Form 10-K: 0000038723-23-000037 compared to 0001376474-22-000181
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☒
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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 ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐2022
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
EXCHANGE ACT OF 1934
For the transition period from __________to _________
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__________ to _________
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Commission File Number 2-27985
1st FRANKLIN FINANCIAL CORPORATION
CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | |
Georgia
| 58-0521233
|
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
|
incorporation or organization)
| Identification No.)
(I.R.S. Employer Identification No.) |
|
|
|
|
|
|
|
|
(Address of principal executive offices)
| (Zip Code)
(Zip Code) |
Registrant's telephone number, including area code: : (706) 886-7571
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ Yes o No X
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 __ Yes o No X
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 __
- 1 -
(Cover page 1 of 2 pages)
x No o
(Cover page 1 of 2 pages)
Indicate by check mark whether registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x X No No ___
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer __ Accelerated Filer __ (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer X
Smaller Reporting Company x
Smaller Reporting Company ☐o Emerging Growth Company ☐o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___
o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of it internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No Yes o No [X]
x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Yes o No X
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:
|
| | | | | | | | |
|
Class
Class | | Outstanding at February 28April 11, 20212023
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Common Stock, $100 Common Stock, $100 Par Value
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Non-Voting Common Stock, No Non-Voting Common Stock, No Par Value
| | |
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 20212022, 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)
- 2 -
PART I
Item 1.BUSINESS:
(Cover page 2 of 2 pages)
TABLE OF CONTENTS
PART I
Item 1. BUSINESS:
The information under the headings “The Company”, page 23 and “Business”, pages 45-1013, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 20212022 (the “Annual Report”) are incorporated herein by reference.
Item 1A.RISK FACTORS:
Item 1A. RISK FACTORS:
You should carefully consider the risks described below, as well as the other risks and information disclosed from time to time by 1st1st 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.
Risks Related to Our Business
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 any 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 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.
Holders of our senior demand notes may request their redemption at any time without penalty. Our variable rate subordinated debentures also may request that we redeem debentures at the end of any interest rate adjustment period or within the 14-day grace period thereafter without penalty. As a result, it is possible that a significant number of redemption requests could adversely affect our liquidity.
In addition, 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 or if our current or any future credit facility matures or is terminated without our entering into a replacement facility on acceptable terms, conditions and timing, or at all, 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.
- 3 -
Adverse changes in the ability or willingness of our customers to meet their repayment obligations to the Company 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, and our ability to collect on loans depends on the willingness and repayment ability of our customers. Adverse changes in the ability or willingness of a significant portion of our customers to repay their obligations to the Company, whether due to changes in general economic, political or social conditions, the cost of consumer goods, interest rates, natural disasters, acts of war or terrorism, prolonged public health crisis or a pandemic (such as COVID-19), or other causes, or events affecting our customers such as unemployment, major medical expenses, bankruptcy, divorce or death, could have a material effect on our liquidity, financial condition and results of operations.
We maintain an allowance for credit losses in our financial statements at a level considered adequate by Management to absorb expected credit losses inherent in the loan portfolio as of the balance sheet date based on estimates and assumptions at that date. However, the amount of actual future credit losses we may incur is susceptible to changes in economic, operating and other conditions within our various local markets, which may be beyond our control, and such losses may exceed current estimates. Although Management believes that the Company’s allowance for credit losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot estimate credit losses with certainty, and we cannot provide any assurances that our allowance for credit losses will prove sufficient to cover actual credit losses in the future. Credit losses in excess of our reserves may adversely affect our financial condition and results of operations.
In any 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.
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 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 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.
We operate in a highly competitive environment.
The consumer financing industry is highly competitive, and the barriers to entry for new competitors are relatively low in the markets in which we operate. We compete for customers, locations and other important aspects of our business with, among others, large national and regional finance companies, as well as a variety of local finance companies. Increased competition, or any failure on our part to compete successfully, could adversely affect our ability to attract and retain business and reduce the profits that would otherwise arise from operations.
- 4 -
We may not be able to make technological improvements as quickly as some of our competitors, which could harm our competitive ability and adversely affect our business, prospects, financial condition and results of operations.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products, services and marketing channels. We rely on our branch offices as the primary point of contact with our active accounts. In order to serve consumers who want to reach us over the internet, we make available an online loan application on our consumer website, and we provide customers an online customer portal, giving them online access to their account information and an electronic payment option. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demand for convenience, as well as to create additional efficiencies in our operations. We expect that new technologies and business processes applicable to the consumer finance industry will continue to emerge, and these new technologies and business processes may be more efficient than those that we currently use. We cannot ensure that we will be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could cause disruptions in our operations, harm our ability to compete with our competitors, and adversely affect our business, prospects, financial condition and results of 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. In addition, we could be required to spend significant additional amounts to maintain, repair, upgrade or replace our systems. Any such failures or expenditures could materially adversely impact our business operations and financial condition.
A data security breach with regard to personally identifiable information
We could incur significant liability, and our business, financial condition, results of operations and reputation could be harmed, if our information systems are breached or we otherwise fail to protect customer, investor, employee or Company data or systems.
In operating our business, we collect, use, store, transmit and otherwise process certain electronic information, including personal, confidential, proprietary and sensitive data about our customers or employees could negatively affect operations and result in, investors and employees. We higher costs.
In the ordinary course of business, we receive a significant amount ofalso share and receive electronic information with our vendors and other third parties. This electronic information comprises sensitive and confidential data, including 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 choose to or be required to implement or adopt in the future, our facilities and") and Company data. We rely on the efficient, uninterrupted and secure operation of complex information technology systems and networks to operate our business and securely store, transmit and process electronic information. Our information technology systems, and those of our third-party service providers and vendors, could beare potentially vulnerable to intentional or unintentional securityunauthorized access, damage or interruption from a variety of threats, including cybersecurity breaches, computer viruses, lost or misplaced data, programming or human errors, scams, burglary, acts of vandalism,, malware, ransomware, theft, lost or misplaced data, scams, misappropriation of data and other types of data and systems-related modes of attack.
We have been, and in the future may be, the target of cyber attacks, including social engineering attacks, phishing attacks and denial-of-service attacks, as well as ransomware cyber attacks where hackers have requested “ransom” payments in exchange for not disclosing stolen electronic information or for unlocking or not disabling our computer or other events. Alleged or actualinformation systems. Any disruption to the safety, integrity or accessibility of such information or systems could impact our ability to operate our business.
In [November 2022], we became aware of a cyber attack against certain systems within our network environment. The attack temporarily affected operations and caused delays in originating loans at
some locations. Data was breached during the incident, whereby the attackers had access to PII of certain Company employees, customers and investors. The incident has been contained, operations have been restored and notifications were provided to affected individuals. The Company has also been named as a defendant in consumer class action lawsuits alleging harm from the cyber attack.
Following the cyber attack, we began undertaking significant remediation efforts and other steps to enhance our cybersecurity and data security infrastructure. We continue to enhance our data security infrastructure and take further steps to prevent unauthorized access to our systems and the data we maintain. Despite our efforts to ensure the integrity of our software, computers, systems and information, we may not be able to anticipate, detect or recognize threats to our systems and assets, or to implement effective preventive measures against all cyber threats, especially because the techniques used by bad actors are increasingly sophisticated, change frequently, are complex, and are often not recognized until launched. These cyber attacks have involved and in the future may involve the dissemination, theft, destruction or other compromise of Company or confidential information, including PII. Efforts to resolve any cyber attacks may be unsuccessful, and these efforts involve costs that can be significant. Although we maintain insurance coverage relating to certain cybersecurity risks, our insurance may not be sufficient to provide adequate loss coverage in all circumstances (including if the insurer denies future claims) and may not continue to be available to us on economically reasonable terms, or at all.
We could suffer significant financial losses or liabilities, loss of customers and business opportunities, reputational damage, litigation, regulatory fines, penalties or intervention, reimbursement or other compensatory costs, as a result of actual or alleged cyber attacks or data security breaches, and costs to avoid the occurrence of those events, 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.
- 5 -
these attacks or breaches and their impacts are hard to predict. Further, we cannot ensure that any limitations of liability provisions in our agreements with customers, vendors and other third parties with which we do business would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to a particular claim in connection with a cyber attack, breach or other information security incident.
In addition, the legal and regulatory environment related to data privacy and cybersecurity is constantly changing. Privacy and cybersecurity are currently areas of considerable legislative and regulatory attention, with new or modified laws, regulations, rules and standards being frequently adopted and potentially subject to divergent interpretation or application in different states in a manner that may create inconsistent or conflicting requirements for businesses. The uncertainty and compliance risks created by these legislative and regulatory developments are compounded by the rapid pace of technology development that may affect the use or security of data, including PII. Privacy and cybersecurity laws and regulations often impose strict requirements on the collection, storage, handling, use, disclosure, transfer, security, and other processing of PII. An actual or perceived failure by us or our vendors or service providers to comply with privacy, data protection and information security laws, regulations, standards, policies and contractual obligations could result in legal liabilities, fines, regulatory action and reputational harm that could have a material adverse impact on our business, financial results and financial condition.
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.
Risks Related to Our Debt Securities
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 on our website, 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 we are otherwise 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.
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 1
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.
Uncertain economic conditions could negatively affect our results and profitability.
Increases in unemployment levels or 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.
The effects of a pandemic, epidemic or other widespread public health emergency may adversely affect our business, financial condition and results of operations.
Our business, financial condition and results of operations could be materially and adversely affected by the effects of a pandemic, epidemic or other widespread public health emergency such as the outbreak of the novel coronavirus, or COVID-19. Widespread health emergencies
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Widespread health emergencies can disrupt our operations through their impact on our employees, investors, customers and the communities in which we operate. Disruptions to our customers could result in increased risk of delinquencies, defaults and losses on our loans, negatively impact regional economic conditions, and result in a decline in loan demand and loan originations.
The risks related to a widespread health emergency such as COVID-19 could also lead to the temporary closure of one or more of our branch offices. The ultimate extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain or prevent its further spread.
actions taken to contain or prevent its further spread. These and other potential impacts could adversely affect our business, financial condition and results of operations.
Risks Related to Our Regulatory Environment
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. Compliance with these regulations requires significant time and attention of management, and is costly. Further, 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 continue to be subject to significant 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;
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•limit the interest rates, fees and other charges that we are allowed to charge;
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•require specified disclosures to borrowers;
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•limit or prescribe other terms of our loans;
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•govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and
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•define our rights to repossess and sell collateral.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly increased the regulation of financial institutions and the financial services industry in recent periods. 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 be implemented by the various regulatory agencies, 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.
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. 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, further 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
- 7 -
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 would be expected to include requests for compensatory, statutory and punitive damages. Unfavorable outcomes in any litigation or statutory 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.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS:
Not Applicable.
Item 2.PROPERTIES:
: Not Applicable.
Item 2. PROPERTIES:
Paragraph 1 of “The Company”, page 23; paragraph 1 (and the accompanying table) of Footnote 8 (Leases) of the Notes to Consolidated Financial Statements, pages 4247-4348; and the 1st Franklin Financial Corporation Branch Offices directory of branch offices, pages 5364-5465 of the Annual Report are incorporated herein by reference.
Item 3.
Item 3. LEGAL PROCEEDINGS:
From time to time, the Company is involved in various claims and lawsuits incidental to its business.
In March 2023, five putative class action lawsuits, Laney v. 1st Franklin Financial Corporation and Moreland v. 1st Franklin Financial [sic] Corporation, were filed against the Company in the United States District Court for the Northern District of Georgia. The complaints generally assert claims of negligence, breach of implied contract and, in the case of Laney, violations of the Georgia Deceptive Practices Act, on behalf of a putative class of individuals whose PII was accessed in the November 2022 cyber-attack on the Company and related data breach. The plaintiffs are seeking equitable and injunctive relief and an unspecified amount of damages in connection with their claims, as well as an award of attorneys’ fees and costs. The Company intends to vigorously defend against these matters.
