by reference herein, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may constitute “forward-looking statements” within the meaning of the federal securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those set out under the caption “Risk Factors”, the ability to manage cash flow and working capital, the accuracy of Management’s estimates and judgments, adverse developments in economic conditions including within the interest rate environment, unfavorable outcomes of litigation, federal and state regulatory changes and other factors referenced elsewhere herein or incorporated herein by reference.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
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| Ben F. Cheek, III (3)(4)(5) | 79 | 1967 | Vice Chairman of the Board |
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| Ben F. Cheek, IV (3)(4)(5) | 54 | 2001 | Chairman of the Board |
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| A. Roger Guimond (3)(5) | 61 | 2004 | Executive Vice President / Chief Financial Officer |
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| James H. Harris, III (1)(2)(5) | 62 | 2014 | None |
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| John G. Sample, Jr. (1)(2)(5) | 59 | 2004 | None |
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| C. Dean Scarborough (1)(2)(5) | 61 | 2004 | None |
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| Keith D. Watson (1)(2)(5) | 58 | 2004 | None |
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(1) Member of Audit Committee.
(2) Mr. Harris, III is the retired founder of Unichem Technologies, Inc., a specialty chemicals company which he founded over 20 years ago. Mr. Harris, III is also President of Moonrise Distillery, a producer of spirits, which he formed and has owned since 2012. Mr. Sample has been the Senior Vice President and Chief Financial Officer of Atlantic American Corporation, an insurance holding company, since 2002. Mr. Scarborough has served as a county commissioner for Stephens County, Georgia since 2009. Mr. Watson is President of Bowen & Watson, Inc., a general contracting company. Mr. Watson has been with Bowen & Watson since 1980.
(3) Reference is made to “Executive Officers” for a discussion of business experience.
(4) Mr. Ben F. Cheek, III and IV are father and son.
(5) The term of each director will expire when a successor to such director is elected and qualified.
There was no, nor is there presently any, arrangement or understanding between any director and any other person (except directors and officers of the registrant acting solely in their capacities as such) pursuant to which the director was selected.
As a family controlled company, historically Mr. Ben F. Cheek, III, who with his family directly or indirectly owns all of the Company's stock, served as the Chairman and Chief Executive Officer of the Company. Mr. Cheek, III has significant knowledge of all aspects of the Company's business and operations and, as a result, the combination of these positions fostered consistent communication, accountability and alignment on corporate strategy. Effective January 1, 2015, Mr. Cheek, III transitioned to the role of Vice Chairman and Ben F. Cheek, IV, who previously served as Vice Chairman and hs been with the
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Company since 1988 in roles of increasing responsibility, was appointed Chairman of the Board. At that time, Ms. Virginia C. Herring, who was our President, took on the additional role of Chief Executive Officer. In light of the additional responsibilities assumed by Mr. Cheek, IV and Ms. Herring, and in order to allow them to each focus on the new and additional requirements of their new roles, the Board has determined at this time that it is appropriate to separate the roles of Chairman and Chief Executive Officer. Given the relatively low historical turnover of members of the Board of Directors and the strong working relationship between such members, the Board has not determined a need to appoint appointed a lead independent director.
The day-to-day management of the Company, including identifying and evaluating current and potential risks within financial operations, compensation related and other processes and development is primarily the responsibility of the Company’s Executive Management Team (the “EMT”). The individuals comprising the EMT during 2015 were all executive officers of the Company as follows: Messrs. Cheek, III, Cheek, IV, Guimond, Haynie, Clevenger (since joining the Company in February 2016), Culpepper and Vercelli, and Ms. Herring and Ms. Lovern. The Board of Directors maintains the ultimate responsibility for oversight of the Company’s risks. In fulfilling its duties, the Board allocates a portion of its direct oversight responsibilities to various committees. The Audit Committee has specific responsibility for oversight of risks associated with financial accounting and audits, as well as internal control over financial reporting. The Board regularly receives, evaluates and discusses presentations, at least quarterly, on the financial condition and operating results of the Company. Management discusses matters of particular importance or concern as they may be materially impacted by risk on an ongoing basis, and members of the EMT remain available to members of the Board for discussion and review both during meetings of the Board of Directors and at other times.
Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, as a matter of good corporate governance, the Board of Directors has determined that it is important to have Board members who are independent from management represented on the Board of Directors. The Board has determined that a majority of the members of the Board of Directors, specifically Messrs. Harris, Sample, Scarborough, and Watson are “independent” (as such term is defined in the rules of the Securities and Exchange Commission (the “SEC”) and the NASDAQ Marketplace Rules). In making this determination, the Board concluded that none of such persons have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The Audit Committee is composed of Messrs. Sample, Scarborough, Watson, and Harris. In accordance with the provisions of the charter of the Audit Committee, the Board of Directors has determined that all of the members thereof are “independent” and that Mr. Sample is an “audit committee financial expert” as defined by the SEC in Rule 407(d)(5) of Regulation S-K. In making such determination, the Board of Directors took into consideration, among other things, the express provision in Item 407(d)(5) of Regulation S-K that the designation of a person as an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on that person as a member of the Audit Committee, nor shall it affect the duties or obligations of other Audit Committee members of the Board of Directors. A copy of the Company’s Audit Committee charter is publicly available on the Company’s website at: http//www.1ffc.com.
The Company is a family owned business. Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining the responsibilities thereof. The EMT establishes the bases for all executive compensation, which compensation is subject to approval by the shareholders in their capacities as such. Additional information concerning the processes and procedures for the consideration and determination of executive officer and director compensation is contained under the heading “Compensation Discussion and Analysis” below.
Because of the closely held nature of the ownership of the Company, the Board determined that it is not necessary for the Company to have a formal process for shareholders to send communications to the Board.
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Director Qualifications:
The members of the Board of Directors each have the qualifications we believe necessary and desirable to appropriately perform their duties. Each member has an exemplary record of professional integrity, a dedication to their respective professions and a strong work ethic.
| Director | Summary of Qualifications |
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| Ben F. Cheek, III | Previously executive officer of the Company and currently executive officer of Company's insurance subsidiaries. Extensive knowledge in the banking and consumer finance industry. Previously served as director of a Habersham Bancorp. Has legal background as an attorney. Has 54 years experience with the Company. Has previously served as board member of various consumer industry associations. |
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| Ben F. Cheek, IV | Executive officer of the Company. Highly knowledgeable of the banking and consumer finance industry. Has been with the Company for 29 years. Currently serves on two of the industry’s state association boards and serves as a board member on our industry’s national association. |
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| A. Roger Guimond | Executive officer of the Company. Knowledgeable of the banking and consumer finance industry. Has been with the Company for 39 years and is responsible for the accounting, audit and compliance, technology infrastructure and investment center operations of the Company. Significant experience in finance and related areas. |
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| James H. Harris, III | Independent director. Appointed to the Board om January 2014. Has significant executive officer experience in small to mid-size companies and currently maintains executive position, with responsibility for finance and other matters which provides him significant knowledge to function as an effective member of our audit committee. |
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| John G. Sample, Jr. | Independent director. Extensive knowledge of accounting and reporting standards. Prior experience as an audit partner in an international public accounting firm. Experience and knowledge of the insurance industry through executive management positions at operating companies. Serves as director at Captial City Bank Group, Inc. ( a Tallahassee, Florida bank holding company). Has served as director of the Company for 11 years and is the Company’s audit committee chairman. |
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| C. Dean Scarborough | Independent director. Previously served on board of a community bank. Currently serves as a county Commissioner for Stephens County, Georgia, where the Company maintains its headquarters. Has served as director of the Company for 11 years. |
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| Keith D. Watson | Independent director. Previously served on board of a community bank. Has served as director of the Company for 11 years. Maintains executive position with significant oversight responsibility in self-owned corporation. |
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EXECUTIVE OFFICERS
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| EXECUTIVE OFFICERS (continued) | |
| Name, Age, Position(s) and Family Relationships | Business Experience |
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| Daniel E. Clevenger, II, 42 Executive Vice President – Compliance | Jointed the Company in February 2015 as Executive Vice President - Compliance. Prior thereto, served as General Counsel and Chief Compliance Officer at Millennium Capital and Recovery Corporation from 2014 to 2015 and prior thereto provided legal services at Day Kettierer, LTD from 2006 to 2013. Served in private practice from 1998 to 2006. |
| Lynn E. Cox, 58 Vice President - Secretary / Treasurer No Family Relationship | Joined the Company in 1983 and became Secretary in 1990. Appointed Treasurer in 2002. Became Area Vice President and Secretary in 2001. Promoted to Vice President in 2005. |
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The term of office of each Executive Officer expires when a successor is elected by the Board of Directors and qualified. There was no, nor is there presently any, arrangement or understanding between any officer and any other person (except directors or officers acting solely in their capacities as such) pursuant to which the officer was selected.
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or any persons performing similar functions, as well as to its Directors and other employees. A copy of this code of ethics is publicly available on the Company’s website at: http//www.1ffc.com. The Company will provide a copy of this code of ethics, free of charge, upon any written request. Requests should be directed to Lynn Cox, Secretary and Treasurer, 1st Franklin Financial Corporation, P.O. Box 880, Toccoa, Georgia 30577. If we enter into any amendment to this code of ethics, other than a technical, administrative, or non-substantive amendment, or we grant any waiver from a provision of the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, we will disclose the nature of the amendment or waiver on our website. Also, we may elect to disclose the amendment or waiver in a report on Form 8-K filed with the SEC.
The Company has established an “Ethics Hotline” which enables employees to report any questionable ethics actions including, but not limited to, fraud or deliberate error in recording and/or maintaining accurate records, deficiencies or noncompliance with the Company’s policies. The reporting is strictly confidential and is reviewed by our Vice President of Human Resources and the Chairman of the Audit Committee. Ethics violations that are reported are promptly investigated and appropriate corrective action is taken as warranted by the results of the investigation.
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Item 11. EXECUTIVE COMPENSATION:
Compensation Discussion and Analysis
Overall Philosophy:
The overall financial objective of the Company is to achieve or exceed specific annual and long-term strategic goals set by the Executive Management Team (the “EMT”), described below, from time to time, while maintaining a healthy and stable financial position. It is part of the overall responsibility of our executive officers to successfully manage the Company to reach this objective. Our compensation philosophy revolves around the motivation to achieve, and achievement of, these goals and is designed to attract and retain top executives, and to incentivize and reward the executive officers for their efforts and successes, while properly balancing the encouragement of risk-taking behavior.
Role of Executive Officers in Compensation Decisions:
The Company is a family-owned business. Because of the closely-held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions). The EMT, consisting of executive officers of the Company, establishes the bases for all executive officer compensation, which compensation is approved by Messrs. Cheek, III, Cheek IV, and Ms. Herring, who are also shareholders of the Company. The EMT consists of Messrs. Cheek, III, Cheek IV, Guimond, Haynie, Culpepper and Vercelli, and Ms. Herring and Ms. Lovern. Mr. Clevenger, II joined the EMT in February 2015. For the foregoing reasons the Company has not historically engaged any consultant to advise on compensation related matters.
Components of Compensation:
The principal components of the Company’s executive compensation program include base salary, discretionary bonus awards and non-equity incentive plan compensation. The Company also expects that earnings on non-qualified deferred compensation amounts and other compensation, including certain perquisites as detailed below, will meaningfully add to each executive officer’s overall total compensation each year. Given the closely-held nature of the Company, the Company does not have available for grant, and does not deem it appropriate to pay, any equity based compensation. The EMT takes into account this fact annually when determining other components and amounts of compensation.
Base Salary:
The Company provides executive officers, and other employees, with a base salary intended to provide a level of financial security and appropriately compensate them for services rendered throughout the year. Salaries for all executive officers are established annually by Messrs. Cheek III and Cheek, IV and Ms. Herring, based on the level of each executive officer’s responsibility, tenure with the Company and certain publicly available market data with respect to salaries paid for like positions at comparable companies. In addition, base salaries are set at a level designed to take into account the fact that the Company does not provide equity-based compensation, as described elsewhere.
Each executive officer has goals set annually which are reviewed with the officer by the President, Vice Chairman and Chief Executive Officer throughout the year. These goals typically vary depending on the nature of the executive’s responsibilities but are set at a level that is expected to be challenging but achievable. A formal individual performance and development review is also held each year with each executive officer and Ms. Herring and Mr. Cheek, III, in which the level of achievement with respect to such goals is reviewed. Merit based adjustments to salaries are based on the assessment of each executive’s performance review and overall Company performance.
Bonus Awards:
Bonus amounts payable to the executive officers include discretionary bonuses and may include certain cash bonuses from time to time for special recognition, each determined at the discretion of the EMT and approved by Messrs. Cheek, III, Cheek IV, and Ms. Herring, who are also shareholders of the Company. The EMT considers, among other factors, the Company’s inability to grant equity-based awards to its officers and employees, as described below, when determining whether and to what extent to make
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awards. As in prior years, in 2015 it was determined appropriate to award the executive officers a bonus of 4% of their respective base salaries, which was awarded and paid in November as a “holiday” bonus. In addition to this 4% bonus, Messrs. Cheek, III and Cheek, IV and Ms. Herring, retain the discretion to award certain additional amounts. In 2015, Mr. Guimond was awarded an additional discretionary bonus in recognition of his continued significant contributions and service to the Company and its subsidiaries (for which he received no separate compensation during such period).
Non-Equity Incentive Compensation:
As described elsewhere herein, the Company’s stock is not traded or quoted on any national securities exchange or association, but is closely held by Mr. Cheek, III, and his family. As a result, the Company does not grant stock or other equity based awards. In consideration of this and other factors, and in order to establish quantitative financial targets, the achievement of which would trigger the payment of additional compensation, the EMT has, historically, adopted annual incentive compensation plans. Consistently therewith, at the beginning of 2015 the EMT approved the Company’s 2015 Bonus Plan (the “2015 Bonus Plan”). Mr. Cheek, III voluntarily elected not to participate in the 2015 Bonus Plan.
The 2015 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 2015 Bonus Plan, at inception, a minimum pre-tax income requirement of $24.3 million was established as a baseline goal required to be achieved in order for any payouts to be made under such Plan. The minimum pre-tax income threshold was determined by reference to the average trailing three years' pre-tax income, plus the Company's projected accrued incentive bonus at December 31, 2015, multiplied by 50%. The EMT believes using a trailing three-year metric incents management to focus on long-term growth, and not be disproportionately focused on short-term results. The EMT determined that pre-tax income was an appropriate measure upon which to provide a threshold evaluation of our annual performance because the EMT believes pre-tax income represents an appropriate measure of profitability for the Company.
If that threshold was met, payouts under the 2015 Bonus Plan were based on the number of strategic goals met, as established in advance by the EMT. For 2015, the EMT identified five strategic goals in addition to the minimum pre-tax income threshold goal. Each goal was chosen as a critical metric for the continued growth and financial soundness of the Company based on the impact the achievement of each such goal has on the Company’s results of operations and financial condition. The quantifiable amounts in each of the goals (including the threshold minimum pre-tax income) were determined by the EMT after review and consideration of various internal budgets and forecasts. The goals were:
(i) Minimum 4.00% corporate net receivables growth;
(ii) Delinquency control – Percent of accounts with balances 30 days or more
past due, not to exceed 9.00% of outstanding receivables;
(iii) $32.0 million minimum pre-tax income (separate from minimum threshold goal);
(iv) Maximum corporate expense / revenue ratio of 84.00% or less; and
(v) Minimum 5.00% return on assets.
Bonus payouts under the 2015 Plan depended on the number of goals met as follows:
No. of Strategic Goals Met Bonus Payout (% of Salary)
1 5% - 25%
2 5% - 35%
3 5% - 45%
4 5% - 55%
5 5% - 65%
In 2015, the Company exceeded the $24.3 million pre-tax threshold goal. In addition, the Company met two of the five strategic goals as set out in the 2015 Bonus Plan.
In accordance with discretion afforded the EMT under the 2015 Bonus Plan, amounts paid to each executive officer, other than Mr. Cheek, III, varied within the payout range depending on personal performance milestones as determined by the EMT. The actual amounts paid to each executive officer
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are set out in the Summary Compensation Table which follows, under the heading “Non-Equity Incentive Plan Compensation”.
Deferred Compensation:
The Company offers all eligible employees the opportunity to participate in a Company-sponsored deferred compensation plan in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The Company “matches” employee contributions of up to 6% of their salary, using the following formula: 100% of first 1% and 70% of next 5% of salary deferred.
As a result of certain federal limitations on the ability of management or highly compensated employees (within the respective meanings of Section 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974) to participate in such plans, Management established the Company’s Executive Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”). Pursuant to the Deferred Compensation Plan, the Company annually credits the account of each participant who received more than the Section 401(a)(17) salary limit (as described in the Code) with a discretionary amount that is usually, but not always, equal to the amount the participant would have received as a 401(k) Company matching contribution on the amount of their salary above the Section 401(a)(17) limit had they been allowed to defer 6% of that amount into the qualified plan. The EMT determined that it was appropriate to offer the Deferred Compensation Plan, and the matching contribution consistent with the level provided by employees generally, to such persons as if they were eligible to participate in Company sponsored plans open to other employees.
Perquisites and Other Compensation:
The Company believes that providing its executive officers with certain reasonable perquisites and other compensation is appropriate and consistent with the Company’s overall compensation philosophy designed to attract and retain top executives. The EMT periodically reviews the types and amounts of perquisites and other compensation provided to the Company’s executive officers. In conducting this review, the EMT considers, among other things, the types and ranges of compensation provided at various similar sized or situated companies and, in 2015, determined that these amounts were appropriate.
The Company’s executive officers are provided the use of Company-owned automobiles and granted a travel allowance to cover certain costs of business-related travel when an overnight stay is not required and the Company’s travel expense policy is not otherwise involved. These amounts are included in the taxable income of the executive officers. In addition, the Company generally provides certain insurance benefits to its executive officers. This includes long-term disability and travel accident insurance (which pays a benefit upon the occurrence of certain specific events), as well as basic life and accidental death insurance coverage, which coverage is provided on a graduated scale based on seniority. In addition, in recognition of the commitment to the Company by those individuals with twenty or more years of service to the Company, the Company also pays the premiums for their personal medical benefits. In 2015 Messrs. Cheek, III, Cheek, IV, Guimond and Culpepper received this benefit. In addition, during 2015, Messrs. Cheek, III and Cheek, IV, and Ms. Herring, based on positions as shareholders and executive officers, were determined eligible to participate in the Company’s medical expenses reimbursement program (“MERP”), which provides reimbursement for amounts not otherwise covered under policies for which these officers are eligible to participate in.
These amounts are reflected in the Summary Compensation Table and related notes below.
Employment Agreements and Change in Control Arrangements:
The Company does not enter into employment agreements with its executive officers. Given the nature and location of its business, and the fact that the Company is a family owned business whose stock is not publicly traded, the Company has not had significant turnover among its senior management, and has determined that it is not necessary to enter into such agreements with its executives.
For similar reasons, due to the nature of compensation and the fact that a change in control of the Company is unlikely without significant input and approval from the EMT and the Company’s closely-held
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ownership, the EMT has determined that it is not necessary to condition any payments upon, or make any amounts contractually payable upon, any change in control of the Company.
Compensation Committee Report:
In the absence of a standing compensation committee, the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with Management and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
The Board of Directors:
Ben F. Cheek, III John G. Sample, Jr.
Ben F. Cheek, IV C. Dean Scarborough
A. Roger Guimond Keith D. Watson
James H. Harris, III
| Summary Compensation Table | |||||||
| Name and Principal Position | Year | Salary | Bonus (1) | Non-Equity Incentive Plan Compensation (2) | All Other Compensation (3) | Total | |
| Ben F. Cheek, III Vice Chairman (4) | 2015 2014 2013 | $ 240,000 $ 240,000 $ 240,000 | $ 10,033 $ 10,033 $ 9,817 | $ - $ 7,500 $ - | $ 15,778 $ 10,501 $ 14,989 | $ 265,811 $ 268,034 $ 264,806 | |
| Ben F. Cheek, IV Chairman (4) | 2015 2014 2013 | $ 294,833 $ 279,650 $ 264,754 | $ 12,958 $ 12,146 $ 11,550 | $ 127,533 $ 167,008 $ 187,690 | $ 75,093 $ 68,794 $ 66,586 | $ 510,417 $ 527,598 $ 530,580 | |
| Virginia C. Herring President and CEO (4) | 2015 2014 2013 | $ 353,378 $ 331,250 $ 315,000 | $ 14,750 $ 13,660 $ 12,805 | $ 141,351 $ 194,113 $ 204,750 | $ 33,114 $ 46,367 $ 23,805 | $ 542,593 $ 585,390 $ 556,360 | |
| A. Roger Guimond Executive Vice President and Chief Financial Officer | 2015 2014 2013 | $ 384,210 $ 368,385 $ 349,725 | $ 24,537 $ 24,438 $ 20,669 | $ 158,484 $ 209,212 $ 235,121 | $ 70,534 $ 67,138 $ 64,999 | $ 637,765 $ 669,173 $ 670,514 | |
| J. Michael Culpepper Executive Vice President and Chief Operating Officer | 2015 2014 2013 | $ 348,353 $ 331,509 $ 310,400 | $ 15,304 $ 17,556 $ 13,786 | $ 148,941 $ 195,530 $ 217,360 | $ 44,331 $ 45,238 $ 42,971 | $ 556,929 $ 589,833 $ 584,517 | |
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| (1) For additional information on the payments of discretionary bonus awards, see “Compensation Discussion and Analysis – Bonus Awards” above. | |||||||
| (2) For additional information on the payments of non-equity incentive plan compensation, see “Compensation Discussion and Analysis – Non-Equity Incentive Compensation” above. | |||||||
| (3) All other compensation for executive officers for 2015 is detailed as follows: | |||||||
| (4) Until January 1, 2015, Mr. Cheek, III served as Chairman of the Board, Mr. Cheek, IV served as Vice Chairman and Ms. Herring served as President. They each assumed their current roles effective January 1, 2015. | |||||||
| Name | Personal Use of Company Auto | Travel Allowance | Insurance Premiums | Director Fees and Deferred Salary (a) | Company Contribution To Deferred Comp Plan | Total |
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| Ben F. Cheek, III | $ 7,150 | $ 2,400 | $ 6,228 | $ - | $ - | $ 15,778 |
| Ben F. Cheek, IV | $ 186 | $ 2,400 | $ 7,995 | $ 54,000 | $ 10,512 | $ 75,093 |
| Virginia C. Herring | $ 1,910 | $ 2,400 | $ 15,992 | $ - | $ 12,812 | $ 33,114 |
| A. Roger Guimond | $ - | $ 2,400 | $ 2,085 | $ 42,000 | $ 24,049 | $ 70,534 |
| J. Michael Culpepper | $ 1,546 | $ 2,400 | $ 2,085 | $ 24,000 | $ 14,300 | $ 44,331 |
(a) Messrs. Cheek IV and Guimond, both Directors of the Company, elected to receive their 2015 director fees as deferred compensation amounting to $30,000 each. Also in 2015, Mr. Cheek IV and Mr. Culpepper elected to defer $24,000 in salary and Mr. Guimond elected to defer $12,000 in salary. See “Executive Nonqualified Deferred Compensation Plan” and “Director Fees” below.
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Grant of Plan-Based Awards
In 2015, the named executive officers (other than Mr. Cheek, III as a result of his voluntary election not to participate in the 2015 Bonus Plan) were eligible to receive non-equity incentive plan payouts under the Company’s 2015 Bonus Plan. The following table sets forth certain information with respect to award eligibility for the fiscal year ended December 31, 2015 to our executive officers.
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| Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) | ||
| Name | Grant Date | Threshold $ | Target $ | Maximum $ |
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| Ben F. Cheek, III | 3/01/2015 | $ - | $ - | $ - |
| Ben F. Cheek, IV | 3/01/2015 | $ 15,942 | $ 111,592 | $ 207,241 |
| Virginia C. Herring | 3/01/2015 | $ 17,669 | $ 123,682 | $ 229,696 |
| A. Roger Guimond | 3/01/2015 | $ 19,811 | $ 138,674 | $ 257,537 |
| J. Michael Culpepper | 3/01/2015 | $ 18,618 | $ 130,324 | $ 242,029 |
(1) Represents estimated possible payouts under the 2015 Bonus Plan. The “Threshold “ column reflects the payout which would have occurred if each performance goal as set out in the 2015 Bonus Plan was met, and payouts were made at the minimum level (5%) of salary. The “Target” column reflects the payout which would have occurred if each performance goal as set out in the 2015 Bonus Plan was met, and payouts were made at the midpoint of bonus payout as a percent of salary (35%). The “Maximum” column reflects the payout which would have occurred if each performance goal as set out in the 2015 Bonus Plan was met, and payouts were made at the maximum level (65%) of salary. Actual amounts paid to each named executive officer are set out in the Summary Compensation Table above, under the heading “Non-Equity Incentive Plan Compensation”.
Compensation Committee Interlocks and Insider Participation
The Company is a family owned business and because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining there responsibilities thereof. The EMT establishes the bases for all executive compensation, which compensation is approved by shareholders Messrs. Cheek, III and Cheek, IV, and Ms. Herring,
During 2015, none of the Company’s executive officers served as a member of the board of directors or compensation committee of any entity for which a member of our Board served as an executive officer.
Executive Nonqualified Deferred Compensation Plan
Any management or highly compensated employee who has been designated by the Administrative Committee for the Company’s Deferred Compensation Plan as an eligible employee may participate in the Company’s Executive Nonqualified Deferred Compensation Plan (the “Plan”). Outside directors are also eligible to defer their respective director fees into the Deferred Compensation Plan.
The Plan does not require any contribution to be made by a participant therein.
Interest is credited on the participant’s account on the last day of each quarter at an interest rate equal to the average of the interest rate during such quarter paid on the Company’s Variable Rate Subordinated Debentures with a one-year interest adjustment period.
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| Nonqualified Deferred Compensation Table | |||||
| Name | Executive Contributions In Last Fiscal Year (1) | Registrant Contributions In Last Fiscal Year (2) | Aggregate Earnings In Last Fiscal Year | Aggregate Withdrawals / Distributions | Aggregate Balance At Last Fiscal Year End |
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| Ben F. Cheek, III | $ - | $ - | $ 20,049 | $ - | $ 812,063 |
| Ben F. Cheek, IV | $ 54,000 | $ 10,512 | $ 7,252 | $ - | $ 346,523 |
| Virginia C. Herring | $ - | $ 12,812 | $ 1,410 | $ - | $ 69,893 |
| A. Roger Guimond | $ 42,000 | $ 24,049 | $ 13,073 | $ - | $ 589,614 |
| J. Michael Culpepper | $ 24,000 | $ 14,300 | $ 3,556 | $ - | $ 170,682 |
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| (2) Includes compensation of $30,000 for service as a member of the Company’s Board of Directors voluntarily deferred by Ben F. Cheek, IV and A. Roger Guimond. Also includes $24,000 in deferred salary by Messrs. Cheek, IV and Culpepper and $12,000 in deferred salary by Mr. Guimond. See the “All Other Compensation” portion of the “Summary Compensation Table” above, and “Director Compensation” below. (2) Company contributions are included in the “All Other Compensation” portion of the Summary Compensation Table above. | |||||
| Director Compensation | |||
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| Name | Fees Earned Or Paid In Cash | All Other Compensation | Total |
| Ben F. Cheek, III | $ -- | $ -- | $ -- |
| Ben F. Cheek, IV | $30,000 | $ -- | $30,000 |
| A. Roger Guimond | $30,000 | $ -- | $30,000 |
| James H. Harris, III | $30,000 | $ -- | $30,000 |
| John G. Sample, Jr. | $35,000 | $1,000 | $36,000 |
| C. Dean Scarborough | $30,000 | $ -- | $30,000 |
| Keith D. Watson | $30,000 | $ -- | $30,000 |
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In 2015, each member of the Board was entitled to receive $30,000 per year for service as a member of the Board of Directors, including service on any committee thereof. The Chairman of the Audit Committee was entitled to additional $5,000. In addition, Mr. Sample also received $1,000 in travel-related expenses to attend meetings. Mr. Cheek, III voluntarily elected to forego any such compensation. Messrs. Cheek IV, Guimond and Sample elected to receive their 2015 director fees as deferred compensation (see “Executive Nonqualified Deferred Compensation Plan” above).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS:
(a) Security Ownership of Certain Beneficial Owners:
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Information listed below represents ownership in the Company with respect to any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company’s voting securities as of December 31, 2015. Each such person has sole “beneficial” ownership of such shares (as determined in accordance with applicable SEC rules relating to share ownership).
| Name and Address of |
| Amount and Nature of | Percent of |
| Beneficial Owner | Title of Class | Beneficial Ownership | Class |
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| Ben F. Cheek, IV | Voting Common Stock | 644 Shares - Direct | 37.88% |
| 135 East Tugalo Street |
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| Toccoa, Georgia 30577 |
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| Virginia C. Herring | Voting Common Stock | 644 Shares - Direct | 37.88% |
| 135 East Tugalo Street |
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| Toccoa, Georgia 30577 |
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| David W. Cheek | Voting Common Stock | 412 Shares - Direct | 24.24% |
| 4500 Barony Dr. |
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| Suwanee, Georgia 30024 |
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| (b) Security Ownership of Management: |
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| Ownership listed below represents ownership in each class of equity securities of the Company as of December 31, 2015, by (i) Directors who were then serving in such capacity and Executive Officers of the Company named in the summary compensation table and (ii) all Directors and Executive Officers of the Company as a group. Except as described below, each person has sole voting and dispositive power over such shares. |
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| Amount and Nature of | Percent of |
| Name | Title of Class | Beneficial Ownership | Class |
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| Ben F. Cheek, III | Voting Common Stock | None | None |
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| Non-Voting Common Stock | 574 Shares - Direct | .34% |
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| Ben F. Cheek, IV | Voting Common Stock | 644 Shares - Direct | 37.88% |
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| Non-Voting Common Stock | 18,011 Shares - Direct | 10.70% |
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| Non-Voting Common Stock | 37,898 Shares – Indirect (1) | 22.52% |
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| Virginia C. Herring | Voting Common Stock | 644 Shares - Direct | 37.88% |
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| Non-Voting Common Stock | 18,012 Shares - Direct | 10.70% |
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| Non-Voting Common Stock | 37,896 Shares – Indirect (1) | 22.52% |
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| A. Roger Guimond | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| J. Michael Culpepper | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| James H. Harris, III | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| John G. Sample, Jr. | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| C. Dean Scarborough | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| Amount and Nature of | Percent of |
| Name | Title of Class | Beneficial Ownership | Class |
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| Keith D. Watson | Voting Common Stock | None | None |
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| Non-Voting Common Stock | None | None |
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| All Directors and |
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| Executive Officers | Voting Common Stock | 1,288 Shares - Direct | .76% |
| as a Group | Non-Voting Common Stock | 36,597 Shares - Direct | 21.74% |
| (13 persons) | Non-Voting Common Stock | 75,794 Shares- Indirect (1) | 45.04% |
(1) Various trusts have been established for the benefit of each of Ben F. Cheek, IV, Virginia C. Herring and David W. Cheek. The trustees of each of the trusts, who by virtue of dispositive power over the assets thereof are deemed to be the beneficial owners of shares of the Company’s non-voting common stock contained therein, are two children of Ben F. Cheek, III named above who are not the named beneficiaries of each of the respective trusts.
| Trustees | Trust for Benefit of | Number of Shares | % |
| David W. Cheek and Virginia C. Herring | Ben F. Cheek, IV | 37,898 | 22.52% |
| David W. Cheek and Ben F. Cheek, IV | Virginia C. Herring | 37,896 | 22.52% |
| Ben F. Cheek, IV and Virginia C. Herring | David W. Cheek | 37,898 | 22.52% |
(c) The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE:
In accordance with the provisions of the written charter of the Audit Committee of the Board of Directors, the Audit Committee approves all related party transactions that are required to be disclosed pursuant to the rules and regulations of the SEC.
