1st Franklin Financial Corp.
11/12/2026 | Press release | Distributed by Public on 11/12/2026 15:53
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
The following narrative is management’s discussion and analysis of the foremost factors that influenced 1st Franklin Financial Corporation’s and its consolidated subsidiaries’ (the “Company”, “1FFC”, “our” or “we”) financial condition and operating results as of and for the three and nine months ended September 30, 2026 and 2025. This discussion and analysis and the accompanying unaudited condensed consolidated financial information should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. Results achieved in any interim period are not necessarily indicative of the results to be expected for the full year period or any other interim period.
FORWARD-LOOKING STATEMENTS:
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are all statements other than those of historical fact. Forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "potential," "predict," "project," "seek," "should," "will," "would" or comparable terminology. These forward-looking statements include, but are not limited to, statements about our strategies, future operations, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our financial products, growth opportunities and trends in the market in which we operate, and our prospects, plans and objectives of management. The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein, which involve known and unknown risks and uncertainties. Possible factors that could cause actual future results to differ from expectations include, but are not limited to: our ability to manage cash flow and working capital; the accuracy of management’s estimates and judgments; adverse general economic conditions, including changes in employment rates or in the interest rate environment; adverse changes in the ability or willingness of our customers to meet their loan repayment obligations to the Company; unexpected reductions in the size or collectability of our loan portfolio; unexpected increases in our allowance for credit losses; reduced sales or increased redemptions of our securities; unavailability of borrowings under our credit facility; federal and state regulatory changes affecting consumer finance companies; unfavorable outcomes in legal proceedings; our ability to remediate the previously disclosed material weaknesses in our internal control over financial reporting; and those risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, as well as other factors referenced elsewhere in our subsequent filings with the Securities and Exchange Commission from time to time. As a result, you should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements, except as required by law.
OVERVIEW:
The Company is a privately-held Georgia corporation headquartered in Toccoa, Georgia. 1FFC has been engaged in the consumer finance business since 1941. Our operations focus primarily on making consumer loans to individuals for personal or family needs, in relatively small amounts with maturities of approximately 2 years. The Company historically extended real estate loans. Beginning in 2024, 1FFC discontinued the origination of real estate loans, and the portfolio is currently in runoff. The Company also purchases sales finance contracts from various dealers.
All of 1FFC's loans are at fixed rates and contain fixed terms and fixed payments. The Company operates branch offices in ten southern states and had a total of 362 branch locations as of September 30, 2026, including 100 branch offices in Georgia, 48 in Alabama, 43 in South Carolina, 40 in Mississippi, 39 in Tennessee, 36 in Louisiana, 25 in Texas, 19 in Kentucky, 7 in Virginia, and 5 in Florida. The Company and its operations are guided by a strategic plan which includes planned growth through strategic expansion of our branch office network. The majority of our revenues are derived from interest and finance charges earned on loans outstanding. Additional revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.
In connection with our business, we also offer optional single premium credit insurance products to our customers when making a consumer loan. Such products may include credit life insurance, credit accident and health insurance, credit involuntary unemployment 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. In certain states where offered, customers may choose involuntary unemployment insurance for payment protection in the form of loan payment assistance due to an unexpected job loss. Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.
1FFC writes these various insurance products as an agent for a non-affiliated insurance company specializing in such insurance. However, under various agreements, 1st Franklin's two wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company (collectively, "the Frandiscos"), reinsure the credit insurance policies written on behalf of the Company's customer base. These subsidiaries are licensed insurance companies and are subject to regulation and supervision by the Georgia
Commissioner of Insurance and Safety Fire, including statutory capital and surplus requirements, restrictions of dividends and other distributions, and oversight of related-party transactions.
FACTORS IMPACTING RESULTS OF OPERATIONS:
1FFC's results of operations are affected by various factors that influence our revenues and costs, including the following:
Seasonality:
The Company's loan volume follows seasonal trends. The highest loan demand generally occurs during the second, third and fourth quarters, which we believe is primarily due to customers borrowing money for vacations and holiday spending. Loan demand is generally lowest and loan repayment highest during the first quarter, which we believe is primarily driven by the timing of income tax refunds.
Changes in quarterly growth or liquidation could result in larger allowance for credit loss releases in periods of portfolio liquidation, and larger provisions for credit losses in periods of portfolio growth. Consequently, 1FFC experiences seasonal fluctuations in our operating results. However, due to 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, changes in macroeconomic factors, including inflation, higher interest rates, and increases in unemployment, may have a material adverse effect on our profitability and may impact our typical seasonal trends for loan volume.
