MANAGEMENT’S DISCUSSION AND ANALYSIS OF |
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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Overview: |
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The following narrative is Management’s discussion and analysis of the foremost factors that influenced 1stFranklin Financial Corporation’s and its consolidated subsidiaries’ (the “Company”, “our” or “we”) operating results and financial condition as of and for the three- and nine-month periods ended September 30, 2008 and 2007. This analysis and the accompanying interim financial information should be read in conjunction with the audited consolidated financial statements included in the Company’s December 31, 2007 Annual Report. Results achieved in any interim period are not necessarily reflective of the results to be expected for the full year period. |
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Forward Looking Statements: |
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Certain information in this discussion and other statements contained in this Quarterly Report, which are not historical facts, may be forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements involve known and unknown risks and uncertainties. The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Possible factors which could cause actual future results to differ from expectations include, but are not limited to, adverse general economic conditions, including changes in the interest rate environment, unexpected reductions in the size of or collectability of amounts in our loan portfolio, reduced sales or increased redemptions of our securities, unavailability of amounts under our credit facilities, federal and state regulatory changes affecting consumer finance companies, unfavorable outcomes in legal proceedings and other factors referenced elsewhere in our filings with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to update any forward-looking statements, except as required by law. |
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The Company: |
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We are engaged in the consumer finance business, primarily in making consumer loans to individuals in relatively small amounts for short periods of time. Other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage loans on real estate to homeowners. As of September 30, 2008, the Company’s business was operated through a network of 246 branch offices located in Alabama, Georgia, Louisiana, Mississippi, South Carolina and Tennessee. |
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We also offer optional credit insurance coverage to our customers when making a loan. Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance. Customers may request credit life insurance coverage to help assure 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. |
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The Company's operations are subject to various state and federal laws and regulations. We believe our operations are in compliance with applicable state and federal laws and regulations. |
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Financial Condition: |
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Turmoil in the financial markets has been creating considerable stress on the U.S. and other global economies during recent months. Volatility in the stock market, combined with increasing unemployment and high commodity prices continue to indicate a possible recessionary period. The current economic environment is one of the most challenging and volatile since we began operations in 1941. A number of significant financial institutions and investment banks are facing economic difficulties and a few have failed. Amid the economic instability, our Company is financially sound and our balance sheet strong. |
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At September 30, 2008, the Company had $403.5 million in total assets compared to $402.5 million at December 31, 2007. The $1.0 million increase was mainly due to an increase in investment securities held by the Company’s insurance subsidiaries. Investment securities increased $13.1 million (17%) at September 30, 2008 compared to December 31, 2007. During the current year, Management transferred a portion of the insurance subsidiaries’ surplus cash and cash equivalents into investment securities to maximize yields. The Company's investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds. A significant portion of these investment securities have been designated as “available for sale” (84% as of September 30, 2008 and 77% as of December 31, 2007) with any unrealized gain or loss, net of deferred income taxes, accounted for as accumulated other comprehensive income in the equity section of the Company’s balance sheet. The remainder of the Company’s investment portfolio represents securities carried at amortized cost and designated as “held to maturity,” as Management has both the ability and intent to hold these securities to maturity. |
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Cash and cash equivalents declined $12.8 million to $17.0 million at September 30, 2008 from $29.8 million at December 31, 2007. The majority of the decline was due to the aforementioned transfer of surplus funds into investment securities. Funds were also used to redeem senior demand note balances upon request by investors and redemptions of maturing commercial paper. |
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The Company held cash in restricted accounts of approximately $2.3 million and $2.2 million at September 30, 2008 and December 31, 2007, respectively. These restricted accounts are held by the Company’s insurance subsidiaries in order to meet certain deposit requirements applicable to insurance companies in the State of Georgia and to meet the reserve requirements contained in the Company’s reinsurance agreements. |