The Company leases its home office building and print shop for a total of $151,200 per year from Franklin Enterprises, Inc. under leases which expire December 31, 2018. Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, and Ms. Herring, Executive Officer of the Company, own 66.67%, 11.11% and 11.11% of the shares of Franklin Enterprises, Inc., respectively. In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties. The aggregate dollar amount of all remaining periodic payments due during the lease term is $453,600.
The Company leases its Clarkesville, Georgia branch office for a total of $5,400 per year from Cheek Investments, Inc. under a lease which expires June 30, 2020. Messrs. Cheek, III and Cheek, IV and Ms. Herring, own .50%, 33.17% and 33.17%, respectively, of the shares of Cheek Investments, Inc. In Management’s opinion, the lease is at a rate and on terms which approximate those obtainable from independent third parties. The aggregate dollar amount of all remaining periodic payments due during the lease term is $24,300.
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During 2015, Messrs. Cheek, III and Cheek, IV were both directors and executive officers of the Company. Effective January 1, 2015, Mr. Cheek, III transitioned to solely a director of the Company. At all relevant times, Ms. Herring has been an executive officer of the Company.
During 1999, a loan was extended to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner. David Cheek (the adult son of Ben F. Cheek, III) owns 24.24% of the Company’s voting stock. The loan was renewed on July 20, 2015. The balance on this commercial loan (including principal and accrued interest) was $1,576,355 at December 31, 2015, which was also the maximum amount outstanding during the year. No principal or interest payments were applied against this loan during 2015. The loan is a variable-rate loan with the interest based on the prime rate plus 1%. Interest is currently computed at an annual rate of 4.25%. The interest rate adjusts whenever the prime rate changes.
Effective September 23, 1995, the Company and Deborah A. Guimond, Trustee of the Guimond Trust (an irrevocable life insurance trust, the “Trust”) entered into a Split-Dollar Life Insurance Agreement. The life insurance policy insures A. Roger Guimond, Executive Vice President and Chief Financial Officer of the Company. As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust. The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate. A payment of $5,584 for interest accrued during 2015 was applied to the loan on December 31, 2015. No principal payments on this loan were made in 2015. The balance on this loan at December 31, 2015 was $349,870. This was the maximum amount outstanding during the year.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES:
The Company was billed for professional services provided during fiscal years 2015 and 2014 by Deloitte & Touche LLP, the Company's independent registered public accounting firm, in the amounts set out in the following table, all of which were pre-approved by the Audit Committee. Other than as set out below, the Company was not billed for any services provided by Deloitte & Touche LLP.
The Audit Committee of the Board of Directors has considered the services rendered by Deloitte & Touche LLP for services other than the audit of the Company’s financial statements and has determined that the provision of these services is compatible with maintaining the independence of Deloitte & Touche LLP.
|
| Fee | Fee | |
|
| Amount | Amount | |
|
| 2015 | 2014 | |
| Services Provided: | | | |
| Audit Fees (1) | $ 421,087 | $ 394,724 | |
| Tax Fees (2) | 97,405 | 93,922 | |
| Total | $ 518,492 | $ 488,646 | |
|
|
|
| |
| (1) | Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2014 and 2013, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2015 and 2014 fiscal years. Included in these amounts are fees of $24,000 for 2014 for fees related to audit of the Company's 401(k) Plan and $5,000 for 2015 related to the review of certain registration statements. | ||
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- 23 -
| (2) | Fees billed by Deloitte & Touche LLP for professional services rendered for tax compliance, tax advice and tax planning. The services included the preparation of the Company’s and its subsidiaries’ tax returns. | ||
All audit and non-audit services to be performed by the Company’s independent registered public accounting firm must be approved in advance by the Audit Committee. Pursuant to the Audit Committee Pre-Approval Policy (the “Policy”), and as permitted by SEC rules, the Audit Committee may delegate pre-approval authority to any of its members, provided that any service approved in this manner is reported to the full Audit Committee at its next meeting. The Policy provides for a general pre-approval of certain specifically enumerated services that are to be provided within specified fee levels. With respect to requests to provide services not specifically pre-approved pursuant to the general grant, such requests must be submitted to the Audit Committee by the Company’s independent registered public accounting firm and the Company's Chief Financial Officer and must include a joint statement as to whether, in their view, the request is consistent with SEC rules on auditor independence.
- 24 -
| PART IV | |||
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| |||
| Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: | |||
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| |||
| (a) (1) The following Report of Independent Registered Public Accounting Firm and financial statements are incorporated by reference herein from Exhibit 13 hereto: | |||
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| |||
| Report of Independent Registered Public Accounting Firm. | |||
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| Consolidated Statements of Financial Position at December 31, 2015 and 2014. | |||
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| |||
| Consolidated Statements of Income for the three years ended December 31, 2015. Consolidated Statements of Comprehensive Income for the three years ended December 31, 2015. | |||
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| Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2015. | |||
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| Consolidated Statements of Cash Flows for the three years ended December 31, 2015. | |||
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| Notes to Consolidated Financial Statements. | |||
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| (2) Financial Statement Schedule: | |||
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| Report of Independent Registered Public Accounting Firm. | |||
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| Condensed Statements of Financial Position at December 31, 2015 and 2014. | |||
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| Condensed Statements of Income for the three years ended December 31, 2015. Condensed Statements of Comprehensive Income for the three years ended December 31, 2015. Condensed Statements of Stockholders’ Equity for the three years ended December 31, 2015. | |||
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| Condensed Statements of Cash Flows for the three years ended December 31, 2015. | |||
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| (3) Exhibits: | |||
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| 3. | (a) | Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(a) to Form 10-K for the fiscal year ended December 31, 1995). |
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| (b) | Bylaws (incorporated herein by reference to Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1995). |
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| 4. | (a) | Indenture dated October 31, 1984, between the Company and The First National Bank of Gainesville, Trustee (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to the Registration Statement on Form S-2 dated April 24, 1998, File No. 333-47515). |
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- 25 -
|
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| (b) | Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Amendment No. 3 to the Registration Statement on Form S-2 dated November 14, 2005, File No. 333-126589). |
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| (c) | Agreement of Resignation, Appointment and Acceptance dated as of May 28, 1993 between the Company, The First National Bank of Gainesville, and Columbus Bank and Trust Company (incorporated by reference to Exhibit 4(c) to the Company’s Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 dated June 8, 1993, File No. 33-49151). |
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| (d) | Modification of Indenture, dated March 30, 1995, by and among Columbus Bank and Trust Company, Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(b) to the Company’s Form 10-K for the year ended December 31, 1994). |
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| (e) | Second Modification of Indenture dated December 2, 2004 by and among Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-2 dated July 14, 2005, File No. 333-126589). |
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| (f) | Form of Indenture by and between the Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form S-1 dated December 27, 2007, File No. 333-148331). |
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| (g) | Third Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(h) to the Company’s Form 10-K for the year ended December 31, 2009). |
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| (h) | Tri-party Agreement by and among the Company, Synovus Trust Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(i) to the Company’s Form 10-K for the year ended December 31, 2009). |
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| (i) | Fourth Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(j) to the Company’s Form 10-K for the year ended December 31, 2009). |
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| (j) | Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173684). |
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| (k) | Form of Indenture by and between the Company and U.S. Bank National Association as of April 3, 2008 (incorporated by reference to Exhibit 4(a) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). |
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| (l) | Form of Senior Demand Note (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). |
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- 26 -
|
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| (m) | Form of Overdraft Protection Agreement, Security Agreement and Assignment (incorporated by reference to Exhibit 4(c) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). |
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| (n) | Form of Senior Demand Note Check Redemption Agreement (incorporated by reference to Exhibit 4(d) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). |
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| (o) | Form of Check (incorporated by reference to Exhibit 4(e) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685). |
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| 10. | (a) | Loan and Security Agreement, dated September 11, 2009, by and among the Company and Wells Fargo Preferred Capital, Inc., as agent (“Agent”) and a lender, and the other financial institutions from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated September 17, 2009). |
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| (b) | First Amendment to Loan and Security Agreement dated as of November 3, 2009, by and among the Company, Wells Fargo Preferred Capital, Inc., as agent for lenders, and the other financial institutions from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated November 5, 2009). |
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| (c) | Second Amendment to Loan and Security Agreement dated as of August 11, 2010, by and among the Company, Wells Fargo Preferred Capital, Inc., as agent for lenders, and the financial institutions a party thereto as lenders (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2010). |
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| (d) | Third Amendment to Loan and Security Agreement, dated as of September 20, 2011, by and among the Company, Wells Fargo Preferred Capital, Inc. and the financial institutions a party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on September 21, 2011). |
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| (e) (g) | Fourth Amendment to Loan and Security Agreement, dated as of September 04, 2013, by and among the Company, Wells Fargo Preferred Capital, Inc. and the financial institutions a party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on September 10, 2013). Fifth Amendment to Loan and Security Agreement, dated as of November 13, 2014, by and among the Company, Wells Fargo Bank, N.A. and the financial institutions a party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended September 30, 2014). |
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- 27 -
|
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| (h) (i) (j) | Sixth Amendment to Loan and Security Agreement, dated as of September 21, 2015, by and among the Company, Wells Fargo Bank, N.A. and the financial institutions a party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on September 21, 2015). Director Compensation Summary Term Sheet. * Form of the Company’s 2016 Executive Bonus Plan. * |
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| 11. | Computation of Earnings per Share is self-evident from the Consolidated Statement of Income and Retained Earnings in the Annual Report, incorporated by reference herein. | |
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| 12. | Ratio of Earnings to Fixed Charges. | |
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| 13. | Annual Report. | |
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| 21. | Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Form 10-K for the year ended December 31, 2010). | |
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| |
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| 31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. | |
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| 31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. | |
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| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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|
| 32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF | Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. XBRL Instance Document. XBRL Taxonomy Extension Schema Document. XBRL Taxonomy Extension Calculation Linkbase Document. XBRL Taxonomy Extension Label Linkbase Document. XBRL Taxonomy Extension Presentation Linkbase Document. XBRL Taxonomy Extension Definition Linkbase Document. | |
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| * | Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. | |
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| (b) | See “Index to Exhibits”. | ||
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| ||
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- 28 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
|
| 1st FRANKLIN FINANCIAL CORPORATION |
|
|
|
| March 30, 2016 | By: /s/ Virginia C. Herring |
| Date | Virginia C. Herring |
|
| President and Chief Executive Officer |
| Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: |
| Signatures | Title | Date |
|
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|
| /s/ Ben F. Cheek, IV |
| March 30, 2016 |
| (Ben F. Cheek, IV) | Chairman of Board |
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| /s/ Ben F. Cheek, III |
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| (Ben F. Cheek, III) | Vice Chairman | March 30, 2016 |
| |
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| /s/ James H. Harris, III |
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| (James H. Harris, III) | Director | March 30, 2016 |
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| /s/ Virginia C. Herring |
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| (Virginia C. Herring) | President and Chief Executive Officer | March 30, 2016 |
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|
| /s/ A. Roger Guimond |
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| (A. Roger Guimond) | Executive Vice President; | March 30, 2016 |
|
| Principal Financial Officer |
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| Principal Accounting Officer; Director |
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| /s/ John G. Sample, Jr. |
|
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| (John G. Sample, Jr.) | Director | March 30, 2016 |
| |
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| /s/ C. Dean Scarborough |
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| (C. Dean Scarborough) | Director | March 30, 2016 |
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|
|
| /s/ Keith D. Watson |
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| (Keith D. Watson) | Director | March 30, 2016 |
- 29 -
| Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. | |||
|
| |||
| (a) | Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23b), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following: | ||
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| ||
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| (1) | Any annual report to security holders covering the registrant's last fiscal year; and | |
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| (2) | Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders. | |
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| ||
| (b) | The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference. | ||
|
|
| ||
| (c) | This Annual Report on Form 10-K incorporates by reference portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2015, which is filed as Exhibit 13 hereto. Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements to its shareholders. | ||
- 30 -
| Schedule I | ||||
|
| ||||
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| ||||
|
| ||||
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | ||||
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| ||||
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| ||||
| To the Board of Directors and Shareholders 1st Franklin Financial Corporation We have audited the consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and for each of the three years in the period ended December 31, 2015, and have issued our report thereon dated March 30, 2016; such consolidated financial statements and report are included in your 2015 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company listed in Item 15. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia March 30, 2016 | ||||
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- 31 -
| SCHEDULE I | |||||||||
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| |||||||||
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| |||||||||
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |||||||||
| 1st FRANKLIN FINANCIAL CORPORATION | |||||||||
| (Parent Company Only) STATEMENTS OF FINANCIAL POSITION | |||||||||
|
| |||||||||
| DECEMBER 31, 2015 AND 2014 | |||||||||
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| |||||||||
| ASSETS | |||||||||
|
|
|
| 2015 | 2014
| |||||
|
| CASH AND CASH EQUIVALENTS: | | | ||||||
|
| Cash and Due from Banks | $ 5,369,892 | $ 1,313,334 | ||||||
|
| Short-term Investments | 38,829,982 | 11,467,151 | ||||||
|
|
| 44,199,874 | 12,780,485 | ||||||
|
|
|
|
| ||||||
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| RESTRICTED CASH | 461,337 | 370,272 | ||||||
|
|
|
|
| ||||||
|
| LOANS: |
|
| ||||||
|
| Direct Cash Loans | 494,836,733 | 471,195,331 | ||||||
|
| Real Estate Loans | 22,128,090 | 20,271,000 | ||||||
|
| Sales Finance Contracts | 30,071,077 | 23,906,111 | ||||||
|
|
| 547,035,900 | 515,372,442 | ||||||
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|
|
|
| ||||||
|
| Less: | Unearned Finance Charges | 65,699,425 | 59,649,718 | |||||
|
|
| Unearned Insurance Commissions | 19,560,153 | 16,609,492 | |||||
|
|
| Allowance for Loan Losses | 33,500,000 | 24,680,789 | |||||
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| 428,276,322 | 387,414,201 | |||||
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|
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| ||||||
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| INVESTMENTS IN SUBSIDIARIES | 154,988,795 | 140,085,947 | ||||||
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| ||||||
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| MARKETABLE DEBT SECURITIES: |
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| ||||||
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| Available for Sale, at fair market value | 328,781 | 418,987 | ||||||
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|
|
|
| ||||||
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| EQUITY METHOD INVESTMENT | 24,989,505 | 26,059,579 | ||||||
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| ||||||
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| OTHER ASSETS: |
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| ||||||
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| Land, Buildings, Equipment and Leasehold Improvements, |
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| ||||||
|
| less accumulated depreciation and amortization |
|
| ||||||
|
| of $24,049,665 and $21,657,107 in 2014 and 2013, respectively | 10,336,073 | 10,205,126 | ||||||
|
| Miscellaneous | 3,976,341 | 4,235,189 | ||||||
|
|
| 14,312,414 | 14,440,315 | ||||||
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|
|
| ||||||
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| TOTAL ASSETS | $ 667,557,028 | $ 600,963,182 | ||||||
- 32 -
| SCHEDULE I | ||
|
| ||
|
| ||
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | ||
| 1st FRANKLIN FINANCIAL CORPORATION | ||
| (Parent Company Only) STATEMENTS OF FINANCIAL POSITION | ||
|
| ||
| DECEMBER 31, 2015 AND 2014 | ||
|
| ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||
|
|
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|
|
| 2015 | 2014 |
| SENIOR DEBT: |
|
|
| Notes Payable to Banks | $ -- | $ -- |
| Senior Demand Notes, including accrued interest | 71,001,087 | 58,530,148 |
| Commercial Paper | 317,488,208 | 276,656,052 |
|
| 388,489,295 | 335,186,200 |
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|
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|
|
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 18,573,356 | 19,603,258 |
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|
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|
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|
| SUBORDINATED DEBT | 36,004,009 | 37,726,538 |
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|
|
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|
|
| Total Liabilities | 443,066,660 | 392,515,996 |
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|
|
| STOCKHOLDERS' EQUITY: |
|
|
| Preferred Stock; $100 par value |
|
|
| 6,000 shares authorized; no shares issued or outstanding | -- | -- |
| Common Stock: |
|
|
| Voting Shares; $100 par value; |
|
|
| 2,000 shares authorized; 1,700 shares issued and outstanding as of December 31, 2015 and 2014 | 170,000 | 170,000 |
| Non-Voting Shares; no par value; |
|
|
| 198,000 shares authorized; 168,300 shares issued and |
|
|
| outstanding as of December 31, 2015 and 2014 | -- | -- |
| Accumulated Other Comprehensive Income | 4,142,986 | 3,663,475 |
| Retained Earnings | 220,177,382 | 204,613,711 |
| Total Stockholders' Equity | 224,490,368 | 208,447,186 |
|
|
|
|
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 667,557,028 | $ 600,963,182 |
- 33 -
| SCHEDULE I | |||
|
| |||
|
| |||
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |||
| 1st FRANKLIN FINANCIAL CORPORATION | |||
| (Parent Company Only) | |||
|
| |||
| STATEMENTS OF INCOME | |||
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 | |||
|
|
|
|
|
|
| 2015 | 2014 | 2013 |
| INTEREST INCOME: |
|
|
|
| Finance Charges | $ 147,813,018 | $ 140,071,693 | $ 128,761,404 |
| Investment Income | 53,476 | 45,333 | 52,831 |
|
| 147,866,494 | 140,117,026 | 128,814,235 |
|
|
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|
|
| INTEREST EXPENSE: |
|
|
|
| Senior Debt | 11,868,927 | 10,755,834 | 10,091,821 |
| Subordinated Debt | 1,086,012 | 1,195,676 | 1,380,051 |
|
| 12,954,939 | 11,951,510 | 11,471,872 |
|
|
|
|
|
| NET INTEREST INCOME | 134,911,555 | 128,165,516 | 117,342,363 |
|
|
|
|
|
| PROVISION FOR LOAN LOSSES | 36,887,285 | 32,622,546 | 27,623,368 |
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|
|
|
|
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 98,024,270 | 95,542,970 | 89,718,995 |
|
|
|
|
|
| NET INSURANCE INCOME | 23,246,055 | 23,655,495 | 22,793,586 |
|
|
|
|
|
| OTHER REVENUE | 3,433,389 | 7,274,666 | 7,816,981 |
|
|
|
|
|
| OPERATING EXPENSES: |
|
|
|
| Personnel Expense | 71,834,872 | 67,419,267 | 63,044,814 |
| Occupancy Expense | 13,707,326 | 13,188,162 | 12,368,589 |
| Other Expense | 27,623,814 | 24,519,791 | 21,483,407 |
|
| 113,166,012 | 105,127,220 | 96,896,810 |
|
|
|
|
|
| INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES | 11,537,702 | 21,345,911 | 23,432,752 |
|
|
|
|
|
| PROVISION FOR INCOME TAXES | 5,160 | 12,500 | 6,432 |
|
|
|
|
|
| EQUITY IN EARNINGS OF SUBSIDIARIES, Net of Tax | 14,333,131 | 12,000,335 | 10,981,441 |
|
|
|
|
|
| NET INCOME | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 |
|
|
|
|
|
- 34 -
| SCHEDULE I | ||||
|
| ||||
|
| ||||
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | ||||
| 1st FRANKLIN FINANCIAL CORPORATION | ||||
| (Parent Company Only) | ||||
|
| ||||
| STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||
|
| ||||
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 | ||||
|
| ||||
|
|
|
|
| |
|
| 2015 | 2014 | 2013 | |
| Net Income | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 | |
|
|
|
|
| |
| Other Comprehensive Income: |
|
|
| |
| Net changes related to available-for-sale Securities: |
|
|
| |
| Unrealized gains income (losses) | 862,930 | 8,297,119 | (6,145,189) | |
| Income tax provision | (332,201) | (2,160,903) | 1,695,874 | |
| Net unrealized gains (losses) | 530,729 | 6,136,216 | (4,449,315) | |
|
|
|
|
| |
| Less reclassification of gains to net income | 51,218 | 7 | 122,037 | |
|
|
|
|
| |
| Total Other Comprehensive Income (Loss) | 479,511 | 6,136,209 | (4,571,352) | |
|
|
|
|
| |
| Total Comprehensive Income | $ 26,345,184 | $ 39,469,955 | $ 29,836,409 | |
|
|
|
|
| |
|
|
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|
| |
|
| ||||
|
| ||||
- 35 -
| SCHEDULE I |
|
|
|
|
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT |
| 1st FRANKLIN FINANCIAL CORPORATION |
| (Parent Company Only) |
|
|
| STATEMENTS OF STOCKHOLDERS’ EQUITY |
|
|
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 |
|
|
|
|
| Accumulated |
| |
|
|
|
|
| Other |
| |
|
| Common Stock |
| Retained | Comprehensive |
| |
|
| Shares | Amount | Earnings | Income (Loss) | Total | |
| Balance at December 31, 2012 | 170,000 | $170,000 | $174,265,215 | $2,098,618 | $176,533,833 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2013 | — | — | 34,407,761 | — |
|
| Other Comprehensive Loss | — | — | — | (4,571,352) |
|
| Total Comprehensive Income (Loss) | — | — | — | — | 29,836,409 |
| Cash Distributions Paid | — |
| (14,017,609) | — | (14,017,609) |
|
|
|
|
|
|
|
| Balance at December 31, 2013 | 170,000 | 170,000 | 194,655,367 | (2,472,734) | 192,352,633 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2014 | — | — | 33,333,746 | — |
|
| Other Comprehensive Income | — | — | — | 6,136,209 |
|
| Total Comprehensive Income | — | — | — | — | 39,469,955 |
| Cash Distributions Paid | — |
| (23,375,402) | — | (23,375,402) |
|
|
|
|
|
|
|
| Balance at December 31, 2014 | 170,000 | 170,000 | $204,613,711 | $3,663,475 | $208,447,186 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2015 | — | — | 25,865,673 | — |
|
| Other Comprehensive Income | — | — | — | 479,511 |
|
| Total Comprehensive Income | — | — | — | — | 26,345,184 |
| Cash Distributions Paid | — | — | (10,302,002) | — | (10,302,002) |
|
|
|
|
|
|
|
| Balance at December 31, 2015 | 170,000 | $170,000 | $220,177,382 | $4,142,986 | $224,490,368 |
|
|
|
|
|
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|
- 36 -
| SCHEDULE I | |||
|
| |||
|
| |||
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1st FRANKLIN FINANCIAL CORPORATION | |||
| (Parent Company Only) | |||
|
| |||
| STATEMENTS OF CASH FLOWS | |||
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 | |||
|
|
|
|
|
|
| 2015 | 2014 | 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES:
| Net Income | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 |
| Adjustments to reconcile net income to net |
|
|
|
| cash provided by operating activities: |
|
|
|
| Provision for Loan Losses | 36,887,285 | 32,622,546 | 27,623,368 |
| Depreciation and Amortization | 3,318,710 | 3,156,828 | 2,910,855 |
| Equity in undistributed earnings of subsidiaries | (14,333,131) | (12,000,335) | (10,981,441) |
| Earnings in equity method investment | 1,070,074 | (847,944) | (211,635) |
| Gain on sale of marketable securities and |
|
|
|
| equipment and premium amortization on securities | (25,141) | (45,247) | (28,043) |
| (Increase) Decrease in Miscellaneous Assets | (158,368) | 91,289 | (1,064,925) |
| (Decrease) Increase in Other Liabilities | (1,029,902) | 1,171,257 | (324,681) |
| Net Cash Provided | 51,595,200 | 57,482,140 | 52,331,259 |
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| Loans originated or purchased | (387,639,565) | (351,600,837) | (334,922,921) |
| Loan payments | 329,283,555 | 299,584,895 | 279,927,895 |
| Increase in restricted cash | (91,065) | (43,386) | (83,049) |
| Purchase of equity fund investment | - | (15,000,000) | (10,000,000) |
| Capital expenditures | (3,045,037) | (4,487,073) | (2,715,004) |
| Proceeds from sale of equipment | 37,737 | 84,231 | 45,662 |
| Net Cash Used | (61,454,375) | (71,462,170) | (67,747,417) |
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| Net increase in Senior Demand Notes | 12,470,939 | 4,475,141 | 4,022,163 |
| Advances on credit line | 531,641 | 531,475 | 531,375 |
| Payments on credit line | (531,641) | (531,475) | (531,375) |
| Commercial paper issued | 67,964,535 | 65,587,144 | 61,559,542 |
| Commercial paper redeemed | (27,132,379) | (42,891,237) | (33,460,285) |
| Subordinated debt issued | 8,164,215 | 7,210,193 | 8,645,970 |
| Subordinated debt redeemed | (9,886,744) | (9,862,162) | (11,185,439) |
| Dividends / Distributions paid | (10,302,002) | (23,375,402) | (14,017,609) |
| Net Cash Provided | 41,278,564 | 1,143,677 | 15,564,342 |
|
|
|
|
|
| NET INCREASE (DECREASE) IN |
|
|
|
| CASH AND CASH EQUIVALENTS | 31,419,389 | (12,836,353) | 148,184 |
|
|
|
|
|
| CASH AND CASH EQUIVALENTS, beginning | 12,780,485 | 25,616,838 | 25,468,654 |
|
|
|
|
|
| CASH AND CASH EQUIVALENTS, ending | $ 44,199,874 | $ 12,780,485 | $ 25,616,838 |
| Cash paid during the year for: | Interest | $ 12,954,939 | $ 11,881,150 | $ 11,537,662 |
|
| Income Taxes | 6,000 | - | 8,000 |
- 37 -
|
|
|
|
| 1st FRANKLIN FINANCIAL CORPORATION INDEX TO EXHIBITS | ||
|
| ||
|
| ||
| Exhibit No. | Description | Page No. |
|
|
|
|
| 10(g) | Director Compensation Summary Term Sheet | 39 |
| 10(h) | Form of the Company’s 2016 Executive Bonus Plan | 40 |
| 12 | Ratio of Earnings to Fixed Charges | 42 |
| 13 | Annual Report | 43 |
| 31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934 | 93 |
| 31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934 | 94 |
| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 95 |
| 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 96 |
|
|
|
|
| 101.INS | XBLR Instance Document |
|
| 101.SCH | XBRL Taxonomy Extension Schema Document |
|
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
- 38 -
| Exhibit 10(g) | |||
|
| |||
|
| |||
| 1st FRANKLIN FINANCIAL CORPORATION | |||
| Director Compensation Summary Term Sheet | |||
|
| |||
| Compensation to be paid to the following directors, whether or not executive officers of the Company, will be as follows: | |||
|
| |||
|
| Name of Director | Compensation | |
|
|
|
| |
|
| Ben F. Cheek,. III (Vice Chairman) | $ - * | |
|
| Ben F. Cheek, IV (Chairman) | $ 30,000 | |
|
| A. Roger Guimond | $ 30,000 | |
|
| James H. Harris, III | $ 30,000 | |
|
| John G. Sample, Jr. (Audit Committee Chairman) | $ 35,000 | |
|
| C. Dean Scarborough | $ 30,000 | |
|
| Keith D. Watson | $ 30,000 | |
|
|
|
| |
|
| * Note: Ben F, Cheek, III elected not to receive any Director fees. | ||
| Exhibit 10(h) |
|
|
| 1st Franklin Financial Corporation |
| Executive Bonus Plan: 2016 |
| Plan Overview: |
|
|
| As we analyze the results from 2015, and review the budget set for 2016 and weigh in the economic forecast for the year, we recognize the need today, more than ever, to balance short-term results – growth and profit, with long-term positioning – new product development and improved systems. This balance is expected to provide the foundation that remains critical for the future success of the Company. |
|
|
| The short term bonus goals that are set for the Company each year, which are reflected in this Executive Bonus Plan, are the milestones which will drive the overall performance to achieve the long range goals and plans. |
|
|
| The Executive Bonus Plan for 2016 will focus first on meeting a minimum income requirement threshold, and thereafter meeting five strategic goals. The combination of these goals is expected to provide a balanced measurement of 1st Franklin’s performance and will also support the achievement of our long term goals. |
|
|
| DISCLAIMERS: “The Company must be in compliance with all credit line debt covenants prior to the disbursement of any bonus.” Right to Alter Program The Company reserves the right, at any time, or from time to time during the year, with or without notice, to continue or discontinue this program, or to alter it as necessary in the best interest of the Company. |
| The goals that are set were identified and agreed upon by the Executive Management Team. Below are the five strategic goals, as well as the minimum income requirement for the 2016 bonus to be paid. |
THRESHOLD: The Company must achieve minimum pre-tax income based on the average pre-tax income for the three years ended December 31, 2015 plus the projected accrued incentive bonus for December 31, 2016 divided by 2. The minimum pre-tax income threshold for 2016 is $21,343,589.