In addition, 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.
Item 4. MINE SAFETY DISCLOSURES:
Not Applicable.
PART II
Item 5.
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 Matters"", page 1014 of the Annual Report is incorporated herein by reference.
Item 6.[Reserved]
- 8 -
Item 7.
Item 6. [Reserved]
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 1215-2022 of the Annual Report is incorporated herein by reference. This section generally discusses 2022 and 2021 and 2020 operating results and year-to-year comparisons between 2021 and 2020. Discussion of 2019 operating results and year-to-year comparisons between 2020 and 2019operating results and year-to-year comparisons between 2022 and 2021. Discussion
of 2020 operating results and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 filed on March 30, 2021.
Item 7A.2022.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
"
"Quantitative and Qualitative Disclosures About Market Risk”, page 1620-21 of the Annual Report is incorporated herein by reference.
Item 8.
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 2123-4958 of the Annual Report are incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE:
Not applicable.
Item 9A.
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, 20212022. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures under Rule 15d-15(e) of the Exchange Act were effective at December 31, 2021.
2022.
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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.
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 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, 20212022 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 the Company’s internal control over financial reporting, as such term is defined in Exchange Act Rule 15d-15(f), was effective as of December 31, 2021.
2022.
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.
Item 9B. OTHER INFORMATION:
Not Applicable.
Item 9C.
Not Applicable.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS:
Not Applicable.
Not Applicable.
------------------------------------------
Forward Looking Statements:
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, ability to control credit losses, federal and state regulatory changes and other factors referenced elsewhere herein or incorporated herein by reference.
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PART III
Item 10.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS
:DIRECTORS
|
|
| Position(s)
|
| | | | | | | | | | | | | | | | | | Name of Director
| | Age
| | Director Since
| | Position(s) with Company
|
|
|
|
|
| | | Ben F. Cheek, III (3)(4)(5)
| 85
| 1967
| Chairman Emeritus
86 | | 1967 | | Chairman Emeritus |
|
|
|
|
| | | Ben F. Cheek, IV (3)(4)(5)
| 60
| 2001
| Chairman of the Board
61 | | 2001 | | Chairman of the Board |
|
|
|
|
| | | Virginia C. Herring (3)(4)(5)
| 58
| 2020
| President /59 | | 2020 | | President and Chief
Executive Officer
|
|
|
|
|
| | | A. Roger Guimond (2)(5)
| 67
| 2004
| None
68 | | 2004 | | None |
|
|
|
|
| | | James H. Harris, III (1)(2)(5)
| 68
| 2014
| None
69 | | 2014 | | None |
|
|
|
|
| | | Jerry J. Harrison, Jr. (1)(2)(5)
2)(5) | | 60 | | 2020 | | Project Engineer |
| | | | | | |
Donata Ison (2)(5) | 59
| 2020
| None
38 | | 2023 | | None |
|
|
|
|
| | | John G. Sample, Jr. (1)(2)(5)
| 65
| 2004
| None
66 | | 2004 | | None |
|
|
|
|
| | | C. Dean Scarborough (1)(2)(5)
| 67
| 2004
| None
68 | | 2004 | | None |
|
|
|
|
| | | Keith D. Watson (1)(2)(5)
| 64
| 2004
| None
|
|
65 | 2004 | | None |
(1)(1)Member of Audit Committee.
(2)
(2)Mr. Guimond is the retired EVP and Chief Financial Officer of 1st Franklin Financial Corporation where he served for more than 45 years. Mr. Harris, III is the retired owner of Unichem Technologies, Inc., a specialty chemicals company which he founded over 20 years ago. Mr. Harris, III is also former owner of Moonrise Distillery, a producer of spirits, which he formed and owned beginning in 2012. Mr. Harrison, Jr. is presently employed by the Chief Operating Officer at Crider Foods since 2020Company as Project Engineer - Special Projects. Previously Mr. Harrison, Jr. was the Chief Executive Officer at Five Stand Capital, a private equity firm, since 2007. Ms. Donata Ison is VP Finance Controller at Libra Solutions, specialty finance holding company. Mr. Sample is the retired Senior Vice President and Chief Financial Officer of Atlantic American Corporation, an insurance holding company, where he served from 2002 through July 31, 2017. Mr. Scarborough is a retired retail business owner. Mr. Watson is Chairman of the Board of Bowen & Watson, Inc., a general contracting company. Mr. Watson has been with Bowen & Watson since 1980.
(3)
(3)Reference is made to “Executive Officers” for a discussion of business experience.
(4)
(4)Mr. Ben F. Cheek, III and IV are father and son. Mr. Ben F. Cheek, III and Ms. Virginia C. Herring and father and daughter. Mr. Ben F. Cheek, IV and Ms. Virginia C. Herring are brother and sister.
(5)
(5)The term of office of each director continues until the next annual meeting of shareholders of the Company and 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.
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1
1st Franklin Financial Corporation is a family controlled company, with Mr. Ben F. Cheek, III‘s family directly or indirectly owning all of the Company's stock. Mr. Cheek, III, who has significant knowledge of all aspects of the Company's business and operations, served as Chairman and Chief Executive Officer through 2014. 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 has been with the Company since 1988 in roles of increasing responsibility, was appointed Chairman of the Board. At that time, Mrs. Virginia C. Herring, the Company’s 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 significant responsibilities contained within these new roles, the Board determined at that time that it was appropriate to separate the roles of Chairman and Chief Executive Officer. Given the separation of the Chairman and Chief Executive Officer roles, relatively low historical turnover of members of the Board of Directors and the strong working relationship between such members, the Board has determined there is not a need to appoint a lead independent director. The Board continues to believe that such determination is in the best interests of the Company. During 2020, Mr. Cheek, III transitioned to Chairman Emeritus.
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 ManagementLeadership Team (the “EMTELT”). Individuals comprising the EMTELT are as follows: Ms. Herring, Ms. Baker, Messrs. Cheek, IV, Clevenger II, Gyomory, MankeMcQuain, McQuainScarpitti, Shaw, Scarpitti, Thompson, and Vercelli and Ms. Herring. . 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, reporting 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 EMTELT 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. For this purpose, the Board has adopted and considers the independence requirements for companies whose securities are listed for trading on the NASDAQ Stock Market. The Board has determined that a majority of the members of the Board of Directors, specifically Ms. Ison, Messrs. HarrisGuimond, HarrisonHarris, 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 Listing 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, Harris and HarrisonHarris. 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. A copy of the Company’s Audit Committee charter is publicly available on the Company’s website at: https://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
- 12 -
Directors performing equivalent functions) or a charter outlining the responsibilities thereof. The EMTELT establishes the bases for all executive compensation, which compensation is subject to approval by the shareholders in their capacities as such.
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 has determined that it is not necessary for the Company to have a formal process for shareholders to send communications to the Board.
Director Qualifications:
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
|
|
| |
Ben F. Cheek, III
| | Retired executive officer of the Company. Previously served as director of a Habersham Bancorp. Has legal background as an attorney. Has 6162 years experience with the Company. Has previously served as board member of various consumer industry associations. He has served as director of the Company for 5455 years.
|
|
| |
Ben F. Cheek, IV
| | Executive officer of the Company. Highly knowledgeable of the banking and consumer finance industry. Has been with the Company for 3334 years. Currently serves on two of the industry’s state association boards and has previously served as a board member of our industry’s national association.
|
|
| |
Virginia C. Herring
| | Executive officer of the Company. Highly knowledgeable of the banking and consumer finance industry. Has been with the Company for 3334 years.
|
|
| |
A. Roger Guimond
| | Independent director. Retired executive officer of the Company. Highly knowledgeable of the banking and consumer finance industry. Had been with the Company for more than 45 years. Significant experience in finance and related areas.
|
|
| |
James H. Harris, III
| | Independent director. Has significant executive 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.
|
|
| |
Jerry J. Harrison, Jr.
| Independent director | Employee of the Company. Extensive experience in private equity and technology services industry. Has a law degree and significant financial and technology related experience.
|
|
|
| Director
Donata Ison | | Summary of Qualifications
Independent director. Extensive knowledge of accounting and reporting standards and specialty finance industry. Prior experience at an international public accounting firm as well as management experience at middle market operating companies. |
John G. Sample, Jr.
| | |
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 prior executive management positions at operating companies. Serves as board member and Chairman of the Audit Committee at Capital City Bank Group, Inc. (a Tallahassee, Florida bank holding company). Has served as director of the Company for 1718 years and is the Company’s Audit Committee Chairman.
|
|
| |
C. Dean Scarborough
| | Independent director. Previously served on board of a community bank. Currently serves as a Commissioner for Stephens County, Georgia, where the Company maintains its headquarters. Has served as director of the Company for 1618 years.
|
|
| |
Keith D. Watson
| | Independent director. Previously served on board of a community bank. Has served as director of the Company for 1618 years. Maintains executive position with significant oversight responsibility in self-owned corporation.
|
|
|
Name, Age, Position(s)
|
|
| | | | | | | | |
EXECUTIVE OFFICERS |
| | |
Name, Age, Position(s) and Family Relationships
| | Business Experience
|
|
| |
Ben F. Cheek, IV, 60
61 Chairman of Board
Son of Ben F. Cheek, III, Brother of
Virginia C. Herring
| | Joined the Company in 1988 working in Statistics and Planning, Became Vice Chairman in 2001 and Chairman of Board effective January 2015.
|
|
| |
Ben F. Cheek, III, 85
86 Chairman Emeritus
Father of Ben F. Cheek, IV and
Virginia C. Herring
| | Joined the Company in 1961 as attorney and became Vice President in 1962, President in 1972 and Chairman of Board in 1989. Effective January 2015, assumed role of Vice Chairman of the Board. During 2020, Mr. Cheek, III transitioned to Chairman Emeritus.
|
|
| |
Virginia C. Herring, 58
59 President and Chief Executive Officer
Daughter of Ben F. Cheek, III, Sister of
Ben F. Cheek, IV
| | Joined the Company on a full time basis in 1988 as Developmental Officer. Since then, she has worked throughout the Company in different departments on special assignments and consultant projects. Became President in 2001. Effective January 2015 promoted to Chief Executive Officer in addition to retaining her position as President.
|
|
| |
Brian J. Gyomory, 54
Brian J. Gyomory, 55 Executive Vice President, Chief
Financial Officer
and Chief Financial Officer | | Joined the Company in December 2019 as Senior Vice President of Finance. Became Executive Vice President and Chief Financial Officer in April 2021. Prior thereto, was Vice President, of Finance at Global Lending Services, LLC beginning 2012.
|
- 14 -
|
| |
EXECUTIVE OFFICERS (continued)
|
Name, Age, Position(s)
and Family Relationships
|
Business Experience
|
Todd S. Manke, 53
Executive Vice President –
Chief Risk Officer
No Family Relationship
| Joined the Company in August 2020 as Executive Vice President and Chief Risk Officer. Prior thereto, was Chief Risk Officer at American Credit Acceptance Corporation beginning in 2009. Prior to that, experiences include work for Capital One, Lincoln Financial and Corning, Inc.
|
|
|
Gary L. McQuain, 56
Executive Vice President –
Chief Operating Officer
Gary L. McQuain, 57 Executive Vice President and Chief Operating Officer | | Joined the Company in October 2019 as Senior Operations Vice President. Became Executive Vice President and Chief Operating Officer in May 2020. Prior thereto, was President and CEO of Southern Management Corporation, a financial services company, from October 2017 to August 2019. Prior to that, served as a financial services professional at MidCountry Financial Corp., a financial services holding company, from January 2016 to October 2017, and President of Pioneer Services, a financial services company from January 2016 to October 2017.
|
|
| |
Jeffrey R. Thompson, 64
Executive Vice President –
Jeffrey R. Thompson, 65 Executive Vice President and Chief Human Resources
Officer | | Joined the Company in 2015 as Project Manager. Became Vice President – Human Resources in May 2019. Became Executive Vice President -and Chief Human Resources Officer in May 2020.