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Growth in the Company’s net loan portfolio has been slower this year compared to recent years as a result of the downturn in the economy. The net loan portfolio is only slightly higher at September 30, 2008 as compared to December 31, 2007. The Company’s business cycle for loan originations is seasonal. The first quarter of each year is typically our slowest in terms of loan originations, followed by increases during the next two quarters and a peak during the fourth quarter. Due to current economic uncertainties, many consumers are showing a reluctance to engage in borrowing. In addition, Management has taken a more conservative approach this year in its loan underwriting standards which contributed to the slower growth in loan originations. An increase in our allowance for loan losses also offset some of the increase in our net loan portfolio. The allowance is an offset in the loan portfolio to reserve for losses which Management believes is inherent in current loans outstanding at September 30, 2008. |
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Total liabilities of the Company declined $2.7 million (1%) at September 30, 2008 compared to the prior year-end. The majority of the decline has been due to aforementioned turmoil in the financial markets which has led to a negative impact on investments in of our senior and subordinated debt securities offered to investors. Highly publicized bank failures have caused concerns among some of our investors, and potential investors, about the safety and security of an investment in the Company’s debt securities. Although we have never defaulted on the payment of any debt security since we began offering them to the public in 1950, some investors have elected to redeem their securities and transfer their funds to insured bank accounts. As a result, outstanding amounts of the Company’s senior and subordinated debt securities have declined a net total of $18.9 million (7%) at September 30, 2008 compared to December 30, 2007. The Company utilized funds available under its credit facility to offset a majority of the decrease in investor balances. At September 30, 2008, senior and/or subordinated debt securities held by investors totaled $238.7 million. |
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A decline in accrued expenses and accounts payable during the current year also contributed to the decrease in overall liabilities. During February 2008, the Company disbursed the prior year’s annual incentive bonus and annual profit sharing contributions to employees. Both of these disbursements had previously been accrued for as of December 31, 2007. These disbursements were the primary cause of a $.7 million (4%) reduction in accrued expenses and other liabilities as of September 30, 2008 compared to December 31, 2007. |
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Results of Operations: |
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The prior year was a record year for the Company in terms of revenues and asset growth, and while 2008 may not exceed the performance achieved in 2007, it is on track to be a good year, a profitable year. Total revenues were $34.9 million and $33.2 million during the three-month periods ended September 30, 2008 and 2007, respectively, representing a $1.7 million (5%) increase. During the nine-month comparable periods, revenues were $102.8 million and $95.9 million, respectively, representing a $6.9 million (7%) increase. Although revenues increased, higher operating costs during the 2008 periods offset the increase, resulting in lower net income. Net income during the three-month periods ended September 30, 2008 and 2007 was $3.2 million and $4.5 million, respectively. During the nine-month comparable periods, net income was $8.5 million and $11.9 million, respectively. |
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Credit losses and higher personnel expense continue to be the primary categories contributing to higher expenses during the current year. The continued expansion of our branch office network has also contributed to increased expenses. Since September 30, 2007, the Company has opened 12 new branch offices and the costs associated therewith have had a negative impact on our operating results. While each of the new branches is meeting initial expectations, Management expects that as they mature, they will add to the growth and profitability of the Company. |
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Net Interest Margin |
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Our net interest margin increased $1.9 million (10%) and $5.8 million (10%) during the three- and nine-month periods ended September 30, 2008, respectively, compared to the same comparable periods a year ago. The net interest margin reflects the difference between earnings on the Company’s loan and investment portfolios and interest incurred on the Company’s senior and subordinated debt. Average net receivables were $315.3 million during the nine-month period ended September 30, 2008 as compared to $291.1 million during the same period in 2007. The higher level of average net receivables resulted in an increase in interest income during the current year, which led to the increase in our net interest margin. |
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Lower interest expense during the three- and nine-month periods just ended as compared to the same periods in 2007 also contributed to the increase in our net interest margin. Although average debt outstanding was $271.9 million during the nine-month period ended September 30, 2008 compared to $250.5 million during the same period a year ago, average borrowing rates declined to 5.49% from 5.95%. The lower borrowing rate resulted in interest expense decreasing $.5 million (13%) and $.3 million (2%) during the three- and nine-month periods ended September 30, 2008, respectively, compared to the same periods in 2007. |
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Management projects that, based on historical results, average net receivables will grow through the remainder of the year, and earnings are expected to increase accordingly. However, an increase in interest rates could negatively impact our interest margin. |
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Insurance Income |