| STRATEGIC GOALS: | ||
|
|
|
|
|
| 1. | Corporate Net Receivables Growth – a target of 4.00% annual growth; |
|
| 2. | Corporate Delinquency Control – 30 days or more delinquency (including bankrupt accounts) not to exceed 10.00% of receivables; |
|
| 3. | Corporate Expenses to Revenue – less than or equal to 89.5%; |
|
| 4. | Corporate Return on Assets (ROA) – greater than or equal to 3.50%; |
|
| 5. | Corporate Pre-tax Income (separate from the threshold goal) - $27.5 million. |
| PROGRAM ELIGIBILITY: |
|
|
| Company: The threshold pre-tax income goal must be achieved for the Executive Bonus Plan to be activated. After this requirement is achieved, the bonus will be paid based on the achievement of the strategic goals, and will be paid according to the following scale on an individual basis as a percentage of the participant’s annual salary. |
| No. of Strategic Goals Met | % Bonus Paid Based on Annual Salary |
|
| (in increments of 5 percentage points) |
| 1 | Up to 30% (0% - 30%) |
| 2 | Up to 40% (0% - 40%) |
| 3 | Up to 50% (0% - 50%) |
| 4 | Up to 60% (0% - 60%) |
| 5 | Up to 65% (0% - 65%) |
| The percentage range is based on many factors, including but not limited to: achieving budget projections, achieving monthly / quarterly objectives, training (both individually and for the respective participant’s employees), performance management review (“PMR”) ratings and achievement of PMR goals, employee retention, managing human resource issues, audit and compliance guidelines, etc. |
|
|
| Example: if the Company achieves the threshold, which will then activate the bonus plan, and any two strategic goals, the range of bonus paid will be from 0% to 40% of participants’ annual salary depending on their performance. |
|
|
| INDIVIDUAL EXCEPTIONS: If 1st Franklin fails to achieve the minimum requirement of pre-tax income – the Executive Bonus Plan, which is an incentive bonus plan based on performance, will not be paid. However, the Executive Compensation Committee, which consists of; Ben F. Cheek, III, Vice-Chairman; Ben F. Cheek, IV, Chairman; Ginger Herring, President and CEO; Roger Guimond, EVP/Chief Financial Officer; Mike Culpepper, EVP/Chief Operating Officer; Kay O'Shields, EVP/Strategic and Organizational Development; Mike Haynie, EVP/Human Resources; Dan Clevenger, II, EVP/Compliance; and Charles E. Vercelli, Jr., EVP/General Counsel, may chose to award individual bonuses to a select number of executives. These exceptions will only be made if those said individuals have achieved an outstanding year by ALL standards. In such a case, a bonus may be awarded but may be based on a lower scale than the above plan. |
| Executive Compensation Committee Review |
|
|
| The Executive Compensation Committee will review all executive, performance ratings and bonus recommendations and determine the final bonus awarded. |
| AREA | RECOMMENDATION | COMMITTEE MEMBERS |
| Home Office Supervisors, Home Office Vice Presidents | Direct Report | Ginger Herring, Ben F. Cheek, III, Roger Guimond, Mike Culpepper Mike Haynie, Kay O'Shields, Dan Clevenger and Chip Vercelli |
| Executive Vice Presidents, General Counsel | Ginger Herring | Ginger Herring, Ben F. Cheek, III, Ben. F. Cheek, IV |
Exhibit 12 |
RATIO OF EARNINGS TO FIXED CHARGES |
| 2015 | 2014 | 2013 | 2012 | 2011 |
| (In thousands, except ratio data) | ||||
Income before income taxes | $ 31,130 | $ 37,531 | $ 38,400 | $ 36,663 | $ 32,229 |
|
|
|
|
|
|
Interest on indebtedness | 12,955 | 11,952 | 11,472 | 11,394 | 11,641 |
|
|
|
|
|
|
Portion of rents representative |
|
|
|
|
|
of the interest factor | 2,014 | 1,939 | 1,837 | 1,739 | 1,670 |
|
|
|
|
|
|
Earnings as adjusted | $ 46,099 | $ 51,422 | $ 51,709 | $ 49,796 | $ 45,540 |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
Interest on indebtedness | $ 12,955 | $ 11,952 | $ 11,472 | $ 11,394 | $ 11,641 |
|
|
|
|
|
|
Portion of rents representative |
|
|
|
|
|
of the interest factor | 2,014 | 1,939 | 1,837 | 1,739 | 1,670 |
|
|
|
|
|
|
Fixed charges | $ 14,969 | $ 13,891 | $ 13,309 | $ 13,133 | $ 13,311 |
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings |
|
|
|
|
|
to fixed charges | 3.08 | 3.70 | 3.89 | 3.79 | 3.42 |
|
|
|
|
|
|
EXHIBIT 13
|
|
|
|
|
|
|
|
| 1st FRANKLIN FINANCIAL CORPORATION |
|
|
| ANNUAL REPORT |
|
|
|
|
| DECEMBER 31, 2015 |
|
|
| ||
|
| TABLE OF CONTENTS | ||
|
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|
|
|
|
|
| The Company |
| 1 |
|
|
|
|
|
|
| Chairman's Letter |
| 2 |
|
|
|
|
|
|
| Selected Consolidated Financial Information |
| 3 |
|
|
|
|
|
|
| Business |
| 4 |
|
|
|
|
|
|
| Sources of Funds and Common Stock Matters |
| 11 |
|
|
|
|
|
|
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
| 12 |
|
|
|
|
|
|
| Report of Independent Registered Public Accounting Firm |
| 21 |
|
|
|
|
|
|
| Consolidated Financial Statements |
| 22 |
|
|
|
|
|
|
| Directors and Executive Officers |
| 45 |
|
|
|
|
|
|
| Corporate Information |
| 45 |
|
|
|
|
|
|
| Ben F. Cheek, Jr. Office of the Year |
| 47 |
|
|
|
|
|
|
|
| THE COMPANY |
|
|
| 1st Franklin Financial Corporation, a Georgia corporation, has been engaged in the consumer finance business since 1941, particularly in making direct cash loans and real estate loans. As of December 31, 2015 the business was operated through 111 branch offices in Georgia, 39 in Alabama, 44 in South Carolina, 36 in Mississippi, 33 in Louisiana and 22 in Tennessee. Also on that date, the Company had 1,269 employees. |
|
|
| As of December 31, 2015, the resources of the Company were invested principally in loans, which comprised 60% of the Company's assets. The majority of the Company's revenues are derived from finance charges earned on loans and other outstanding receivables. Our remaining revenues are derived from earnings on investment securities, insurance income and other miscellaneous income. |
1
To our Investors, Bankers, Co-Workers, Customers and Friends:
The year 2015 was a year in which the 1,257 “Friendly Franklin Folks” put in many hours of hard work at their branches and areas of responsibility as well as giving countless volunteer hours to the many worthy causes in their communities. I feel that you will agree that the facts and figures that are found on the following pages will reflect the excellent results that their efforts attained during the year.
Every year has its highlights and challenges and 2015 was no different for 1st Franklin. New rules and regulations emanating from both the Federal and State governments have required that we adapt to a number of changes in some areas of our operations. We have accepted these changes with a positive attitude and expect that in many cases our practices and procedures will be streamlined and improved. To assist us in our effort to adapt correctly to these new regulations we sought some assistance and overviews from outside our company. One company analyzed our internal auditing procedures with an eye toward implementing Risk Based Auditing. The second company focused on our overall operating procedures approaching their analysis from a regulatory point of view. We feel that both of these outside sources brought a very valuable insight to our company and we will be adopting a number of their recommendations. In order to effectively implement these recommendations, we were fortunate to be able to add three very capable and knowledgeable people to our legal, compliance and auditing departments.
Highlights for the year that I hope you will review include:
· Assets for the year 2015 increased 11% to $674.4 million.
· Our Investment Center grew 14% adding $51.6 million.
· We opened four new branches – Morristown, TN, Baker, LA, Lake Charles, LA and Tucker, GA.
· The capital base of our company increased 8% or $16.0 million.
During the year 2016, 1st Franklin Financial Corporation will celebrate its 75th Anniversary. The theme for the year is “1941-2016 75 Years Strong.” When my grandfather started our company in 1941 I don’t know what his goals and aspirations were. I do know however, that he would be very proud and humbled to know what all of the wonderful people that have been associated with our company over the years have accomplished. Co-workers, investors, bankers, customers and friends. All have played a vital part in bringing us the successful years that we have enjoyed. I also know that he would be filled with excitement and expectation as we look forward to the possibilities that the future holds.
Thanks to all who have made our 75 years of growth and success possible. We continue to value and covet your confidence and support.
Sincerely yours,
/s/ Ben F. “Buddy” Cheek, IV
Chairman of the Board
2
| SELECTED CONSOLIDATED FINANCIAL INFORMATION |
| Set forth below is selected consolidated financial information of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more detailed consolidated financial statements and notes thereto included herein. |
|
| Year Ended December 31 | ||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Selected Income Statement Data: | (In 000's, except ratio data) | ||||
|
|
|
|
|
|
|
| Revenues: |
|
|
|
|
|
| Interest and Finance Charges | $ 152,590 | $ 144,569 | $ 132,579 | $ 122,805 | $ 111,730 |
| Insurance | 52,447 | 47,964 | 45,684 | 42,746 | 39,440 |
| Other | 3,325 | 7,167 | 7,709 | 7,084 | 6,724 |
|
|
|
|
|
|
|
| Net Interest Income | 139,636 | 132,617 | 121,108 | 111,410 | 100,089 |
| Interest Expense | 12,955 | 11,952 | 11,472 | 11,394 | 11,641 |
| Provision for Loan Losses | 36,887 | 32,623 | 27,623 | 22,485 | 19,009 |
| Income Before Income Taxes | 31,130 | 37,531 | 38,400 | 36,663 | 32,229 |
| Net Income | 25,866 | 33,334 | 34,408 | 32,749 | 29,123 |
|
|
|
|
|
|
|
| Ratio of Earnings to Fixed Charges | 3.08 | 3.70 | 3.89 | 3.79 | 3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31 | ||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Selected Balance Sheet Data: | (In 000's, except ratio data) | ||||
|
|
|
|
|
|
|
| Net Loans | $ 406,390 | $ 388,341 | $ 369,427 | $ 343,574 | $ 317,959 |
| Total Assets | 674,414 | 605,588 | 561,761 | 518,289 | 464,885 |
| Senior Debt | 388,489 | 335,186 | 308,015 | 275,894 | 243,801 |
| Subordinated Debt | 36,004 | 37,727 | 40,379 | 42,918 | 46,870 |
| Stockholders’ Equity | 224,490 | 208,447 | 192,353 | 176,534 | 153,585 |
|
|
|
|
|
|
|
| Ratio of Total Liabilities to Stockholders’ Equity | 2.00 | 1.91 | 1.92 | 1.94 | 2.03 |
3
| BUSINESS |
| References in this Annual Report to “1st Franklin”, the “Company”, “we”, “our” and “us” refer to 1st Franklin Financial Corporation and its subsidiaries. |
| |
| 1st Franklin is engaged in the consumer finance business, primarily in making consumer loans to individuals in relatively small amounts for relatively short periods of time, and in making first and second mortgage loans on real estate in larger amounts and for longer periods of time. We also purchase sales finance contracts from various retail dealers. At December 31, 2015, direct cash loans comprised 90%, real estate loans comprised 4% and sales finance contracts comprised 6% of our outstanding loans, respectively. |
|
|
| In connection with our business, we also offer optional credit insurance products to our customers when making a loan. Such products 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 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 products 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. |
| |
| Earned finance charges generally account for the majority of our revenues. The following table shows the sources of our earned finance charges in each of the past five years: |
|
| Year Ended December 31 | |||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | |||
|
| (in thousands) | |||||||
|
|
|
|
|
|
| |||
|
| Direct Cash Loans | $139,945 | $132,974 | $121,848 | $112,522 | $101,683 | ||
|
| Real Estate Loans | 3,432 | 3,202 | 3,223 | 3,272 | 3,539 | ||
|
| Sales Finance Contracts | 4,436 | 3,896 | 3,690 | 3,648 | 3,637 | ||
|
| Total Finance Charges | $147,813 | $140,072 | $128,761 | $119,442 | $108,859 | ||
| Our business consists mainly of making loans to individuals who depend primarily on their earnings to meet their repayment obligations. We make direct cash loans primarily to people who need money for some non-recurring or unforeseen expense, for debt consolidation, or to purchase household goods such as furniture and appliances. These loans are generally repayable in 6 to 60 monthly installments and generally do not exceed $15,000 principal amount. The loans are generally secured by personal property (other than certain household goods), motor vehicles and/or real estate. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws. |
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| First and second mortgage loans on real estate are made to homeowners who typically use funds to improve their property or who wish to restructure their financial obligations. We generally make such loans in amounts from $3,000 to $50,000 and with maturities of 35 to 180 months. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws. |
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4
| Our decision making on loan originations is based on: (i) ability to pay, (ii) creditworthiness, (iii) stability, (iv) willingness to pay and (v) collateral security. The Company does not utilize credit score modeling or risk based pricing in its loan decision making. Prior to the making of a loan, we complete a relevant credit investigation on a potential customer. Such investigation primarily focuses on an evaluation of a potential borrower’s income, existing total indebtedness, length and stability of employment, trade or other references, debt payment history (including related collections), existing credit and any other relationships such potential borrower may have with the Company. The Company considers and evaluates a potential borrower’s debt-to-disposable income ratio after giving effect to the potential loan and may, in certain instances and depending upon the overall results of the credit evaluation process, require additional internal review and supervisory approvals prior to approving a proposed loan. |
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| Sales finance contracts are contracts purchased from retail dealers. These contracts have maturities that generally range from 3 to 60 months and generally do not individually exceed $10,000 in principal amount. Interest rates we charge on these contracts are in compliance with applicable federal and state laws. |
1st Franklin competes with several national and regional finance companies, as well as a variety of local finance companies, in the communities we serve. Competition is based primarily on interest rates and terms offered and on customer service, as well as, to some extent, reputation. We believe that our emphasis on customer service helps us compete effectively in the markets we serve.
Because of our reliance on the continued income stream of most of our loan customers, our ability to continue the profitable operation of our business depends to a large extent on the continued employment of our customers and their ability to meet their obligations as they become due. Therefore, continued economic uncertainty or worsening economic condtions, increases in unemployment or continued increases in the number of personal bankruptcies within our typical customer base may have a material adverse effect on our collection ratios and profitability.
The average annual yield on loans we make (the percentage of finance charges earned to average net outstanding balance) has been as follows:
|
| Year Ended December 31 | ||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
|
|
|
|
|
|
| ||
| Direct Cash Loans | 35.25% | 35.50% | 34.79% | 34.36% | 33.75% | ||
| Real Estate Loans | 16.50 | 16.49 | 16.38 | 15.65 | 16.03 | ||
| Sales Finance Contracts | 19.66 | 20.17 | 20.42 | 20.61 | 20.58 | ||
| The following table contains certain information about our operations: |
|
| As of December 31 | ||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
|
|
|
|
|
|
| ||
| Number of Branch Offices | 285 | 282 | 275 | 266 | 258 | ||
| Number of Employees | 1,269 | 1,217 | 1,146 | 1,092 | 1,074 | ||
| Average Total Loans Outstanding Per Branch (in 000's) |
$1,919 |
$1,828 |
$1,776 |
$1,693 |
$1,622 | ||
| Average Number of Loans Outstanding Per Branch | 930 | 882 | 843 | 800 | 724 | ||
5
| DESCRIPTION OF LOANS |
|
| Year Ended December 31 | ||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 |
| DIRECT CASH LOANS: |
|
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|
|
|
|
|
|
|
|
|
| Number of Loans Made to New Borrowers | 73,371 | 67,140 | 64,709 | 60,610 | 41,821 |
|
|
|
|
|
|
|
| Number of Loans Made to Former Borrowers | 55,139 | 50,948 | 46,757 | 38,243 | 33,240 |
|
|
|
|
|
|
|
| Number of Loans Made to Present Borrowers | 190,211 | 192,564 | 187,962 | 171,505 | 159,177 |
|
|
|
|
|
|
|
| Total Number of Loans Made | 318,721 | 310,652 | 299,428 | 270,358 | 234,238 |
|
|
|
|
|
|
|
| Total Volume of Loans Made (in 000’s) | $719,251 | $695,144 | $669,565 | $603,627 | $550,120 |
|
|
|
|
|
|
|
| Average Size of Loan Made | $2,257 | $2,238 | $2,236 | $2,233 | $2,349 |
|
|
|
|
|
|
|
| Number of Loans Outstanding | 248,627 | 233,965 | 217,352 | 198,202 | 171,984 |
|
|
|
|
|
|
|
| Total Loans Outstanding (in 000’s) | $494,837 | $471,195 | $445,755 | $408,691 | $376,568 |
|
|
|
|
|
|
|
| Percent of Total Loans Outstanding | 90% | 91% | 91% | 91% | 90% |
| Average Balance on Outstanding Loans | $1,990 | $2,014 | $2,051 | $2,062 | $2,190 |
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|
|
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|
| REAL ESTATE LOANS: |
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number of Loans Made | 515 | 402 | 463 | 462 | 520 |
|
|
|
|
|
|
|
| Total Volume of Loans Made (in 000’s) | $ 9,798 | $ 8,455 | $ 8,924 | $ 7,328 | $ 9,010 |
|
|
|
|
|
|
|
| Average Size of Loan Made | $19,025 | $21,031 | $19,274 | $15,863 | $17,327 |
|
|
|
|
|
|
|
| Number of Loans Outstanding | 1,468 | 1,439 | 1,508 | 1,622 | 1,776 |
|
|
|
|
|
|
|
| Total Loans Outstanding (in 000’s) | $22,128 | $20,271 | $20,329 | $20,659 | $22,123 |
|
|
|
|
|
|
|
| Percent of Total Loans Outstanding | 4% | 4% | 4% | 4% | 5% |
| Average Balance on Outstanding Loans | $15,074 | $14,087 | $13,481 | $12,736 | $12,457 |
|
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|
|
|
|
|
| SALES FINANCE CONTRACTS: |
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Contracts Purchased | 14,973 | 13,488 | 13,751 | 14,143 | 13,939 |
|
|
|
|
|
|
|
| Total Volume of Contracts Purchased (in 000’s) | $35,315 | $28,403 | $27,395 | $27,422 | $25,281 |
|
|
|
|
|
|
|
| Average Size of Contract Purchased | $2,359 | $2,106 | $1,992 | $1,939 | $1,814 |
|
|
|
|
|
|
|
| Number of Contracts Outstanding | 15,090 | 13,446 | 13,188 | 13,154 | 13,096 |
|
|
|
|
|
|
|
| Total Contracts Outstanding (in 000’s) | $30,071 | $23,906 | $22,270 | $20,983 | $19,765 |
|
|
|
|
|
|
|
| Percent of Total Loans Outstanding | 6% | 5% | 5% | 5% | 5% |
| Average Balance on Outstanding Loans | $1,993 | $1,778 | $1,689 | $1,595 | $1,509 |
6
| LOANS ORIGINATED, ACQUIRED, LIQUIDATED AND OUTSTANDING |
|
| Year Ended December 31 | ||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
(in thousands)
|
| LOANS ORIGINATED OR ACQUIRED | |||||||
|
|
|
|
|
|
| |||
| Direct Cash Loans | $ 718,834 | $ 695,144 | $ 669,331 | $ 603,467 | $ 550,078 | |||
| Real Estate Loans | 9,798 | 8,454 | 8,924 | 7,328 | 9,010 | |||
| Sales Finance Contracts | 34,444 | 28,055 | 26,745 | 26,279 | 23,705 | |||
| Net Bulk Purchases | 1,288 | 348 | 884 | 1,303 | 1,618 | |||
|
|
|
|
|
|
| |||
| Total Loans Acquired | $ 764,364 | $ 732,001 | $ 705,884 | $ 638,377 | $ 584,411 | |||
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| |||
|
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|
|
|
|
| |||
|
| LOANS LIQUIDATED * | |||||||
|
|
|
|
|
|
| |||
| Direct Cash Loans | $ 695,608 | $ 669,704 | $ 632,501 | $ 571,504 | $ 520,997 | |||
| Real Estate Loans | 7,941 | 8,512 | 9,254 | 8,792 | 9,854 | |||
| Sales Finance Contracts | 29,151 | 26,767 | 26,108 | 26,204 | 27,211 | |||
|
|
|
|
|
|
| |||
| Total Loans Liquidated | $ 732,700 | $ 704,983 | $ 667,863 | $ 606,500 | $ 558,062 | |||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
|
| LOANS OUTSTANDING AT YEAR END | |||||||
|
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|
|
|
|
| |||
| Direct Cash Loans | $ 494,837 | $ 471,195 | $ 445,755 | $ 408,691 | $ 376,568 | |||
| Real Estate Loans | 22,128 | 20,271 | 20,329 | 20,659 | 22,123 | |||
| Sales Finance Contracts | 30,071 | 23,906 | 22,270 | 20,983 | 19,765 | |||
|
|
|
|
|
|
| |||
| Total Loans Outstanding | $ 547,036 | $ 515,372 | $ 488,354 | $ 450,333 | $ 418,456 | |||
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|
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| |||
|
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|
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| |||
|
| UNEARNED FINANCE CHARGES | |||||||
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|
|
|
|
|
| |||
| Direct Cash Loans | $ 60,753 | $ 59,376 | $ 56,159 | $ 49,933 | $ 46,297 | |||
| Real Estate Loans | 159 | 244 | 390 | 335 | 317 | |||
| Sales Finance Contracts | 4,787 | 3,460 | 3,101 | 2,768 | 2,593 | |||
|
|
|
|
|
|
| |||
| Total Unearned Finance Charges | $ 65,699 | $ 63,080 | $ 59,650 | $ 53,036 | $ 49,207 | |||
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| |||
| |
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| |||
______________________
* Liquidations include customer loan payments, refunds on precomputed finance charges, renewals and charge offs.