Growth in Loan Portfolio:
The Company's financial performance continues to be dependent in large part upon the growth in its loan portfolio. Portfolio growth has been driven by expanding 1FFC's geographic footprint and growing our loan portfolios within existing branches. In addition, an increased focus on mailing convenience checks has also contributed to portfolio growth in recent years.
Almost all loans, regardless of origination channel, are serviced through our branches, which allows us to build and maintain relationships with our customers throughout the life of each loan. We believe this relationship-driven model provides greater visibility into potential payment challenges, helps mitigate credit risk, and allows us to better understand and respond to our customers' evolving borrowing needs. 1FFC intends to continue capitalizing on opportunities in the marketplace to drive growth in the loan portfolio, increase revenue, and enhance the profitability of existing branches. Additionally, the Company plans to open new branches within our current geographic footprint and strategically expand operations into new states that we believe align well with our products, services, and operating model.
Allowance for Credit Losses:
Operating results are significantly influenced by the credit quality of the loan portfolio. The Company utilizes a Probability of Default (“PD”) / Loss Given Default (“LGD”) model to estimate the allowance for credit losses whereby estimated loss is equal to the product of PD and LGD. The allowance for credit losses model estimates instances of loss and the average severity of losses using the characteristics of the loan portfolio, along with incorporating a reasonable and supportable forecast which is utilized to support the adjustments to historical loss experience of loans with similar credit risk.
The allowance for credit losses recorded in the balance sheet reflects the Company’s best estimate of expected credit losses. See Note 2, Loans and Allowance for Credit Losses, in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.
Interest Rates:
1FFC's cost of funds is influenced by changes in interest rates, as certain of our liabilities bear interest at variable rates. Volatility in interest rates generally has more impact on income earned from investments and the Company's borrowing costs than on interest income earned on loans. All of 1FFC's loans are at fixed rates and, therefore, are not impacted by changes in the interest rate environment.
Operating Expenses:
The Company's financial results are significantly impacted by the costs associated with our operations and corporate office functions. These expenses include personnel-related costs as well as the infrastructure and
administrative support necessary to manage our branch network, service the loan portfolio, oversee compliance and risk management, and support corporate governance and strategic initiatives.
COMPONENTS OF RESULTS OF OPERATIONS:
Interest Income:
Interest income is a principal component of the Company’s operating performance and resulting net income. It primarily represents income on earning assets and is affected by the size and mix of the loan and investment portfolios, as well as the related interest and finance charges.
Interest income on loans is recognized as revenue on an accrual basis using the effective interest method. Loans are generally placed on non-accrual status after two missed payments. For loans placed on non-accrual status, the Company ceases accruing interest and finance charges and previously accrued interest is reversed against interest income. 1FFC generally charges off a loan when a full contractual payment has not been received in the preceding 180 days.
Most states permit certain fees in connection with lending activities, such as loan origination fees and maintenance fees. Loan fees are deferred and amortized to interest income over the contractual life of the loan using methods that approximate the effective interest method. Depending on applicable state law, such fees may or may not be refundable to the customer in the event of an early payoff. If a loan liquidates before amortization is complete, the Company applies any unamortized fees and origination costs to interest income at the date of liquidation. The Company recognizes late charges and prepayment penalties as revenue when received.
Interest Expense:
Interest expense represents the cost of funds associated with interest-bearing liabilities, with debt securities comprising the majority of these obligations. Key factors affecting our interest expense include 1FFC's average outstanding debt as well as the general interest rate environment.
Provision for Credit Losses:
The Company’s provision for credit losses is a charge against earnings in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover expected losses in our loan portfolio.
Determining a proper allowance for credit 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, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions. Changes in the provision are intended to ensure that the allowance for credit losses reported on the Condensed Consolidated Statements of Financial Position appropriately reflects expected credit losses over the remaining maturity of the portfolio.
While management believes its approach for determining the allowance for credit losses adequately considers the potential factors that could potentially result in credit losses, to the extent actual outcomes are worse than management’s estimates, additional provision for credit losses could be required which could adversely affect our earnings or financial position in future periods. See Note 2, Loans and Allowance for Credit Losses, in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.