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Higher levels of credit insurance in-force held by our insurance subsidiaries led to a $.2 million (3%) and $.5 million (2%) increase in net insurance income during the three- and nine-month periods ended September 30, 2008 and 2007, respectively. An increase in claims paid during the current year offset some of the increase in insurance income. |
Provision for Loan Losses |
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The provision for loan losses reflects the amount charged against earnings to increase the allowance for loan losses to a level deemed appropriate by Management to cover probable credit losses inherent in our loan portfolio. Determining a proper allowance for loan losses is a critical accounting estimate which involves Management’s judgment on certain relevant factors, such as historical loss trends, current net charge offs, delinquency levels, bankruptcy trends and overall economic conditions. |
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During the current year there has been unprecedented instability in our country’s financial system mainly due to the sub-prime mortgage meltdown. Many lending institutions extended adjustable rate loans to borrowers in past years when interest rates were at historically low levels. A number of these adjustable rate loans have re-priced at higher interest rates and a number of borrowers are not able to afford the new payment levels and/or terms. The Company does not believe it has any material direct exposure to these risks as we do not operate in the type of lending market and do not offer these types of real estate loans. All real estate loans currently extended by the Company are at fixed interest rates and with fixed payments. Notwithstanding this, and despite the Company’s efforts to evaluate its customers’ creditworthiness and ability to repay borrowings, the Company cannot provide any assurances that it will not be, directly or indirectly, affected by the increasing number of payment delinquencies and foreclosures. Certain of the Company’s customers may be borrowers on these, or similar loans from other lenders, and any increases in payment amounts or rates experienced by these customers may adversely affect their ability to make payments on any loans extended by the Company. In addition, the Company may be exposed to an increasing number of bankruptcy filings by its customers as a result of their inability to make timely payments to other lenders. Any of the foregoing could have a material adverse effect on the Company’s financial condition or results of operations. Management continues to monitor the ongoing challenges facing the real estate marketplace and the creditworthiness of its own customers. |
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The Company is seeing a greater impact on operating results during the current year as compared to 2007 due to aforementioned challenging economic conditions. Rising prices for consumer goods and services appears to be putting financial pressure on our loan customers. As a result, the Company has experienced an increase in bankruptcy filings among its loan customers and higher net charge offs to date in 2008 than in the prior year’s period. The Company held $12.5 million in loan receivables under bankruptcy at September 30, 2008 compared to $10.6 million at September 30, 2007. Net charges offs increased $2.3 million (17%) during the nine-month period ended September 30, 2008 compared to the same period a year ago. |
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Management increased the allowance for loan losses during the nine-month period ended September 30, 2008 due to matters described above. As a result, the provision for loan losses increased $1.1 million (20%) and $3.3 million (24%) during the three- and nine-month periods ended September 30, 2008 compared to the same comparable periods a year ago. We continue to be watchful of credit quality issues. Should the economic climate deteriorate from current levels, more borrowers may experience difficulty repaying loans and the level of loan delinquencies, bankruptcies and loan charge-offs could rise and require additional increases in the loan loss allowance. Currently, we believe the allowance for loan losses is adequate to absorb actual losses. |
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Other Operating Expenses |
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Personnel expense increased $1.2 million (12%) and $4.6 million (15%) during the three- and nine-month periods ended September 30, 2008, respectively, compared to the same periods in 2007. Merit salary increases awarded in February and an increase in our employee base, due to new office openings, resulted in higher compensation levels during 2008. An increase in employee health insurance claims and an increase in Company 401(k) matching contributions also contributed to higher personnel expense during the current year. |
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Increases in maintenance of offices, depreciation expense on furniture and equipment, and rent expense were the main factors causing the $.3 million (14%) and $.8 million (11%) increase in occupancy expense during the three- and nine-month periods ended September 30, 2008 compared to the same periods a year ago. The opening of new branch offices, office relocations and renewal of certain expiring leases were the underlying reasons for the increase. |
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Other miscellaneous operating expenses increased approximately $1.0 million (27%) and $1.5 million (12%) during the three- and nine-month periods ended September 30, 2008, respectively, compared to the same periods a year ago. An increase in charitable contributions, travel expenses, legal and audit fees, computer expenses, postage and training expenses are the primary causes of the increases. During the nine-month comparable period, higher advertising expenses also contributed to the increase. |
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Income Taxes: |