7
| DELINQUENCIES |
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| We classify 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. Once an account becomes greater than 149 days past due, our charge off policy governs when the account must be charged off. For more information on our charge off policy, see Note 2 "Loans" in the Notes to the Consolidated Financial Statements. |
| In connection with any bankruptcy court initiated repayment plan, the Company effectively resets the delinquency rating of each account to coincide with the court initiated repayment plan. Effectively, the account’s delinquency rating is changed thereafter under normal grading parameters. The following table shows the number of loans in bankruptcy in which the delinquency rating was reset to coincide with a court initiated repayment plan. | ||||||
|
| As of December 31 | |||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | |
| Number of Bankrupt Delinquency Resets |
1,369 |
1,662 |
1,463 |
1,683 |
1,601 | |
| The Company tracks the dollar amount of loans in bankruptcy in which the delinquency rating was reset. During 2015 and 2014, the Company reset the delinquency rating to coincide with court initiated repayment plans on bankrupt accounts with principal balances totaling $4.7 million and $5.5 million, respectively. This represented approximately .92% and 1.16% of the average principal loan portfolios outstanding during both 2015 and 2014, respectively. The following table shows the amount of certain classifications of delinquencies and the ratio of such delinquencies to related outstanding loans: |
|
| As of December 31 | ||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
|
| (in thousands, except % data) | ||||||
8
| LOSS EXPERIENCE |
|
|
| Net losses (charge-offs less recoveries) and the percent such net losses represent of average net loans (loans less unearned finance charges) and liquidations (loan payments, refunds on unearned finance charges, renewals and charge-offs of customers' loans) are shown in the following table: |
|
|
|
| Year Ended December 31 | ||||||
|
|
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
|
|
|
| (in thousands, except % data) | ||||||
|
| DIRECT CASH LOANS | ||||
|
|
|
|
|
|
|
| Average Net Loans | $ 404,057 | $ 381,367 | $ 357,552 | $ 334,084 | $ 305,152 |
| Liquidations | $ 695,608 | $ 669,704 | $ 632,501 | $ 571,504 | $ 520,997 |
| Net Losses | $ 31,119 | $ 27,824 | $ 24,476 | $ 21,241 | $ 21,014 |
| Net Losses as % of Average Net Loans | 7.70% | 7.30% | 6.85% | 6.36% | 6.89% |
| Net Losses as % of Liquidations | 4.47% | 4.15% | 3.87% | 3.72% | 4.03% |
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|
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|
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| REAL ESTATE LOANS | ||||
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|
| Average Net Loans | $ 21,194 | $ 19,765 | $ 20,031 | $ 21,192 | $ 22,253 |
| Liquidations | $ 7,941 | $ 8,513 | $ 9,254 | $ 8,792 | $ 9,854 |
| Net Losses | $ 11 | $ 72 | $ 6 | $ 63 | $ 75 |
| Net Losses as a % of Average Net Loans | .05% | .36% | .03% | .30% | .34% |
| Net Losses as a % of Liquidations | .14% | .85% | .06% | .72% | .76% |
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| SALES FINANCE CONTRACTS | ||||
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| Average Net Loans | $ 22,908 | $ 19,646 | $ 18,366 | $ 17,891 | $ 17,863 |
| Liquidations | $ 29,151 | $ 26,767 | $ 26,108 | $ 26,204 | $ 27,211 |
| Net Losses | $ 877 | $ 787 | $ 471 | $ 531 | $ 670 |
| Net Losses as % of Average Net Loans | 3.83% | 4.01% | 2.56% | 2.97% | 3.75% |
| Net Losses as % of Liquidations | 3.01% | 2.94% | 1.80% | 2.03% | 2.46% |
| ALLOWANCE FOR LOAN LOSSES |
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| We determine the allowance for loan losses by reviewing our previous loss experience, reviewing specifically identified loans where collection is believed to be doubtful and evaluating the inherent risks and changes in the composition of our loan portfolio. Such allowance is, in our opinion, sufficient to provide adequate protection against probable loan losses in the current loan portfolio. For additional information about Management’s approach to estimating and evaluating the allowance for loan losses, see Note 2 “Loans” in the Notes to the Consolidated Financial Statements. |
9
| SEGMENT FINANCIAL INFORMATION |
| The Company operates in one reportable business segment. For additional financial information about our segment and the divisions of our operations, see Note 13 “Segment Financial Information” in the Notes to Consolidated Financial Statements. |
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|
| CREDIT INSURANCE |
| We offer optional credit insurance products to our customers when making a loan. Such products 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 any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request credit 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 products 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. |
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|
| REGULATION AND SUPERVISION |
| The Company is subject to regulation under numerous state and federal laws and regulations as enforced and interpreted by various state and federal governmental agencies. Generally, state laws require that each office in which a small loan business such as ours is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations. The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show evidence of a need through convenience and advantage documentation. As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies. Licenses are revocable for cause, and their continuance depends upon an applicant’s continued compliance with applicable laws and in connection with its receipt of a license. We are also subject to state regulations governing insurance agents in the states in which we sell credit insurance. State insurance regulations require, among other things, that insurance agents be licensed and, in some cases, limit the premiums that insurance agents can charge. We believe we conduct our business in accordance with all applicable state statutes and regulations. The Company has never had any of its licenses revoked and has never been subject to an enforcement order or regulatory settlement. |
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|
| We conduct our lending operations under the provisions of various federal laws and implementing regulations. These laws and regulations are interpreted, implemented, and enforced by the Bureau of Consumer Financial Protection (the "CFPB"). Chief among these federal laws with which the Company must comply are the Federal Consumer Credit Protection Act (the "Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act. The Truth-in-Lending Act requires us, among other things, to disclose to our customers the finance charge, the annual percentage rate, the total number and amount of payments and other material information on all loans. A Federal Trade Commission ruling prevents consumer lenders such as the Company from using certain household goods as collateral on direct cash loans. As a result, we generally seek to collateralize such loans with non-household goods such as automobiles, boats and other exempt items. |
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| Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business. While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof. Significant additional regulation or costs of compliance could materially adversely affect our business and financial condition. |
10
| SOURCES OF FUNDS AND COMMON STOCK MATTERS |
|
|
| The Company is dependent upon the availability of funds from various sources in order to meet its ongoing financial obligations and to make new loans as a part of its business. Our various sources of funds as a percent of total liabilities and stockholders’ equity and the number of persons investing in the Company's debt securities was as follows: |
|
| As of December 31 | ||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Bank Borrowings | -% | -% | -% | -% | -% |
| Senior Debt | 58 | 55 | 55 | 53 | 53 |
| Subordinated Debt | 5 | 6 | 7 | 8 | 10 |
| Other Liabilities | 4 | 4 | 4 | 5 | 4 |
| Stockholders’ Equity | 33 | 35 | 34 | 34 | 33 |
| Total | 100% | 100% | 100% | 100% | 100% |
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|
|
|
|
|
| Number of Investors | 5,415 | 5,405 | 5,436 | 5,445 | 5,406 |
| The average interest rates we pay on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, have been as follows: |
|
| Year Ended December 31 | |||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | |
| Senior Borrowings | 3.32% | 3.31% | 3.46% | 3.75% | 4.08% |
| Subordinated Borrowings | 2.82 | 2.92 | 3.14 | 3.33 | 4.20 |
| All Borrowings | 3.27 | 3.26 | 3.41 | 3.69 | 4.11 |
| Certain financial ratios relating to our debt have been as follows: |
|
| As of December 31 | ||||||
|
| 2015 | 2014 | 2013 | 2012 | 2011 | ||
| Total Liabilities to |
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|
|
|
| |
| Stockholders’ Equity | 2.00 | 1.91 | 1.92 | 1.94 | 2.03 | |
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| |
| Unsubordinated Debt to |
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| |
| Subordinated Debt plus |
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|
| |
| Stockholders’ Equity | 1.59 | 1.46 | 1.41 | 1.36 | 1.32 | |
| As of March 28, 2016, all of our voting common stock was closely held by three related individuals and all of our non-voting common stock was held by thirteen shareholders. None of our common stock was listed on any securities exchange or traded on any established public trading market. The Company does not maintain any equity compensation plans, and did not repurchase any of its equity securities during any period represented. Cash distributions of $60.60 and $137.50 per share were paid to shareholders in 2015 and 2014, respectively, primarily in amounts to enable the Company’s shareholders to pay their related income tax obligations which arise as a result of the Company’s status as an S Corporation. No other cash dividends were paid during the applicable periods. For the foreseeable future, the Company expects to pay annual cash distributions equal to an amount sufficient to enable the Company’s shareholders to pay their respective income tax obligations as a result of the Company’s status as an S Corporation. | ||||||
11
| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
|
| Management’s Discussion and Analysis provides a narrative of the Company’s financial condition and performance. The narrative reviews the Company’s results of operations, liquidity and capital resources, critical accounting policies and estimates, and certain other matters. It includes Management’s interpretation of our financial results, the factors affecting these results and the significant factors that we currently believe may materially affect our future financial condition, operating results and liquidity. This discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained elsewhere in this Annual Report. |
|
|
| Our significant accounting policies are disclosed in Note 1 "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. Certain information in this discussion and other statements contained in this Annual Report which are not historical facts are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Possible factors which could cause our actual future results to differ from any expectations within any forward-looking statements, or otherwise, include, but are not limited to, changes in our ability to manage liquidity and cash flow, the accuracy of Management’s estimates and judgments, adverse developments in economic conditions including the interest rate environment, unforeseen changes in our net interest margin, federal and state regulatory changes, unfavorable outcomes of litigation and other factors referenced in the “Risk Factors” section of the Company’s Annual Report and elsewhere herein, or otherwise contained in our filings with the Securities and Exchange Commission from time to time. |
| |
| General: |
| |
| The Company is a privately-held corporation that has been engaged in the consumer finance industry since 1941. Our operations focus primarily on making installment 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. All our loans are at fixed rates, and contain fixed terms and fixed payments. We operate branch offices in six southeastern states and had a total of 285 branch locations at December 31, 2015. The Company and its operations are guided by a strategic plan which includes planned growth through strategic expansion of our branch office network. The Company expanded its operations with the opening of seven new branch offices during the year just ended. The majority of our revenues are derived from finance charges earned on loans outstanding. Additional revenues are derived from earnings on investment securities, insurance income and other miscellaneous income. |
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| Financial Condition: |
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|
12
| The Company's total assets increased $68.8 million (11%) to $674.4 million as of December 31, 2015 compared to $605.6 million at December 31, 2014. Increases in our cash, investment and loan portfolios were the primary areas of growth in the asset section of our balance sheet. Our cash and short-term investments increased $36.7 million (249%) at December 31, 2015 compared to December 31, 2014. Surplus funds generated from increased sales of our debt securities during 2015 and funds generated from operations led to the growth in our cash and holdings of short-term investments. The Company maintains an amount of 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 December 31, 2015, restricted cash was approximately $9.3 million compared to $1.1 million at December 31, 2014. The Company has two investment portfolios on the Statements of Financial Position. One is titled "Marketable Debt Securities" which consists primarily of invested surplus funds generated by the Company's insurance subsidiaries. This investment portfolio increased $5.3 million (3%) at December 31, 2015 compared to December 31, 2014 as a result of the aforementioned increase in surplus funds generated from sales of the our debt securities and funds generated from operations. Management maintains what it believes to be a conservative approach when formulating its investment strategy. The Company does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments. This investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds. Approximately 89% of these investment securities have been designated as “available for sale” at December 31, 2015 with any unrealized gain or loss accounted for in the equity section of the Company’s consolidated statement of financial position, net of deferred income taxes for those investments held by the insurance subsidiaries. The remainder of this investment portfolio represents securities that are designated “held to maturity”, as Management has both the ability and intent to hold these securities to maturity, and are carried at amortized cost. A second investment portfolio, captioned "Equity Method Investments", consists of invested surplus funds generated from operations and financing activities of the Parent Company. Management originally invested $10.0 million of these funds on November 1, 2013 in Meritage Capital, Centennial Absolute Return Fund, L.P. in an attempt to increase yield. An additional $15.0 million was invested on April 1, 2014. Total value of the fund was $25.0 million at December 31, 2015 compared to $26.1 million at December 31, 2014. The decline in the value of the fund during 2015 was due to the volitility in the bond and equity markets. The Company uses the equity method of accounting to account for this investment. Our net loan portfolio grew $18.0 million (5%) to $406.4 million at December 31, 2015 compared to $388.3 million at December 31, 2014. The increase in the net loan portfolio was the result of higher loan originations during the year just ended. Loan originations were $764.4 million during 2015 compared to $732.0 million during the prior year. A $4.9 million increase in the Company's allowance for loan losses (which is included in the net loan portfolio) offset a portion of the increase in the portfolio. Our allowance for loan losses 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. Management increased the allowance for loan losses at December 31, 2015 compared to December 31, 2014 mainly due to a higher level of charge offs during 2015 and the higher level of loans outstanding. Management believes the allowance for loan losses is adequate to cover probable losses; however, changes in trends or deterioration in economic conditions could result in a change in the allowance or an increase in actual losses. Any increase could have a material adverse impact on our results of operation or financial condition in the future. |
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13
| Increases in deferred acquisition costs and accounts receivable related to our credit insurance business were the primary factors causing the $1.6 million (8%) increase in miscellaneous other assets at December 31, 2015 compared to the prior year end. |
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| A substantial portion of the Company's funding is generated from sales of the Company's various debt securities. Aggregate senior and subordinated debt of the Company increased $51.6 million (14%) to $424.5 million at December 31, 2015 compared to $372.9 million at December 31, 2014. Higher sales of the Company's senior demand notes and commercial paper resulted in the increase. Other liabilities increased $1.2 million (5%) at December 31, 2015 compared to the prior year end mainly due to increases in accounts payable, accrued deferred compensation expenses and accrued employee health insurance claims. |
| Results of Operations: |
|
|
| Total revenues were $208.4 million, $199.7 million and $186.0 million during 2015, 2014 and 2013, respectively. Growth in earning assets (loans and investments) during the period just ended led to higher finance charge earnings, insurance earnings and investment income, which led to higher revenues during the comparable periods. Higher expenses during 2015 and 2014 offset the increases in revenues during the same respective periods resulting in declines in net income. Net income for each of the three years ended December 31, 2015 was $25.9 million, $33.3 million and $34.4 million, respectively. |
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| Net Interest Income: |
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| Net interest income is a principal component of the Company’s operating performance and resulting net income. It represents the difference between income on earning assets and the cost of funds on interest bearing liabilities. Debt securities represent a majority of our interest bearing liabilities. Factors affecting our net interest margin include the level of average net receivables and the interest income associated therewith, capitalized loan origination costs and our average outstanding debt, as well as the general interest rate environment. Volatility in interest rates generally has more impact on the income earned on investments and the Company’s borrowing costs than on interest income earned on loans. Management does not normally change the rates charged on loans originated solely as a result of changes in the interest rate environment. |
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| Net interest income was $139.6 million during 2015, compared to $132.6 million in 2014 and $121.1 million during 2013. The higher margins during 2015 and 2014 were due to higher levels of average net receivables outstanding and the associated finance charge income thereon. Average net receivables were $440.3 million during 2015 compared to $413.3 million during 2014 and $388.0 million during 2013. Interest income grew $8.0 million (6%) during 2015 compared to 2014, and $12.0 million (9%) during 2014 compared to 2013 as a result of the higher average net receivables outstanding. |
| |
| Interest expense was $13.0 million, $12.0 million and $11.5 million during 2015, 2014 and 2013, respectively, mainly due to increases in average borrowings outstanding. Average borrowings were $395.5 million during 2015 compared to $363.9 during 2014 and $335.8 during 2013. Although average borrowings increased, the continued low interest rate environment has enabled the Company to minimize increases in interest expense. Our weighted average borrowing rate was 3.28% during the two year period just ended and 3.42% during 2013. |
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| Net Insurance Income: |
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| The Company offers certain optional credit insurance products to loan customers. Growth in our loan portfolio typically leads to increases in insurance in-force as many loan customers elect to purchase the credit insurance coverage offered by the Company. Net insurance income (insurance revenues less claims and expenses) increased $2.8 million (7%), $1.7 million (5%) and $1.8 million (5%) during the three years ended December 31, 2015, respectively.
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14
| Other Revenue: |
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| Other revenue earned was $3.3 million during 2015 compared to $7.2 million during 2014 and $7.7 million during 2013. The primary revenue category included in other revenue relates to commissions earned by the Company on sales of the auto club memberships. The Company, as an agent for a third party, offers auto club memberships to loan customers during the closing of a loan. During fourth quarter of 2014, the Company elected to begin offering customers an enhanced auto club product with expanded coverage. Commission rates earned by the Company on the enhanced product are lower than those earned on the original product offered. The lower commission rates were one of the primary causes of the $3.8 million (54%) decline in other revenue during 2015 compared to 2014. During 2014, other revenue decreased $.5 million (9%) compared to 2013 mainly due to lower commissions earned on sales of auto club memberships. Another factor contributing to the decrease in other revenue during 2015 compared to 2014 was a $1.0 million loss in income on the equity method investment held by the Company. As previously mentioned, the Company has a $25.0 million equity fund investment. Volatility in the bond and equity markets resulted in a loss on this investment during 2015. During 2014, the investment earned $1.0 million. |
| Provision for Loan Losses: |
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| The Company’s provision for loan losses represents net charge offs and adjustments to the allowance for loan losses to cover credit losses inherent in the outstanding loan portfolio at the balance sheet date. Determining the 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 economic conditions. See Note 2, “Loans”, in the accompanying “Notes to Consolidated Financial Statements” for additional discussion regarding the allowance for loan losses. |
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| Higher net charge offs and additions to the allowance for loan losses resulted in increases in the provision for loan losses during 2015 and 2014. Net charge offs during 2015, 2014 and 2013 were $32.0 million, $28.7 million and $25.0 million, respectively. During 2015 and 2014, the Company increased the allowance for loan losses by $4.9 million and $3.9 million, respectively. As a result of the foregoing, our provision for loan losses increased $4.3 million (13%) and $5.0 million (18%) during 2015 and 2014, respectively. |
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| We believe that the allowance for loan losses is adequate to cover probable losses inherent in our portfolio; however, because the allowance for loan losses is based on estimates, there can be no assurance that the ultimate charge off amount will not exceed such estimates or that our loss assumptions will not increase. |
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| Operating Expenses: |
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| Operating expenses increased approximately $8.1 million (8%) during 2015 compared to 2014, and approximately $8.5 million (9%) during 2014 compared to 2013. Operating expenses include personnel expense, occupancy expense and miscellaneous other expenses. Personnel expense increased $4.4 million (7%) during 2015 as compared to 2014 and $4.4 million (7%) during 2014 compared to 2013. The increases in each of the two year periods just ended were primarily due to increases in the employee base, merit salary increases, higher contributions to the Company's 401(k) plan, higher claims expense associated with the Company’s self insured employee medical program and higher payroll taxes. An increase in the accrual for incentive bonuses during 2014 also contributed to the increase in personnel expense during that year compared to 2013. |
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| Occupancy expense increased $.5 million (4%) during 2015 compared to 2014 and $.8 million (7%) during 2014 compared to 2013. Higher maintenance expense, utilities expense, telephone expense, depreciation expense and increased rent expense were the primary factors responsible for the increase in occupancy expense. |
15
16
| Loans originated by the Company are excluded from the table below since interest rates charged on loans are based on rates allowable in compliance with any applicable regulatory guidelines. Management does not believe that changes in market interest rates will significantly impact rates charged on loans. The Company has no exposure to foreign currency risk. |
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| Expected Year of Maturity | |||||||||||
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| 2021 & |
| Fair | ||||
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| 2016 | 2017 | 2018 | 2019 | 2020 | Beyond | Total | Value | ||||
| Assets: | (Dollars in millions) | |||||||||||
| Marketable Debt Securities | $ 5 | $ 7 | $ 8 | $ 6 | $ 3 | $ 132 | $161 | $161 | ||||
| Average Interest Rate | 2.2% | 2.6% | 2.3% | 2.8% | 3.1% | 3.4% | 3.2% |
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| Liabilities: |
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| Senior Debt: |
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| Senior Demand Notes | $71 | — | — | — | — | — | $ 71 | $ 71 | ||||
| Average Interest Rate | 1.7% | — | — | — | — | — | 1.7% |
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| Commercial Paper | $317 | — | — | — | — | — | $317 | $317 | ||||
| Average Interest Rate | 3.5% | — | — | — | — | — | 3.5% |
| ||||
| Subordinated Debentures | $ 6 | $ 8 | $9 | $13 | — | — | $ 36 | $ 36 | ||||
| Average Interest Rate | 2.9% | 2.8% | 2.8% | 2.8% | — | — | 2.8% |
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| Liquidity and Capital Resources: |
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| Liquidity is the ability of the Company to meet its ongoing financial obligations, either through the collection of receivables or by generating additional funds through liability management. The Company’s liquidity is therefore dependent on the collection of its receivables, the sale of debt securities and the continued availability of funds under the Company’s revolving credit agreement. |
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| In light of continued economic uncertainty, we continue to monitor and review current economic conditions and the related potential implications on us, including with respect to, among other things, changes in loan losses, liquidity, compliance with our debt covenants, and relationships with our customers. |
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| As of December 31, 2015 and December 31, 2014, the Company had $51.4 million and $14.7 million, respectively, invested in cash and short-term investments readily convertible into cash with original maturities of three months or less. As previously discussed, the Company uses cash reserves to fund its operations, including providing funds for any increase in redemptions of debt securities by investors which may occur. |
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| The Company's investments in marketable securities can be converted into cash, if necessary. As of December 31, 2015 and 2014, 79% and 80%, respectively, of the Company's cash and cash equivalents and investment securities were maintained in Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company, the Company’s insurance subsidiaries. Georgia state insurance regulations limit the use an insurance company can make of its assets. Ordinary dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. Any dividends above these state limitations are termed “extraordinary dividends” and must be approved in advance by the Georgia Insurance Commissioner. The maximum aggregate amount of dividends these subsidiaries could have paid to the Company during 2015, without prior approval of the Georgia Insurance Commissioner, was approximately $11.8 million. The Company elected not to pay any dividends from the insurance subsidiaries during 2015. |
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|
17
| Most of the Company's loan portfolio is financed through sales of its various debt securities, which, because of certain redemption features contained therein, have shorter average maturities than the loan portfolio as a whole. The difference in maturities may adversely affect liquidity if the Company is not able to continue to sell debt securities at interest rates and on terms that are responsive to the demands of the marketplace or maintain sufficient borrowing availability under our credit facility. |
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| The Company’s continued liquidity is therefore also 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 revolving credit facility with Wells Fargo Bank, NA. This credit agreement provides for borrowings or reborrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company. There were no borrowings outstanding against the credit line at December 31, 2015 or 2014. The credit agreement has a commitment terminaton date of September 11, 2018. Management believes the current credit facility, when considered with funds expected to be available from operations, should provide sufficient liquidity for the Company. Available but unborrowed amounts under the credit agreement are subject to a periodic unused line fee of .50%. The interest rate under the credit agreement is equivalent to the greater of (a) .75% per annum plus 300 basis points or (b) the three month London Interbank Offered Rate (the “LIBOR Rate”) plus 300 basis points. The LIBOR Rate is adjusted on the first day of each calendar month based upon the LIBOR Rate as of the last day of the preceding calendar month. |
|
|
| The credit agreement requires the Company to comply with certain covenants customary for financing transactions of this nature, including, among others, maintaining a minimum interest coverage ratio, a minimum loss reserve ratio, a minimum ratio of earnings to interest, taxes and depreciation and amortization to interest expense, a minimum asset quality ratio, a minimum consolidated tangible net worth ratio, and a maximum debt to tangible net worth ratio, each as defined. The Company must also comply with certain restrictions on its activities consistent with credit facilities of this type, including limitations on: (a) restricted payments; (b) additional debt obligations (other than specified debt obligations); (c) investments (other than specified investments); (d) mergers, acquisitions, or a liquidation or winding up; (e) modifying its organizational documents or changing lines of business; (f) modifying certain contracts; (g) certain affiliate transactions; (h) sale-leaseback, synthetic lease, or similar transactions; (i) guaranteeing additional indebtedness (other than specified indebtedness); (j) capital expenditures; or (k) speculative transactions. The credit agreement also restricts the Company or any of its subsidiaries from creating or allowing certain liens on their assets, entering into agreements that restrict their ability to grant liens (other than specified agreements), or creating or allowing restrictions on any of their ability to make dividends, distributions, inter-company loans or guaranties, or other inter-company payments, or inter-company asset transfers. At December 31, 2015, the Company was in compliance with all covenants. The Company has no reason to believe that it will not remain in compliance with these covenants and obligations for the foreseeable future. |
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| We are not aware of any additional restrictions placed on us, or being considered to be placed on us, related to our ability to access capital, such as borrowings under our credit agreement prior to its maturity. |
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|
| Any decrease in the Company’s allowance for loan losses would not directly affect the Company’s liquidity, as any adjustment to the allowance has no impact on cash; however, an increase in the actual loss rate may have a material adverse effect on the Company’s liquidity. The inability to collect loans could eventually impact the Company’s liquidity in the future. |
|
|
| The Company was subject to the following contractual obligations and commitments at December 31, 2015: |
18
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| Payment due by period | |||||||
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| Contractual Obligations | Total | Less Than 1 Year | 1 to 2 Years | 3 to 5 Years | More than 5 Years | |||
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| | (in millions) | |||||||
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| Bank Commitment Fee ** | $ 1.4 | $ .5 | $ .9 | $ - | $ - | |||
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| Senior Demand Notes * | 72.2 | 72.2 | - | - | - | |||
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| Commercial Paper * | 327.8 | 327.8 | - | - | - | |||
|
| Subordinated Debt * | 40.0 | 7.2 | 18.5 | 14.3 | - | |||
|
| Human resource insurance and support contracts ** | .8 | .8 | - | - | - | |||
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| Marketing Database | .3 | .1 | .1 | .1 |
| |||
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| Operating leases (offices) | 15.9 | 5.7 | 7.7 | 2.5 | - | |||
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| Communication lines contract ** | 1.4 | .6 | .6 | .2 | - | |||
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| Software service contract ** | 9.4 | 3.1 | 6.3 | - | - | |||
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| Total | $469.2 | $418.0 | $34.1 | $17.1 | $ - | |||
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| * Includes estimated interest at current rates. |
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| ** Based on current usage. |
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| Critical Accounting Policies: | |||||||||
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| The accounting and reporting policies of 1st Franklin and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the financial services industry. The more critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves. | |||||||||
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| 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 losses inherent in our loan portfolio. The allowance for loan losses is established based on the estimate of the amount of probable losses inherent in the loan portfolio as of the reporting date. We review charge off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends such as unemployment rates and bankruptcy filings and other information in order to make 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. | |||||||||
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| Revenue Recognition: Accounting principles generally accepted in the United States of America 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 on-going 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 which have precomputed charges are paid off or renewed prior to maturity, the result is that most of the accounts effectively yield on a Rule of 78’s basis. | |||||||||
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| 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 a loan that is more than 60 days past due. | |||||||||
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| Loan fees and origination costs are deferred and recognized as an adjustment to the loan yield over the contractual life of the related loan. | |||||||||
19
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| 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 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. | |||||||||
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| The credit life and accident and health policies written by the Company, as agent for a non-affiliated insurance company, are also reinsured by the Company’s life insurance subsidiary. The premiums are deferred and earned using the pro-rata method for level-term life policies and the effective yield method for decreasing-term life policies. Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method. | |||||||||
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| Insurance Claims Reserves: Included in unearned insurance premiums and commissions on the 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 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. | |||||||||
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| Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations. | |||||||||
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| New Accounting Pronouncements: | |||||||||
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| See Note 1, “Summary of Significant Accounting Policies - Recent Accounting Pronouncements,” in the accompanying “Notes to Consolidated Financial Statements” for a discussion of new 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 Notes to the Company’s Consolidated Financial Statements included elsewhere in this annual report. | |||||||||
20
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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| To the Board of Directors and Shareholders We have audited the accompanying consolidated statements of financial position of 1st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of 1st Franklin Financial Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Atlanta, Georgia March 30, 2016 |
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21
| 1st FRANKLIN FINANCIAL CORPORATION |
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| CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
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| DECEMBER 31, 2015 AND 2014 |
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| ASSETS |
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| 2015 | 2014 |
| CASH AND CASH EQUIVALENTS (Note 6): |
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| |
| Cash and Due From Banks | $ 5,531,687 | $ 1,524,217 | |
| Short-term Investments | 45,917,730 | 13,202,325 | |
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| 51,449,417 | 14,726,542 | |
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| RESTRICTED CASH (Note 1) | 9,335,466 | 1,073,157 | |
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| LOANS (Note 2): |
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| Direct Cash Loans | 494,836,733 | 471,195,331 | |
| Real Estate Loans | 22,128,090 | 20,271,000 | |
| Sales Finance Contracts | 30,071,077 | 23,906,111 | |
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| 547,035,900 | 515,372,442 | |
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| Less: | Unearned Finance Charges | 65,699,425 | 63,079,794 |
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| Unearned Insurance Premiums | 41,446,393 | 35,331,723 |
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| Allowance for Loan Losses | 33,500,000 | 28,620,000 |
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| 406,390,082 | 388,340,925 |
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| MARKETABLE DEBT SECURITIES (Note 3): |
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| Available for Sale, at fair value | 143,862,165 | 132,847,073 | |
| Held to Maturity, at amortized cost | 17,058,181 | 22,762,252 | |
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| 160,920,346 | 155,609,325 | |
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| EQUITY METHOD INVESTMENTS (Note 5) | 24,989,505 | 26,059,579 | |
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| OTHER ASSETS: |
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| Land, Buildings, Equipment and Leasehold Improvements, |
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| less accumulated depreciation and amortization |
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| of $26,780,217 and $24,049,665 in 2015 and 2014, respectively | 9,918,857 | 10,205,126 | |
| Deferred Acquisition Costs | 2,483,781 | 2,028,468 | |
| Due from Non-affiliated Insurance Company | 2,886,086 | 2,102,978 | |
| Other Miscellaneous | 6,040,269 | 5,441,945 | |
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| 21,328,993 | 19,778,517 | |
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| TOTAL ASSETS | $ 674,413,809 | $ 605,588,045 | |
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| See Notes to Consolidated Financial Statements | |||
22
| 1st FRANKLIN FINANCIAL CORPORATION |
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| CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
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| DECEMBER 31, 2015 AND 2014 |
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| LIABILITIES AND STOCKHOLDERS' EQUITY |
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| 2015 | 2014 |
| SENIOR DEBT (Note 7): |
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| Senior Demand Notes, including accrued interest | $ 71,001,087 | $ 58,530,148 |
| Commercial Paper | 317,488,208 | 276,656,052 |
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| 388,489,295 | 335,186,200 |
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| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 25,430,137 | 24,228,121 |
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| SUBORDINATED DEBT (Note 8) | 36,004,009 | 37,726,538 |
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| Total Liabilities | 449,923,441 | 397,140,859 |
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| COMMITMENTS AND CONTINGENCIES (Note 9) |
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| STOCKHOLDERS' EQUITY: |
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| Preferred Stock; $100 par value |
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| 6,000 shares authorized; no shares outstanding | -- | -- |
| Common Stock: |
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| Voting Shares; $100 par value; |
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| 2,000 shares authorized; 1,700 shares outstanding as of December 31, 2015 and 2014 | 170,000 | 170,000 |
| Non-Voting Shares; no par value; |
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| 198,000 shares authorized; 168,300 shares |
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| outstanding as of December 31, 2015 and 2014 | -- | -- |
| Accumulated Other Comprehensive Income | 4,142,986 | 3,663,475 |
| Retained Earnings | 220,177,382 | 204,613,711 |
| Total Stockholders' Equity | 224,490,368 | 208,447,186 |
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| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 674,413,809 | $ 605,588,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| See Notes to Consolidated Financial Statements | ||
23
| 1st FRANKLIN FINANCIAL CORPORATION | ||||
|
| ||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||
|
| ||||
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 | ||||
|
| ||||
|
|
|
|
| |
|
| 2015 | 2014 | 2013 | |
| INTEREST INCOME: Finance Charges Net Investment Income | $ 147,813,018 4,777,467 152,590,485 | $ 140,071,693 4,497,090 144,568,783 | $ 128,761,404 3,818,099 132,579,503 | |
| INTEREST EXPENSE: Senior Debt Subordinated Debt | 11,868,927 1,086,012 12,954,939 | 10,755,834 1,195,676 11,951,510 | 10,091,821 1,380,051 11,471,872 | |
|
|
|
|
| |
| NET INTEREST INCOME | 139,635,546 | 132,617,273 | 121,107,631 | |
|
|
|
|
| |
| PROVISION FOR LOAN LOSSES (Note 2) | 36,887,285 | 32,622,546 | 27,623,368 | |
|
|
|
|
| |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 102,748,261 | 99,994,727 | 93,484,263 | |
|
|
|
|
| |
| NET INSURANCE INCOME: Premiums Insurance Claims and Expense | 52,446,561 (12,559,411) 39,887,150 | 47,964,294 (10,836,029) 37,128,265 | 45,683,657 (10,205,444) 35,478,213 | |
|
|
|
|
| |
| OTHER REVENUE | 3,325,389 | 7,166,666 | 7,708,981 | |
|
|
|
|
| |
| OPERATING EXPENSES: Personnel Expense Occupancy Expense Other Expense | 71,834,872 13,707,326 29,288,935 114,831,133 | 67,419,267 13,188,162 26,150,789 106,758,218 | 63,044,814 12,368,589 22,857,629 98,271,032 | |
|
|
|
|
| |
| INCOME BEFORE INCOME TAXES | 31,129,667 | 37,531,440 | 38,400,425 | |
|
|
|
|
| |
| PROVISION FOR INCOME TAXES (Note 12) | 5,263,994 | 4,197,694 | 3,992,664 | |
|
|
|
|
| |
| NET INCOME | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 | |
|
|
|
|
| |
| BASIC EARNINGS PER SHARE: 170,000 Shares Outstanding for All Periods (1,700 voting, 168,300 non-voting) |
$152.15 |
$196.08 |
$202.40 | |
|
|
|
|
| |
|
|
|
|
| |
| See Notes to Consolidated Financial Statements | ||||
24
| 1st FRANKLIN FINANCIAL CORPORATION | ||||
|
| ||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||
|
| ||||
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 | ||||
|
| ||||
|
|
|
|
| |
|
| 2015 | 2014 | 2013 | |
| Net Income | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 | |
|
|
|
|
| |
| Other Comprehensive Income / (Loss): |
|
|
| |
| Net changes related to available-for-sale Securities: |
|
|
| |
| Unrealized gains (losses) | 862,930 | 8,297,119 | (6,145,189) | |
| Income tax (provision) benefit | (332,201) | (2,160,903) | 1,695,874 | |
| Net unrealized gains (losses) | 530,729 | 6,136,216 | (4,449,315) | |
|
|
|
|
| |
| Less reclassification of gains to net income | 51,218 | 7 | 122,037 | |
|
|
|
|
| |
| Total Other Comprehensive Income (Loss) | 479,511 | 6,136,209 | (4,571,352) | |
|
|
|
|
| |
| Total Comprehensive Income | $ 26,345,184 | $ 39,469,955 | $ 29,836,409 | |
|
|
|
|
| |
|
|
|
|
| |
| See Notes to Consolidated Financial Statements | ||||
|
| ||||
25
| 1st FRANKLIN FINANCIAL CORPORATION |
|
|
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
|
|
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013 |
|
|
|
|
| Accumulated |
| |
|
|
|
|
| Other |
| |
|
| Common Stock |
| Retained | Comprehensive |
| |
|
| Shares | Amount | Earnings | Income (Loss) | Total | |
| Balance at December 31, 2012 | 170,000 | $170,000 | $174,265,215 | $2,098,618 | $176,533,833 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2013 | — | — | 34,407,761 | — |
|
| Other Comprehensive Loss | — | — | — | (4,571,352) |
|
| Total Comprehensive Income | — | — | — | — | 29,836,409 |
| Cash Distributions Paid | — |
| (14,017,609) | — | (14,017,609) |
|
|
|
|
|
|
|
| Balance at December 31, 2013 | 170,000 | 170,000 | 194,655,367 | (2,472,734) | 192,352,633 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2014 | — | — | 33,333,746 | — |
|
| Other Comprehensive Loss | — | — | — | 6,136,209 |
|
| Total Comprehensive Income | — | — | — | — | 39,469,955 |
| Cash Distributions Paid | — |
| (23,375,402) | — | (23,375,402) |
|
|
|
|
|
|
|
| Balance at December 31, 2014 | 170,000 | 170,000 | 204,613,711 | 3,663,475 | 208,447,186 |
|
|
|
|
|
|
|
| Comprehensive Income: |
|
|
|
|
|
| Net Income for 2015 | — | — | 25,865,673 | — |
|
| Other Comprehensive Income | — | — | — | 479,511 |
|
| Total Comprehensive Income | — | — | — | — | 26,345,184 |
| Cash Distributions Paid | — | — | (10,302,002) | — | (10,302,002) |
|
|
|
|
|
|
|
| Balance at December 31, 2015 | 170,000 | $170,000 | $220,177,382 | $ 4,142,986 | $224,490,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| See Notes to Consolidated Financial Statements |
|
|
26
| 1st FRANKLIN FINANCIAL CORPORATION |
|
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 |
|
| 2015 | 2014 | 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES:
| Net Income | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 |
| Adjustments to reconcile net income to net |
|
|
|
| cash provided by operating activities: |
|
|
|
| Provision for loan losses | 36,887,285 | 32,622,546 | 27,623,368 |
| Depreciation and amortization | 3,318,710 | 3,156,828 | 2,910,855 |
| Provision for deferred taxes | 1,037,993 | 41,211 | 145,730 |
| Loss (Earnings) in equity method investment | 1,070,074 | (847,943) | (211,635) |
| Losses due to called redemptions on marketable securities, loss on sales of equipment and |
|
|
|
| amortization on securities | 768,903 | 1,101,092 | 1,004,266 |
| (Increase) decrease in miscellaneous assets and other | (1,836,742) | 421,877 | (1,561,178) |
| (Decrease) Increase in other liabilities | (149,424) | 1,011,240 | (333,179) |
| Net Cash Provided | 66,962,472 | 70,840,597 | 63,985,988 |
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| Loans originated or purchased | (387,639,565) | (351,600,837) | (334,922,921) |
| Loan payments | 332,703,123 | 300,064,326 | 281,446,113 |
| (Increase) decrease in restricted cash | (8,262,309) | (98,705) | 3,702,378 |
| Purchases of securities, available for sale | (20,649,356) | (30,969,513) | (38,947,670) |
| Purchase of equity fund investment | - | (15,000,000) | (10,000,000) |
| Sales of securities, available for sale | 797,246 | - | 4,199,916 |
| Redemptions of securities, available for sale | 9,200,000 | 11,895,000 | 12,880,000 |
| Redemptions of securities, held to maturity | 5,340,000 | 6,455,000 | 2,975,000 |
| Capital expenditures | (3,045,037) | (4,487,073) | (2,715,004) |
| Proceeds from sale of equipment | 37,737 | 84,231 | 45,662 |
| Net Cash Used | (71,518,161) | (83,657,571) | (81,336,526) |
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| Net increase in Senior Demand Notes | 12,470,939 | 4,475,141 | 4,022,163 |
| Advances on credit line | 531,641 | 531,475 | 531,375 |
| Payments on credit line | (531,641) | (531,475) | (531,375) |
| Commercial paper issued | 67,964,535 | 65,587,144 | 61,559,542 |
| Commercial paper redeemed | (27,132,379) | (42,891,237) | (33,460,285) |
| Subordinated debt issued | 8,164,215 | 7,210,193 | 8,645,970 |
| Subordinated debt redeemed | (9,886,744) | (9,862,162) | (11,185,439) |
| Dividends / Distributions paid | (10,302,002) | (23,375,402) | (14,017,609) |
| Net Cash Provided | 41,278,564 | 1,143,677 | 15,564,342 |
|
|
|
|
|
| NET INCREASE (DECREASE) IN |
|
|
|
| CASH AND CASH EQUIVALENTS | 36,722,875 | (11,673,297) | (1,786,196) |
|
|
|
|
|
| CASH AND CASH EQUIVALENTS, beginning | 14,726,542 | 26,399,839 | 28,186,035 |
| CASH AND CASH EQUIVALENTS, ending | $ 51,449,417 | $ 14,726,542 | $ 26,399,839 |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||
|
| Interest | $ 12,874,565 | $ 11,881,150 | $ 11,537,662 | |
|
| Income Taxes | 3,768,000 | 4,304,000 | 3,857,000 | |
|
| Non-cash Exchange of Investment Securities | 533,859 | - | 2,830,022 | |
|
|
|
|
|
| |
| See Notes to Consolidated Financial Statements | |||||
27
1st FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
1st Franklin Financial Corporation (the "Company") is a consumer finance company which originates and services direct cash loans, real estate loans and sales finance contracts through 285 branch offices located throughout the southeastern United States. In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance. Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the credit life, the credit accident and health and the credit property insurance so written.