Net Insurance Income:
The Company offers certain optional credit insurance products to customers when closing a loan. Net insurance income primarily represents earned premiums from these products, net of related insurance claims and associated expenses. In addition, net insurance income includes earned premiums and direct costs related to non-file insurance that 1FFC purchases to protect us from credit losses, where following an event of default, we are unable to take possession of personal property collateral because our security interest is not perfected.
Other Revenue:
Other revenue consists mainly of earnings from the sale of auto club memberships and fees charged to customers for non-sufficient funds.
Operating Expenses:
The cost of operations impacts 1FFC's financial results, which are comprised of personnel expenses, occupancy expenses, and other expenses.
Personnel expenses represent the largest component of our operating costs and consist largely of salaries and wages, overtime, contract labor, incentives, benefits, medical claims, and related payroll taxes associated with all of our operations.
Occupancy expenses primarily include the cost of leasing our facilities, as well as related expenses such as utilities, maintenance, and depreciation and amortization expenses.
Other expenses primarily include advertising and marketing costs, legal and audit fees, consulting, postage, computer and IT expenses, collection costs and credit bureau dues, conversion expenses, training and development, bank service charges, and the amortization of loans purchased at a premium.
Income Taxes:
The Company is an S corporation for income tax reporting purposes. Taxable income or loss of an S corporation is passed through to the shareholders of the Company. 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 certain states which do not recognize S corporation status for income tax reporting purposes. 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 as they are not permitted to be treated as S Corporations. The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences.
RESULTS OF OPERATIONS:
Net loans are carried on an amortized cost basis which includes the remaining principal balance, accrued interest, and net unamortized deferred fees and costs. The following table summarizes our results of operations, both in dollars and as a percentage of average net loans (in thousands):
| Nine Months Ended September 30, 2026 | |||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||
| Amount | % of Average Net Loans | Amount | % of Average Net Loans | ||||||||||||||||||||
Interest income | $ | 285,729 | 27.7 | % | $ | 263,253 | 28.1 | % | |||||||||||||||
Interest expense | 45,886 | 4.5 | 43,077 | 4.6 | |||||||||||||||||||
Provision for credit losses | 81,319 | 7.9 | 74,604 | 8.0 | |||||||||||||||||||
Net insurance income | 40,202 | 3.9 | 38,814 | 4.1 | |||||||||||||||||||
Other revenue | 6,784 | 0.7 | 6,228 | 0.7 | |||||||||||||||||||
Personnel | 112,185 | 10.9 | 107,041 | 11.4 | |||||||||||||||||||
Occupancy | 19,721 | 1.9 | 17,297 | 1.8 | |||||||||||||||||||
Other | 49,326 | 4.8 | 49,718 | 5.3 | |||||||||||||||||||
Total operating expenses | 181,232 | 17.6 | 174,056 | 18.6 | |||||||||||||||||||
Income before income taxes | 24,278 | 2.4 | 16,558 | 1.8 | |||||||||||||||||||
Income taxes | 5,175 | 0.5 | 4,469 | 0.5 | |||||||||||||||||||
| Net income | $ | 19,103 | 1.9 | % | $ | 12,089 | 1.3 | % | |||||||||||||||
Information explaining the changes in our results of operations from year-to-year is provided in the following pages.
Comparison of September 30, 2026 versus December 31, 2025
The following table describes the changes in loans by loan class (in thousands, except for %):
| Loans Outstanding | |||||||||||||||||||||||
| September 30, 2026 | December 31, 2025 | $ Change | % Change | ||||||||||||||||||||
Direct cash loans | $ | 1,353,815 | $ | 1,308,075 | $ | 45,740 | 3 | % | |||||||||||||||
| Real estate loans | 13,340 | 18,859 | (5,519) | (29) | |||||||||||||||||||
| Sales finance contracts | 104,830 | 120,669 | (15,839) | (13) | |||||||||||||||||||
Total loans outstanding | $ | 1,471,985 | $ | 1,447,603 | $ | 24,382 | 2 | % | |||||||||||||||
Comparison of the Three Months Ended September 30, 2026, versus the Three Months Ended September 30, 2025
Net Income:
Net income increased $1.4 million (23%) to $7.6 million during the three months ended September 30, 2026, from $6.2 million during the same period a year ago. The change in net income is explained in greater detail below.