|
|
| |
Mark J. Scarpitti, 49
Executive Vice President –
General Counsel
Mark J. Scarpitti, 50 Executive Vice President and General Counsel and Secretary / Treasurer | | Joined the Company in November 2015 as Vice President – Deputy General Counsel. Became Executive Vice President – and General Counsel in August 2021.
|
|
| |
Charles E. Vercelli, Jr., 61
Charles E. Vercelli, Jr., 62 Executive Vice President –
and Chief Government and Regulatory Affairs
Officer | | Joined the Company in 2008 as Executive Vice President – General Counsel. Became Executive Vice President – and Chief Government and Regulatory Affairs Officer in 2021. Prior thereto, he provided legal services in his privately held law firm.
|
|
|
Daniel E. Clevenger, II, 48
Executive Vice President –
Compliance
| |
| | | | | | | | |
EXECUTIVE OFFICERS (continued) |
| | |
Name, Age, Position(s) and Family Relationships | | Business Experience |
Daniel E. Clevenger, II, 49 Executive Vice President and Chief Compliance Officer | | Joined 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, a collateral recovery company, from 2014 to 2015 and prior thereto provided legal services at Day Kettierer, LTD from 2006 to 2013. Served in private practice of law from 1998 to 2006.
|
- 15 -
EXECUTIVE OFFICERS (continued)
|
| | |
Name, Age, Position(s)
|
Business Experience
|
Joseph A. Shaw, 51
Executive Vice President –
Chief Information Officer
Joseph A. Shaw, 52 Executive Vice President and Chief Information Officer | | Joined the Company in July 2017 as Chief Information Officer and became Executive Vice President and Chief Information Officer in January 2018. Prior thereto, he was a Technology Strategist for a Microsoft consulting firm he founded in 2007.
|
|
| |
Lynn E Julie I. Cox, 64
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 toBaker, 61 Executive Vice President and Chief Information Security Officer No Family Relationship | | Joined the company in September 2021 as the Chief Information Security Officer and became Executive Vice President in 2005.
|
|
|
and Chief Information Security Officer in March 2023. Prior thereto, was Head of Cyber Innovation at TD Bank, based out of Israel from 2017-2021 and Head of Application Security from 2015-2017. Prior thereto worked on Wall Street in New York City for Citigroup (2006-2014) as SVP, Information Security and Deutsche Bank (2001-2006) as Technical Information Security Officer and Infrastructure Architect. Prior to that was Director of IT for Pace University School of Law (1995-2001) and Manager of Network Services at NYU School of Law (1992-1995).
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 elected.
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: https://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 CoxMark Scarpitti, 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 maintains 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.
Item 11.
Item 11.EXECUTIVE COMPENSATION:
Compensation Discussion and Analysis
Overall Philosophy:
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 ManagementLeadership Team (described below, the “EMTELT”), 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
- 16 -
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 EMTELT, which consists of certain executive officers of the Company, establishes the bases for all executive officer compensation, which compensation is approved by Mr.Cheek IV, and Ms. Herring, who are shareholders of the Company and Mr. Cheek, III, retired executive officer. At December 31, 20212022, the EMTELT consisted of Ms. Herring, Ms. Baker, Messrs. Cheek IV, Guimond, Gyomory, Clevenger, Manke, McQuain, Scarpitti, Shaw, Thompson, and Vercelli, Ms. Herring, and Ms. O’Shields. . For the foregoing reasons the Company has not historically engaged any independent compensation consultant to advise on compensation related matters.
Components of Compensation:
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 opportunities, 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 EMTELT takes into account this fact annually when determining other components and amounts of compensation.
Base Salary:
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 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, 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 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 EMTELT and approved by Mr. Cheek IV, Ms. Herring, who are shareholders of the Company. The EMTELT 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 awards.
determining whether and to what extent to make awards. As in prior years, in 20212022 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, Mr. Cheek, IV and Ms. Herring retain the discretion to award certain additional amounts.
- 17 -
Non-Equity Incentive Compensation:
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 MrMs. Virgina C. Herring and Messrs. Ben F. Cheek, IIIIV, and his family. Mr. David W. Cheek. 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 EMTELT has, historically, adopted annual incentive compensation plans. Consistently therewith, in the first quarter of 20212022 the EMTELT approved the Company’s 20212022 Executive Bonus Plan (the “20212022 Bonus Plan”). Mr. Cheek, III voluntarily elected not to participate in the 2021 Bonus Plan.
The 20212022 Bonus Plan.
The 2022 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 20212022 Bonus Plan, at inception, a minimum pre-tax income requirement of $1417.65 million was established as a threshold 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 of the Company, plus the Company's projected accrued incentive bonus at December 31, 20202021, multiplied by 50%. The EMTELT believed using a trailing three-year average metric would incent management to focus on long-term growth, and not be disproportionately focused on short-term results. The EMTELT determined that pre-tax income was an appropriate measure upon which to provide a threshold evaluation of our annual performance because the EMTELT believes pre-tax income represents an appropriate measure of profitability for the Company.
If that threshold was met, payouts under the 20212022 Bonus Plan were based on the achievement of personal and department goals and the performance evaluation. The bonus will be paid on an individual basis as a percentage of the participant’s annualbase salary. The plan allows for a bonus range of 0% to 65%.
In 2021 of the participant's base salary.
In 2022, the Company surpassed the $1417.65 million pre-tax threshold goal.
income threshold goal.
In accordance with discretion afforded to the EMTELT under the 20212022 Bonus Plan, amounts paid to each executive officer, other than Mr. Cheek, III, varied within the payout range depending on personal performance milestones and department goals as determined by the EMTELT. The actual amounts paid to each executive officer are set out in the Summary Compensation Table which follows, under the heading “Non-Equity Incentive Plan Compensation”.
Deferred Compensation:
Deferred Compensation:
The Company offers all eligible employees, including executive officers, 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 the first 1% and 70% of the 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, the Company has 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 EMTELT 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.
- 18 -
Perquisites and Other Compensation:
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 EMTELT periodically reviews the types and amounts of perquisites and other compensation provided to the Company’s executive officers. In conducting this review, the EMTELT considers, among other things, the types and ranges of compensation provided at various similar sized or situated companies and, in 20212022, determined that these amounts were appropriate.
The Company’s
Select Company 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. 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 20212022, Messrs. Cheek, IV, Guimond (retired effective December 31, 2021) and Morrow (retired effective January 1, 2021), Ms. Herring and Ms. O’Shields (retired effective December 31, 2021), and Ms. Herring received this benefit. In addition, during 20212022, 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 for each named executive officer 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 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 EMTELT and the Company’s closely-held ownership, the EMTELT 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:
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
| | | | | |
The Board of Directors: | |
Ben F. Cheek, III | Jerry L. Harrison, Jr.
Ben F. Cheek. IVJohn G. Sample, Jr.
Virginia C. HerringC. Dean Scarborough
A. Roger GuimondKeith D. Watson
James H. Harris, III
|
Ben F. Cheek. IV | Donata Ison |
Virginia C. Herring | John G. Sample, Jr. |
A. Roger Guimond | C. Dean Scarborough |
James H. Harris, III | Keith D. Watson |
- 19 -
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, IV
Chairman
| 2021
2020
2019
| $321,384
$321,384
$297,384
| $95,301
$96,157
$95,855
| $208,899
$114,965
$32,138
| $59,602
$58,192
$123,757
| $685,186
$590,698
$549,134
|
Virginia C. Herring
President and CEO
| 2021
2020
2019
| $402,000
$398,833
$383,000
| $251,477
$247,667
$247,892
| $261,300
$145,709
$57,450
| $99,484
$66,425
$35,549
| $1,014,261
$ 858,634
$723,891
|
A. Roger Guimond
Executive Vice President of
Finance and Investor
Relations (4)
| 2021
2020
2019
| $491,741
$465,500
$450,917
| $38,313
$23,805
$33,449
| $319,632
$170,065
$90,183
| $74,306
$60,655
$74,715
| $923,992
$720,025
$649,264
|
Brian J. Gyomory
Executive Vice President and
Chief Financial Officer
| 2021
2020
2019
| $ 265,500
$ -
$ -
| $ 11,053
$ -
$ -
| $172,575
$-
$ -
| $3,609
$ -
$ -
| $452,737
$-
$-
|
Gary L. McQuain
Executive Vice President and
Chief Operating Officer
| 2021
2020
2019
| $398,750
$366,667
$-
| $16,051
$14,667
$-
| $259,188
$133,957
$-
| $21,726
$17,188
$-
| $695,715
$532,479
$-
|
Charles E. Vercelli, Jr.
Executive Vice President of
Government and Regulatory
Affairs
| 2021
2020
2019
| $315,500
$315,668
$319,140
| $15,020
$15,341
$14,014
| $244,075
$132,862
$70,068
| $71,333
$56,179
$42,720
| $645,928
$520,050
$445,942
|
|
|
|
|
|
|
|
(1)For additional information on the payments of discretionary bonus awards, see “Compensation Discussion and Analysis – |
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary | | Bonus | | Non-Equity Incentive Plan Compensation | | All Other Compensation | | Total |
| | | | | | (1) | | (2) | | (3) | | |
Ben F. Cheek, IV Chairman | | 2022 | | $ | 328,564 | | | $ | 95,816 | | | $ | — | | | $ | 93,344 | | | $ | 517,724 | |
| 2021 | | $ | 321,384 | | | $ | 95,301 | | | $ | 208,899 | | | $ | 59,603 | | | $ | 685,186 | |
| 2020 | | $ | 321,384 | | | $ | 96,157 | | | $ | 114,965 | | | $ | 58,192 | | | $ | 590,698 | |
Virginia C. Herring President and CEO | | 2022 | | $ | 417,000 | | | $ | 252,208 | | | $ | 122,211 | | | $ | 118,036 | | | $ | 909,455 | |
| 2021 | | $ | 402,000 | | | $ | 251,477 | | | $ | 261,300 | | | $ | 99,484 | | | $ | 1,014,260 | |
| 2020 | | $ | 398,833 | | | $ | 247,667 | | | $ | 145,709 | | | $ | 66,425 | | | $ | 858,634 | |
Brian J. Gyomory Executive Vice President and Chief Financial Officer | | 2022 | | $ | 300,500 | | | $ | 12,500 | | | $ | 91,585 | | | $ | 23,441 | | | $ | 428,026 | |
| 2021 | | $ | 265,500 | | | $ | 11,053 | | | $ | 172,575 | | | $ | 3,609 | | | $ | 452,737 | |
| 2020 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Gary L. McQuain Executive Vice President and Chief Operating Officer | | 2022 | | $ | 416,500 | | | $ | 17,345 | | | $ | 125,582 | | | $ | 39,719 | | | $ | 599,146 | |
| 2021 | | $ | 398,750 | | | $ | 16,051 | | | $ | 259,188 | | | $ | 21,725 | | | $ | 695,715 | |
| 2020 | | $ | 366,667 | | | $ | 14,667 | | | $ | 133,957 | | | $ | 17,188 | | | $ | 532,479 | |
Charles E. Vercelli, Jr. Executive Vice President and Chief Government and Regulatory Affairs Officer | | 2022 | | $ | 269,980 | | | $ | 15,599 | | | $ | 114,292 | | | $ | 136,341 | | | $ | 536,212 | |
| 2021 | | $ | 315,500 | | | $ | 15,020 | | | $ | 244,075 | | | $ | 71,333 | | | $ | 645,928 | |
| 2020 | | $ | 315,668 | | | $ | 15,341 | | | $ | 132,862 | | | $ | 56,179 | | | $ | 520,050 | |
(1)For additional information on the payments of discretionary bonus awards, see “Compensation Discussion and Analysis – Bonus Awards” above.
(2) |
(2)For additional information on the payments of non-equity incentive plan compensation, see “Compensation Discussion and Analysis – Non-Equity Incentive Compensation” above.