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company accounts and transactions have been eliminated.
Fair Values of Financial Instruments:
The following methods and assumptions are used by the Company in estimating fair values for financial instruments.
Cash and Cash Equivalents. 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 the origination of the instruments and their expected realization. Cash and cash equivalents are classified as a Level 1 financial asset.
Loans. The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying 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 rates. Loans are classified as a Level 3 financial asset.
Marketable Debt Securities. The fair value of marketable debt securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Held-to-maturity marketable debt securities are classified as Level 2 financial assets. See additional information below regarding fair value under Accounting Standards Codification ("ASC") No. 820, Fair Value Measurements. See Note 4 for fair value measurement of available-for-sale marketable debt securities and for information related to how these securities are valued.
Equity Method Investment. The fair value of equity method investment is estimated based on the Company's allocable share of the investee net asset value as of the reporting date.
Senior Debt. 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 payment. Senior debt securities are classified as a Level 2 financial liability.
Subordinated Debt. The carrying value of the Company's subordinated debt securities approximates fair value due to the re-pricing frequency of the securities. Subordinated debt securities are classified as a Level 2 financial liability.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates.
28
Income Recognition:
Accounting principles generally accepted in the United States of America 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 on-going 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 repaid or renewed prior to maturity, the result is that most of the accounts with precomputed charges 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. Any loan which becomes 60 days or more past due, based on original contractual term, is placed in a non-accrual status. When a loan is placed in non-accrual status, income accruals are discontinued. Accrued income prior to the date an account becomes 60 days or more past due is not reversed. Income on loans in non-accrual status is earned only if payments are received. A loan in nonaccrual status is restored to accrual status when it becomes less than 60 days past due.
Loan fees and origination costs are deferred and recognized as an adjustment 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 an unrelated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary. The premiums 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 policies written by the Company, as agent for an unrelated 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 policies and the effective yield method for decreasing-term life policies. Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.
Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported claims. Reserves for claims totaled $3,028,970 and $1,498,249 at December 31, 2015 and 2014, respectively, and are included in unearned insurance premiums on the consolidated statements of financial position.
Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.
The primary revenue category included in other revenue relates to commissions earned by the Company on sales of auto club memberships. Commissions received from the sale of auto club memberships are earned at the time the membership is sold. The Company sells the memberships as an agent for a third party. The Company has no further obligations after the date of sale as all claims for benefits are paid and administered by the third party.
Depreciation and Amortization:
Office machines, equipment and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years. Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the applicable lease. Depreciation and amortization expense for each of the three years ended December 31, 2015 was $3,318,710, $3,156,828 and $2,910,855, respectively.
Restricted Cash:
At December 31, 2015 and 2014, the Company had cash of $9,335,466 and $1,073,157, respectively, held 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. During 2015 and 2014, restricted cash also included escrow deposits held by the Company on behalf of certain mortgage real estate customers.
29
Equity Method Investment:
The Company evaluates its unconsolidated equity investment to determine whether it should be recorded on a consolidated basis. The percentage ownership interest in the equity investment, an evaluation of control and whether a variable interest entity ("VIE") exists are all considered in the Company's consolidation assessment.
The Company accounts for its equity investment where it owns a non-controlling interest or where it is not the primary beneficiary of a VIE using the equity method of accounting. Under the equity method, the Company's cost of an investment is adjusted for its share of equity in the earnings or losses of the unconsolidated investment and reduced by distributions received. There is no difference between the cost of the Company's equity investment and the value of the underlying equity as reflected in the unconsolidated equity investment's financial statements.
The Company assesses the carrying value of its equity method investment for impairment in accordance with Accounting Standards Codification ("ASC") 323-10, Investments - Equity Method and Joint Ventures. The Company assesses whether there are any indicators that the fair value of the Company's equity method investment might be impaired. An investment is deemed impaired if the Company's estimate of the fair value of the investment is less than the carrying value of the investment and such decline in value is deemed to be other than temporary. During the years ended December 31, 2015, 2014 and 2013, no impairment of the Company's equity method investment was recognized.
Impairment of Long-Lived Assets:
The Company annually evaluates whether events and circumstances have occurred or triggering events have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. Based on Management’s evaluation, there has been no impairment of carrying value of the long-lived assets, including property and equipment at December 31, 2015 or 2014.
Income Taxes:
The Financial Accounting Standards Board (“FASB”) issued ASC 740-10. FASB ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. FASB ASC 740-10 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2015 and December 31, 2014, the Company had no uncertain tax positions.
The Company’s insurance subsidiaries are treated as taxable entities and income taxes are provided for where applicable (Note 12). No provision for income taxes has been made by the Company since it has elected to be treated as an S Corporation for income tax reporting purposes. However, the state of Louisiana does not recognize S Corporation status, and the Company has accrued amounts necessary to pay the required income taxes in such state.
Collateral Held for Resale:
When the Company takes possession of collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance. Any losses incurred at that time are charged against the Allowance for Loan Losses.
Marketable Debt Securities:
Management has designated a significant portion of the Company’s marketable debt securities held in the Company's investment portfolio at December 31, 2015 and 2014 as being available-for-sale. This portion of the investment portfolio is reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss) included in the consolidated statements of comprehensive income/loss. Gains and losses on sales of securities designated as available-for-sale are determined based on the specific identification method. The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity.
30
Earnings per Share Information:
The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same.
Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This update supersedes revenue recognition requirements in Topic 605, "Revenue Recognition," including most industry-specific revenue guidance in the FASB Accounting Standards Codification. The new guidance stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides specific steps that entities should apply in order to achieve this principle. The amendments are effective for interim and annual periods beginning after December 15, 2017. Adoption is allowed by either the full retrospective or modified retrospective approach. The Company in in the process of evaluating the expected impact of the ASU's adoption on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Imputation of Interest." ASU 2015-03 applies to the presentation of debt issuance costs in financial statements. It requires debt issurance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Debt disclosures will include the face amount of the debt liability and the effective interest rate. In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issurance costs related to line of credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, reqardless of whether there are any outstanding borrowings on the line of credit arrangement. The accounting standards require retrospective application and represent a change in accounting principle. The standard is effective for fiscal years beginning after December 15, 2015. The Company does not expect the adoption of these standards to have a material impact on the Company's consolidated financial statements.
In February 2016, FASB issued ASU 2016-01, "Leases." The ASU requires all lessees to recognize lease assets and lease liabilities on the balance sheet. Lessor accounting is largely unchanged by the ASU, however disclosures about cash flows arising from leases are required of both lessees and lessors. The disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact this new accounting standard on the consolidated financial statements.
2. LOANS
The Company’s consumer loans are made to individuals in relatively small amounts for relatively short periods of time. First and second mortgage loans on real estate are made in larger amounts and for longer periods of time. The Company also purchases sales finance contracts from various dealers. All loans and sales contracts are held for investment.
Contractual Maturities of Loans:
An estimate of contractual maturities stated as a percentage of the loan balances based upon an analysis of the Company's portfolio as of December 31, 2015 is as follows:
|
|
| Direct | Real | Sales | ||
|
| Due In | Cash | Estate | Finance | ||
|
| Calendar Year | Loans | Loans | Contracts | ||
|
| 2016 | 69.86% | 14.10% | 57.32% | ||
|
| 2017 | 25.45 | 13.86 | 28.50 | ||
|
| 2018 | 3.92 | 13.38 | 10.50 | ||
|
| 2019 | . 56 | 12.03 | 3.28 | ||
|
| 2020 | .09 | 10.11 | .39 | ||
|
| 2021 & beyond | .12 | 36.52 | .01 | ||
|
|
| 100.00% | 100.00% | 100.00% | ||
31
Historically, a majority of the Company's loans have been renewed many months prior to their final contractual maturity dates, and the Company expects this trend to continue in the future. Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections.
Cash Collections on Principal:
During the years ended December 31, 2015 and 2014, cash collections applied to the principal of loans totaled $332,703,123 and $300,064,326, respectively, and the ratios of these cash collections to principal average net receivables were 75.56% and 72.61%, respectively.
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 statement of financial position 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. If trends indicate credit losses are increasing or decreasing, Management will evaluate to ensure the allowance for loan losses remains at proper levels. Delinquency and bankruptcy filing trends are also tracked. If these trends indicate an adjustment to the allowance for loan losses is warranted, Management will make what it considers to be appropriate adjustments. The level of receivables at the statement of financial position 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 allowance for loan losses 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/or other indicators of collectability. 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 a court initiated repayment plan. In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.
When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status. At this 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 until the account qualifies for return to accrual status. Non-accrual 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 December 31, 2015 or December 31, 2014. The Company’s principal balances on non-accrual loans by loan class at December 31, 2015 and 2014 are as follows:
| Loan Class | December 31, 2015 | December 31, 2014 |
|
|
|
|
| Consumer Loans | $ 25,070,209 | $ 23,124,540 |
| Real Estate Loans | 846,894 | 919,600 |
| Sales Finance Contracts | 1,009,475 | 739,009 |
| Total | $ 26,926,578 | $ 24,783,149 |
32
An age analysis of principal balances past due, segregated by loan class, as of December 31, 2015 and 2014 is as follows:
| December 31, 2015 | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due Loans |
|
|
|
|
|
|
| Consumer Loans | $ 13,836,033 | $ 8,073,384 | $ 15,895,050 | $ 37,804,467 |
| Real Estate Loans | 321,249 | 161,974 | 480,929 | 964,152 |
| Sales Finance Contracts | 498,374 | 346,930 | 584,919 | 1,430,223 |
| Total | $ 14,655,656 | $ 8,582,288 | $ 16,960,898 | $ 40,198,842 |
|
|
|
|
|
|
| December 31, 2014 | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due Loans |
|
|
|
|
|
|
| Consumer Loans | $ 11,919,463 | $ 7,217,788 | $ 14,282,710 | $ 33,419,961 |
| Real Estate Loans | 441,721 | 180,756 | 504,384 | 1,126,861 |
| Sales Finance Contracts | 374,821 | 209,845 | 463,957 | 1,048,623 |
| Total | $ 12,736,005 | $ 7,608,389 | $ 15,251,051 | $ 35,595,445 |
In addition to the delinquency rating analysis, the ratio of bankrupt accounts to our total loan portfolio is also used as a credit quality indicator. The ratio of bankrupt accounts to total principal loan balances outstanding at December 31, 2015 and December 31, 2014 was 2.40% and 2.48%, respectively.
Nearly our entire loan portfolio consists of small homogeneous consumer loans (of the product types set forth in the table below).
| December 31, 2015 | Principal Balance | % Portfolio | Net Charge Offs | % Net Charge Offs |
|
|
|
|
|
|
| Consumer Loans | $ 492,742,657 | 90.5% | $ 31,119,348 | 97.2% |
| Real Estate Loans | 21,754,111 | 4.0 | 10,699 | .0 |
| Sales Finance Contracts | 29,908,790 | 5.5 | 877,238 | 2.8 |
| Total | $ 544,405,558 | 100.0% | $ 32,007,285 | 100.0% |
|
|
|
|
|
|
| December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
| Consumer Loans | $ 468,956,278 | 91.5% | $ 27,824,196 | 97.0% |
| Real Estate Loans | 19,914,898 | 3.9 | 71,789 | .0 |
| Sales Finance Contracts | 23,721,528 | 4.6 | 787,350 | 3.0 |
| Total | $ 512,592,704 | 100.0% | $ 28,683,335 | 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 96% of the Company’s loan portfolio at December 31, 2015 and 2014. 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:
|
| 2015 | 2014 | 2013 |
| Allowance For Credit Losses: |
|
|
|
| Beginning Balance | $ 28,620,000 | $ 24,680,789 | $ 22,010,085 |
| Provision for Loan Losses | 36,887,285 | 32,622,546 | 27,623,368 |
| Charge-Offs | (42,017,880) | (38,024,773) | (33,938,554) |
| Recoveries | 10,010,595 | 9,341,438 | 8,985,890 |
| Ending Balance | $ 33,500,000 | $ 28,620,000 | $ 24,680,789 |
|
|
|
|
|
33
|
|
|
|
|
|
| 2015 | 2014 | 2013 |
| Finance Receivables: |
|
|
|
| Ending Balance | $ 544,405,558 | $ 512,592,704 | $ 485,149,825 |
| Ending Balance; collectively evaluated for impairment | $ 544,405,558 | $ 512,592,704 | $ 485,149,825 |
Troubled debt restructurings (“TDRs”) represent loans on which the original terms 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 customer. The following table presents a summary of loans that were restructured during the year ended December 31, 2015.
|
| Number of Loans | Pre-Modification Recorded Investment | Post-Modification Recorded Investment |
|
|
|
|
|
| Consumer Loans | 6,975 | $ 15,593,924 | $ 14,501,969 |
| Real Estate Loans | 44 | 379,550 | 372,984 |
| Sales Finance Contracts | 251 | 500,839 | 464,498 |
| Total | 7,270 | $ 16,474,313 | $ 15,339,451 |
TDRs that subsequently defaulted during the year ended December 31, 2015 are listed below.
|
| Number of Loans | Pre-Modification Recorded Investment |
|
|
|
|
|
|
| Consumer Loans | 2,147 | $ 2,996,600 |
|
| Real Estate Loans | 2 | 8,045 |
|
| Sales Finance Contracts | 64 | 93,051 |
|
| Total | 2,213 | $ 3,097,696 |
|
The following table presents a summary of loans that were restructured during the year ended December 31, 2014.
TDRs that subsequently defaulted during the year ended December 31, 2014 are listed below.
|
| Number of Loans | Pre-Modification Recorded Investment |
|
|
|
|
|
|
| Consumer Loans | 587 | $ 1,163,067 |
|
| Real Estate Loans | 4 | 23,040 |
|
| Sales Finance Contracts | 27 | 54,574 |
|
| Total | 618 | $ 1,240,681 |
|
The level of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses.
34
3. MARKETABLE DEBT SECURITIES
Debt securities available for sale are carried at estimated fair market value. The amortized cost and estimated fair values of these debt securities are as follows:
|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
| December 31, 2015 |
|
|
|
|
| Obligations of states and |
|
|
|
|
| political subdivisions | $ 138,123,137 | $ 5,622,609 | $ (212,362) | $ 143,533,384 |
| Corporate securities | 130,316 | 198,465 | -- | 328,781 |
|
| $ 138,253,453 | $ 5,821,074 | $ (212,362) | $ 143,862,165 |
| December 31, 2014 |
|
|
|
|
| Obligations of states and |
|
|
|
|
| political subdivisions | $ 127,901,002 | $ 4,885,012 | $ (357,928) | $ 132,428,086 |
| Corporate securities | 130,316 | 288,671 | -- | 418,987 |
|
| $ 128,031,318 | $ 5,173,683 | $ (357,928) | $ 132,847,073 |
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 are as follows:
|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value |
| December 31, 2015 |
|
|
|
|
| Obligations of states and |
|
|
|
|
| political subdivisions | $ 17,058,181 | $ 243,377 | $ (130,505) | $ 17,171,053 |
| December 31, 2014 |
|
|
|
|
| Obligations of states and |
|
|
|
|
| political subdivisions | $ 22,762,252 | $ 489,958 | $ (122,589) | $ 23,129,621 |
The amortized cost and estimated fair values of marketable debt securities at December 31, 2015, by contractual maturity, are shown below:
|
| Available for Sale | Held to Maturity | ||
|
|
| Estimated |
| Estimated |
|
| Amortized | Fair | Amortized | Fair |
|
| Cost | Value | Cost | Value |
|
|
|
|
|
|
| Due in one year or less | $ 3,837,754 | $ 4,073,213 | $ 1,188,643 | $ 1,193,954 |
| Due after one year through five years | 13,309,944 | 13,537,787 | 9,791,621 | 9,891,023 |
| Due after five years through ten years | 17,069,261 | 17,513,906 | 6,077,917 | 6,086,076 |
| Due after ten years | 104,036,494 | 108,737,259 | -- | -- |
|
| $ 138,253,453 | $ 143,862,165 | $ 17,058,181 | $ 17,171,053 |
The following table presents an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2015:
|
| Less than 12 Months | 12 Months or Longer | Total | |||
|
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| Available for Sale: |
|
|
|
|
|
|
| Obligations of states and political subdivisions | $ 7,154,930 | $ (75,054) | $ 4,287,447 | $ (137,308) | $ 11,442,377 | $ (212,362) |
|
|
|
|
|
|
|
|
| Held to Maturity: |
|
|
|
|
|
|
| Obligations of states and political subdivisions | 4,471,673 | (61,813) | 1,406,089 | (68,692) | 5,877,762 | (130,505) |
|
|
|
|
|
|
|
|
| Overall Total | $ 11,626,603 | $ (136,867) | $ 5,693,536 | $ (206,000) | $ 17,320,139 | $ (342,867) |
35
The following table presents an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2014:
|
| Less than 12 Months | 12 Months or Longer | Total | |||
|
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| Available for Sale: |
|
|
|
|
|
|
| Obligations of states and political subdivisions | $ 6,047,595 | $ (115,227) | $ 12,257,317 | $ (242,701) | $ 18,304,912 | $ (357,928) |
|
|
|
|
|
|
|
|
| Held to Maturity: |
|
|
|
|
|
|
| Obligations of states and political subdivisions | 1,970,828 | (45,586) | 1,387,733 | (77,003) | 3,358,561 | (122,589) |
|
|
|
|
|
|
|
|
| Overall Total | $ 8,018,423 | $ (160,813) | $ 13,645,050 | $ (319,704) | $21,663,473 | $ (480,517) |
The previous two tables represent 25 investments and 32 investments held by the Company at December 31, 2015 and 2014, respectively, the majority of which were rated “A+” or higher. The unrealized losses on the Company’s investments were the result of interest rate increases over the previous years. 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 did not consider the impairment of these investments to be other-than-temporary at December 31, 2015 or 2014.
Proceeds from sales of securities during 2015 were $797,246. Gross gains of $56,113 were realized on these sales. Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2015 were $14,540,000. Gross gains of $13,859 were realized from these redemptions.
Proceeds from sales of securities during 2014 were $0. Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2014 were $18,350,000. Gross gains of $9 were realized from these redemptions.
4. FAIR VALUE
FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on 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 asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
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 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 or 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.
36
There was no change in this methodology during any period reported.
Assets measured at fair value as of December 31, 2015 and 2014 are 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 |
|
|
| Assets | Inputs | Inputs |
| Description | 12/31/2015 | (Level 1) | (Level 2) | (Level 3) |
|
|
|
|
|
|
| Corporate securities | $ 328,781 | $ 328,781 | $ - | $ - |
| Obligations of states and political subdivisions | 143,533,384 | - | 143,533,384 | - |
| Available-for-sale investment securities | $ 143,862,165 | $ 328,781 | $ 143,533,384 | $ - |
| |
|
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using | ||
|
|
| Quoted Prices |
|
|
|
|
| In Active | Significant |
|
|
|
| Markets for | Other | Significant |
|
|
| Identical | Observable | Unobservable |
|
|
| Assets | Inputs | Inputs |
| Description | 12/31/2014 | (Level 1) | (Level 2) | (Level 3) |
|
|
|
|
|
|
| Corporate securities | $ 418,987 | $ 418,987 | $ -- | $ -- |
| Obligations of states and political subdivisions | 132,428,086 | -- | 132,428,086 | -- |
| Available-for-sale investment securities | $ 132,847,073 | $ 418,987 | $ 132,428,086 | $ -- |
5. EQUITY METHOD INVESTMENT:
The Company has one investment accounted for using the equity method of accounting. On November 1, 2013, the Company invested $10.0 million in Meritage Capital, Centennial Absolute Return Fund, L.P. (the "Fund"). An additional $15.0 was invested in the same fund on April 1, 2014. The carrying value of this investment was $25.0 million as of December 31, 2015, which represents a 25.85% ownership interest in the Fund. The carrying value of this investment was $26.1 million as of December 31, 2014, which represented a 25.76% ownership interest in the Fund. Due to the volatile market conditions the Company recorded a loss of $1.0 million on this investment during 2015. During 2014, the Company earned $.8 million on this investment. The loss during 2015 and the earnings during 2014 were recorded in other revenue on the Company's consolidated statement of income. With at least 60 days notice, the Company has the ability to redeem its investment in the Fund at the end of any calendar quarter.
Condensed financial statement information of the equity method investment is as follows:
|
| December 31, 2015 | December 31, 2014 |
|
| Company's equity method investment | $ 24,989,505 | $ 26,059,579 |
|
| Partnership assets | $ 97,456,613 | $ 104,677,496 |
|
| Partnership liabilities | $ 148,566 | $ 2,667,002 |
|
| Partnership net (loss) income | $ (3,344,462) | $ 4,560,544 |
|
6. INSURANCE SUBSIDIARY RESTRICTIONS
As of December 31, 2015 and 2014, respectively, 79% and 80% the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries. State insurance regulations limit the types of investments an insurance company may hold in its portfolio. These limitations specify types of eligible investments, quality of investments and the percentage a particular investment may constitute of an insurance company’s portfolio.
Dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries, unless prior approval is
37
obtained from the Georgia Insurance Commissioner. At December 31, 2015, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $70.5 million and $67.3 million, respectively. The maximum aggregate amount of dividends these subsidiaries could pay to the Company during 2015, without prior approval of the Georgia Insurance Commissioner, was approximately $11.8 million. The Company elected not to pay any dividends from the insurance subsidiaries during the year ended December 31, 2015.
7. SENIOR DEBT
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 and reborrrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company. The credit agreement contains covenants customary for financing transactions of this type. Available borrowings under the credit agreement were $100.0 million at December 31, 2015 and 2014, at an interest rate of 3.75%. At December 31, 2015 and 2014, the Company had no borrowings under the credit agreement.
Available but unborrowed amounts under the credit agreement are subject to a periodic unused line fee of .50%. The interest rate under the credit agreement is equivalent to the greater of (a) .75% per annum plus 300 basis points or (b) the three month London Interbank Offered Rate (the “LIBOR Rate”) plus 300 basis points. The LIBOR Rate is adjusted on the first day of each calendar month based upon the LIBOR Rate as of the last day of the preceding calendar month.
The credit agreement has a commitment termination date of September 11, 2018. Any then- outstanding balance under the Credit Agreement would be due and payable on such date. The lender also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the credit agreement or if the financial condition of the Company becomes unsatisfactory to the lender, according to standards set forth in the credit agreement. Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio, among others. At December 31, 2015, the Company was in compliance with all financial covenants.