Interest Income:
Interest income increased $6.1 million (7%) to $96.6 million during the three months ended September 30, 2026, from $90.5 million during the same period in 2025. The increase in interest income was primarily driven by growth in the average net loans outstanding, which increased $71.3 million (7%) to $1,054.9 million during the three months just ended, compared to $983.6 million during the prior-year period.
Gross loan originations decreased $3.8 million (1%) to $434.2 million for the three months ended September 30, 2026, compared to $438.1 million during the prior-year period. The decrease in origination volume was primarily attributable to lower direct cash loan originations, reflecting a more conservative underwriting approach within certain higher-risk segments of the portfolio. Sales finance originations also declined in the current quarter. The overall decline was partially offset by increases in bulk purchases. The following table represents the volume of loans originated or acquired (in thousands):
| Three Months Ended September 30, 2026 | |||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||
Direct cash loans | $ | 412,336 | $ | 421,259 | $ | (8,923) | (2) | % | |||||||||||||||
Real estate loans | — | — | — | — | |||||||||||||||||||
Sales finance contracts | 13,584 | 15,260 | (1,676) | (11) | |||||||||||||||||||
Net bulk purchases | 8,324 | 1,561 | 6,763 | 433 | |||||||||||||||||||
| Total loans originated / acquired | $ | 434,244 | $ | 438,080 | $ | (3,836) | (1) | % | |||||||||||||||
Interest Expense:
Interest expense increased $1.5 million (10%) to $16.5 million during the three months ended September 30, 2026, from $15.0 million during the prior-year period due to higher average borrowings.
Provision for Credit Losses:
The Company’s provision for credit losses increased $5.2 million (24%) to $27.2 million during the three months ended September 30, 2026, from $22.0 million during the same period last year. The increase was primarily driven by net charge-offs increasing $5.3 million (26%) to $25.5 million from $20.2 million during the same period last year, reflecting higher gross charge-offs and lower recoveries in the current-year period, partially offset by a smaller allowance adjustment in the current-year period.
Insurance Revenue:
Net insurance income (insurance revenues less claims and expenses) decreased $1.0 million (7%) to $13.5 million during the three months ended September 30, 2026, from $14.5 million during the same period a year ago.
The following table summarizes the components of insurance income net (in thousands):
| Three Months Ended September 30, 2026 | |||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||
Earned premiums and commissions | $ | 18,415 | $ | 18,890 | $ | (475) | (3) | % | |||||||||||||||
Insurance claims and expenses | 4,910 | 4,400 | 510 | 12 | |||||||||||||||||||
Net insurance income | $ | 13,505 | $ | 14,490 | $ | (985) | (7) | % | |||||||||||||||
Earned premiums and commissions were $0.5 million (3%) lower during the three months ended September 30, 2026, compared to the same period a year ago. Insurance claims and expenses increased $0.5 million (12%) for the three month period just ended. The decrease in earned premiums and commissions primarily reflected changes in the mix of loan originations, while the increase in insurance claims and expenses was driven by higher claim activity associated with growth in the direct cash loan portfolio.
Other Revenue:
Other revenue remained consistent at $2.4 million during the three months ended September 30, 2026 and 2025, as lower miscellaneous income was offset by higher NSF fee income.
Operating Expenses:
The Company's operating expenses decreased $3.2 million (5%) to $59.5 million during the three months ended September 30, 2026, from $62.7 million during the same period a year ago. Other operating expenses encompass personnel expense, occupancy expense and other expenses.
Personnel expense decreased $0.4 million (1%) to $37.2 million during the three months ended September 30, 2026, from $37.6 million during the same period in 2025. The decrease was attributable to lower bonus accruals and medical claims which were partially offset by higher salary expense and medical claims administration fees.
Occupancy expenses increased $0.4 million (7%) to $6.4 million during the three months ended September 30, 2026, from $6.0 million during the same period a year ago. The increase was driven by higher maintenance and utility costs and rent expense, partially offset by lower depreciation and amortization expense.
Other expenses decreased $3.2 million (17%) to $15.9 million during the three months ended September 30, 2026, from $19.1 million during the same period in 2025. The decrease was driven by lower information technology consulting expenses, conversion expenses, postage expenses, and credit bureau dues, partially offset by higher advertising costs, professional fees, and computer expenses.
Income Taxes:
Income taxes increased $0.1 million (6%) to $1.7 million during the three months ended September 30, 2026, from $1.6 million during the same period in 2025.