(3) |
(3)All other compensation for the Company’s named executive officers for 20212022 is detailed as follows:
(4)Title changed from Executive Vice President and Chief Financial Officer to Executive Vice President of Finance and Investor Relations effective April 2021.
|
All Other Compensation
|
Name
|
Personal
Use of
Company
Auto or Airplane
| Travel
Allowance and/or
Travel Expense Reimb.
|
Insurance
Premiums
|
Director Fees
and/or
Deferred Salary (a)
|
Company
Contribution
To Deferred
Compensation Plan
|
Total
|
|
|
|
|
|
|
|
Ben F. Cheek, IV
| $5,425
| $-
| $12,013
| $35,000
| $7,164
| $59,602
|
Virginia C. Herring
| $46,857
| $-
| $5,306
| $35,000
| $12,321
| $99,484
|
A. Roger Guimond
| $11,563
| $-
| $2,301
| $35,000
| $25,442
| $74,306
|
Brian J. Gyomory
| $-
| $-
| $819
| $-
| $2,790
| $3,609
|
Gary L. McQuain
| $9,267
| $-
| $819
| $-
| $11,640
| $21,726
|
Charles E. Vercelli, Jr.
| $-
| $-
| $831
| $60,000
| $10,502
| $71,333
|
(a) Mr. Vercelli elected to defer $60
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All Other Compensation |
Name | | Personal Use of Company Auto or Airplane | | | Insurance Premiums | | Director Fees and/or Deferred Salary (a) | | Company Contribution To Deferred Compensation Plan | | Total |
| | | | | | | | | | | |
Ben F. Cheek, IV | | $ | 38,241 | | | | $ | 9,051 | | | $ | 35,000 | | | $ | 11,052 | | | $ | 93,344 | |
Virginia C. Herring | | $ | 50,511 | | | | $ | 14,976 | | | $ | 35,000 | | | $ | 17,549 | | | $ | 118,036 | |
Brian J. Gyomory | | $ | 1,956 | | | | $ | 819 | | | $ | 12,000 | | | $ | 8,666 | | | $ | 23,441 | |
Gary L. McQuain | | $ | 8,908 | | | | $ | 819 | | | $ | 12,000 | | | $ | 17,992 | | | $ | 39,719 | |
Charles E. Vercelli, Jr. | | $ | — | | | | $ | 831 | | | $ | 120,000 | | | $ | 15,509 | | | $ | 136,340 | |
(a)Mr. Vercelli elected to defer $120,000 in salary in 2021. See “. Mr. McQuain elected to defer $12,000 in salary. Mr. Gyomory elected to defer $12,000 in salary. See "Executive Nonqualified Deferred Compensation Plan”" and “"Director Fees” below.
Grants of Plan-Based Awards
In 2021Compensation" below.
Grants of Plan-Based Awards
In 2022, the named executive officers were eligible to receive non-equity incentive plan payouts under the Company’s 20212022 Bonus Plan. The following table sets forth certain information with respect to award eligibility and payments for the fiscal year ended December 31, 2021 to our named executive officers.
- 20 -
|
| Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (1)
|
Name
|
Grant Date
| Threshold
$
| Target
$
| Maximum
$
|
|
|
|
|
|
Ben F. Cheek, IV
| 3/01/2021
| $-
| $104,450
| $208,899
|
Virginia C. Herring
| 3/01/2021
| $-
| $130,651
| $259,242
|
A. Roger Guimond
| 3/01/2021
| $-
| $159,816
| $319,632
|
Brian J. Gyomory
| 3/01/2021
| $-
| $ 86,288
| $172,575
|
Gary L. McQuain
| 3/01/2021
| $-
| $129,594
| $259,188
|
Charles E. Vercelli, Jr.
| 3/01/2021
| $-
| $122,038
| $244,075
|
(1)Represented estimated possible payouts under the 20212022 to our named executive officers.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) |
Name | | Grant Date | | Threshold $ | | Target $ | | Maximum $ |
| | | | | | | | |
Ben F. Cheek, IV | | 3/1/2022 | | $ | — | | | $ | 106,783 | | | $ | 213,567 | |
Virginia C. Herring | | 3/1/2022 | | $ | — | | | $ | 135,525 | | | $ | 271,050 | |
Brian J. Gyomory | | 3/1/2022 | | $ | — | | | $ | 101,563 | | | $ | 203,125 | |
Gary L. McQuain | | 3/1/2022 | | $ | — | | | $ | 139,263 | | | $ | 278,525 | |
Charles E. Vercelli, Jr. | | 3/1/2022 | | $ | — | | | $ | 126,744 | | | $ | 253,487 | |
(1)Represented estimated possible payouts under the 2022 Bonus Plan. The “Threshold” column reflects the payout which would have occurred if each performance goal as set out in the 20212022 Bonus Plan was met, and payouts were made at the minimum level (0%) of salary. The “Target” column reflects the payout which would have occurred if each performance goal as set out in the 20212022 Bonus Plan was met, and payouts were made at the midpoint of bonus payout as a percent of salary (32.5%). The “Maximum” column reflects the payout which would have occurred if each performance goal as set out in the 20212022 Bonus Plan was met, and payouts were made at the maximum level (65.0%) of salary.
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 the responsibilities thereof. The EMTELT establishes the bases for all executive compensation, which compensation is approved by shareholders Messrs. Cheek, III and Cheek, IV and Ms. Herring.
During 2021
During 2022, 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”). Non-employee 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.
|
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
|
|
|
|
|
|
|
Ben F. Cheek, IV
| $-
| $7,164
| $18,025
| $-
| $ 703,081
|
Virginia C. Herring
| $-
| $12,321
| $3,207
| $-
| $ 142,154
|
A. Roger Guimond
| $-
| $25,442
| $25,938
| $-
| $ 1,027,102
|
Brian J. Gyomory
| $-
| $2,790
| $-
| $-
| $ -
|
- 21 -
Nonqualified Deferred Compensation Table
(continued)
|
Name
|
Executive
Contributions
In Last
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | Ben F. Cheek, IV | | $ | 35,000 | | | $ | 11,052 | | | $ | 22,143 | | | $ | — | | | $ | 729,848 | | Virginia C. Herring | | $ | 35,000 | | | $ | 17,549 | | | $ | 4,327 | | | $ | — | | | $ | 142,478 | | Brian J. Gyomory | | $ | 12,000 | | | $ | 8,666 | | | $ | 272 | | | $ | — | | | $ | 2,790 | | Gary L. McQuain | | $ | 12,000 | | | $ | 17,992 | | | $ | 701 | | | $ | — | | | $ | 16,907 | | Charles E. Vercelli, Jr. | | $ | 120,000 | | | $ | 15,510 | | | $ | 13,049 | | | $ | — | | | $ | 368,675 | |
|
Registrant
Contributions
In Last
Fiscal Year (2)
|
Aggregate
Earnings
In Last
Fiscal Year
|
Aggregate
Withdrawals /
Distributions
|
Aggregate
Balance
At Last
Fiscal Year
End
|
|
|
|
|
|
|
Gary L. McQuain
| $-
| $11,640
| $-
| $-
| $16,673
|
Charles E. Vercelli,(1)Mr. Vercelli Jr.
| $60,000
| $10,502
| $6,974
| $-
| $366,773
|
|
|
|
|
|
|
(1)Includes $60elected to defer $120,000 in deferred salary by. Mr. Vercelli. McQuain elected to defer $12,000 in salary. Mr. Gyomory elected to defer $12,000 in salary. See the “"All Other Compensation”" portion of the “"Summary Compensation Table”" above, and “"Director Compensation” below.
(2)" below. (2)Company contributions are included in the “All Other Compensation” portion of the Summary Compensation Table above.
|
Director Compensation
|
|
Name
| Fees
Earned Or
Paid In
Cash
|
All
Other
Compensation
|
Total
|
Ben F. Cheek, III
| $--
| $--
| $--
|
Ben F. Cheek, IV
| $35,000
| $--
| $35,000
|
A. Roger Guimond
| $35,000
| $--
| $35,000
|
James H. Harris, III
| $35,000
| $--
| $35,000
|
Jerry J. Harrison, Jr.
| $35,000
| $--
| $35,000
|
Virginia C. Herring
| $35,000
| $--
| $35,000
|
John G. Sample, Jr.
| $40,000
| $--
| $40,000
|
C. Dean Scarborough
| $35,000
| $--
| $35,000
|
Keith D. Watson
| $35,000
| $--
| $35,000
|
In 2021Director Compensation
| | | | | | | | | | | | | | | | | | | | |
Name | | Fees Earned Or Paid In Cash | | All Other Compensation | | Total |
Ben F. Cheek, III | | $ | — | | | $ | — | | | $ | — | |
Ben F. Cheek, IV | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
A. Roger Guimond | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
James H. Harris, III | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
Jerry J. Harrison, Jr. | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
Virginia C. Herring | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
John G. Sample, Jr. | | $ | 40,000 | | | $ | — | | | $ | 40,000 | |
C. Dean Scarborough | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
Keith D. Watson | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
In 2022, each member of the Board was entitled to receive $35,000 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. Messrs. Cheek IV and Sample elected to receive their 20212022 director fees as deferred compensation (see “Executive Nonqualified Deferred Compensation Plan” above).
Chief Executive Officer Compensation Ratio
For the 2021
For the 2022 fiscal year, the ratio of the annual total compensation of Ms. Virginia C. Herring, our Chief Executive Officer (“CEO Compensation”), to the median of the annual total compensation of all of our employees other than our Chief Executive Officer (“Median Annual Compensation”) was 2319.1 to 1. This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K using the data and assumptions summarized below. In this summary, we refer to the employee who received such Median Annual Compensation as the “Median Employee.” For purposes of this disclosure, the date used to identify the Median Employee was December 31, 20212022 (the “Determination Date”).
CEO Compensation for purposes of this disclosure represents the total compensation reported for Ms. Virginia C. Herring for 20212022 under the “Total” column of the “Summary Compensation Table” for the 20212022 fiscal year. For purposes of this disclosure, Median Annual Compensation was $4445,009, and was calculated by totaling for our Median Employee all applicable elements of compensation for the 2021837, and was calculated by totaling for our
Median Employee all applicable elements of compensation for the 2022 fiscal year in accordance with Item 402(c)(2)(x) of Regulation S-K.
To identify the Median Employee, we first determined our employee population as of the Determination Date. We had 1,442575 employees, representing all full-time and part-time employees. This number does not include any independent contractors, as permitted by the applicable SEC rules. We then measured
- 22 -
We then measured compensation for the period beginning on January 1, 20212022 and ending on December 31, 20212022. This compensation measurement was calculated by totaling for each employee gross taxable earnings salary, bonus, sick pay, vacation pay and other compensation as shown in our payroll and human resources records for 2021.