The Company’s Senior Demand Notes are unsecured obligations which are payable on demand. The interest rate payable on any Senior Demand Note is a variable rate, compounded daily, established from time to time by the Company.
Commercial paper is issued by the Company only to qualified investors, in amounts in excess of $50,000, with maturities of less than 270 days and at interest rates that the Company believes are competitive in its market.
Additional data related to the Company's senior debt is as follows:
|
| Weighted |
|
|
|
|
| Average | Maximum | Average | Weighted |
|
| Interest | Amount | Amount | Average |
| Year Ended | Rate at End | Outstanding | Outstanding | Interest Rate |
| December 31 | of Year | During Year | During Year | During Year |
|
| (In thousands, except % data) | |||
| 2015: |
|
|
|
|
| Bank Borrowings | 3.75% | $ 45 | $ 1 | 3.75% |
| Senior Demand Notes | 1.73 | 71,001 | 61,713 | 1.72 |
| Commercial Paper | 3.47 | 317,488 | 295,263 | 3.48 |
| All Categories | 3.15 | 388,489 | 356,980 | 3.32 |
|
|
|
|
|
|
| 2014: |
|
|
|
|
| Bank Borrowings | 3.75% | $ 45 | $ 1 | 3.75% |
| Senior Demand Notes | 1.73 | 60,561 | 58,328 | 1.72 |
| Commercial Paper | 3.48 | 276,656 | 264,479 | 3.49 |
| All Categories | 3.17 | 335,186 | 322,808 | 3.33 |
|
|
|
|
|
|
| 2013: |
|
|
|
|
| Bank Borrowings | 3.75% | $ 45 | $ 1 | 3.75% |
| Senior Demand Notes | 1.72 | 55,196 | 53,060 | 1.76 |
| Commercial Paper | 3.49 | 253,960 | 238,782 | 3.61 |
| All Categories | 3.18 | 308,015 | 291,843 | 3.46 |
38
8. SUBORDINATED DEBT
The payment of the principal and interest on the Company’s subordinated debt is subordinate and junior in right of payment to all unsubordinated indebtedness of the Company.
Subordinated debt consists of Variable Rate Subordinated Debentures issued from time to time by the Company, and which mature four years after their date of issue. The maturity date is automatically extended for an additional four year term unless the holder or the Company redeems the debenture on its original maturity date or within any applicable grace period thereafter. The debentures are offered and sold in various minimum purchase amounts with varying interest rates as established from time to time by the Company and interest adjustment periods for each respective minimum purchase amount. Interest rates on the debentures automatically adjust at the end of each adjustment period. The debentures may also be redeemed by the holder at the applicable interest adjustment date or within any applicable grace period thereafter without penalty. Redemptions at any other time are at the discretion of the Company and are subject to a penalty. The Company may redeem the debentures for a price equal to 100% of the principal plus accrued but unpaid interest upon 30 days’ notice to the holder.
Interest rate information on the Company’s subordinated debt at December 31 is as follows:
| Weighted Average Interest Rate at |
| Weighted Average Interest Rate | ||||
| End of Year |
| During Year | ||||
|
|
|
|
|
|
|
|
| 2015 | 2014 | 2013 |
| 2015 | 2014 | 2013 |
|
|
|
|
|
|
|
|
| 2.86% | 2.90% | 3.02% |
| 2.82% | 2.91% | 3.14% |
Maturity and redemption information relating to the Company's subordinated debt at December 31, 2015 is as follows:
|
| Amount Maturing or Redeemable at Option of Holder | |
|
| Based on Maturity | Based on Interest |
|
| Date | Adjustment Period |
|
|
|
|
| 2016 | $ 6,491,917 | $ 21,964,100 |
| 2017 | 7,703,476 | 8,939,116 |
| 2018 | 8,977,753 | 2,093,520 |
| 2019 | 12,830,863 | 3,007,273 |
|
| $ 36,004,009 | $ 36,004,009 |
9. COMMITMENTS AND CONTINGENCIES
The Company's operations are carried on in locations which are occupied under operating lease agreements. These lease agreements usually provide for a lease term of five years with the Company holding a renewal option for an additional five years. Total operating lease expense was $6,042,567, $5,818,043 and $5,511,912 for the years ended December 31, 2015, 2014 and 2013, respectively. The Company’s minimum aggregate lease commitments at December 31, 2015 are shown in the table below.
| Year | Operating Leases |
|
|
|
| 2016 | $ 5,690,228 |
| 2017 | 4,551,312 |
| 2018 | 3,135,950 |
| 2019 | 1,667,435 |
| 2020 | 796,547 |
| 2021 and beyond | 39,534 |
| Total | $ 15,881,006 |
39
| We conduct our lending operations under the provisions of various federal and state laws and implementing regulations. Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business. While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof. Significant additional regulation or costs of compliance could materially adversely affect our business, financial position, results of operations and/or cash flows. |
|
|
| |
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan, which was qualified under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), as amended, to cover employees of the Company.
Any employee who is 18 years of age or older is eligible to participate in the 401(k) plan on the first day of the month following the completion of one complete calendar month of continuous employment and the Company begins matching up to 4.50% of an employee’s deferred contribution, up to 6.00% of their total compensation. During 2015, 2014 and 2013, the Company contributed $1,834,138, $1,744,475 and $1,606,957, respectively, in matching funds for employee 401(k) deferred accounts.
The Company also maintains a non-qualified deferred compensation plan for employees who receive compensation in excess of the amount provided in Section 401(a)(17) of the Code, as such amount may be adjusted from time to time in accordance with the Code.
11. RELATED PARTY TRANSACTIONS
The Company leases a portion of its properties (see Note 9) for an aggregate of $156,600 per year from certain officers or stockholders.
The Company has an outstanding loan to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner. David Cheek (son of Ben F. Cheek, III) owns 24.24% of the Company’s voting stock. The balance on this commercial loan (including principal and accrued interest) was $1,288,054 at December 31, 2015. During 2015, the maximum amount outstanding (including accrued interest) on this loan was $1,576,355. The loan is a variable-rate loan with the interest based on the prime rate plus 1%. The interest rate adjusts whenever the prime rate changes.
Effective September 23, 1995, the Company entered into a Split-Dollar Life Insurance Agreement with the Trustee of an executive officer’s irrevocable life insurance trust. The life insurance policy insures one of the Company’s executive officers. As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust. The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate. A payment of $5,584 for interest accrued during 2015 was applied to the loan on December 31, 2015. No principal payments on this loan were made in 2015. The balance on this loan at December 31, 2015 was $349,870. This was the maximum loan amount outstanding during the year.
12. INCOME TAXES
The Company has elected to be treated as an S corporation for income tax reporting purposes. The taxable income or loss of an S corporation is treated as income of and is reportable in the individual tax returns of the shareholders of the Company in an appropriate allocation. Accordingly, deferred income tax assets and liabilities have been eliminated and no provisions for current and deferred income taxes were made by the Company except for amounts attributable to state income taxes for the state of Louisiana, which does not recognize S corporation status for income tax reporting purposes. Deferred income tax assets and liabilities will continue to be recognized and provisions for current and deferred income taxes will be made by the Company’s subsidiaries as they are not permitted to be treated as S Corporations.
40
The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 is made up of the following components:
|
| 2015 | 2014 | 2013 |
|
|
|
|
|
| Current – Federal | $ 4,220,841 | $ 4,143,983 | $ 3,840,502 |
| Current – State | 5,160 | 12,500 | 6,432 |
| Total Current | 4,226,001 | 4,156,483 | 3,846,934 |
|
|
|
|
|
| Deferred – Federal | 1,037,993 | 41,211 | 145,730 |
|
|
|
|
|
| Total Provision | $ 5,263,994 | $ 4,197,694 | $ 3,992,664 |
Temporary differences create deferred federal tax assets and liabilities, which are detailed below as of December 31, 2015 and 2014. These amounts are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position.
|
| Deferred Tax Assets (Liabilities) | |
|
|
|
|
|
| 2015 | 2014 |
| Insurance Commissions | $ (6,043,688) | $ (5,754,290) |
| Unearned Premium Reserves | 1,656,106 | 2,194,586 |
| Unrealized (Gain) Loss on |
|
|
| Marketable Debt Securities | (1,465,727) | (1,152,280) |
| Other | (332,215) | (122,100) |
|
| $ (6,185,524) | $ (4,834,084) |
The Company's effective tax rate for the years ended December 31, 2015, 2014 and 2013 is analyzed as follows. Rates were lower than statutory federal income tax rates mainly due to taxable income at the S corporation level being passed to the shareholders of the Company for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.
|
| 2015 | 2014 | 2013 |
| Statutory Federal income tax rate | 34.0% | 34.0% | 34.0% |
| Net tax effect of IRS regulations |
|
|
|
| on life insurance subsidiary | - | - | - |
| Tax effect of S corporation status | (12.6) | (19.3) | (20.7) |
| Tax exempt income | (4.5) | (3.5) | (2.9) |
| Effective Tax Rate | 16.9% | 11.2% | 10.4% |
13. SEGMENT FINANCIAL INFORMATION:
The Company discloses segment information in accordance with FASB ASC 280. FASB ASC 280 requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. The Company operates in one reportable business segment.
The Company has five operating divisions which comprise its operations: Division I through Division V. Each division is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location. Division I is comprised of offices located in South Carolina. Division II is comprised of offices in North Georgia and Division III is comprised of South Georgia offices. Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.
Accounting policies of the divisions are the same as those of the Company described in the summary of significant accounting policies. Performance of each division is measured based on objectives set at the beginning of each year and include various factors such as division profit, growth in earning assets and delinquency and loan loss management. All division revenues result from transactions with third parties. The Company does not allocate income taxes or corporate headquarter expenses to the any division.
41
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2015 followed by a reconciliation to consolidated Company data.
| Year 2015 |
| Division I | Division II | Division III | Division IV | Division V |
| Total | ||
| Revenues: |
| ( In Millions) | ||||||||
| Finance Charges Earned | $ 23.0 | $ 33.4 | $ 30.6 | $ 33.0 | $ 27.7 | | $ 147.7 | |||
| Insurance Income | 4.1 | 13.0 | 11.7 | 5.1 | 6.5 | | 40.4 | |||
| Other | .1 | 1.0 | .9 | 2.4 | 1.1 | | 5.5 | |||
|
|
| 27.2 | 47.4 | 43.2 | 40.5 | 35.3 | | 193.6 | ||
| Expenses: |
|
|
|
|
|
|
|
| ||
| Interest Cost | 1.7 | 3.1 | 2.9 | 3.0 | 2.2 | | 12.9 | |||
| Provision for Loan Losses | 4.6 | 7.2 | 6.6 | 7.3 | 6.3 | | 32.0 | |||
| Depreciation | .5 | .6 | .5 | .5 | .6 | | 2.7 | |||
| Other | 11.6 | 15.4 | 15.1 | 14.9 | 15.0 | | 72.0 | |||
| | 18.4 | 26.3 | 25.1 | 25.7 | 24.1 | | 119.6 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Profit | $ 8.8 | $ 21.1 | $ 18.1 | $ 14.8 | $ 11.2 | | $ 74.0 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Assets: |
|
|
|
|
|
|
| |||
| Net Receivables | $ 63.3 | $ 107.9 | $101.0 | $ 107.0 | $ 79.3 | | $458.5 | |||
| Cash | .5 | 1.1 | 1.2 | 1.0 | 1.0 | | 4.8 | |||
| Net Fixed Assets | 1.2 | 1.5 | .8 | 1.3 | 1.5 | | 6.3 | |||
| Other Assets | .0 | .0 | .0 | .2 | .2 | | .4 | |||
| Total Division Assets | $ 65.0 | $110.5 | $ 103.0 | $ 109.5 | $ 82.0 | | $470.0 | |||
|
| | | | | | | | |||
| RECONCILIATION: | | | | | | | 2015 | |||
| Revenues: | | | | | |
| (In Millions) | |||
| Total revenues from reportable divisions | $ 193.7 | |||||||||
| Corporate finance charges earned not allocated to divisions | .1 | |||||||||
| Corporate investment income earned not allocated to divisions | 4.8 | |||||||||
| Timing difference of insurance income allocation to divisions | 12.0 | |||||||||
| Other revenues not allocated to divisions | (2.2) | |||||||||
| Consolidated Revenues | $208.4 | |||||||||
|
|
|
|
|
|
| | | |||
| Net Income: |
|
|
|
|
| | | |||
| Total profit or loss for reportable divisions | $ 74.0 | |||||||||
| Corporate earnings not allocated | 14.7 | |||||||||
| Corporate expenses not allocated | (57.5) | |||||||||
| Income taxes not allocated | (5.3) | |||||||||
| Consolidated Net Income | $ 25.9 | |||||||||
|
| | | | | | | | |||
| Assets: | | | | | | | | |||
| Total assets for reportable divisions | $470.0 | |||||||||
| Loans held at corporate level | 2.0 | |||||||||
| Unearned insurance at corporate level | (20.5) | |||||||||
| Allowance for loan losses at corporate level | (33.5) | |||||||||
| Cash and cash equivalents held at corporate level | 55.9 | |||||||||
| Investment securities at corporate level | 160.9 | |||||||||
| Equity method investment at corporate level | 25.0 | |||||||||
| Fixed assets at corporate level | 3.6 | |||||||||
| Other assets at corporate level | 11.0 | |||||||||
| Consolidated Assets | $674.4 | |||||||||
42
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2014 followed by a reconciliation to consolidated Company data.
| Year 2014 |
| Division I | Division II | Division III | Division IV | Division V |
| Total | ||
| Revenues: |
| ( In Millions) | ||||||||
| Finance Charges Earned | $ 22.0 | $ 31.5 | $ 29.9 | $ 30.8 | $ 25.8 | | $ 140.0 | |||
| Insurance Income | 4.1 | 12.4 | 11.2 | 6.2 | 6.3 | | 40.2 | |||
| Other | .1 | 1.6 | 1.4 | 1.5 | 1.5 | | 6.1 | |||
|
|
| 26.2 | 45.5 | 42.5 | 38.5 | 33.6 | | 186.3 | ||
| Expenses: |
|
|
|
|
|
|
|
| ||
| Interest Cost | 1.5 | 2.9 | 2.8 | 2.7 | 2.0 | | 11.9 | |||
| Provision for Loan Losses | 3.8 | 6.2 | 6.8 | 6.6 | 5.4 | | 28.8 | |||
| Depreciation | .5 | .6 | .5 | .5 | .5 | | 2.6 | |||
| Other | 11.1 | 14.3 | 14.5 | 14.0 | 13.9 | | 67.8 | |||
| | 16.9 | 24.0 | 24.6 | 23.8 | 21.8 | | 111.1 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Profit | $ 9.3 | $ 21.5 | $ 17.9 | $ 14.7 | $ 11.8 | | $ 75.2 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Assets: |
|
|
|
|
|
|
| |||
| Net Receivables | $ 56.4 | $ 104.1 | $ 96.9 | $ 101.3 | $ 74.4 | | $433.1 | |||
| Cash | .3 | .6 | .6 | .5 | .5 | | 2.5 | |||
| Net Fixed Assets | 1.2 | 1.7 | 1.1 | 1.1 | 1.2 | | 6.3 | |||
| Other Assets | .0 | .0 | .0 | .2 | .1 | | .3 | |||
| Total Division Assets | $ 57.9 | $ 106.4 | $ 98.6 | $ 103.1 | $ 76.2 | | $442.2 | |||
|
| | | | | | | | |||
| RECONCILIATION: | | | | | | | 2014 | |||
| Revenues: | | | | | |
| (In Millions) | |||
| Total revenues from reportable divisions | $ 186.3 | |||||||||
| Corporate finance charges earned not allocated to divisions | .1 | |||||||||
| Corporate investment income earned not allocated to divisions | 4.5 | |||||||||
| Timing difference of insurance income allocation to divisions | 7.8 | |||||||||
| Other revenues not allocated to divisions | 1.0 | |||||||||
| Consolidated Revenues | $199.7 | |||||||||
|
|
|
|
|
|
| | | |||
| Net Income: |
|
|
|
|
| | | |||
| Total profit or loss for reportable divisions | $ 75.2 | |||||||||
| Corporate earnings not allocated | 13.4 | |||||||||
| Corporate expenses not allocated | (51.1) | |||||||||
| Income taxes not allocated | (4.2) | |||||||||
| Consolidated Net Income | $ 33.3 | |||||||||
|
| | | | | | | | |||
| Assets: | | | | | | | | |||
| Total assets for reportable divisions | $442.2 | |||||||||
| Loans held at corporate level | 1.9 | |||||||||
| Unearned insurance at corporate level | (18.1) | |||||||||
| Allowance for loan losses at corporate level | (28.6) | |||||||||
| Cash and cash equivalents held at corporate level | 13.4 | |||||||||
| Investment securities at corporate level | 155.6 | |||||||||
| Equity method investment at corporate level | 26.1 | |||||||||
| Fixed assets at corporate level | 3.9 | |||||||||
| Other assets at corporate level | 9.2 | |||||||||
| Consolidated Assets | $605.6 | |||||||||
43
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2013 followed by a reconciliation to consolidated Company data.
| Year 2013 |
| Division I | Division II | Division III | Division IV | Division V |
| Total | ||
| Revenues: |
| ( In Millions) | ||||||||
| Finance Charges Earned | $ 19.8 | $ 28.6 | $ 28.0 | $ 28.4 | $ 23.9 | | $ 128.7 | |||
| Insurance Income | 3.6 | 11.8 | 10.7 | 5.5 | 5.9 | | 37.5 | |||
| Other | .1 | 2.1 | 1.9 | 1.4 | 1.8 | | 7.3 | |||
|
|
| 23.5 | 42.5 | 40.6 | 35.3 | 31.6 | | 173.5 | ||
| Expenses: |
|
|
|
|
|
|
|
| ||
| Interest Cost | 1.4 | 2.8 | 2.8 | 2.6 | 1.9 | | 11.5 | |||
| Provision for Loan Losses | 3.5 | 5.2 | 5.7 | 5.8 | 4.7 | | 24.9 | |||
| Depreciation | .4 | .6 | .5 | .5 | .5 | | 2.5 | |||
| Other | 10.0 | 13.2 | 13.8 | 12.8 | 12.7 | | 62.5 | |||
| | 15.3 | 21.8 | 22.8 | 21.7 | 19.8 | | 101.4 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Profit | $ 8.2 | $ 20.7 | $ 17.8 | $ 13.6 | $ 11.8 | | $ 72.1 | |||
|
|
|
|
|
|
|
|
|
| ||
| Division Assets: |
|
|
|
|
|
|
| |||
| Net Receivables | $ 51.9 | $ 98.7 | $ 95.7 | $ 94.5 | $ 69.0 | | $409.8 | |||
| Cash | .3 | .6 | .7 | .5 | .5 | | 2.6 | |||
| Net Fixed Assets | 1.3 | 1.4 | .9 | 1.3 | 1.2 | | 6.1 | |||
| Other Assets | .0 | .0 | .0 | .1 | .2 | | .3 | |||
| Total Division Assets | $ 53.5 | $ 100.7 | $ 97.3 | $ 96.4 | $ 70.9 | | $418.8 | |||
|
| | | | | | | | |||
| RECONCILIATION: | | | | | | | 2013 | |||
| Revenues: | | | | | |
| (In Millions) | |||
| Total revenues from reportable divisions | $ 173.5 | |||||||||
| Corporate finance charges earned not allocated to divisions | .2 | |||||||||
| Corporate investment income earned not allocated to divisions | 3.8 | |||||||||
| Timing difference of insurance income allocation to divisions | 8.1 | |||||||||
| Other revenues not allocated to divisions | .4 | |||||||||
| Consolidated Revenues | $186.0 | |||||||||
|
|
|
|
|
|
| | | |||
| Net Income: |
|
|
|
|
| | | |||
| Total profit or loss for reportable divisions | $ 72.1 | |||||||||
| Corporate earnings not allocated | 12.5 | |||||||||
| Corporate expenses not allocated | (46.2) | |||||||||
| Income taxes not allocated | (4.0) | |||||||||
| Consolidated Net Income | $ 34.4 | |||||||||
|
| | | | | | | | |||
| Assets: | | | | | | | | |||
| Total assets for reportable divisions | $418.8 | |||||||||
| Loans held at corporate level | 1.9 | |||||||||
| Unearned insurance at corporate level | (17.5) | |||||||||
| Allowance for loan losses at corporate level | (24.7) | |||||||||
| Cash and cash equivalents held at corporate level | 24.8 | |||||||||
| Investment securities at corporate level | 135.9 | |||||||||
| Equity method investment at corporate level | 10.2 | |||||||||
| Fixed assets at corporate level | 2.7 | |||||||||
| Other assets at corporate level | 9.7 | |||||||||
| Consolidated Assets | $561.8 | |||||||||
44
| DIRECTORS AND EXECUTIVE OFFICERS | ||
|
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|
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| Directors |
|
|
|
|
|
|
| Name | Principal Occupation, Title and Company | Has Served as a Director Since |
|
|
|
|
| Ben F. Cheek, III | Vice Chairman of Board, 1st Franklin Financial Corporation | 1967 |
|
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|
|
| Ben F. Cheek, IV | Chairman of Board, 1st Franklin Financial Corporation | 2001 |
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|
|
| A. Roger Guimond | Executive Vice President and Chief Financial Officer | 2004 |
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|
|
| James H. Harris, III | Co-owner and Vice President, Unichem Technologies, Inc. President, Moonrise Distillery | 2014 |
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| John G. Sample, Jr. | Senior Vice President and Chief Financial Officer, Atlantic American Corporation | 2004 |
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| C. Dean Scarborough | Real Estat Agent | 2004 |
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|
|
| Keith D. Watson | Vice President and Corporate Secretary, Bowen & Watson, Inc. | 2004 |
| Executive |
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|
|
|
|
|
| Name | Position with Company | Served in this Position Since |
|
|
|
|
| Ben F. Cheek, III | Vice Chairman of Board | January 1, 2015 |
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| Ben F. Cheek, IV | Chairman of Board | January 1, 2015 |
|
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|
|
| Virginia C. Herring | President and Chief Executive Officer | January 1, 2015 |
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|
|
| A. Roger Guimond | Executive Vice President and Chief Financial Officer | 1991 |
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| J. Michael Culpepper | Executive Vice President and Chief Operating Officer | 2006 |
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| C. Michael Haynie | Executive Vice President - Human Resources | 2006 |
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| Karen S. O'Shields | Executive Vice President - Strategic and Organization Development | 2006 |
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| Charles E. Vercelli, Jr | Executive Vice President - General Counsel | 2008 |
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| Daniel E. Clevenger, II | Executive Vice President - Compliance | February 1, 2015 |
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|
| Lynn E. Cox | Vice President / Secretary & Treasurer | 1989 |
| CORPORATE INFORMATION | ||
|
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|
|
| Independent Registered Public Accounting Firm |
| P.O. Box 880 | Jones Day | Deloitte & Touch, LLP |
| 135 East Tugalo Street | Atlanta, Georgia | Atlanta, Georgia |
Requests for Additional Information
Informational inquiries, including requests for a copy of the Company’s most recent annual report on Form 10-K, and any subsequent quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, should be addressed to the Company's Secretary at the corporate offices listed above.
45
| BRANCH OPERATIONS | |||||||||||||||||
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| |||||||||||||
| Division I - South Carolina | |||||||||||||||||
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| Virginia K. Palmer | ---------- | Vice President |
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| Regional Operations Directors |
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| Richard F. Corirossi |
| Brian L. McSwain |
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| David A. Hoard |
| Larry D. Mixson |
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| Victoria A. McLeod |
| M. Summer Rhodes |
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| Division II - North Georgia * | |||||||||||||||||
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| Ronald F. Morrow | ---------- | Vice President |
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| Regional Operations Directors |
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| Ronald E. Byerly |
| John R. Massey |
| |||||||||||||
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| A. Keith Chavis |
| Sharon S. Langford |
| |||||||||||||
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| Shelia H. Garrett |
| Diana L. Lewis |
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| Janee G. Huff |
| Harriet H. Welch |
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| Division III – South Georgia * | |||||||||||||||||
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| Marcus C. Thomas | ---------- | Vice President |
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| Regional Operations Directors |
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| Bertrand P. Brown |
| Thomas C. Lennon |
| |||||||||||||
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| William J. Daniel |
| James A. Mahaffey |
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| Judy A. Landon |
| Jennifer C. Purser |
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| Jeffrey C. Lee |
| Michelle Rentz-Benton |
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| Division IV - Alabama and Tennessee | |||||||||||||||||
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| |||||||||||||
|
| Michael J. Whitaker | ---------- | Vice President |
| |||||||||||||
|
| Joseph R. Cherry | ---------- | Area Vice President - TN |
| |||||||||||||
|
| Regional Operations Directors |
| |||||||||||||||
|
| Brian M. Hill |
| William N. Murillo |
| |||||||||||||
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| Jerry H. Hughes |
| Johnny M. Olive |
| |||||||||||||
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| Janice E. Hyde |
| Hilda L. Phillips |
| |||||||||||||
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| J. Steven Knotts |
| Michael E. Shankles |
| |||||||||||||
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| |||||||||||||
| Division V – Louisiana and Mississippi | |||||||||||||||||
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| |||||||||||||
|
| James P. Smith, III | ---------- | Vice President |
| |||||||||||||
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| John B. Gray | ---------- | Area Vice President - LA |
| |||||||||||||
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| Regional Operations Directors |
| |||||||||||||||
|
| Sonya L. Acosta |
| Carla A. Eldridge |
| |||||||||||||
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| Bryan W. Cook |
| Jimmy R. Fairbanks, Jr. |
| |||||||||||||
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| Charles R. Childress |
| Chad H. Frederick |
| |||||||||||||
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| Jeremy R. Cranfield |
| Marty B. Miskelly |
| |||||||||||||
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| T. Loy Davis |
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| ADMINISTRATION | |||||||||||||||||
|
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| |||||||||||||
| Brent R. Cooler | Vice President – Internal Audit |
| Cindy H. Mullin | Vice President – Information Technology | |||||||||||||
| Lynn E. Cox | Vice President – Investment Center |
| Pamela S. Rickman | Vice President - Compliance | |||||||||||||
| Brian D. Lingle | Vice President – Controller |
| Mark J. Scarpitti | Deputy General Counsel | |||||||||||||
| R. Darryl Parker | Vice President - Employee Development |
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46
|
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___________________
2015 BEN F. CHEEK, JR. "OFFICE OF THE YEAR"
*********************
** PICTURE OF EMPLOYEES **
*********************
This award is presented annually in recognition of the office that represents the highest overall performance within the Company. Congratulations to the entire Douglas 2, Georgia staff for this significant achievement. The Friendly Franklin Folks salute you!
47
INSIDE BACK COVER PAGE OF ANNUAL REPORT
(Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi and South Carolina which is regional operating territory of Company and listing of branch offices)
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES
| ALABAMA | |||||||
| Adamsville | Center Point | Fayette | Jasper | Oxford | Selma | ||
| Albertville | Clanton | Florence | Moody | Ozark | Sylacauga | ||
| Alexander City | Cullman | Fort Payne | Moulton | Pelham | Tallassee * | ||
| Andalusia | Decatur | Gadsden | Muscle Shoals | Prattville | Troy | ||
| Arab | Dothan | Hamilton | Opelika | Russellville (2) | Tuscaloosa | ||
| Athens | Enterprise | Huntsville (2) | Opp | Scottsboro | Wetumpka | ||
| Bessemer |
|
|
|
|
| ||
| GEORGIA | |||||||
| Adel | Carrollton | Dalton | Gray | Macon | Statesboro | ||
| Albany (2) | Cartersville | Dawson | Greensboro | Madison | Stockbridge | ||
| Alma | Cedartown | Douglas (2) | Griffin | Manchester | Swainsboro | ||
| Americus | Chatsworth | Douglasville | Hartwell | McDonough | Sylvania | ||
| Athens (2) | Clarkesville | Dublin | Hawkinsville | Milledgeville | Sylvester | ||
| Bainbridge | Claxton | East Ellijay | Hazlehurst | Monroe | Thomaston | ||
| Barnesville | Clayton | Eastman | Helena | Montezuma | Thomson | ||
| Baxley | Cleveland | Eatonton | Hinesville (2) | Monticello | Tifton | ||
| Blairsville | Cochran | Elberton | Hiram | Moultrie | Toccoa | ||
| Blakely | Colquitt | Fayetteville | Hogansville | Nashville | Tucker | ||
| Blue Ridge | Columbus | Fitzgerald | Jackson | Newnan | Valdosta | ||
| Bremen | Commerce | Flowery Branch | Jasper | Perry | Vidalia | ||
| Brunswick | Conyers | Forsyth | Jefferson | Pooler | Villa Rica | ||
| Buford | Cordele | Fort Valley | Jesup | Richmond Hill | Warner Robins | ||
| Butler | Cornelia | Fort Oglethorpe | Kennesaw | Rome | Washington | ||
| Cairo | Covington | Gainesville | LaGrange | Royston | Waycross | ||
| Calhoun | Cumming | Garden City | Lavonia | Sandersville | Waynesboro | ||
| Canton | Dahlonega | Georgetown | Lawrenceville | Savannah | Winder | ||
| LOUISIANA | |||||
| Abbeville | Crowley | Houma | Marksville | New Iberia | Slidell |
| Alexandria | Denham Springs | Jena | Minden | Opelousas | Springhill |
| Baker | DeRidder | Lafayette | Monroe | Pineville | Sulphur |
| Bastrop | Eunice | Lake Charles | Morgan City | Prairieville | Thibodaux |
| Bossier City Covington (2) | Franklin Hammond | LaPlace Leesville | Natchitoches | Ruston | Winnsboro |
| MISSISSIPPI | |||||
| Amory | Columbia | Gulfport | Jackson | Newton | Pontotoc |
| Batesville | Columbus | Hattiesburg | Kosciusko | Olive Branch | Ripley |
| Bay St. Louis | Corinth | Hazlehurst | Magee | Oxford | Senatobia |
| Booneville | Forest | Hernando | McComb | Pearl | Starkville |
| Brookhaven | Greenwood | Houston | Meridian | Philadelphia | Tupelo |
| Carthage | Grenada | Iuka | New Albany | Picayune | Winona |
| SOUTH CAROLINA | |||||
| Aiken | Chester | Greenwood | Manning | North Charleston | Spartanburg |
| Anderson | Columbia | Greer | Marion | North Greenville | Summerville |
| Batesburg- Leesville | Conway | Hartsville | Moncks Corner | North Myrtle Beach | SumterG |
| Beaufort | Dillon | Irmo | Myrtle Beach |
|
|
| Camden | Easley | Lake City | Newberry | Orangeburg | Union |
| Cayce | Florence | Lancaster | North | Rock Hill | Walterboro |
| Charleston | Gaffney | Laurens | Augusta ** | Seneca | Winnsboro |
| Cheraw | Georgetown | Lexington |
| Simpsonville | York |
48
|
| |||||
|
| |||||
| 1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES (Continued) | |||||
|
| |||||
| TENNESSEE | |||||
| Aloca | Crossville | Greenville | LaFollette | Newport | Sparta |
| Athens | Dayton | Hixson | Lenior City | Powell | Tullahoma |
| Bristol | Elizabethton | Johnson City | Madisonville | Sevierville | Winchester |
| Cleveland | Gallatin | Kingsport | Morristown |
|
|
|
* Opened January 28, 2016 ** Closed February 29, 2016 | |||||
|
| |||||
1st FRANKLIN FINANCIAL CORPORATION
MISSION STATEMENT:
"1st Franklin Financial is a major provider of financial and consumer services to individuals and families.