The effective income tax rate was 19% during the three months ended September 30, 2026, compared to 20% during the same period ended September 30, 2025. The effective income tax rate differs from the statutory rate due to changes in the proportion of income earned by the Company's insurance subsidiaries.
Comparison of the Nine Months Ended September 30, 2026, versus the Nine Months Ended September 30, 2025
Net Income:
Net income increased $7.0 million (58%) to $19.1 million during the nine months ended September 30, 2026, from $12.1 million during the same period a year ago. The change in net income is explained in greater detail below.
Interest Income:
Interest income increased $22.4 million (9%) to $285.7 million during the nine months ended September 30, 2026, from $263.3 million during the same period in 2025. The increase in interest income was primarily driven by growth in the average net loans outstanding, which increased $94.6 million (10%) to $1,030.8 million during the nine months just ended, compared to $936.2 million during the prior-year period.
Gross loan originations increased $14.2 million (1%) to $1,182.7 million for the nine months ended September 30, 2026, compared to $1,168.5 million during the prior-year period. The increase in origination volume was due to growth in direct cash loans and bulk purchases, partially offset by declines in sales finance originations. 1FFC's net loan portfolio increased $7.0 million to $1,055.0 million at September 30, 2026 compared to $1,048.0 million at December 31, 2025. The following table represents the volume of loans originated or acquired (in thousands):
| Nine Months Ended September 30, 2026 | |||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||
Direct cash loans | $ | 1,126,870 | $ | 1,112,703 | $ | 14,167 | 1 | % | |||||||||||||||
Real estate loans | — | — | — | — | |||||||||||||||||||
Sales finance contracts | 41,993 | 46,892 | (4,899) | (10) | |||||||||||||||||||
Net bulk purchases | 13,793 | 8,892 | 4,901 | 55 | |||||||||||||||||||
| Total loans originated / acquired | $ | 1,182,656 | $ | 1,168,487 | $ | 14,169 | 1 | % | |||||||||||||||
Interest Expense:
Interest expense increased $2.8 million (6%) to $45.9 million during the nine months ended September 30, 2026, from $43.1 million during the prior-year period due to higher average borrowings. Average borrowings increased $58.1 million (6%) to $1,113.9 million during the nine months ended September 30, 2026 compared to $1,055.8 million during the prior-year period. The Company's average borrowing rates were 5.35% and 5.62% during the nine month period ended September 30, 2026 and 2025, respectively.
Management expects that, based on historical results and current estimates, average net receivables will grow throughout the remainder of 2026, and net interest income is expected to increase accordingly. However, a decrease in net receivables or an increase in interest rates on outstanding borrowings could negatively impact net interest income.
Provision for Credit Losses:
The Company’s provision for credit losses increased $6.7 million (9%) to $81.3 million during the nine months ended September 30, 2026, from $74.6 million during the same period last year. The increase was driven by net charge-offs, which increased $6.3 million (9%) to $78.8 million from $72.5 million in the prior-year period. The increase in net charge-offs was primarily due to growth in the loan portfolio during the nine months ended September 30, 2026 compared to the same period last year.
Delinquency Performance:
The allowance for credit losses is evaluated and pooled based on similar risk characteristics, pricing, and term, among other factors. 1FFC also evaluates credit quality based on the aging status of the loan and by payment activity. Accounts are classified in delinquency categories of 30-59 days (1 installment), 60-89 days (2 installments), or 90 or more days (3+ installments) past due. The Company categorizes its loans into risk categories based on relevant information about the ability of borrowers to service their debt. 1FFC analyzes the loan portfolio by credit risk and updates the rating periodically based on current credit information.
The percent of the loan portfolio greater than 30 days delinquent is 6.99% at September 30, 2026 compared to 7.00% at December 31, 2025. The ratio of bankrupt accounts to the net principal balance was 1.41% at September 30, 2026 and 1.30% at December 31, 2025 respectively.