Item 12.2022.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS:
(a)
(a)Security Ownership of Certain Beneficial Owners:
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, 2021. 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
| | | | | | | | | | | | | | | | | | | | |
Name and Address of Beneficial Owner |
| Amount and Nature of
|
Percent of
|
Beneficial Owner
| Title of Class
| Beneficial Ownership
Title of Class | | Amount and Nature of Beneficial Ownership | | Percent of Class
|
|
|
|
|
| | | Ben F. Cheek, IV
| Voting Common Stock
| Voting Common Stock | 644 Shares - Direct
| 644 Shares - Direct | 37.88%
| 37.88% |
135 East Tugalo Street
|
|
|
|
| | | Toccoa, Georgia 30577
|
|
|
|
| | |
|
|
|
|
| | | Virginia C. Herring
| Voting Common Stock
| Voting Common Stock | 644 Shares - Direct
| 644 Shares - Direct | 37.88%
| 37.88% |
135 East Tugalo Street
|
|
|
|
| | | Toccoa, Georgia 30577
|
|
|
|
| | |
|
|
|
|
| | | David W. Cheek
| Voting Common Stock
| Voting Common Stock | 412 Shares - Direct
| 412 Shares - Direct | 24.24%
| 24.24% |
4500 Barony Dr.
|
|
|
|
| | | Suwanee, Georgia 30024
|
|
|
|
| | |
(b)(b)Security Ownership of Management:
|
|
|
Ownership listed below represents ownership in each class of equity securities of the Company as of December 31, 20212022, 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 “beneficial” ownership of such shares.
|
| Amount and Nature of
| Percent of
|
Name
| Title of Class
| Beneficial Ownership
| Class
|
|
|
|
|
Ben F. Cheek, III
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
Ben F. Cheek, IV
| Voting Common Stock
| 644 Shares - Direct
| 37.88%
|
| Non-Voting Common Stock
| 7,405 Shares - Direct
| 4.40%
|
| Non-Voting Common Stock
| 38,089 Shares – Indirect (1)
| 22.63%
|
|
|
|
|
Virginia C. Herring
| Voting Common Stock
| 644 Shares - Direct
| 37.88%
|
| Non-Voting Common Stock
| 7,911 Shares - Direct
| 4.70%
|
| Non-Voting Common Stock
| 38,088 Shares – Indirect (1)
| 22.63%
|
|
|
|
|
A. Roger Guimond
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
- 23 -
Security Ownership of Management (continued):
|
|
| Amount and Nature of
| Percent of
|
Name
| Title of Class
| Beneficial Ownership
| Class
|
|
|
|
|
Brian J. Gyomory
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
James H. Harris, III
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
Jerry J. Harrison, Jr.
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
John G. Sample, Jr.
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
C. Dean Scarborough
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
|
|
|
|
Keith D. Watson
| Voting Common Stock
| None
| None
|
| Non-Voting Common Stock
| None
| None
|
All directors and
|
|
|
|
executive officers
| Voting Common Stock
| 1,288 Shares - Direct
| 75.76%
|
as a group
| Non-Voting Common Stock
| 15,316 Shares - Direct
| 9.10%
|
(11 persons)
| Non-Voting Common Stock
| 76,177 Shares- Indirect (1)
| 45.26%
|
(1)
| | | | | | | | | | | | | | | | | | | | |
Name | | Title of Class | | Amount and Nature of Beneficial Ownership | | Percent of Class |
| | | | | | |
Ben F. Cheek, III | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
Ben F. Cheek, IV | | Voting Common Stock | | 644 Shares - Direct | | 37.88% |
| | Non-Voting Common Stock | | 7,405 Shares - Direct | | 4.40% |
| | Non-Voting Common Stock | | 38,089 Shares – Indirect (1) | | 22.63% |
| | | | | | |
Virginia C. Herring | | Voting Common Stock | | 644 Shares - Direct | | 37.88% |
| | Non-Voting Common Stock | | 7,911 Shares - Direct | | 4.70% |
| | Non-Voting Common Stock | | 38,088 Shares – Indirect (1) | | 22.63% |
| | | | | | |
Brian J. Gyomory | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
A. Roger Guimond | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
James H. Harris, III | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
Jerry J. Harrison, Jr. | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
Donata Ison | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
John G. Sample, Jr. | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
C. Dean Scarborough | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
Keith D. Watson | | Voting Common Stock | | None | | None |
| | Non-Voting Common Stock | | None | | None |
| | | | | | |
| | | | | | |
All directors and executive officers as a group (11 persons) | | Voting Common Stock | | 1,288 Shares - Direct | | 75.76% |
| Non-Voting Common Stock | | 15,316 Shares - Direct | | 9.10% |
| Non-Voting Common Stock | | 76,177 Shares- Indirect (1) | | 45.26% |
(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
| Trust for Benefit of
| Number of | Number of Shares
|
| %
|
David W. Cheek and
Virginia C. Herring
| Ben F. Cheek, IV
| Ben F. Cheek, IV | 38,089
| 38,089 | 22.63%
| 22.63% |
David W. Cheek and
Ben F. Cheek, IV
| Virginia C. Herring
| Virginia C. Herring | 38,088
| 38,088 | 22.63%
| 22.63% |
Ben F. Cheek, IV and
Virginia C. Herring
| David W. Cheek
| David W. Cheek | 38,089
| 38,089 | 22.63%
| 22.63% |
(c)(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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE:
Related Party Transactions:
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 expired December 31, 2021. The Company continues to make monthly rent payments to Franklin Enterprises, Inc. while renewal of the lease is being negotiated. Effective July 1, 2017, the Company entered into a lease with Franklin
- 24 -
Enterprises, Inc. for rental of office space for its marketing department at a cost of $9,600 per year. This lease expires June 30, 2022. 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 these lease terms is $4,800.
The Company leased its Clarkesville, Georgia branch office for a total of $5,400 per year from Cheek Investments, Inc. In July of 2021 the lease was terminated when the Company purchased the land and building from Cheek Investments, Inc. Messrs. Cheek, III and Cheek, IV and Ms. Herring, own .50%, 33.17% and 33.17%, respectively, of the shares of Cheek Investments, Inc.
During 1998, the Company extended a loan was extended to a real estate development partnership of which David Cheek (the adult son of Ben F. Cheek, III) who beneficially owns 24.24% of the Company’s voting stock, is a partner. The loan was renewed effective July 20, 2021. The balance on this commercial loan (including principal and accrued interest) was $1,841,381 at December 31, 2021, which was also the maximum amount outstanding during the year. There were no principal or interest payments applied against this loan during 2021. 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, retired executive 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 $3,960 for interest accrued during 2021 was applied to the loan on December 31, 2021. No principal payments on this loan were made in 2021. The balance on this loan at December 31, 2021 was $434,550. This was the maximum amount outstanding during the year.
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.
Director Independence:
INDEPENDENCE: Related Party Transactions:
The Company leases its home office buildings for a total of $151,200 per year from Franklin Enterprises, Inc. under leases which expire December 31, 2024. Effective July 1, 2022, the Company entered into a lease with Franklin Enterprises, Inc. for rental of office space for its marketing department at a cost of $9,600 per year. This lease expires June 30, 2027. Messrs. Cheek, III, Cheek, IV, and Ms. Herring, directors and executive officers 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 these lease terms is $351,000.
During 1998, the Company extended a loan to a real estate development partnership of which David Cheek (the adult son of Ben F. Cheek, III) who beneficially owns 24.24% of the Company’s voting stock, is a partner. The loan was renewed effective July 20, 2022. The balance on this commercial loan (including principal and accrued interest) was $1,959,772 at December 31, 2022, which was also the maximum amount outstanding during the year. There were no principal or interest payments applied against this loan during 2022. 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 8.00%. 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, retired executive 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 $12,187 for interest accrued during 2022 was applied to the loan on December 30, 2022. No principal payments on this loan were made in 2022. The balance on this loan at December 31, 2022 was $468,422. This was the maximum amount outstanding during the year.
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.
Director Independence:
See Part III, Item 10. Directors, Executive Officers and Corporate Governance, of this Annual Report on Form 10-K for a discussion on director independence matters, which discussion is incorporated herein by reference.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES:
The Company was billed for professional services provided during fiscal years 20212022 and 20202021 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.
- 25 -
| Fee
| Fee
|
| Amount
| Amount
|
| 2021
| 2020
|
Services Provided:
|
|
|
Audit Fees (1)
| $ 361,900
| $ 474,600
|
Audit Related Fees (2)
| 27,150
| 26,900
|
Tax Fees (3)
| 132,394
| 117,068
|
All Other Fees
| -
| -
|
Total
| $ 521,444
| $ 626,236
|
|
|
|
(1)
| Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2021 |
| | | | | | | | | | | |
| Fee Amount 2022 | | Fee Amount 2021 |
Services Provided: | | | |
Audit Fees (1) | $ | 397,362 | | | $ | 361,900 | |
Audit Related Fees (2) | 151,295 | | | 27,150 | |
Tax Fees (3) | 151,568 | | | 132,394 | |
Total | $ | 700,225 | | | $ | 521,444 | |
(1)Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2022 and 20202021, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 20212022 and 2020 fiscal years.
|
|
(2)
| 2021 fiscal years. |
(2)Fees in connection with the audit of the Company’s 401(k) retirement plan.
(3)
| |
(3)Fees billed by Deloitte Tax 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.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
| | | | | | | | |
|
(a)(1)(a) | (1) | The following Report of Independent Registered Public Accounting Firm and financial
statements are incorporated by reference herein from Exhibit 13 hereto:
|
| | |
| | Report of Independent Registered Public Accounting Firm.
|
| | |
| | Consolidated Statements of Financial Position at December 31, 20212022 and 2020.
2021. |
| | |
| | Consolidated Statements of Income for the three years ended December 31, 2021.
2022. |
| | |
| | Consolidated Statements of Comprehensive Income for the three years ended
December 31, 2021.
2022. |
| | |
| | Consolidated Statements of Stockholders’ Equity for the three years ended
December 31, 2021.
2022. |
| | |
| | Consolidated Statements of Cash Flows for the three years ended December 31, 2021.
2022. |
| | |
| | Notes to Consolidated Financial Statements.
|
|
- 26 -
- 27 -
- 28 -
| | | (2) | Financial Statement Schedule: |
| | |
| | Report of Independent Registered Public Accounting Firm. |
| | |
| | Condensed Statements of Financial Position at December 31, 2022 and 2021. |
| | |
| | Condensed Statements of Income for the three years ended December 31, 2022. |
| | |
| | Condensed Statements of Comprehensive Income for the three years ended December 31, 2022. |
| | |
| | Condensed Statements of Stockholders’ Equity for the three years ended December 31, 2022. |
| | |
| | Condensed Statements of Cash Flows for the three years ended December 31, 2022. |
| | | | | | | | | | | |
| 4. | (a) | |
| | | |
| | (b) | |
| | | |
| | (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). |
| | | |
| | (d) | |
| | | |
| | (e) | |
| | | |
| | (f) | |
| | | |
| | (g) | |
| | | |
| | (h) | |
| | | |
| | (i) | |
| | | |
| | (j) | |
| | | |
| | (k) | |
| | | |
| | (l) | |
| | | |
| | | | | | | | | | | |
| | (m) | |
| | | |
| | (n) | |
| | | |
| | (o) | |
| | | |
| 10. | (a) | |
| | | |
| | (b) | |
| | | |
| | (c) | |
| | | |
| | (d) | |
| | | |
| | (e) | |
| | | |
| | (f) | |
| | | |
| | (g) | |
| | | |
| 13. | |
| | |
| 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). |
| | |
| 23. | |
Item 16. | | | | | | | | | | | |
| | | |
| 31.1 | |
| | | |
| 31.2 | |
| | | |
| 32.1 | |
| | | |
| 32.2 | |
| | | |
| 101.INS | XBRL 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. |
| | | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
| | | |
| * | Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. |
Item 16. FORM 10-K SUMMARY:
NONE.
- 29 -
SIGNATURES
NONE.