Our business will be managed according to best practices that will allow us to maintain a healthy financial position.”
CORE VALUES:
Ø Integrity Without Compromise
Ø Open Honest Communication
Ø Respect all Customers and Employees
Ø Teamwork and Collaboration
Ø Personal Accountability
Ø Run It Like You Own It
49
| Exhibit 31.1 |
| |
| RULE 13a-14(a)/15d-14(a) |
| CERTIFICATIONS |
| |
| I, Virginia C. Herring, certify that: 1. I have reviewed this annual report on Form 10-K of 1st Franklin Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| |
| Date: March 30, 2016 /s/ Virginia C. Herring Virginia C. Herring President and Chief Executive Officer |
| Exhibit 31.2 |
| |
| RULE 13a-14(a)/15d-14(a) |
| CERTIFICATIONS |
| |
| I, A. Roger Guimond, certify that: 1. I have reviewed this annual report on Form 10-K of 1st Franklin Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| |
| Date: March 30, 2016 /s/ A. Roger Guimond A. Roger Guimond Executive Vice President and Chief Financial Officer |
Exhibit 32.1 |
|
|
1st FRANKLIN FINANCIAL CORPORATION |
135 EAST TUGALO STREET |
P.O. BOX 880 |
TOCCOA, GEORGIA 30577 |
TELEPHONE: (706) 886-7571 |
|
|
March 30, 2016 |
|
|
Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
|
Ladies and Gentlemen: |
|
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1st Franklin Financial Corporation (the "Company") for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge: |
|
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
|
|
/s/ Virginia C. Herring |
Name: Virginia C. Herring |
Title: President and Chief Executive Officer |
|
|
|
|
|
|
Exhibit 32.2 |
|
|
1st FRANKLIN FINANCIAL CORPORATION |
135 EAST TUGALO STREET |
P.O. BOX 880 |
TOCCOA, GEORGIA 30577 |
TELEPHONE: (706) 886-7571 |
|
|
March 30, 2016 |
|
|
Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
|
Ladies and Gentlemen: |
|
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1st Franklin Financial Corporation (the "Company") for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge: |
|
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
|
|
/s/ A. Roger Guimond |
Name: A. Roger Guimond |
Title: Executive Vice President and |
Chief Financial Officer |
|
|
|
|
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Feb. 29, 2016 |
Jun. 30, 2013 |
|
| Entity Registrant Name | 1st Franklin Financial Corporation | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2015 | ||
| Trading Symbol | ffc | ||
| Amendment Flag | false | ||
| Entity Central Index Key | 0000038723 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Public Float | $ 0 | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Current Reporting Status | No | ||
| Entity Voluntary Filers | Yes | ||
| Entity Well-known Seasoned Issuer | Yes | ||
| Document Fiscal Year Focus | 2015 | ||
| Document Fiscal Period Focus | FY | ||
| Nonvoting Common Stock | |||
| Entity Common Stock, Shares Outstanding | 168,300 | ||
| Voting Common Stock | |||
| Entity Common Stock, Shares Outstanding | 1,700 |
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CASH AND CASH EQUIVALENTS | |||||||||||||||||||||||
| Cash and Due From Banks | $ 5,531,687 | $ 1,524,217 | |||||||||||||||||||||
| Short-term Investments | 45,917,730 | 13,202,325 | |||||||||||||||||||||
| Cash and Cash Equivalents, net | 51,449,417 | 14,726,542 | |||||||||||||||||||||
| RESTRICTED CASH | [1] | 9,335,466 | 1,073,157 | ||||||||||||||||||||
| LOANS: | |||||||||||||||||||||||
| Direct Cash Loans | 494,836,733 | 471,195,331 | |||||||||||||||||||||
| Real Estate Loans | 22,128,090 | 20,271,000 | |||||||||||||||||||||
| Sales Finance Contracts | 30,071,077 | 23,906,111 | |||||||||||||||||||||
| Loans, Total | 547,035,900 | 515,372,442 | |||||||||||||||||||||
| Unearned Finance Charges | 65,699,425 | 63,079,794 | |||||||||||||||||||||
| Unearned Insurance Premiums and Commissions | 41,446,393 | 35,331,723 | |||||||||||||||||||||
| Allowance for Loan Losses | 33,500,000 | 28,620,000 | |||||||||||||||||||||
| Net Loans | 406,390,082 | 388,340,925 | |||||||||||||||||||||
| MARKETABLE DEBT SECURITIES: | |||||||||||||||||||||||
| Available for Sale, at fair value | 143,862,165 | 132,847,073 | |||||||||||||||||||||
| Held to Maturity, at amortized cost | 17,058,181 | 22,762,252 | |||||||||||||||||||||
| Marketable Debt Securities, Total | 160,920,346 | 155,609,325 | |||||||||||||||||||||
| EQUITY METHOD INVESTMENTS | [2] | 24,989,505 | 26,059,579 | ||||||||||||||||||||
| OTHER ASSETS | |||||||||||||||||||||||
| Land, Buildings, Equipment and Leasehold Improvements | 9,918,857 | [3] | 10,205,126 | [4] | |||||||||||||||||||
| Deferred Acquisition Costs | 2,483,781 | 2,028,468 | |||||||||||||||||||||
| Due from Non-affiliated Insurance Company | 2,886,086 | 2,102,978 | |||||||||||||||||||||
| Other Miscellaneous | 6,040,269 | 5,441,945 | |||||||||||||||||||||
| Other Assets, total | 21,328,993 | 19,778,517 | |||||||||||||||||||||
| ASSETS, Total | 674,413,809 | 605,588,045 | |||||||||||||||||||||
| SENIOR DEBT: | |||||||||||||||||||||||
| Senior Demand Notes, including accrued interest | 71,001,087 | 58,530,148 | |||||||||||||||||||||
| Commercial Paper | 317,488,208 | 276,656,052 | |||||||||||||||||||||
| Senior Debt, total | 388,489,295 | 335,186,200 | |||||||||||||||||||||
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | 25,430,137 | 24,228,121 | |||||||||||||||||||||
| SUBORDINATED DEBT | [5] | 36,004,009 | 37,726,538 | ||||||||||||||||||||
| LIABILITIES, Total | $ 449,923,441 | $ 397,140,859 | |||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | [6] | ||||||||||||||||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||||||||||||||
| Preferred Stock | [7] | ||||||||||||||||||||||
| Common Stock | [8] | $ 170,000 | $ 170,000 | ||||||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | 4,142,986 | 3,663,475 | |||||||||||||||||||||
| Retained Earnings | 220,177,382 | 204,613,711 | |||||||||||||||||||||
| Stockholders' Equity, Total | 224,490,368 | 208,447,186 | |||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY, TOTAL | $ 674,413,809 | $ 605,588,045 | |||||||||||||||||||||
| Nonvoting Common Stock | |||||||||||||||||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||||||||||||||
| Common Stock | [9] | ||||||||||||||||||||||
| |||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - Parenthetical - $ / shares |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Preferred Stock, Par Value | $ 100 | $ 100 |
| Preferred Stock, Shares Authorized | 6,000 | 6,000 |
| Preferred Stock, Shares Outstanding | 0 | 0 |
| Voting Common Stock | ||
| Common Stock, Par Value | $ 100 | $ 100 |
| Common Stock, Shares Authorized | 2,000 | 2,000 |
| Common Stock, Shares Outstanding | 1,700 | 1,700 |
| Nonvoting Common Stock | ||
| Common Stock, Par Value | $ 0 | $ 0 |
| Common Stock, Shares Authorized | 198,000 | 198,000 |
| Common Stock, Shares Outstanding | 168,300 | 168,300 |
CONDENSED STATEMENTS OF INCOME - USD ($) |
12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
||||||||
| INTEREST INCOME | ||||||||||
| Finance Charges | $ 147,813,018 | $ 140,071,693 | $ 128,761,404 | |||||||
| Net Investment Income | 4,777,467 | 4,497,090 | 3,818,099 | |||||||
| Total Interest Income | 152,590,485 | 144,568,783 | 132,579,503 | |||||||
| INTEREST EXPENSE | ||||||||||
| Senior Debt | 11,868,927 | 10,755,834 | 10,091,821 | |||||||
| Subordinated Debt | 1,086,012 | 1,195,676 | 1,380,051 | |||||||
| Total interest expense | 12,954,939 | 11,951,510 | 11,471,872 | |||||||
| NET INTEREST INCOME | 139,635,546 | 132,617,273 | 121,107,631 | |||||||
| PROVISION FOR LOAN LOSSES | [1] | 36,887,285 | 32,622,546 | 27,623,368 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 102,748,261 | 99,994,727 | 93,484,263 | |||||||
| INSURANCE INCOME | ||||||||||
| Premiums | 52,446,561 | 47,964,294 | 45,683,657 | |||||||
| Insurance Claims and Expenses | (12,559,411) | (10,836,029) | (10,205,444) | |||||||
| Total Insurance Income | 39,887,150 | 37,128,265 | 35,478,213 | |||||||
| OTHER REVENUE | 3,325,389 | 7,166,666 | 7,708,981 | |||||||
| OTHER OPERATING EXPENSES: | ||||||||||
| Personnel Expense | 71,834,872 | 67,419,267 | 63,044,814 | |||||||
| Occupancy Expense | 13,707,326 | 13,188,162 | 12,368,589 | |||||||
| Other Expense | 29,288,935 | 26,150,789 | 22,857,629 | |||||||
| Total Operating Expenses | 114,831,133 | 106,758,218 | 98,271,032 | |||||||
| INCOME BEFORE INCOME TAXES | 31,129,667 | 37,531,440 | 38,400,425 | |||||||
| PROVISION FOR INCOME TAXES | [2] | 5,263,994 | 4,197,694 | 3,992,664 | ||||||
| Net Income (Loss) | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 | |||||||
| BASIC EARNINGS PER SHARE | [3] | $ 152.15 | $ 196.08 | $ 202.40 | ||||||
| ||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||
| Net Income (Loss) | $ 25,865,673 | $ 33,333,746 | $ 34,407,761 |
| Other Comprehensive Income (Loss): | |||
| Unrealized gains (losses) during period | 862,930 | 8,297,119 | (6,145,189) |
| Income tax (provision) benefit | (332,201) | (2,160,903) | 1,695,874 |
| Net unrealized (losses) gains | 530,729 | 6,136,216 | (4,449,315) |
| Reclassification of (gains)/losses to Net Income (Loss) | 51,218 | 7 | 122,037 |
| Total Other Comprehensive Income (Loss) | 479,511 | 6,136,209 | (4,571,352) |
| Total Comprehensive Income (Loss) | $ 26,345,184 | $ 39,469,955 | $ 29,836,409 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) |
Common Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total |
|---|---|---|---|---|
| Equity Balance, Value at Dec. 31, 2013 | $ 170,000 | $ 174,265,215 | $ 2,098,618 | $ 176,533,833 |
| Equity Balance, Shares at Dec. 31, 2013 | 170,000 | |||
| Comprehensive Income (Loss): | ||||
| Net Income (Loss) | 33,333,746 | 33,333,746 | ||
| Other Comprehensive Income (Loss) | 6,136,209 | 6,136,209 | ||
| Total Comprehensive Income (Loss) | 39,469,955 | |||
| Cash Distributions Paid | (23,375,402) | (23,375,402) | ||
| Equity Balance, Value at Dec. 31, 2014 | $ 170,000 | 204,613,711 | 3,663,475 | 208,447,186 |
| Equity Balance, Shares at Dec. 31, 2014 | 170,000 | |||
| Comprehensive Income (Loss): | ||||
| Net Income (Loss) | 25,865,673 | 25,865,673 | ||
| Other Comprehensive Income (Loss) | 479,511 | 479,511 | ||
| Total Comprehensive Income (Loss) | 26,345,184 | |||
| Cash Distributions Paid | (10,302,002) | (10,302,002) | ||
| Equity Balance, Value at Dec. 31, 2015 | $ 170,000 | $ 220,177,382 | $ 4,142,986 | $ 224,490,368 |
| Equity Balance, Shares at Dec. 31, 2015 | 170,000 |
1. Summary of Significant Accounting Policies |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Notes | |
| 1. Summary of Significant Accounting Policies | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
1st Franklin Financial Corporation (the "Company") is a consumer finance company which originates and services direct cash loans, real estate loans and sales finance contracts through 285 branch offices located throughout the southeastern United States. In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance. Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the credit life, the credit accident and health and the credit property insurance so written.
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company accounts and transactions have been eliminated.
Fair Values of Financial Instruments:
The following methods and assumptions are used by the Company in estimating fair values for financial instruments.
Cash and Cash Equivalents. 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 the origination of the instruments and their expected realization. Cash and cash equivalents are classified as a Level 1 financial asset.
Loans. The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying 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 rates. Loans are classified as a Level 3 financial asset.
Marketable Debt Securities. The fair value of marketable debt securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Held-to-maturity marketable debt securities are classified as Level 2 financial assets. See additional information below regarding fair value under Accounting Standards Codification ("ASC") No. 820, Fair Value Measurements. See Note 4 for fair value measurement of available-for-sale marketable debt securities and for information related to how these securities are valued.
Equity Method Investment. The fair value of equity method investment is estimated based on the Company's allocable share of the investee net asset value as of the reporting date.
Senior Debt. 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 payment. Senior debt securities are classified as a Level 2 financial liability.
Subordinated Debt. The carrying value of the Company's subordinated debt securities approximates fair value due to the re-pricing frequency of the securities. Subordinated debt securities are classified as a Level 2 financial liability.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates.
Income Recognition:
Accounting principles generally accepted in the United States of America 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 on-going 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 repaid or renewed prior to maturity, the result is that most of the accounts with precomputed charges 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. Any loan which becomes 60 days or more past due, based on original contractual term, is placed in a non-accrual status. When a loan is placed in non-accrual status, income accruals are discontinued. Accrued income prior to the date an account becomes 60 days or more past due is not reversed. Income on loans in non-accrual status is earned only if payments are received. A loan in nonaccrual status is restored to accrual status when it becomes less than 60 days past due.
Loan fees and origination costs are deferred and recognized as an adjustment 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 an unrelated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary. The premiums 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 policies written by the Company, as agent for an unrelated 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 policies and the effective yield method for decreasing-term life policies. Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.
Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported claims. Reserves for claims totaled $3,028,970 and $1,498,249 at December 31, 2015 and 2014, respectively, and are included in unearned insurance premiums on the consolidated statements of financial position.
Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.
The primary revenue category included in other revenue relates to commissions earned by the Company on sales of auto club memberships. Commissions received from the sale of auto club memberships are earned at the time the membership is sold. The Company sells the memberships as an agent for a third party. The Company has no further obligations after the date of sale as all claims for benefits are paid and administered by the third party.
Depreciation and Amortization:
Office machines, equipment and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years. Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the applicable lease. Depreciation and amortization expense for each of the three years ended December 31, 2015 was $3,318,710, $3,156,828 and $2,910,855, respectively.
Restricted Cash:
At December 31, 2015 and 2014, the Company had cash of $9,335,466 and $1,073,157, respectively, held 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. During 2015 and 2014, restricted cash also included escrow deposits held by the Company on behalf of certain mortgage real estate customers.
Equity Method Investment: The Company evaluates its unconsolidated equity investment to determine whether it should be recorded on a consolidated basis. The percentage ownership interest in the equity investment, an evaluation of control and whether a variable interest entity ("VIE") exists are all considered in the Company's consolidation assessment.
The Company accounts for its equity investment where it owns a non-controlling interest or where it is not the primary beneficiary of a VIE using the equity method of accounting. Under the equity method, the Company's cost of an investment is adjusted for its share of equity in the earnings or losses of the unconsolidated investment and reduced by distributions received. There is no difference between the cost of the Company's equity investment and the value of the underlying equity as reflected in the unconsolidated equity investment's financial statements.
The Company assesses the carrying value of its equity method investment for impairment in accordance with Accounting Standards Codification ("ASC") 323-10, Investments - Equity Method and Joint Ventures. The Company assesses whether there are any indicators that the fair value of the Company's equity method investment might be impaired. An investment is deemed impaired if the Company's estimate of the fair value of the investment is less than the carrying value of the investment and such decline in value is deemed to be other than temporary. During the years ended December 31, 2015, 2014 and 2013, no impairment of the Company's equity method investment was recognized.
Impairment of Long-Lived Assets:
The Company annually evaluates whether events and circumstances have occurred or triggering events have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. Based on Management’s evaluation, there has been no impairment of carrying value of the long-lived assets, including property and equipment at December 31, 2015 or 2014.
Income Taxes:
The Financial Accounting Standards Board (“FASB”) issued ASC 740-10. FASB ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. FASB ASC 740-10 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2015 and December 31, 2014, the Company had no uncertain tax positions.
The Company’s insurance subsidiaries are treated as taxable entities and income taxes are provided for where applicable (Note 12). No provision for income taxes has been made by the Company since it has elected to be treated as an S Corporation for income tax reporting purposes. However, the state of Louisiana does not recognize S Corporation status, and the Company has accrued amounts necessary to pay the required income taxes in such state.
Collateral Held for Resale:
When the Company takes possession of collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance. Any losses incurred at that time are charged against the Allowance for Loan Losses.
Marketable Debt Securities:
Management has designated a significant portion of the Company’s marketable debt securities held in the Company's investment portfolio at December 31, 2015 and 2014 as being available-for-sale. This portion of the investment portfolio is reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss) included in the consolidated statements of comprehensive income/loss. Gains and losses on sales of securities designated as available-for-sale are determined based on the specific identification method. The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity.
Earnings per Share Information:
The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same.
Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This update supersedes revenue recognition requirements in Topic 605, "Revenue Recognition," including most industry-specific revenue guidance in the FASB Accounting Standards Codification. The new guidance stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides specific steps that entities should apply in order to achieve this principle. The amendments are effective for interim and annual periods beginning after December 15, 2017. Adoption is allowed by either the full retrospective or modified retrospective approach. The Company in in the process of evaluating the expected impact of the ASU's adoption on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Imputation of Interest." ASU 2015-03 applies to the presentation of debt issuance costs in financial statements. It requires debt issurance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Debt disclosures will include the face amount of the debt liability and the effective interest rate. In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issurance costs related to line of credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, reqardless of whether there are any outstanding borrowings on the line of credit arrangement. The accounting standards require retrospective application and represent a change in accounting principle. The standard is effective for fiscal years beginning after December 15, 2015. The Company does not expect the adoption of these standards to have a material impact on the Company's consolidated financial statements.
In February 2016, FASB issued ASU 2016-01, "Leases." The ASU requires all lessees to recognize lease assets and lease liabilities on the balance sheet. Lessor accounting is largely unchanged by the ASU, however disclosures about cash flows arising from leases are required of both lessees and lessors. The disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact this new accounting standard on the consolidated financial statements. |
2. Loans |
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| 2. Loans | 2. LOANS
The Company’s consumer loans are made to individuals in relatively small amounts for relatively short periods of time. First and second mortgage loans on real estate are made in larger amounts and for longer periods of time. The Company also purchases sales finance contracts from various dealers. All loans and sales contracts are held for investment.
Contractual Maturities of Loans:
An estimate of contractual maturities stated as a percentage of the loan balances based upon an analysis of the Company's portfolio as of December 31, 2015 is as follows:
Historically, a majority of the Company's loans have been renewed many months prior to their final contractual maturity dates, and the Company expects this trend to continue in the future. Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections.
Cash Collections on Principal:
During the years ended December 31, 2015 and 2014, cash collections applied to the principal of loans totaled $332,703,123 and $300,064,326, respectively, and the ratios of these cash collections to principal average net receivables were 75.56% and 72.61%, respectively.
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 statement of financial position 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. If trends indicate credit losses are increasing or decreasing, Management will evaluate to ensure the allowance for loan losses remains at proper levels. Delinquency and bankruptcy filing trends are also tracked. If these trends indicate an adjustment to the allowance for loan losses is warranted, Management will make what it considers to be appropriate adjustments. The level of receivables at the statement of financial position 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 allowance for loan losses 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/or other indicators of collectability. 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 a court initiated repayment plan. In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.
When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status. At this 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 until the account qualifies for return to accrual status. Non-accrual 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 December 31, 2015 or December 31, 2014. The Company’s principal balances on non-accrual loans by loan class at December 31, 2015 and 2014 are as follows:
An age analysis of principal balances past due, segregated by loan class, as of December 31, 2015 and 2014 is as follows:
In addition to the delinquency rating analysis, the ratio of bankrupt accounts to our total loan portfolio is also used as a credit quality indicator. The ratio of bankrupt accounts to total principal loan balances outstanding at December 31, 2015 and December 31, 2014 was 2.40% and 2.48%, respectively.
Nearly our entire loan portfolio consists of small homogeneous consumer loans (of the product types set forth in the table below).
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 96% of the Company’s loan portfolio at December 31, 2015 and 2014. 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:
Troubled debt restructurings (“TDRs”) represent loans on which the original terms 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 customer. The following table presents a summary of loans that were restructured during the year ended December 31, 2015.
TDRs that subsequently defaulted during the year ended December 31, 2015 are listed below.
The following table presents a summary of loans that were restructured during the year ended December 31, 2014.
TDRs that subsequently defaulted during the year ended December 31, 2014 are listed below.
The level of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. |
3 - Marketable Debt Securities |
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| 3 - Marketable Debt Securities | 3. MARKETABLE DEBT SECURITIES
Debt securities available for sale are carried at estimated fair market value. The amortized cost and estimated fair values of these debt securities are as follows:
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 are as follows:
The amortized cost and estimated fair values of marketable debt securities at December 31, 2015, by contractual maturity, are shown below:
The following table presents an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2015:
The following table presents an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2014:
The previous two tables represent 25 investments and 32 investments held by the Company at December 31, 2015 and 2014, respectively, the majority of which were rated “A+” or higher. The unrealized losses on the Company’s investments were the result of interest rate increases over the previous years. 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 did not consider the impairment of these investments to be other-than-temporary at December 31, 2015 or 2014.
Proceeds from sales of securities during 2015 were $797,246. Gross gains of $56,113 were realized on these sales. Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2015 were $14,540,000. Gross gains of $13,859 were realized from these redemptions.
Proceeds from sales of securities during 2014 were $0. Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2014 were $18,350,000. Gross gains of $9 were realized from these redemptions. |
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4 - Fair Value |
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| 4 - Fair Value | 4. FAIR VALUE
FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on 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 asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
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 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 or 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 December 31, 2015 and 2014 are available-for-sale investment securities which are summarized below:
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5. Equity Method Investment |
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| 5. Equity Method Investment: | 5. EQUITY METHOD INVESTMENT:
The Company has one investment accounted for using the equity method of accounting. On November 1, 2013, the Company invested $10.0 million in Meritage Capital, Centennial Absolute Return Fund, L.P. (the "Fund"). An additional $15.0 was invested in the same fund on April 1, 2014. The carrying value of this investment was $25.0 million as of December 31, 2015, which represents a 25.85% ownership interest in the Fund. The carrying value of this investment was $26.1 million as of December 31, 2014, which represented a 25.76% ownership interest in the Fund. Due to the volatile market conditions the Company recorded a loss of $1.0 million on this investment during 2015. During 2014, the Company earned $.8 million on this investment. The loss during 2015 and the earnings during 2014 were recorded in other revenue on the Company's consolidated statement of income. With at least 60 days notice, the Company has the ability to redeem its investment in the Fund at the end of any calendar quarter.
Condensed financial statement information of the equity method investment is as follows:
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6. Insurance Subsidiary Restrictions |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Notes | |
| 6. Insurance Subsidiary Restrictions | 6.INSURANCE SUBSIDIARY RESTRICTIONS
As of December 31, 2015 and 2014, respectively, 79% and 80% the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries. State insurance regulations limit the types of investments an insurance company may hold in its portfolio. These limitations specify types of eligible investments, quality of investments and the percentage a particular investment may constitute of an insurance company’s portfolio.
Dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries, unless prior approval is obtained from the Georgia Insurance Commissioner. At December 31, 2015, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $70.5 million and $67.3 million, respectively. The maximum aggregate amount of dividends these subsidiaries could pay to the Company during 2015, without prior approval of the Georgia Insurance Commissioner, was approximately $11.8 million. The Company elected not to pay any dividends from the insurance subsidiaries during the year ended December 31, 2015. |
7. Senior Debt |
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| 7. Senior Debt | 7.SENIOR DEBT
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 and reborrrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company. The credit agreement contains covenants customary for financing transactions of this type. Available borrowings under the credit agreement were $100.0 million at December 31, 2015 and 2014, at an interest rate of 3.75%. At December 31, 2015 and 2014, the Company had no borrowings under the credit agreement.
Available but unborrowed amounts under the credit agreement are subject to a periodic unused line fee of .50%. The interest rate under the credit agreement is equivalent to the greater of (a) .75% per annum plus 300 basis points or (b) the three month London Interbank Offered Rate (the “LIBOR Rate”) plus 300 basis points. The LIBOR Rate is adjusted on the first day of each calendar month based upon the LIBOR Rate as of the last day of the preceding calendar month.
The credit agreement has a commitment termination date of September 11, 2018. Any then- outstanding balance under the Credit Agreement would be due and payable on such date. The lender also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the credit agreement or if the financial condition of the Company becomes unsatisfactory to the lender, according to standards set forth in the credit agreement. Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio, among others. At December 31, 2015, the Company was in compliance with all financial covenants.
The Company’s Senior Demand Notes are unsecured obligations which are payable on demand. The interest rate payable on any Senior Demand Note is a variable rate, compounded daily, established from time to time by the Company.
Commercial paper is issued by the Company only to qualified investors, in amounts in excess of $50,000, with maturities of less than 270 days and at interest rates that the Company believes are competitive in its market.
Additional data related to the Company's senior debt is as follows:
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8. Subordinated Debt |
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| 8. Subordinated Debt | 8.SUBORDINATED DEBT
The payment of the principal and interest on the Company’s subordinated debt is subordinate and junior in right of payment to all unsubordinated indebtedness of the Company.
Subordinated debt consists of Variable Rate Subordinated Debentures issued from time to time by the Company, and which mature four years after their date of issue. The maturity date is automatically extended for an additional four year term unless the holder or the Company redeems the debenture on its original maturity date or within any applicable grace period thereafter. The debentures are offered and sold in various minimum purchase amounts with varying interest rates as established from time to time by the Company and interest adjustment periods for each respective minimum purchase amount. Interest rates on the debentures automatically adjust at the end of each adjustment period. The debentures may also be redeemed by the holder at the applicable interest adjustment date or within any applicable grace period thereafter without penalty. Redemptions at any other time are at the discretion of the Company and are subject to a penalty. The Company may redeem the debentures for a price equal to 100% of the principal plus accrued but unpaid interest upon 30 days’ notice to the holder.