An age analysis of balances past due, segregated by loan class, as of September 30, 2026 and 2025 is as follows (in thousands):
| September 30, 2026 | ||||||||||||||||||||||||||
| Loan Class | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due Loans | ||||||||||||||||||||||
| Direct Cash Loans | $ | 33,262 | $ | 21,938 | $ | 37,997 | $ | 93,197 | ||||||||||||||||||
| Real Estate Loans | 1,094 | 595 | 810 | 2,499 | ||||||||||||||||||||||
| Sales Finance Contracts | 2,820 | 1,580 | 2,854 | 7,254 | ||||||||||||||||||||||
| Total | $ | 37,176 | $ | 24,113 | $ | 41,661 | $ | 102,950 | ||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||||
| Loan Class | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due Loans | ||||||||||||||||||||||
| Direct Cash Loans | $ | 32,184 | $ | 20,223 | $ | 38,601 | $ | 91,008 | ||||||||||||||||||
| Real Estate Loans | 707 | 406 | 1,001 | 2,114 | ||||||||||||||||||||||
| Sales Finance Contracts | 3,322 | 1,964 | 2,900 | 8,186 | ||||||||||||||||||||||
| Total | $ | 36,213 | $ | 22,593 | $ | 42,502 | $ | 101,308 | ||||||||||||||||||
Insurance Revenue:
Net insurance income (insurance revenues less claims and expenses) increased $1.4 million (4%) to $40.2 million during the nine months ended September 30, 2026, from $38.8 million during the same period a year ago.
The following table summarizes the components of insurance income net (in thousands):
| Nine Months Ended September 30, 2026 | |||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||
Earned premiums and commissions | $ | 54,467 | $ | 50,764 | $ | 3,703 | 7 | % | |||||||||||||||
Insurance claims and expenses | 14,265 | 11,950 | 2,315 | 19 | |||||||||||||||||||
Net insurance income | $ | 40,202 | $ | 38,814 | $ | 1,388 | 4 | % | |||||||||||||||
Earned premiums and commissions were $3.7 million (7%) higher during the nine months ended September 30, 2026 compared to the same period a year ago. Insurance claims and expenses increased $2.3 million (19%) for the nine month period just ended. These increases were driven by growth in the direct cash loan portfolio and the corresponding rise in optional insurance products written.
Other Revenue:
Other revenue increased $0.6 million (10%) to $6.8 million during the nine months ended September 30, 2026, from $6.2 million during the same period last year. This increase was primarily driven by higher sales of auto club membership products resulting from growth in the loan portfolio, partially offset by lower NSF fee income.
Operating Expenses:
The Company's operating expenses increased $7.1 million (4%) to $181.2 million during the nine months ended September 30, 2026, from $174.1 million during the same period a year ago. Other operating expenses encompass personnel expense, occupancy expense and other expenses.
Personnel expense increased $5.2 million (5%) to $112.2 million during the nine months ended September 30, 2026, from $107.0 million during the same period in 2025. This was primarily due to higher salary expense, bonus accruals, and medical claims.
Occupancy expenses increased $2.4 million (14%) to $19.7 million during the nine months ended September 30, 2026, from $17.3 million during the same period a year ago. The increase was driven by higher maintenance and utility costs, depreciation expense, and rent expense.
Other expenses decreased $0.4 million (less than 1%) to $49.3 million during the nine months ended September 30, 2026, from $49.7 million during the same period in 2025. Lower information technology consulting expenses, conversion expenses, and advertising and postage expenses were partially offset by higher professional fees, taxes and licenses, and computer expenses.
Income Taxes:
Income taxes increased $0.7 million (16%) to $5.2 million during the nine months ended September 30, 2026, from $4.5 million during the same period in 2025.
The effective income tax rate was 21% during the nine months ended September 30, 2026, compared to 27% during the same period ended September 30, 2025. The effective income tax rate differs from the statutory rate due to changes in the proportion of income earned by the Company's insurance subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity is the ability of the Company to meet its ongoing financial obligations, either through converting assets into cash or cash equivalents without significant loss or through raising additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, our primary goal is to maintain a sufficient level of liquidity in all expected economic environments.
Sources of Liquidity:
An important part of 1FFC's liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis. Liquidity is also available from cash and cash equivalents.
As of September 30, 2026 and December 31, 2025, the Company had $38.1 million and $18.2 million, respectively, invested in cash and short-term investments readily convertible into cash with original maturities of three months or less. 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.
The Company's investment securities portfolio decreased $37.8 million (14%) to $237.5 million at September 30, 2026 compared to $275.3 million at December 31, 2025. The portfolio consists primarily of invested surplus funds generated by the Company's insurance subsidiaries, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company. 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 similar activities. The investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds, and various municipal bonds. See Note 3, Investment Securities, in the accompanying Notes to Condensed Consolidated Financial Statements for further discussion.