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
| | | | | | | | |
| | 1st FRANKLIN FINANCIAL CORPORATION |
|
| |
MarchApril 3111, 20222023
| By:s/ Virginia C. Herring
| By: /s/ Virginia C. Herring |
Date
Date | Virginia C. Herring
| 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
|
|
|
|
| |
|
|
| | |
/s/ Ben F. Cheek, IV
|
|
| | |
(Ben F. Cheek, IV)
| Chairman of Board
| Chairman of Board | March 31 | April 11, 2022
2023 |
|
|
| | |
/s/ Ben F. Cheek, III
|
|
| | |
(Ben F. Cheek, III)
| Chairman Emeritus
| Chairman Emeritus | March 31 | April 11, 2022
2023 |
|
|
| | |
/s/ Virginia C. Herring
|
|
| | |
(Virginia C. Herring)
| | Director, President and Chief Executive Officer
| March 31 | April 11, 2022
2023 |
/s/ A. Roger Guimond
|
|
| | |
(A. Roger Guimond)
| Director
| March 31, 2022
|
|
|
|
|
/s/ Brian J. Gyomory
|
|
| | |
(Brian J. Gyomory)
| | Executive Vice President and Chief Financial Officer
| March 31 | April 11, 2022
2023 |
/s/ James H. Harris, III
| | | | |
/s/ A. Roger Guimond | | | | |
(A. Roger Guimond) | | Director | | April 11, 2023 |
| | | | |
/s/ James H. Harris, III |
|
| | |
(James H. Harris, III)
| Director
| March 31Director | | April 11, 2022
2023 |
|
|
| | |
/s/ Jerry J. Harrison, Jr.
|
|
| | |
(Jerry J. Harrison, Jr.)
| Director
| March 31Director | | April 11, 2022
2023 |
|
|
| | |
|
/s/ Donata Ison | | | | |
(Donata Ison) | | Director | | April 11, 2023 |
| | | | |
/s/ John G. Sample, Jr.
|
|
| | |
(John G. Sample, Jr.)
| Director
| March 31Director | | April 11, 2022
2023 |
|
|
| | |
/s/ C. Dean Scarborough
|
|
| | |
(C. Dean Scarborough)
| Director
| March 31Director | | April 11, 2022
2023 |
|
|
| | |
/s/ Keith D. Watson
|
|
| | |
(Keith D. Watson)
| Director
| March 31Director | | April 11, 2022
2023 |
- 30 -
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)
| |
(a)Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference, 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:
|
|
| (1)
| Any annual report to security holders covering the registrant's last fiscal year; and
|
|
|
|
|
| (2)
| |
(1)Any annual report to security holders covering the registrant's last fiscal year; and
(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.
|
|
(b)
| |
(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)
| |
(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, 20212022, which is filed as Exhibit 13 hereto. The Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements to its shareholders.
Schedule I
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
|
Schedule I
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of 1st Franklin Financial Corporation
Opinion on the Financial Statement Schedule
We have audited the consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 20212022 and 20202021, and for each of the three years in the period ended December 31, 20212022, and have issued our report thereon dated MarchApril 3111, 20222023; such consolidated financial statements and report are included in your 20212022 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company listed in the Index at Item 15. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the 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 31, 2022
/s/ Deloitte & Touche LLP
Atlanta, Georgia
April 11, 2023
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2022 AND 2021
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NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
ASSETS
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
CASH AND CASH EQUIVALENTS | $ | 6,659,184 | | | $ | 694,240 | |
| | | |
RESTRICTED CASH | 532,706 | | | 1,107,688 | |
| | | |
LOANS: | | | |
Direct Cash Loans | 911,821,593 | | | 873,432,972 | |
Real Estate Loans | 37,323,155 | | | 45,972,414 | |
Sales Finance Contracts | 146,507,130 | | | 118,959,994 | |
| 1,095,651,878 | | | 1,038,365,380 | |
| | | |
Less: Unearned Finance Charges | 154,630,023 | | | 151,081,033 | |
Unearned Insurance Commissions | 26,914,714 | | | 28,486,409 | |
Allowance for Credit Losses | 75,210,063 | | | 67,311,208 | |
| 838,897,078 | | | 791,486,730 | |
| | | |
INVESTMENTS IN SUBSIDIARIES | 248,545,940 | | | 262,106,133 | |
| | | |
INVESTMENT SECURITIES: | | | |
Available for Sale, at fair market value | 380,316 | | | 418,548 | |
| | | |
OTHER ASSETS: | | | |
Land, Buildings, Equipment and Leasehold Improvements, | | | |
Less accumulated depreciation and amortization of $50,116,238 and $46,347,589 in 2022 and 2021, respectively | 13,111,394 | | | 12,265,626 | |
Operating Lease Right-of-Use Assets | 38,153,238 | | | 34,768,208 | |
Miscellaneous | 16,644,400 | | | 8,877,807 | |
| 67,909,032 | | | 55,911,641 | |
| | | |
TOTAL ASSETS | $ | 1,162,924,256 | | | $ | 1,111,724,980 | |
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2022 AND 2021
LIABILITIES AND STOCKHOLDERS' EQUITY
| | | | | | | | | | | |
| 2022 | | 2021 |
SENIOR DEBT: | | | |
Notes Payable to Banks | $ | 67,531,000 | | | $ | 60,300,000 | |
Senior Demand Notes, including accrued interest | 112,325,674 | | | 104,043,479 | |
Commercial Paper | 624,585,553 | | | 552,192,882 | |
| 804,442,227 | | | 716,536,361 | |
| | | |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES: | | | |
Operating Lease Liabilities | 39,019,208 | | | 35,439,377 | |
Other Accounts Payable and Accrued Expenses | 31,163,971 | | | 33,299,145 | |
| 70,183,179 | | | 68,738,522 | |
| | | |
SUBORDINATED DEBT | 29,005,826 | | | 29,692,344 | |
| | | |
Total Liabilities | 903,631,232 | | | 814,967,227 | |
| | | |
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, 2022 and 2021 | 170,000 | | | 170,000 | |
Non-Voting Shares; no par value; | | | |
198,000 shares authorized; 168,300 shares issued and outstanding as of December 31, 2022 and 2021 | — | | | — | |
Accumulated Other Comprehensive Income | (26,401,816) | | | 9,736,651 | |
Retained Earnings | 285,524,840 | | | 286,851,102 | |
Total Stockholders' Equity | 259,293,024 | | | 296,757,753 | |
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,162,924,256 | | | $ | 1,111,724,980 | |
Senior Demand Notes, including accrued interest
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 20212022, 2020 AND 2019
Basis of Presentation
2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
INTEREST INCOME: | | | | | |
Finance Charges | $ | 266,963,826 | | | $ | 236,651,728 | | | $ | 213,087,060 | |
Investment Income | (18,381) | | | 309,412 | | | 21,732 | |
| 266,945,445 | | | 236,961,140 | | | 213,108,792 | |
| | | | | |
INTEREST EXPENSE: | | | | | |
Senior Debt | 27,483,876 | | | 22,786,460 | | | 20,748,957 | |
Subordinated Debt | 971,958 | | | 977,093 | | | 922,083 | |
| 28,455,834 | | | 23,763,553 | | | 21,671,040 | |
| | | | | |
NET INTEREST INCOME | 238,489,611 | | | 213,197,587 | | | 191,437,752 | |
| | | | | |
PROVISION FOR CREDIT LOSSES | 84,287,916 | | | 42,183,163 | | | 56,689,484 | |
| | | | | |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 154,201,695 | | | 171,014,424 | | | 134,748,268 | |
| | | | | |
NET INSURANCE INCOME | 21,957,943 | | | 20,664,481 | | | 19,663,742 | |
| | | | | |
OTHER REVENUE | 6,939,179 | | | 7,029,120 | | | 5,527,562 | |
| | | | | |
OPERATING EXPENSES: | | | | | |
Personnel Expense | 113,732,789 | | | 109,011,575 | | | 99,684,473 | |
Occupancy Expense | 18,173,248 | | | 17,382,787 | | | 17,568,423 | |
Other Expense | 56,955,705 | | | 47,765,457 | | | 43,592,038 | |
| 188,861,742 | | | 174,159,819 | | | 160,844,934 | |
| | | | | |
(LOSS) INCOME BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES | (5,762,925) | | | 24,548,206 | | | (905,362) | |
| | | | | |
PROVISION FOR INCOME TAXES | 655,722 | | | 595,915 | | | 205,779 | |
| | | | | |
EQUITY IN EARNINGS OF SUBSIDIARIES, Net of Tax | 22,578,274 | | | 17,908,716 | | | 17,001,403 | |
| | | | | |
NET INCOME | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net Income | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
| | | | | |
Other Comprehensive Income (Loss): | | | | | |
Net changes related to available-for-sale Securities: | | | | | |
Unrealized (losses) gains | (45,165,474) | | | (3,858,538) | | | 4,658,116 | |
Income tax benefit (provision) | 9,479,082 | | | 816,053 | | | (989,588) | |
Net unrealized (losses) gains | (35,686,392) | | | (3,042,485) | | | 3,668,528 | |
| | | | | |
Less reclassification of gains to net income | 452,074 | | | 487,791 | | | 16,447 | |
| | | | | |
Total Other Comprehensive (Loss) Income | (36,138,467) | | | (3,530,276) | | | 3,652,081 | |
| | | | | |
Total Comprehensive (Loss) Income | $ | (19,978,840) | | | $ | 38,330,731 | | | $ | 19,542,343 | |
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Shares | | Amount | |
| | | | | | | | |
Balance at December 31, 2019 | 170,000 | | 170,000 | | | 251,711,270 | | | 9,614,846 | | | 261,496,116 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2020 | — | | — | | | 15,890,262 | | | — | | | |
Other Comprehensive Income | — | | — | | | — | | | 3,652,081 | | | |
Total Comprehensive Income | — | | — | | | — | | | — | | | 19,542,343 | |
Cumulative Change in Accounting Principle | — | | — | | | (2,158,161) | | | — | | | (2,158,161) | |
Cash Distributions Paid | — | | — | | | (440,970) | | | — | | | (440,970) | |
| | | | | | | | | |
Balance at December 31, 2020 | 170,000 | | $ | 170,000 | | | $ | 265,002,401 | | | $ | 13,266,927 | | | $ | 278,439,328 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2021 | — | | — | | | 41,861,007 | | | — | | | |
Other Comprehensive Loss | — | | — | | | — | | | (3,530,276) | | | |
Total Comprehensive Income | — | | — | | | — | | | — | | | 38,330,731 | |
Cash Distributions Paid | — | | — | | | (20,012,306) | | | — | | | (20,012,306) | |
Balance at | | | | | | | | | |
Balance at December 31, 2021 | 170,000 | | $ | 170,000 | | | $ | 286,851,102 | | | $ | 9,736,651 | | | $ | 296,757,753 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2022 | — | | — | | | 16,159,627 | | | — | | | |
Other Comprehensive Loss | — | | — | | | — | | | (36,138,467) | | | |
Total Comprehensive Loss | — | | — | | | — | | | — | | | (19,978,840) | |
Cash Distributions Paid | — | | — | | | (17,485,889) | | | — | | | (17,485,889) | |
| | | | | | | | | |
Balance at December 31, 2022 | 170,000 | | $ | 170,000 | | | $ | 285,524,840 | | | $ | (26,401,816) | | | $ | 259,293,024 | |
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net Income | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Provision for credit losses | 84,287,916 | | | 42,183,163 | | | 56,689,484 | |
Depreciation and amortization | 4,425,985 | | | 4,629,756 | | | 4,837,876 | |
Equity in undistributed earnings of subsidiaries | (22,578,274) | | | (17,908,716) | | | (17,001,403) | |
Gain on sale of marketable securities and equipment and premium amortization on securities | 38,232 | | | (301,151) | | | (50,194) | |
(Increase) decrease in miscellaneous assets | (7,647,230) | | | (893,761) | | | (4,754,772) | |
Increase (decrease) in other liabilities | (2,135,176) | | | 7,029,138 | | | 8,728,119 | |
Cash Provided | 72,551,080 | | | 76,599,436 | | | 64,339,372 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Loans originated or purchased | (602,792,430) | | | (588,636,277) | | | (516,978,375) | |
Loan payments | 471,094,166 | | | 451,062,343 | | | 410,369,366 | |
Capital expenditures | (5,219,242) | | | (3,339,606) | | | (3,022,147) | |
Proceeds from sale of equipment | 22,929 | | | 35,088 | | | 67,462 | |
Cash Used | (136,894,577) | | | (140,878,452) | | | (109,563,694) | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net increase in Senior Demand Notes | 8,282,195 | | | 17,420,976 | | | 10,372,708 | |
Advances on credit line | 213,677,200 | | | 164,964,653 | | | 193,849,330 | |
Payments on credit line | (206,446,200) | | | (223,564,653) | | | (186,299,330) | |
Commercial paper issued | 135,878,572 | | | 161,768,917 | | | 139,155,810 | |
Commercial paper redeemed | (63,485,901) | | | (41,849,573) | | | (110,373,572) | |
Subordinated debt issued | 5,759,655 | | | 6,963,742 | | | 6,916,788 | |
Subordinated debt redeemed | (6,446,173) | | | (7,346,797) | | | (5,846,413) | |
Dividends / distributions paid | (17,485,889) | | | (20,012,306) | | | (440,970) | |
Cash Provided | 69,733,459 | | | 58,344,959 | | | 47,334,351 | |
| | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 5,389,962 | | | (5,934,057) | | | 2,110,029 | |
| | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning | 1,801,928 | | | 7,735,985 | | | 5,625,956 | |
| | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ending | $ | 7,191,890 | | | $ | 1,801,928 | | | $ | 7,735,985 | |
| | | | | |
Cash paid during the year for: | | | | | |
Interest | $ | 27,264,793 | | | $ | 23,000,475 | | | $ | 21,119,661 | |
Income Taxes | 309,000 | | | 219,000 | | | 126,629 | |
Non-cash transactions | | | | | |
ASC 842 - Lease Assets and Associated Liabilities | 9,553,566 | | | 7,069,375 | | | 7,785,716 | |
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
Basis of Presentation
The parent company financial statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes thereto. For purposes of these condensed financial statements, the Company’s wholly owned subsidiaries are recorded based on the subsidiaries' net assets (similar to presenting them on the equity method).