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The Company has elected to be treated as an S Corporation for income tax reporting purposes. Taxable income or loss of an S Corporation is included in the individual tax returns of the shareholders of the Company, rather then being taxed at the corporate level. Notwithstanding this election, however, income taxes continue to be reported for, and paid by, the Company's insurance subsidiaries as they are not allowed to be treated as S corporations, and for the Company’s state taxes in Louisiana, which does not recognize S Corporation status. Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries. The deferred income tax assets and liabilities are due to certain temporary differences between reported income and expenses for financial statement and income tax purposes. |
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Effective income tax rates were 23% and 20% during the three-month periods ended September 30, 2008 and 2007, respectively. During the nine-month comparable periods, income tax rates were 21% and 18%, respectively. The higher rate experienced during the current year period was due to less income at the S Corporation level which was passed to the shareholders of the Company for tax reporting, whereas income earned at the insurance subsidiary level was taxed at the corporate level. The S Corporation reported less income during the current period just ended as compared to the same comparable period a year ago. |
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Quantitative and Qualitative Disclosures About Market Risk: |
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As previously discussed, interest rates have declined since September 30, 2007 resulting in lower rates being paid on borrowings during the current year. We expect only minimal fluctuations in market interest rates during the remainder of the year, thereby minimizing the impact on our net interest margin. Please refer to the market risk analysis discussion contained in our annual report on Form 10-K as of and for the year ended December 31, 2007 for a more detailed analysis of our market risk exposure. |
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Liquidity and Capital Resources: |
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As of September 30, 2008 and December 31, 2007, the Company had $17.0 million and $29.8 million, respectively, invested in cash and short-term investments, the majority of which was held by the Company’s insurance subsidiaries. |
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The Company’s investments in marketable securities can be converted into cash, if necessary. As of September 30, 2008 and December 31, 2007, the majority of the Company’s cash and cash equivalents and investment securities were maintained in its insurance subsidiaries. State insurance regulations limit the use an insurance company can make of its assets. Dividend payments to the parent company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of policyholders’ surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At December 31, 2007, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had policyholders’ surpluses of $38.7 million and $40.6 million, respectively. The maximum aggregate amount of dividends these subsidiaries can pay to theparent company in 2008 without prior approval of the Georgia Insurance Commissioner is approximately $9.0 million. |
Liquidity requirements of the Company are financed through the collection of receivables and through the sale of short- and long-term debt securities. The Company’s continued liquidity is therefore dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public. In addition to its receivables and securities sales, the Company has an external source of funds available under a credit agreement with Wachovia Bank, N.A. and BMO Capital Markets Financing, Inc. The credit agreement provides for unsecured borrowings of up to $50.0 million, subject to certain limitations, and is scheduled to expire on December 15, 2009. Any amounts then outstanding will be due and payable on such date. The credit agreement contains covenants customary for financing transactions of this type. At September 30, 2008, the Company was in compliance with all covenants. Available borrowings under the agreement were $16.3 million and $33.3 million at September 30, 2008 and December 31, 2007, respectively, at interest rates of 4.50% and 6.75%, respectively. |
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The aforementioned turmoil in the financial markets has created liquidity challenges for many companies. As a result of continued uncertainty in the markets and further weakening of the economy, Management is taking a proactive approach to insure adequate funding for the Company’s continued growth. As previously mentioned, dividend payments could be made by the Company’s insurance subsidiaries to the parent company for approximately $9.0 million without prior approval from the Georgia Insurance Commissioner. Management has requested approval from the Georgia Insurance Commissioner for the insurance subsidiaries to pay up to $35.0 million in additional dividends to the parent company. Management is also exploring the prospect of amending the Company’s current credit facility to increase amounts available there under. Management believes one or a combination of the aforementioned funding resources would provide sufficient liquidity for continued growth. However, there can be no assurance that the Company will be receive permission from the Georgia Insurance Commissioner to pay additional dividends or be able to amend its credit agreement on a timely basis, on terms acceptable to us, or at all. |
Critical Accounting Policies: |
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The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry. The Company’s more critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserve. |
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Allowance for Loan Losses: |
The allowance for loan losses is based on the Company's previous loss experience, a review of specifically identified loans where collection is doubtful and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio. Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral. |