The Company's investment securities can be converted into cash, if necessary. State insurance regulations limit the types of investments an insurance company may hold in its portfolio. Dividend payments to the Company by its wholly owned life insurance subsidiary are subject to annual limitations and are restricted to the lesser of 10% of policyholder's statutory surplus or the net statutory gain from operations before recognizing realized investment gains of the insurance subsidiary during the prior year. Dividend payments to the Company by its wholly owned property and casualty insurance subsidiary are subject to annual limitations and are restricted to the greater of 10% of policyholders' surplus or the net statutory income before recognizing realized investment gains of the individual insurance subsidiary during the prior three years. Any dividends above these state limitations are termed extraordinary dividends and must be approved in advance by the Georgia Commissioner of Insurance and Safety Fire.
On November 14, 2025, management submitted a request for approval of two separate transactions involving dividends and/or lines of credit with maximum amounts of $115.0 million from Frandisco Life Insurance Company and $135.0 million from Frandisco Property and Casualty Insurance Company. The Commissioner of the Insurance Department approved the requests on December 3, 2025. At December 31, 2025, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $139.3 million and $125.6 million, respectively. Effective February 12, 2026, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company amended previous unsecured revolving lines of credit available to the Company by extending the term to December 31, 2028. At September 30, 2026, the outstanding balance on the lines of credit, including accrued interest, was $55.3 million with Frandisco Property and Casualty Insurance Company and $5.8 million with Frandisco Life Insurance Company, respectively. Outstanding balances related to credit lines with the Frandiscos are eliminated upon consolidation.
Another primary source of 1FFC's liquidity is cash flows generated from its loan portfolio, including scheduled principal repayments, collections of outstanding receivables, and interest income earned on such loans. The Company actively manages its portfolio to support ongoing liquidity needs, and contractual principal and interest payments provide a recurring source of cash inflows. The timing and amount of these cash flows are influenced by portfolio performance, borrower repayment behavior, and economic conditions. Any increase in the Company's allowance for credit losses would not directly affect the Company's liquidity, as adjustments to the allowance have no impact on cash. However, an increase in the actual loss rate may have a material adverse effect on the Company's liquidity. As such, the inability to collect loans could materially impact the Company's future liquidity.
Most of the Company's loan portfolio is financed through sales of its various debt securities, which 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. 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.
The Company's debt securities are comprised of senior demand notes, commercial paper debt securities, and variable rate subordinated debentures. Debt securities increased $14.2 million to $902.3 million as of September 30, 2026, compared to $888.1 million as of December 31, 2025. Senior demand notes decreased $6.7 million (7%) and subordinated debentures decreased $2.9 million (9%) while commercial paper increased $23.7 million (3%) from December 31, 2025 to September 30, 2026.
In addition to its receivables and securities sales, the Company has an external source of funds available under a revolving credit facility (the "Credit Agreement") with BMO Bank, N.A., which was originally executed on December 6, 2024. As amended to date, the Credit Agreement provides for borrowings of up to $430.0 million or 85% of the Company's net loans, whichever is less, subject to certain limitations. All borrowings are secured by the loans of the Company. 1FFC had $207.6 million and $79.3 million of availability to draw down cash from the Credit Agreement as of September 30, 2026 and December 31, 2025 at interest rates of 6.68% and 6.87%, respectively. Outstanding borrowings under the Credit Agreement were $222.4 million and $220.7 million at September 30, 2026 and December 31, 2025, respectively.
The Credit Agreement contains covenants customary for financing transactions of this type. The Company is required, under the Credit Agreement, to report on its performance as it relates to the covenants contained therein. The Credit Agreement has a termination date of August 27, 2029. Management believes the current credit facility, when considered with funds expected to be available from operations, should provide sufficient liquidity for the Company. See Note 8, Debt, in the accompanying Notes to Condensed Consolidated Financial Statements for further discussion.
1FFC continues to monitor and review current economic conditions and the related potential implications on the Company, including with respect to, among other things, changes in credit losses, liquidity, compliance with debt covenants, and customer relationships.
Internal Liquidity Management:
Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company can make dividends and/or lines of credit with maximum amounts of $115.0 million and $135.0 million, respectively, which
are subject to approval by the Georgia Commissioner of Insurance and Safety Fire annually. The outstanding balance on the lines of credit with the Frandiscos are eliminated upon consolidation.