Substantially all of the other comprehensive income included in these condensed financial statements is attributable to the Company's wholly owned subsidiaries.
Guarantees
Guarantees
Frandisco Life Insurance Company (“Guarantor”) executed a guaranty in favor of Wells Fargo Bank, N.A. (“Agent”) on November 19, 2019, in conjunction with 1st Franklin Financial Corporation executing an amended and restated loan and security agreement as described in the Company’s consolidated financial statements and accompanying notes thereto. The Guarantor’s liability shall be limited to an amount equal to the lesser of (a) one-half of one percent (0.50%) of Guarantor’s admitted assets or (b) ten percent (10%) of surplus as regards policy holders as of December 31, 2018.
Frandisco Property and Casualty Insurance Company (“Guarantor”) executed a guaranty in favor of Wells Fargo Bank, N.A. (“Agent”) on November 19, 2019, in conjunction with 1st Franklin Financial Corporation executing an amended and restated loan and security agreement as described in the Company’s consolidated financial statements and accompanying notes thereto. The Guarantor’s liability shall be limited to an amount equal to the lesser of (a) one-half of one percent (0.50%) of Guarantor’s admitted assets or (b) ten percent (10%) of surplus as regards policy holders as of December 31, 2018.
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Exhibit 10(f)
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 (Chairman Emeritus) * | | | $ | — | |
Ben F. Cheek, IV (Chairman) | | | $ | 35,000 | |
A. Roger Guimond | | | $ | 35,000 | |
James H. Harris, III | | | $ | 35,000 | |
Jerry J. Harrison, Jr. | | | $ | 35,000 | |
Virginia C. Herring | | | $ | 35,000 | |
Donata Ison | | | $ | 35,000 | |
John G. Sample, Jr. (Audit Committee Chairman) | | | $ | 40,000 | |
C. Dean Scarborough | | | $ | 35,000 | |
Keith D. Watson | | | $ | 35,000 | |
* Note: Mr. Ben F. Cheek, III elected not to receive any Director Fees.
| | |
Exhibit 10(f) |
|
1st Franklin Financial Corporation |
Executive Bonus Plan: 2023 |
| | |
Plan Overview: |
|
The Executive Bonus Plan for 2023 will focus first on meeting a minimum Corporate profit threshold, and thereafter meeting personal goals and department 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 income threshold goal that is set was identified and agreed upon by the Executive Management Team. Below is the minimum income requirement for the 2023 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, 2022 plus the average incentive bonus for the three years ended December 31, 2022 divided by 2. The 2023 threshold is based on pre-tax and income and bonus from 2022, 2020, and 2019. Extraordinary results from 2021 are excluded. The minimum pre-tax income threshold for 2023 is $14,400,000. |
| | |
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, a bonus will be paid based on the achievement of personal and department goals and the performance evaluation. The bonus will be paid on an individual basis as a percentage of the participant’s annual salary. The plan allows for a bonus range of 0% to 65%.
Please note however, that the total bonus amount paid cannot exceed 50% of income before income taxes. If the preliminary total bonus calculation exceeds 50% of income before income taxes, the final bonus amounts paid will be reduced accordingly to meet the 50% limit. |
|
INDIVIDUAL EXCEPTIONS:
If 1st Franklin fails to achieve the Company profit target and the bonus threshold goal, 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; Brian Gyomory, EVP/Chief Financial Officer; Gary McQuain, EVP/Chief Operating Officer; Dan Clevenger, EVP/Chief Compliance Officer; Jeff Thompson, EVP/ Chief Human Resources Officer; Alan Shaw, EVP/Chief Information Officer; Mark L. Scarpitti, EVP/General Counsel; Charles E. Vercelli, Jr., EVP/Government and Regulatory Affairs; Julie I. Baker, EVP/Chief Information Security Officer) may choose 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 |
Executive Vice Presidents | Ginger Herring | Ginger Herring, Ben F. Cheek, III, Ben. F. Cheek, IV |
Exhibit 13
1st FRANKLIN FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 2022
TABLE OF CONTENTS
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, 2022, the business was operated through 119 branch offices in Georgia, 46 in Alabama, 43 in South Carolina, 40 in Mississippi, 40 in Tennessee, 36 in Louisiana, 12 in Texas, 6 in Kentucky, and 1 in Virginia. The Company had 1,575 employees as of December 31, 2022.
As of December 31, 2022, the resources of the Company were invested principally in loans, which comprised 69% of the Company's assets. The majority of the Company's revenues are derived from finance charges earned on loans and sales finance contracts. Our remaining revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.
Our corporate website address is www.1FFC.com. The information posted on our website is not incorporated into this Annual Report.
To our Investors, Bankers, Co-workers, and Friends-
Enclosed in this 2022 Annual Report, you will find the results of 1st Franklin Financial Corporation’s accounting of another successful year, serving our customers and their communities. The financial strength that is represented by the accompanying financials, are highlighted by,
*Added 18 new branches, including adding two new states of Kentucky and Virginia (6 in Kentucky, 6 in Texas, 3 in Tennessee, 1 in Mississippi and 1 in Virginia)
*Grew our receivables $53.7 million which was a 6.1% increase from the previous year.
*With the receivables growth we gained 35,985 accounts.
*4 of our 8 Divisions converted to our new loan origination platform (all of Georgia and Alabama)
*Our Investment Center ended the year with approximately $765.7 million in investments which was an increase of $79.8 million over the previous year.
Something that you will not find in this Annual Report however, is the remarkable dedication, loyalty and resiliency of the 1st Franklin team when unexpected challenges are thrust upon them. We have lived through another year of the pandemic related to COVID-19 and vaccines and the growing worldwide immunity has allowed us to continue to adjust to our new normal. We are still challenged with natural disasters both personally and professionally. The landscape of our industry is ever changing with new regulations at both the state and federal levels requiring us to adjust our business model and philosophy. Economically, the rise in the cost of living, record high inflation, continuing softness in the labor market and the continuing supply chain disruptions have added to consumer anxiety. But through all of this adversity, our team smiled, extended a helping hand and provided credit when it was needed most. What played the biggest part of our successful year? LEADERSHIP. The right people in the right positions doing the right thing for the right reason. Without this vital component a successful year such as the one we are reporting for 2022 would have been difficult to accomplish.
Toward the end of 2022, 1st Franklin Financial endured a cyber-attack. As a result, our ability to do business was interrupted for a period of time and the attack prevented us from conducting business in a manner to which we were accustomed. The diligent efforts by the Information Technologies and Information Securities teams led by Alan Shaw and Julie Baker kept the communications within the Company flowing with information and timelines of how soon our branches would be securely online and making loans again. A perfect example of having the right people in the right places. In the aftermath of the attack, we analyzed and assessed how this event affected us and how we will strive to prevent future incidents, from hardware and software enhancements to increased storage security protocols. While no efforts can guarantee that we will not be the target of future cyber-attacks, we are confident that our enhanced cybersecurity procedures and safeguards will better serve our Company as we continue our business to help Families do Life.
FUTURE FOCUSED is our 2023 theme. We cannot change the past, only learn from it. We believe we have the best team in the consumer finance business. We are focused on continuing our expansion in Texas, Kentucky, and Virginia. We will continue to provide a professional and friendly customer experience by leveraging technology. We will strive each and every day to earn and maintain the confidence and trust of each 1st Franklin Financial investor and customer, and to respect each and every one of our team members, continuing the tradition of being the “Friendly Franklin Folks”.
| | | | | |
| Sincerely yours, |
| |
| /s/ Ben F. “Buddy” Cheek, IV |
| |
| Ben F. Cheek, IV |
| Chairman of the Board |
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 direct cash 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, 2022, direct cash loans comprised 84%, real estate loans comprised 3% and sales finance contracts comprised 13% of our outstanding loans, respectively.
In connection with our business, we also offer optional single premium credit insurance products to our customers when making a 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. 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 by this non-affiliated insurance company.
Finance charges 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 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| (in thousands) |
| | | | | | | | | |
Direct Cash Loans | $ | 240,542 | | | $ | 213,527 | | | $ | 192,976 | | | $ | 185,631 | | | $ | 161,337 | |
Real Estate Loans | 7,285 | | | 7,245 | | | 6,555 | | | 5,859 | | | 4,970 | |
Sales Finance Contracts | 19,137 | | | 15,880 | | | 13,556 | | | 9,088 | | | 6,497 | |
Total Finance Charges | $ | 266,964 | | | $ | 236,652 | | | $ | 213,087 | | | $ | 200,578 | | | $ | 172,804 | |
Our business consists mainly of making loans to individuals (consumer loans) 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 in amount financed. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.
First and second mortgage loans secured by 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 $75,000 and with maturities of 35 to 240 months. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.
Our decision making on loan originations is based on both a judgmental underwriting system which includes an analysis of the following factors (i) ability to pay, (ii) creditworthiness, (iii) income stability, (iv) willingness to pay and (v) as appropriate, collateral security, and a risk based underwriting system that evaluates (i) credit score, (ii) annual income, (iii) payment history to other creditors and (iv) debt to income ratios. As part of our loan decision making process, we review each customer's credit report to verify income and total indebtedness, debt payment history and overall credit related performance to other creditors. The Company uses this information to evaluate a potential borrower's debt-to-income ratios and, depending on the
result of the overall credit evaluation process, may require internal review and senior supervisory approval prior to originating the potential borrower's loan.
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 $25,000 in amount financed. We believe that the interest and fees 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, economic uncertainty or downturns in economic conditions, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Direct Cash Loans | 31.12 | % | | 31.22 | % | | 31.45 | % | | 32.03 | % | | 32.66 | % |
Real Estate Loans | 17.48 | | | 17.33 | | | 17.16 | | | 17.36 | | | 17.55 | |
Sales Finance Contracts | 19.36 | | | 19.66 | | | 19.13 | | | 18.86 | | | 19.12 | |
The following table contains certain information about our operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Number of Branch Offices | 343 | | 325 | | 320 | | 319 | | 315 |
Number of Employees | 1,575 | | 1,442 | | 1,476 | | 1,513 | | 1,488 |
Average Total Loans Outstanding Per Branch (in 000's) | $ | 3,177 | | | $ | 3,176 | | | $ | 2,860 | | | $ | 2,647 | | | $ | 2,328 | |
Average Number of Loans Outstanding Per Branch | 944 | | 886 | | 849 | | 895 | | 873 |
DESCRIPTION OF LOANS
Loans outstanding on the Consolidated Statements of Financial Position (“Financial Gross Outstanding(s)”) include principal, origination fees, premiums, discounts, and in the case of interest-bearing loans, deferred fees, other fees receivable, and accrued interest receivable.