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Revenue Recognition: |
Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges. An interest yield method is used by the Company on each individual precomputed account to calculate income for on-going precomputed 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 precomputed accounts are paid off or renewed prior to maturity, the result is that most of the precomputed 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 adjustments to the loan yield over the contractual life of the related loan. |
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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 on these policies are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines. |
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The credit life and accident and health insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s life insurance subsidiary. The premiums are deferred and earned using the pro-rata method for level-term life insurance policies and the effective yield method for decreasing-term life policies. Premiums on accident and health insurance policies are earned based on an average of the pro-rata method and the effective yield method. |
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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 generally accepted actuarial methods. In the event that the Company’s actual reported losses for any given period are materially in excess of the previous 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 thesepolicies could result in material changes in the Company’s consolidated financialposition or consolidated results of operations. |
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Recent Accounting Pronouncements: |
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In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not requireany new assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and accordingly, the Company adopted SFAS No. 157 effective January 1, 2008. The adoption of this accounting principle did not have a material effect on its financial position, results of operations or cash flows, but did result in additional disclosures being added to the footnotes to the consolidated financial statements (See Note 4). |
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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has no current plans to elect the fair value option for any specific financial instruments or other items. Accordingly, the adoption of this accounting pronouncement as of January 1, 2008 did not have a material impact on the Company’s financial position, results of operations or cash flows. |
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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” – an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures concerning (1) the manner in which an entity uses derivatives (and the reasons it uses them), (2) the manner in which derivatives and related hedged items are accounted for under SFAS No. 133 and interpretations thereof, and (3) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect SFAS 161 to have a material effect on the Company’s financial position or results of operations. |
1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
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| September 30, | December 31, |
| 2008 | 2007 |
| (Unaudited) | |
ASSETS |
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CASH AND CASH EQUIVALENTS ............................................ | $ 17,002,627 | $ 29,831,129 |
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RESTRICTED CASH ................................................................ | 2,314,953 | 2,187,022 |
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LOANS: Direct Cash Loans .............................................................. Real Estate Loans ............................................................... Sales Finance Contracts ..................................................... Less: Unearned Finance Charges ..................................... Unearned Insurance Premiums and Commissions .... Allowance for Loan Losses ..................................... Net Loans ...................................................... | 308,133,778 24,639,020 29,347,443 362,120,241 40,808,546 22,172,718 21,835,085 277,303,892 | 303,678,240 25,052,160 31,747,131 360,477,531 40,720,500 23,066,730 20,035,085 276,655,216 |
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INVESTMENT SECURITIES: Available for Sale, at fair market ........................................... Held to Maturity, at amortized cost ........................................ | 76,755,223 14,454,263 91,209,486 | 60,060,798 18,021,418 78,082,216 |
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OTHER ASSETS ...................................................................... | 15,690,156 | 15,698,052 |
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TOTAL ASSETS .............................................. | $ 403,521,114 | $ 402,453,635 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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SENIOR DEBT ........................................................................ | $ 179,236,809 | $ 182,372,949 |
ACCRUED EXPENSES AND OTHER LIABILITIES ..................... | 17,535,366 | 18,274,446 |
SUBORDINATED DEBT ........................................................... | 93,118,230 | 91,965,714 |
Total Liabilities .............................................................. | 289,890,405 | 292,613,109 |
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STOCKHOLDERS' EQUITY: | | |
Preferred Stock; $100 par value ......................................... | - -- | - -- |
Common Stock Voting Shares; $100 par value; 2,000 shares authorized; 1,700 shares outstanding ........................ Non-Voting Shares; no par value; 198,000 shares authorized; 168,300 shares outstanding .................... | 170,000 - -- | 170,000 - -- |