Cash Flow:
Operating Activities:
Net cash provided by operating activities during the nine months ended September 30, 2026 was $101.2 million, compared to $100.5 million during the prior-year period, representing a net increase of $0.7 million. The increase in cash provided was primarily attributable to higher earnings during the nine months ended September 30, 2026 compared to the same period in the prior year. This increase was partially offset by changes in working capital, including increases in operating assets and decreases in operating liabilities.
Investing Activities:
Investing activities include the origination and repayment of loans, purchases and sales / redemptions of available for sale securities, and purchases of property and equipment for both new and existing branches. Net cash used in investing activities during the nine months ended September 30, 2026 was $83.3 million, compared to $173.6 million during the prior-year period, which represents a net decrease of $90.3 million. The net decrease in cash used was primarily driven by lower loan originations, higher loan repayments, lower purchases of investment securities, and higher sales / redemptions of investment securities in 2026.
Financing Activities:
Financing activities consist of borrowings and payments on our outstanding indebtedness. Net cash provided by financing activities during the nine months ended September 30, 2026 was $15.1 million, compared to $83.7 million during the prior-year period, representing a net decrease of $68.6 million. The decrease was primarily attributable to lower advances and higher payments on the Company's credit line. Lower issuances and increased redemptions of commercial paper and subordinated debt securities also contributed to the decrease. In addition, lower net proceeds from senior demand notes further reduced net cash provided by financing activities during the nine months ended September 30, 2026, compared to the same period in the prior year.
The Company anticipates that its cash and cash equivalents, cash flows from operations, sales of debt securities, available lines of credit, and borrowings under the Credit Agreement will be sufficient to fund its liquidity needs for the next 12 months and thereafter for the foreseeable future.
CRITICAL ACCOUNTING POLICIES:
The accounting and reporting policies of 1st Franklin 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 credit losses, revenue recognition and insurance claims reserves.
Allowance for Credit Losses:
Provisions for credit losses are charged to operations in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover expected credit losses in our loan portfolio. The allowance for credit losses is established based on the determination of expected losses inherent in the loan portfolio as of the reporting date.
The allowance for credit losses calculation is evaluated and pooled based upon the consistent risk characteristics inherent in the portfolio. The Company utilizes a PD / LGD model to estimate the allowance for credit losses whereby estimated loss is equal to the product of PD and LGD. The allowance for credit losses model estimates instances of loss and the average severity of losses using the characteristics of the loan portfolio, along with incorporating a reasonable and supportable forecast which is utilized to support the adjustments to historical loss experience of loans with similar credit risk.
Management’s periodic evaluation of the adequacy of the allowance for credit losses takes into consideration the Company’s probable inherent risks in the homogeneous loan portfolio and current economic conditions, including those geographic regions where the Company has a concentration.
Key segmentation in the calculation is origination vintage, remaining contractual term, risk score and state of origination. The allowance for credit loss methodology produces a variety of alternative economic scenarios. The Company considers how macroeconomic or other factors might impact expected credit losses over the remaining maturity of the portfolio and determine which scenario(s) and specific scenario weights to be applied within the estimation. The allowance for credit losses recorded in the balance sheet reflects the Company's best estimate of expected credit losses.
Revenue Recognition:
Interest income is recognized using the effective interest method, whereby the Company recognizes interest revenue equitably over the term of the loan. Unearned finance charges on pre-compute loans are rebated utilizing statutory methods, which often is the Rule of 78’s method. The difference between income recognized under the effective interest and Rule of 78's method is recognized at the time of rebate as an adjustment to interest income.
Premiums on property and casualty credit, credit life and accident and health insurance policies are deferred and earned over the insurance coverage term using either the pro-rata method or the effective yield method. Rebates are computed using statutory methods. The difference between income recognized under the effective interest and statutory method is recognized at the time of rebate as an adjustment to income.
Policy acquisition costs of the Frandiscos are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.
The Company sells auto club 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. Commissions received from the sale of auto club memberships are earned at the time the membership is sold.
Insurance Claims Reserves:
Included in unearned insurance premiums and commissions on the Condensed Consolidated Statements of Financial Position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries. These reserves are established based on accepted actuarial methods. In the event that the Company’s actual reported losses for any given period be materially in excess of the previously estimated amounts, losses could have a material adverse effect on the Company’s results of operations.
Different assumptions in the application of any of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations.
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