Interest rate information on the Company’s subordinated debt at December 31 is as follows:
Maturity and redemption information relating to the Company's subordinated debt at December 31, 2015 is as follows:
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9. Commitments and Contingencies |
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| 9. Commitments and Contingencies | 9.COMMITMENTS AND CONTINGENCIES
The Company's operations are carried on in locations which are occupied under operating lease agreements. These lease agreements usually provide for a lease term of five years with the Company holding a renewal option for an additional five years. Total operating lease expense was $6,042,567, $5,818,043 and $5,511,912 for the years ended December 31, 2015, 2014 and 2013, respectively. The Company’s minimum aggregate lease commitments at December 31, 2015 are shown in the table below.
We conduct our lending operations under the provisions of various federal and state laws and implementing regulations. Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business. While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof. Significant additional regulation or costs of compliance could materially adversely affect our business, financial position, results of operations and/or cash flows. |
10. Employee Benefit Plans |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Notes | |
| 10. Employee Benefit Plans | 10.EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan, which was qualified under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), as amended, to cover employees of the Company.
Any employee who is 18 years of age or older is eligible to participate in the 401(k) plan on the first day of the month following the completion of one complete calendar month of continuous employment and the Company begins matching up to 4.50% of an employee’s deferred contribution, up to 6.00% of their total compensation. During 2015, 2014 and 2013, the Company contributed $1,834,138, $1,744,475 and $1,606,957, respectively, in matching funds for employee 401(k) deferred accounts.
The Company also maintains a non-qualified deferred compensation plan for employees who receive compensation in excess of the amount provided in Section 401(a)(17) of the Code, as such amount may be adjusted from time to time in accordance with the Code. |
11. Related Party Transactions |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| 11. Related Party Transactions | 11.RELATED PARTY TRANSACTIONS
The Company leases a portion of its properties (see Note 9) for an aggregate of $156,600 per year from certain officers or stockholders.
The Company has an outstanding loan to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner. David Cheek (son of Ben F. Cheek, III) owns 24.24% of the Company’s voting stock. The balance on this commercial loan (including principal and accrued interest) was $1,288,054 at December 31, 2015. During 2015, the maximum amount outstanding (including accrued interest) on this loan was $1,576,355. The loan is a variable-rate loan with the interest based on the prime rate plus 1%. The interest rate adjusts whenever the prime rate changes.
Effective September 23, 1995, the Company entered into a Split-Dollar Life Insurance Agreement with the Trustee of an executive officer’s irrevocable life insurance trust. The life insurance policy insures one of the Company’s executive officers. As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust. The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate. A payment of $5,584 for interest accrued during 2015 was applied to the loan on December 31, 2015. No principal payments on this loan were made in 2015. The balance on this loan at December 31, 2015 was $349,870. This was the maximum loan amount outstanding during the year. |
12. Income Taxes |
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| 12. Income Taxes | 12.INCOME TAXES
The Company has elected to be treated as an S corporation for income tax reporting purposes. The taxable income or loss of an S corporation is treated as income of and is reportable in the individual tax returns of the shareholders of the Company in an appropriate allocation. Accordingly, deferred income tax assets and liabilities have been eliminated and no provisions for current and deferred income taxes were made by the Company except for amounts attributable to state income taxes for the state of Louisiana, which does not recognize S corporation status for income tax reporting purposes. Deferred income tax assets and liabilities will continue to be recognized and provisions for current and deferred income taxes will be made by the Company’s subsidiaries as they are not permitted to be treated as S Corporations.
The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 is made up of the following components:
Temporary differences create deferred federal tax assets and liabilities, which are detailed below as of December 31, 2015 and 2014. These amounts are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position.
The Company's effective tax rate for the years ended December 31, 2015, 2014 and 2013 is analyzed as follows. Rates were lower than statutory federal income tax rates mainly due to taxable income at the S corporation level being passed to the shareholders of the Company for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.
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13. Segment Financial Information |
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| 13. Segment Financial Information: | 13.SEGMENT FINANCIAL INFORMATION:
The Company discloses segment information in accordance with FASB ASC 280. FASB ASC 280 requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. The Company operates in one reportable business segment.
The Company has five operating divisions which comprise its operations: Division I through Division V. Each division is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location. Division I is comprised of offices located in South Carolina. Division II is comprised of offices in North Georgia and Division III is comprised of South Georgia offices. Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.
Accounting policies of the divisions are the same as those of the Company described in the summary of significant accounting policies. Performance of each division is measured based on objectives set at the beginning of each year and include various factors such as division profit, growth in earning assets and delinquency and loan loss management. All division revenues result from transactions with third parties. The Company does not allocate income taxes or corporate headquarter expenses to the any division.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2015 followed by a reconciliation to consolidated Company data.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2014 followed by a reconciliation to consolidated Company data.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2013 followed by a reconciliation to consolidated Company data.
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1. Summary of Significant Accounting Policies: Business (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Business: | Business:
1st Franklin Financial Corporation (the "Company") is a consumer finance company which originates and services direct cash loans, real estate loans and sales finance contracts through 285 branch offices located throughout the southeastern United States. In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance. Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the credit life, the credit accident and health and the credit property insurance so written. |
1. Summary of Significant Accounting Policies: Basis of Consolidation (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Basis of Consolidation: | Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company accounts and transactions have been eliminated. |
1. Summary of Significant Accounting Policies: Fair Values of Financial Instruments (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Fair Values of Financial Instruments: | Fair Values of Financial Instruments:
The following methods and assumptions are used by the Company in estimating fair values for financial instruments.
Cash and Cash Equivalents. 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 the origination of the instruments and their expected realization. Cash and cash equivalents are classified as a Level 1 financial asset.
Loans. The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying 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 rates. Loans are classified as a Level 3 financial asset.
Marketable Debt Securities. The fair value of marketable debt securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Held-to-maturity marketable debt securities are classified as Level 2 financial assets. See additional information below regarding fair value under Accounting Standards Codification ("ASC") No. 820, Fair Value Measurements. See Note 4 for fair value measurement of available-for-sale marketable debt securities and for information related to how these securities are valued.
Equity Method Investment. The fair value of equity method investment is estimated based on the Company's allocable share of the investee net asset value as of the reporting date.
Senior Debt. 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 payment. Senior debt securities are classified as a Level 2 financial liability.
Subordinated Debt. The carrying value of the Company's subordinated debt securities approximates fair value due to the re-pricing frequency of the securities. Subordinated debt securities are classified as a Level 2 financial liability. |
1. Summary of Significant Accounting Policies: Use of Estimates (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Use of Estimates: | Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. |
1. Summary of Significant Accounting Policies: Income Recognition (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Income Recognition: | Income Recognition:
Accounting principles generally accepted in the United States of America 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 on-going 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 repaid or renewed prior to maturity, the result is that most of the accounts with precomputed charges 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. Any loan which becomes 60 days or more past due, based on original contractual term, is placed in a non-accrual status. When a loan is placed in non-accrual status, income accruals are discontinued. Accrued income prior to the date an account becomes 60 days or more past due is not reversed. Income on loans in non-accrual status is earned only if payments are received. A loan in nonaccrual status is restored to accrual status when it becomes less than 60 days past due.
Loan fees and origination costs are deferred and recognized as an adjustment 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 an unrelated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary. The premiums 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 policies written by the Company, as agent for an unrelated 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 policies and the effective yield method for decreasing-term life policies. Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.
Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported claims. Reserves for claims totaled $3,028,970 and $1,498,249 at December 31, 2015 and 2014, respectively, and are included in unearned insurance premiums on the consolidated statements of financial position.
Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.
The primary revenue category included in other revenue relates to commissions earned by the Company on sales of auto club memberships. Commissions received from the sale of auto club memberships are earned at the time the membership is sold. The Company sells the memberships as an agent for a third party. The Company has no further obligations after the date of sale as all claims for benefits are paid and administered by the third party. |
1. Summary of Significant Accounting Policies: Depreciation and Amortization (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Depreciation and Amortization: | Depreciation and Amortization:
Office machines, equipment and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years. Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the applicable lease. Depreciation and amortization expense for each of the three years ended December 31, 2015 was $3,318,710, $3,156,828 and $2,910,855, respectively. |
1. Summary of Significant Accounting Policies: Restricted Cash (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Restricted Cash: | Restricted Cash:
At December 31, 2015 and 2014, the Company had cash of $9,335,466 and $1,073,157, respectively, held 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. During 2015 and 2014, restricted cash also included escrow deposits held by the Company on behalf of certain mortgage real estate customers. |
1. Summary of Significant Accounting Policies: Equity Method Investment (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Equity Method Investment: | Equity Method Investment: The Company evaluates its unconsolidated equity investment to determine whether it should be recorded on a consolidated basis. The percentage ownership interest in the equity investment, an evaluation of control and whether a variable interest entity ("VIE") exists are all considered in the Company's consolidation assessment.
The Company accounts for its equity investment where it owns a non-controlling interest or where it is not the primary beneficiary of a VIE using the equity method of accounting. Under the equity method, the Company's cost of an investment is adjusted for its share of equity in the earnings or losses of the unconsolidated investment and reduced by distributions received. There is no difference between the cost of the Company's equity investment and the value of the underlying equity as reflected in the unconsolidated equity investment's financial statements.
The Company assesses the carrying value of its equity method investment for impairment in accordance with Accounting Standards Codification ("ASC") 323-10, Investments - Equity Method and Joint Ventures. The Company assesses whether there are any indicators that the fair value of the Company's equity method investment might be impaired. An investment is deemed impaired if the Company's estimate of the fair value of the investment is less than the carrying value of the investment and such decline in value is deemed to be other than temporary. During the years ended December 31, 2015, 2014 and 2013, no impairment of the Company's equity method investment was recognized. |
1. Summary of Significant Accounting Policies: Impairment of Long-lived Assets (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Impairment of Long-lived Assets: | Impairment of Long-Lived Assets:
The Company annually evaluates whether events and circumstances have occurred or triggering events have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. Based on Management’s evaluation, there has been no impairment of carrying value of the long-lived assets, including property and equipment at December 31, 2015 or 2014. |
1. Summary of Significant Accounting Policies: Income Taxes (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Income Taxes: | Income Taxes:
The Financial Accounting Standards Board (“FASB”) issued ASC 740-10. FASB ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized. FASB ASC 740-10 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2015 and December 31, 2014, the Company had no uncertain tax positions.
The Company’s insurance subsidiaries are treated as taxable entities and income taxes are provided for where applicable (Note 12). No provision for income taxes has been made by the Company since it has elected to be treated as an S Corporation for income tax reporting purposes. However, the state of Louisiana does not recognize S Corporation status, and the Company has accrued amounts necessary to pay the required income taxes in such state. |
1. Summary of Significant Accounting Policies: Collateral Held For Resale (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Collateral Held For Resale: | Collateral Held for Resale:
When the Company takes possession of collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance. Any losses incurred at that time are charged against the Allowance for Loan Losses. |
1. Summary of Significant Accounting Policies: Marketable Debt Securities (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Marketable Debt Securities: | Marketable Debt Securities:
Management has designated a significant portion of the Company’s marketable debt securities held in the Company's investment portfolio at December 31, 2015 and 2014 as being available-for-sale. This portion of the investment portfolio is reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss) included in the consolidated statements of comprehensive income/loss. Gains and losses on sales of securities designated as available-for-sale are determined based on the specific identification method. The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity. |
1. Summary of Significant Accounting Policies: Earnings Per Share Information (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Earnings Per Share Information: | Earnings per Share Information:
The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same. |
1. Summary of Significant Accounting Policies: Recent Accounting Pronouncements (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Recent Accounting Pronouncements: | Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This update supersedes revenue recognition requirements in Topic 605, "Revenue Recognition," including most industry-specific revenue guidance in the FASB Accounting Standards Codification. The new guidance stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides specific steps that entities should apply in order to achieve this principle. The amendments are effective for interim and annual periods beginning after December 15, 2017. Adoption is allowed by either the full retrospective or modified retrospective approach. The Company in in the process of evaluating the expected impact of the ASU's adoption on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Imputation of Interest." ASU 2015-03 applies to the presentation of debt issuance costs in financial statements. It requires debt issurance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Debt disclosures will include the face amount of the debt liability and the effective interest rate. In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issurance costs related to line of credit arrangements. ASU 2015-15 noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, reqardless of whether there are any outstanding borrowings on the line of credit arrangement. The accounting standards require retrospective application and represent a change in accounting principle. The standard is effective for fiscal years beginning after December 15, 2015. The Company does not expect the adoption of these standards to have a material impact on the Company's consolidated financial statements.
In February 2016, FASB issued ASU 2016-01, "Leases." The ASU requires all lessees to recognize lease assets and lease liabilities on the balance sheet. Lessor accounting is largely unchanged by the ASU, however disclosures about cash flows arising from leases are required of both lessees and lessors. The disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact this new accounting standard on the consolidated financial statements. |
2. Loans: Loans Receivable, Nonaccrual status policy (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Loans Receivable, Nonaccrual status policy | When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status. At this 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 until the account qualifies for return to accrual status. Non-accrual loans return to accrual status when the loan becomes less than 60 days past due. |
2. Loans: Schedule of Contractual Maturity of Loans (Tables) |
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| Schedule of Contractual Maturity of Loans |
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2. Loans: Principal balances on non-accrual loans (Tables) |
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| Principal balances on non-accrual loans |
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2. Loans: Past Due Financing Receivables (Tables) |
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| Past Due Financing Receivables |
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2. Loans: Schedule of Loans and Financing Receivable (Tables) |
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| Schedule of Loans and Financing Receivable |
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2. Loans: Allowance for Credit Losses on Financing Receivables (Tables) |
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| Allowance for Credit Losses on Financing Receivables |
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2. Loans: Troubled Debt Restructurings on Financing Receivables (Tables) |
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| Troubled Debt Restructurings on Financing Receivables |
TDRs that subsequently defaulted during the year ended December 31, 2015 are listed below.
The following table presents a summary of loans that were restructured during the year ended December 31, 2014.
TDRs that subsequently defaulted during the year ended December 31, 2014 are listed below.
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3 - Marketable Debt Securities: Available-for-sale Securities (Tables) |
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| Available-for-sale Securities |
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3 - Marketable Debt Securities: Held-to-maturity Securities (Tables) |
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| Held-to-maturity Securities |
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3 - Marketable Debt Securities: Investments Classified by Contractual Maturity Date (Tables) |
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| Investments Classified by Contractual Maturity Date |
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3 - Marketable Debt Securities: Schedule of Investment Securities, Fair Value and Unrealized Losses (Tables) |
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| Schedule of Investment Securities, Fair Value and Unrealized Losses |
The following table presents an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2014:
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4 - Fair Value: Fair Value Measurements, by Fair Value hierarchy (Tables) |
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| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurements, by Fair Value hierarchy |
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5. Equity Method Investment: Equity Method Investments (Tables) |
12 Months Ended | |||||||||||||||||||||||||
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Dec. 31, 2015 | ||||||||||||||||||||||||||
| Tables/Schedules | ||||||||||||||||||||||||||
| Equity Method Investments |
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7. Senior Debt: Schedule of Senior Debt (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Senior Debt |
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8. Subordinated Debt: Schedule of Subordinated Debt Interest Rates (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||
| Schedule of Subordinated Debt Interest Rates |
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8. Subordinated Debt: Maturity and redemption information relating to Subordinated Debt (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2015 | |||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||
| Maturity and redemption information relating to Subordinated Debt |
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9. Commitments and Contingencies: Contractual Obligation, Fiscal Year Maturity Schedule (Tables) |
12 Months Ended | |||||||||||||||||||||||||||
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Dec. 31, 2015 | ||||||||||||||||||||||||||||
| Tables/Schedules | ||||||||||||||||||||||||||||
| Contractual Obligation, Fiscal Year Maturity Schedule |
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12. Income Taxes: Schedule of Components of Income Tax Expense (Benefit) (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Components of Income Tax Expense (Benefit) |
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12. Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2015 | |||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||
| Schedule of Deferred Tax Assets and Liabilities |
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12. Income Taxes: Schedule of Income Tax Rate Reconciliation (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Income Tax Rate Reconciliation |
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13. Segment Financial Information: Schedule of Segment Reporting Information, by Segment (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Segment Reporting Information, by Segment |
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2014 followed by a reconciliation to consolidated Company data.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2013 followed by a reconciliation to consolidated Company data.
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1. Summary of Significant Accounting Policies: Depreciation and Amortization (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| Depreciation and amortization | $ 3,318,710 | $ 3,156,828 | $ 2,910,855 |
1. Summary of Significant Accounting Policies: Restricted Cash (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
||
|---|---|---|---|---|
| Details | ||||
| RESTRICTED CASH | [1] | $ 9,335,466 | $ 1,073,157 | |
| ||||
2. Loans (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Details | ||
| Cash collections applied to the principal of loans | $ 332,703,123 | $ 300,064,326 |
| Cash collections applied to the principal of loans, percentage of net receivbles | 75.56% | 72.61% |
| Financing Receivable, Recorded Investment, 90 Days Past Due and Still Accruing | $ 0 | $ 0 |
| Ratio of bankrupt accounts to total principal loan balances | 2.40% | 2.48% |
2. Loans: Principal balances on non-accrual loans (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Financing Receivable, Recorded Investment, Nonaccrual Status | $ 26,926,578 | $ 24,783,149 |
| Cosumer Loans | ||
| Financing Receivable, Recorded Investment, Nonaccrual Status | 25,070,209 | 23,124,540 |
| Real Estate Loans | ||
| Financing Receivable, Recorded Investment, Nonaccrual Status | 846,894 | 919,600 |
| Sales Finance Contracts | ||
| Financing Receivable, Recorded Investment, Nonaccrual Status | $ 1,009,475 | $ 739,009 |
2. Loans: Allowance for Credit Losses on Financing Receivables (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| Loans and Leases Receivable, Allowance, Beginning Balance | $ 28,620,000 | $ 24,680,789 | $ 22,010,085 |
| Provision for loan losses | 36,887,285 | 32,622,546 | 27,623,368 |
| Allowance for Credit Losses, Charge-Offs | (42,017,880) | (38,024,773) | (33,938,554) |
| Allowance for Loan and Lease Loss, Recovery of Bad Debts | 10,010,595 | 9,341,438 | 8,985,890 |
| Loans and Leases Receivable, Allowance, Ending Balance | 33,500,000 | 28,620,000 | 24,680,789 |
| Financing Receivable, Allowance for Credit Losses, Ending Balance | 544,405,558 | 512,592,704 | 485,149,825 |
| Financing Receivable, Collectively Evaluated for Impairment | $ 544,405,558 | $ 512,592,704 | $ 485,149,825 |
3 - Marketable Debt Securities (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Details | ||
| Available-for-sale Securities, Basis for Valuation, Other than Equity Securities | Debt securities available for sale are carried at estimated fair market value. | |
| Proceeds from Sale of Securities, Operating Activities | $ 797,246 | $ 0 |
| Available-for-sale Securities, Gross Realized Gains | 56,113 | |
| Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof | 14,540,000 | 18,350,000 |
| Gross Gains realized from Proceeds from redemptions of investment securities due to the exercise of call provisions by the issuers thereof | $ 13,859 | $ 9 |
3 - Marketable Debt Securities: Available-for-sale Securities (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Available-for-sale Securities, Amortized Cost Basis | $ 138,253,453 | $ 128,031,318 |
| Available-for-sale Securities, Gross Unrealized Gain | 5,821,074 | 5,173,683 |
| Available-for-sale Securities, Gross Unrealized Loss | (212,362) | (357,928) |
| Available-for-sale Securities, Estimated Fair Value | 143,862,165 | 132,847,073 |
| US States and Political Subdivisions Debt Securities | ||
| Available-for-sale Securities, Amortized Cost Basis | 138,123,137 | 127,901,002 |
| Available-for-sale Securities, Gross Unrealized Gain | 5,622,609 | 4,885,012 |
| Available-for-sale Securities, Gross Unrealized Loss | (212,362) | (357,928) |
| Available-for-sale Securities, Estimated Fair Value | 143,533,384 | 132,428,086 |
| Corporate Debt Securities | ||
| Available-for-sale Securities, Amortized Cost Basis | 130,316 | 130,316 |
| Available-for-sale Securities, Gross Unrealized Gain | 198,465 | 288,671 |
| Available-for-sale Securities, Estimated Fair Value | $ 328,781 | $ 418,987 |
3 - Marketable Debt Securities: Held-to-maturity Securities (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Held to Maturity, at amortized cost | $ 17,058,181 | $ 22,762,252 |
| US States and Political Subdivisions Debt Securities | ||
| Held to Maturity, at amortized cost | 17,058,181 | 22,762,252 |
| Held-to-maturity Securities, Unrecognized Holding Gain | 243,377 | 489,958 |
| Held-to-maturity Securities, Unrecognized Holding Loss | (130,505) | (122,589) |
| Held-to-maturity Securities, Fair Value | $ 17,171,053 | $ 23,129,621 |
4 - Fair Value: Fair Value Measurements, by Fair Value hierarchy (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Investments, Fair Value Disclosure | $ 143,862,165 | $ 132,847,073 |
| Corporate Debt Securities | ||
| Investments, Fair Value Disclosure | 328,781 | 418,987 |
| US States and Political Subdivisions Debt Securities | ||
| Investments, Fair Value Disclosure | 143,533,384 | 132,428,086 |
| Fair Value, Inputs, Level 1 | ||
| Investments, Fair Value Disclosure | 328,781 | 418,987 |
| Fair Value, Inputs, Level 1 | Corporate Debt Securities | ||
| Investments, Fair Value Disclosure | 328,781 | 418,987 |
| Fair Value, Inputs, Level 2 | ||
| Investments, Fair Value Disclosure | 143,533,384 | 132,428,086 |
| Fair Value, Inputs, Level 2 | US States and Political Subdivisions Debt Securities | ||
| Investments, Fair Value Disclosure | $ 143,533,384 | $ 132,428,086 |
5. Equity Method Investment (Details) - Mertiage Capital, Centennial Absolute Return Fund, L.P. |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Equity Method Investment, Description of Principal Activities | Company invested $10.0 million in Meritage Capital, Centennial Absolute Return Fund, L.P. (the 'Fund'). |
| Equity Method Investment, Ownership Percentage | 25.85% |
| Equity Method Investment, Additional Information | With at least 60 days notice, the Company has the ability to redeem its investment in the Fund at the end of any calendar quarter. |
5. Equity Method Investment: Equity Method Investments (Details) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
|||
| Details | ||||
| EQUITY METHOD INVESTMENTS | [1] | $ 24,989,505 | $ 26,059,579 | |
| Equity Method Investment, Partnership assets | 97,456,613 | 104,677,496 | ||
| Equity Method Investment, Partnership liabilities | 148,566 | 2,667,002 | ||
| Equity Method Investment, Partnership Net Income | $ (3,344,462) | $ 4,560,544 | ||
| ||||
6. Insurance Subsidiary Restrictions (Details) - USD ($) $ in Millions |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Percentage of Cash and cash equivalents and investment securities were maintained in the Company's insurance subsidiaries | 79.00% | 80.00% |
| Frandisco Property and Casualty Insurance Company | ||
| Statutory Accounting Practices, Statutory Capital and Surplus Required | $ 70.5 | |
| Frandisco Life Insurance Company | ||
| Statutory Accounting Practices, Statutory Capital and Surplus Required | $ 67.3 |
7. Senior Debt (Details) - Senior Debt Obligations - Wells Fargo Preferred Capital, Inc. - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Line of Credit Facility, Initiation Date | Sep. 11, 2009 | |
| Line of Credit Facility, Borrowing Capacity, Description | As amended to date, the credit agreement provides for borrowings and reborrrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company. | |
| Line of Credit Facility, Maximum Borrowing Capacity | $ 100,000,000 | |
| Line of Credit Facility, Covenant Terms | The credit agreement contains covenants customary for financing transactions of this type. | |
| Line of Credit Facility, Current Borrowing Capacity | $ 0 | $ 100.0 |
| Line of Credit Facility, Interest Rate During Period | 3.75% | |
| Line of Credit Facility, Commitment Fee Description | Available but unborrowed amounts under the credit agreement are subject to a periodic unused line fee of .50%. | |
| Line of Credit Facility, Interest Rate Description | The interest rate under the credit agreement is equivalent to the greater of (a) .75% per annum plus 300 basis points or (b) the three month London Interbank Offered Rate (the “LIBOR Rate”) plus 300 basis points. The LIBOR Rate is adjusted on the first day of each calendar month based upon the LIBOR Rate as of the last day of the preceding calendar month. | |
| Line of Credit Facility, Expiration Date | Sep. 11, 2018 |
8. Subordinated Debt (Details) - Subordinated Debt |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Long-term Debt, Description | Subordinated debt consists of Variable Rate Subordinated Debentures issued from time to time by the Company, and which mature four years after their date of issue. |
| Debt Instrument, Maturity Date, Description | The maturity date is automatically extended for an additional four year term unless the holder or the Company redeems the debenture on its original maturity date or within any applicable grace period thereafter. |
| Debt Instrument, Interest Rate Terms | Interest rates on the debentures automatically adjust at the end of each adjustment period. |
| Debt Instrument, Call Feature | The Company may redeem the debentures for a price equal to 100% of the principal plus accrued but unpaid interest upon 30 days’ notice to the holder. |
8. Subordinated Debt: Schedule of Subordinated Debt Interest Rates (Details) - Subordinated Debt |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Debt, Weighted Average Interest Rate | 2.86% | 2.90% | 3.02% |
| Debt, Weighted Average Interest Rate during period | 2.82% | 2.91% | 3.14% |
9. Commitments and Contingencies (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| Oil and Gas Property, Lease Operating Expense | $ 6,042,567 | $ 5,818,043 | $ 5,511,912 |
9. Commitments and Contingencies: Contractual Obligation, Fiscal Year Maturity Schedule (Details) |
Dec. 31, 2015
USD ($)
|
|---|---|
| Details | |
| Operating Leases, Future Minimum Payments Due, Next Twelve Months | $ 5,690,228 |
| Operating Leases, Future Minimum Payments, Due in Two Years | 4,551,312 |
| Operating Leases, Future Minimum Payments, Due in Three Years | 3,135,950 |
| Operating Leases, Future Minimum Payments, Due in Four Years | 1,667,435 |
| Operating Leases, Future Minimum Payments, Due in Five Years | 796,547 |
| Operating Leases, Future Minimum Payments, Due Thereafter | 39,534 |
| Operating Leases, Future Minimum Payments Due | $ 15,881,006 |
10. Employee Benefit Plans (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| General Discussion of Pension and Other Postretirement Benefits | The Company maintains a 401(k) plan, which was qualified under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), as amended, to cover employees of the Company. | ||
| Description of Defined Contribution Pension and Other Postretirement Plans | Any employee who is 18 years of age or older is eligible to participate in the 401(k) plan on the first day of the month following the completion of one complete calendar month of continuous employment and the Company begins matching up to 4.50% of an employee’s deferred contribution, up to 6.00% of their total compensation. | ||
| Pension and Other Postretirement Benefit Contributions | $ 1,834,138 | $ 1,744,475 | $ 1,606,957 |
11. Related Party Transactions (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2015
USD ($)
| |
| Beneficial Owner, David W. Cheek | |
| Related Party Transaction, Description of Transaction | outstanding loan to a real estate development partnership |
| Accounts Payable, Related Parties, Current | $ 1,288,054 |
| Trustee of an executive officer's irrevocable life insurance trust | |
| Related Party Transaction, Description of Transaction | Effective September 23, 1995, the Company entered into a Split-Dollar Life Insurance Agreement with the Trustee of an executive officer’s irrevocable life insurance trust. |
| Accounts Payable, Related Parties, Current | $ 349,870 |
| Related Party Transaction, Amounts of Transaction | $ 5,584 |
12. Income Taxes: Schedule of Components of Income Tax Expense (Benefit) (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| Current Federal Tax Expense (Benefit) | $ 4,220,841 | $ 4,143,983 | $ 3,840,502 |
| Current State and Local Tax Expense (Benefit) | 5,160 | 12,500 | 6,432 |
| Current Income Tax Expense (Benefit) | 4,226,001 | 4,156,483 | 3,846,934 |
| Deferred Federal Income Tax Expense (Benefit) | 1,037,993 | 41,211 | 145,730 |
| Other Income Tax Expense (Benefit), Continuing Operations | $ 5,263,994 | $ 4,197,694 | $ 3,992,664 |
12. Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Details | ||
| Deferred Tax Assets (Liabilities), Insurance Commissions | $ (6,043,688) | $ (5,754,290) |
| Deferred Tax Assets (Liabilities), Unearned Premium Reserves | 1,656,106 | 2,194,586 |
| Deferred Tax Assets (Liabilities), Unrealized Gain on Marketable Debt Securities | (1,465,727) | (1,152,280) |
| Deferred Tax Liabilities, Other | $ (332,215) | $ (122,100) |
12. Income Taxes: Schedule of Income Tax Rate Reconciliation (Details) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
| Details | |||
| Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent | 34.00% | 34.00% | 34.00% |
| Tax effect of S corporation status | (12.60%) | (19.30%) | (20.70%) |
| Tax exempt income | (4.50%) | (3.50%) | (2.90%) |
| Effective Income Tax Rate Reconciliation, Percent | 16.90% | 11.20% | 10.40% |
13. Segment Financial Information (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Details | |
| Segment Reporting, Factors Used to Identify Entity's Reportable Segments | Each division is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location. |