Accumulated Other Comprehensive (Loss) Income ............... | (33,289) | 970,603 |
Retained Earnings .............................................................. | 113,493,998 | 108,699,923 |
Total Stockholders' Equity ............................................. | 113,630,709 | 109,840,526 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ | $ 403,521,114 | $ 402,453,635 |
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See Notes to Consolidated Financial Statements |
1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS |
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| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
| (Unaudited) | (Unaudited) |
| 2008 | 2007 | 2008 | 2007 |
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INTEREST INCOME | $ 24,657,652 | $ 23,317,443 | $ 73,147,772 | $ 67,578,793 |
INTEREST EXPENSE | 3,539,671 | 4,086,808 | 11,326,093 | 11,597,041 |
NET INTEREST INCOME | 21,117,981 | 19,230,635 | 61,821,679 | 55,981,752 |
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PROVISION FOR LOAN LOSSES | 6,700,356 | 5,567,463 | 17,101,252 | 13,785,732 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 14,417,625 | 13,663,172 | 44,720,427 | 42,196,020 |
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NET INSURANCE INCOME: | | | | |
Premiums and Commissions Insurance Claims and Expenses | 8,830,417 1,890,302 6,940,115 | 8,602,658 1,865,006 6,737,652 | 26,012,760 5,640,546 20,372,214 | 24,964,081 5,062,015 19,902,066 |
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OTHER REVENUE | 1,395,844 | 1,250,506 | 3,654,742 | 3,371,716 |
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OTHER OPERATING EXPENSES: | | | | |
Personnel Expense Occupancy Expense Other Total | 11,329,497 2,694,696 4,571,558 18,595,751 | 10,136,704 2,364,698 3,587,091 16,088,493 | 36,066,034 7,879,625 14,062,048 58,007,707 | 31,423,856 7,121,084 12,545,060 51,090,000 |
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INCOME BEFORE INCOME TAXES | 4,157,833 | 5,562,837 | 10,739,676 | 14,379,802 |
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Provision for Income Taxes | 937,657 | 1,101,451 | 2,233,719 | 2,528,448 |
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NET INCOME | 3,220,176 | 4,461,386 | 8,505,957 | 11,851,354 |
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RETAINED EARNINGS, Beginning of Period | 110,569,554 | 104,432,919 | 108,699,923 | 97,950,753 |
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Distributions on Common Stock | 295,732 | 110,791 | 3,711,882 | 1,018,593 |
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RETAINED EARNINGS, End of Period | $113,493,998 | $108,783,514 | $ 113,493,998 | $ 108,783,514 |
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BASIC EARNINGS PER SHARE: 170,000 shares outstanding for all periods (1,700 voting, 168,300 non-voting) | $18.94 | $26.24 | $50.04 | $69.71 |
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See Notes to Consolidated Financial Statements |
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1ST FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| Nine Months Ended |
| September 30, |
| (Unaudited) |
| 2008 | 2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net Income | $ 8,505,957 | $ 11,851,354 |
Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses Depreciation and Amortization Provision for Deferred Income Taxes Other, net Increase in Miscellaneous Assets (Decrease) Increase in Other Liabilities Net Cash Provided | 17,101,252 1,814,431 45,117 191,368 (76,644) (508,121) 27,073,360 | 13,785,732 1,511,344 126,643 77,651 (676,732) 788,286 27,464,278 |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Loans originated or purchased Loan payments Increase in restricted cash Purchases of marketable debt securities Redemptions of marketable debt securities Fixed asset additions, net Net Cash Used | (174,399,953) 156,650,025 (127,931) (28,668,748) 14,059,500 (1,719,249) (34,206,356) | (180,500,771) 152,641,173 (164,859) (13,046,181) 10,013,100 (3,336,374) (34,393,912) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Decrease in senior debt Subordinated debt issued Subordinated debt redeemed Dividends / Distributions Net Cash Used (Provided) | (3,136,140) 19,236,549 (18,084,033) (3,711,882) (5,695,506) | (6,566,645) 28,443,120 (10,098,134) (1,018,593) 10,759,748 |
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (12,828,502) | 3,830,114 |
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CASH AND CASH EQUIVALENTS, beginning | 29,831,129 | 24,028,767 |
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CASH AND CASH EQUIVALENTS, ending | $ 17,002,627 | $ 27,858,881 |
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Cash paid during the period for: Interest Income Taxes | $ 11,482,498 2,346,456 | $ 11,533,633 2,546,208 |
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See Notes to Consolidated Financial Statements |
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Note 3 – Investment Securities |
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| Debt securities available for sale are carried at estimated fair market value. Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity. The amortized cost and estimated fair market values of these debt securities were as follows: |
| | As of September 30, 2008 | As of December 31, 2007 |
| | Amortized Cost | Estimated Fair Market Value | Amortized Cost | Estimated Fair Market Value |
| Available for Sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions Corporate securities | $ 5,342,170 71,517,172 130,316 $ 76,989,658 | $ 5,396,307 70,553,643 805,272 $ 76,755,222 | $ 9,015,878 49,869,070 130,316 $ 59,015,264 | $ 9,081,620 50,084,797 894,381 $ 60,060,798 |
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| | As of September 30, 2008 | As of December 31, 2007 |
| | Amortized Cost | Estimated Fair Market Value | Amortized Cost | Estimated Fair Market Value |
| Held to Maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions | $ 1,498,087 12,956,176 $ 14,454,263 | $ 1,501,506 13,028,885 $ 14,530,391 | $ 4,715,540 13,305,878 $ 18,021,418 | $ 4,717,003 13,431,564 $ 18,148,567 |