Loan performance reporting is generally based on a loan’s gross outstanding balance (“Gross Outstanding(s)”), (“Gross Balance”), ("Gross Amount"), or ("Gross Loan") that includes principal plus origination fees for interest-bearing loans and the total of payments for loans with pre-computed interest.
DESCRIPTION OF LOANS - Gross Amount
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
DIRECT CASH LOANS: | | | | | | | | | |
| | | | | | | | | |
Number of Loans Made to New Borrowers | 83,061 | | 71,300 | | 49,942 | | 62,336 | | 59,739 |
| | | | | | | | | |
Number of Loans Made to Former Borrowers | 96,435 | | 59,225 | | 55,088 | | 65,452 | | 64,727 |
| | | | | | | | | |
Number of Loans Made to Present Borrowers | 129,337 | | 147,893 | | 147,228 | | 186,601 | | 187,163 |
| | | | | | | | | |
Total Number of Loans Made | 308,833 | | 278,418 | | 252,258 | | 314,389 | | 311,629 |
Total Volume of Loans Made (in 000’s) | $ | 1,049,088 | | | $ | 1,048,154 | | | $ | 891,358 | | | $ | 953,356 | | | $ | 895,904 | |
| | | | | | | | | |
Average Size of Loan Made | $ | 3,397 | | | $ | 3,765 | | | $ | 3,534 | | | $ | 3,032 | | | $ | 2,875 | |
| | | | | | | | | |
Number of Loans Outstanding | 299,418 | | 266,028 | | 249,880 | | 263,181 | | 255,132 |
| | | | | | | | | |
Total Loans Outstanding (in 000’s) | $ | 911,822 | | | $ | 873,433 | | | $ | 777,569 | | | $ | 737,255 | | | $ | 651,085 | |
| | | | | | | | | |
Percent of Total Loans Outstanding | 84 | % | | 84 | % | | 85 | % | | 87 | % | | 89 | % |
Average Balance on Outstanding Loans | $ | 3,045 | | | $ | 3,283 | | | $ | 3,112 | | | $ | 2,801 | | | $ | 2,552 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
REAL ESTATE LOANS: | | | | | | | | | |
| | | | | | | | | |
Total Number of Loans Made | 73 | | 622 | | 480 | | 553 | | 538 |
Total Volume of Loans Made (in 000’s) | $ | 2,106 | | | $ | 17,419 | | | $ | 11,871 | | | $ | 13,423 | | | $ | 12,307 | |
| | | | | | | | | |
Average Size of Loan Made | $ | 28,845 | | | $ | 28,005 | | | $ | 24,731 | | | $ | 24,273 | | | $ | 22,876 | |
| | | | | | | | | |
Number of Loans Outstanding | 1,690 | | 2,034 | | 1,880 | | 1,812 | | 1,666 |
| | | | | | | | | |
Total Loans Outstanding (in 000’s) | $ | 37,323 | | | $ | 45,972 | | | $ | 39,960 | | | $ | 37,255 | | | $ | 31,655 | |
| | | | | | | | | |
Percent of Total Loans Outstanding | 3 | % | | 4 | % | | 4 | % | | 5 | % | | 4 | % |
Average Balance on Outstanding Loans | $ | 22,085 | | | $ | 22,602 | | | $ | 21,256 | | | $ | 20,560 | | | $ | 19,001 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
SALES FINANCE CONTRACTS: | | | | | | | | | |
| | | | | | | | | |
Number of Contracts Purchased | 12,812 | | 11,515 | | 14,556 | | 18,081 | | 17,185 |
Total Volume of Contracts Purchased (in 000’s) | $ | 106,620 | | | $ | 86,448 | | | $ | 97,371 | | | $ | 69,373 | | | $ | 55,723 | |
| | | | | | | | | |
Average Size of Contract Purchased | $ | 8,322 | | | $ | 7,507 | | | $ | 6,689 | | | $ | 3,837 | | | $ | 3,243 | |
| | | | | | | | | |
Number of Contracts Outstanding | 22,705 | | 19,790 | | 19,961 | | 20,616 | | 18,127 |
| | | | | | | | | |
Total Contracts Outstanding (in 000’s) | $ | 146,507 | | | $ | 118,960 | | | $ | 103,258 | | | $ | 70,019 | | | $ | 50,694 | |
| | | | | | | | | |
Percent of Total Loans Outstanding | 13 | % | | 12 | % | | 11 | % | | 8 | % | | 7 | % |
Average Balance on Outstanding Loans | $ | 6,453 | | | $ | 6,011 | | | $ | 5,173 | | | $ | 3,396 | | | $ | 2,797 | |
LOANS ORIGINATED, ACQUIRED, LIQUIDATED AND OUTSTANDING
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| (in thousands) |
| | | | | | | | | |
| GROSS AMOUNT OF LOANS ORIGINATED OR ACQUIRED |
| | | | | | | | | |
Other Consumer (Live Check and Premier) New Loans | $ | 470,803 | | | $ | 436,278 | | | $ | 392,898 | | | $ | 423,858 | | | $ | 407,410 | |
Other Consumer (Live Check and Premier) Loan Renewals | 567,392 | | | 589,624 | | | 485,948 | | | 526,016 | | | 487,716 | |
Real Estate Loans | 2,106 | | | 17,345 | | | 11,846 | | | 13,423 | | | 12,307 | |
Sales Finance Contracts | 106,620 | | | 82,688 | | | 96,003 | | | 68,573 | | | 55,172 | |
Net Bulk Purchases | 10,893 | | | 26,086 | | | 13,905 | | | 4,282 | | | 1,329 | |
Total Loans Originated / Acquired | $ | 1,157,814 | | | $ | 1,152,021 | | | $ | 1,000,600 | | | $ | 1,036,152 | | | $ | 963,934 | |
| | | | | | | | | |
| GROSS AMOUNT LOANS LIQUIDATED * |
| | | | | | | | | |
Other Consumer (Live Check and Premier) New Loans | $ | 483,042 | | | $ | 398,846 | | | $ | 382,952 | | | $ | 403,655 | | | $ | 373,160 | |
Other Consumer (Live Check and Premier) Loan Renewals | 526,315 | | | 553,444 | | | 468,091 | | | 463,531 | | | 412,039 | |
Real Estate Loans | 10,694 | | | 11,407 | | | 9,166 | | | 7,823 | | | 7,769 | |
Sales Finance Contracts | 79,146 | | | 70,746 | | | 64,132 | | | 50,048 | | | 39,344 | |
Total Loans Liquidated | $ | 1,099,197 | | | $ | 1,034,443 | | | $ | 924,341 | | | $ | 925,057 | | | $ | 832,312 | |
| | | | | | | | | |
| FINANCIAL GROSS OUTSTANDING OF LOANS AT YEAR END |
| | | | | | | | | |
Direct Cash Loans | $ | 911,822 | | | $ | 873,433 | | | $ | 777,569 | | | $ | 737,255 | | | $ | 651,085 | |
Real Estate Loans | 37,323 | | | 45,972 | | | 39,960 | | | 37,255 | | | 31,655 | |
Sales Finance Contracts | 146,507 | | | 118,960 | | | 103,258 | | | 70,019 | | | 50,694 | |
Total Loans Outstanding | $ | 1,095,652 | | | $ | 1,038,365 | | | $ | 920,787 | | | $ | 844,529 | | | $ | 733,434 | |
| | | | | | | | | |
| FINANCIAL GROSS OF UNEARNED FINANCE CHARGES |
| | | | | | | | | |
Direct Cash Loans | $ | 119,804 | | | $ | 122,455 | | | $ | 107,850 | | | $ | 103,810 | | | $ | 88,660 | |
Real Estate Loans | — | | | — | | | 6 | | | 28 | | | 41 | |
Sales Finance Contracts | 34,826 | | | 28,626 | | | 24,847 | | | 14,910 | | | 9,676 | |
Total Unearned Finance Charges | $ | 154,630 | | | $ | 151,081 | | | $ | 132,703 | | | $ | 118,748 | | | $ | 98,377 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COMPONENTS OF GROSS LOAN LIQUIDATIONS |
| | | | | | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Customer Loan Payments | $ | 676,935 | | | $ | 633,979 | | | $ | 573,685 | | | $ | 539,000 | | | $ | 484,991 | |
Other Consumer (Live Check and Premier) Loan Renewals* | 313,843 | | | 332,292 | | | 280,199 | | | 313,726 | | | 292,385 | |
Gross Charge offs | 90,826 | | | 57,439 | | | 57,981 | | | 60,590 | | | 48,806 | |
Refunds on precomputed finance charges | 17,594 | | | 10,733 | | | 12,477 | | | 11,741 | | | 6,129 | |
Total Loans Liquidated | $ | 1,099,197 | | | $ | 1,034,443 | | | $ | 924,341 | | | $ | 925,057 | | | $ | 832,311 | |
*Liquidations include customer loan payments, refunds on precomputed finance charges, renewals and charge offs.
Components of net loss/charge offs include the loan's amortized cost basis based on ASC 326 Financial Instruments - Credit Losses. The following are included in the Company's amortized cost basis:
•For pre-computed loans, the amortized cost basis includes the principal balance, fees, and accrued interest, less unearned finance charges and unearned insurance. As of December 31, 2022, the amount charged off related to the principal balance was $64.8 million.
•For interest-bearing loans, the amortized cost basis includes the balance, fees, and accrued interest, net of unearned insurance. As of December 31, 2022, the amount charged off related to the principal balance was $33.2 million.
DELINQUENCIES
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 some accounts that are secured by real estate, when the bankruptcy court confirms a repayment plan differing from the contractual obligation, the Company will change the delinquency rating of the account after receiving two consecutive full payments. Thereafter, the account falls under normal delinquency rating guidelines. For non-real estate secured accounts, delinquency categories are not altered unless the borrower had a pre-existing partial payment that exceeds any court-mandated new payment amount. In that case, the partial payment is applied at the new payment amount, which may advance the due date, thus causing the delinquency rating to change (lowering the delinquency rating). The following table shows the number of loans in bankruptcy on which the delinquency rating changed due to a court-initiated repayment plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Number of Bankrupt Delinquency Resets | 201 | | 178 | | 335 | | 378 | | 535 |
The Company tracks the dollar amount of loans in bankruptcy on which the delinquency rating was changed. During 2022 and 2021, the delinquency rating changed as a result of court-initiated repayment plans $1.1 million and $1.3 million, respectively. This represented approximately 0.10% and 0.14% of the average principal loan portfolios outstanding during 2022 and 2021, respectively.
The following table shows the amount of certain classifications of delinquencies and the ratio of such delinquencies to related Gross Outstanding loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| (in thousands, except % data) |
| | | | | | | | | |
DIRECT CASH LOANS: | | | | | | | | | |
60-89 Days Past Due | $ | 20,199 | | | $ | 12,272 | | | $ | 10,779 | | | $ | 11,619 | | | $ | 9,541 | |
Percentage of Principal Outstanding | 2.22 | % | | 1.41 | % | | 1.39 | % | | 1.58 | % | | 1.47 | % |
90 Days or More Past Due | $ | 37,465 | | | $ | 23,437 | | | $ | 18,094 | | | $ | 24,972 | | | $ | 20,261 | |
Percentage of Principal Outstanding | 4.12 | % | | 2.69 | % | | 2.33 | % | | 3.40 | % | | 3.12 | % |
| | | | | | | | | |
REAL ESTATE LOANS: | | | | | | | | | |
60-89 Days Past Due | $ | 436 | | | $ | 440 | | | $ | 223 | | | $ | 340 | | | $ | 330 | |
Percentage of Principal Outstanding | 1.19 | % | | 0.97 | % | | 0.57 | % | | 0.93 | % | | 1.06 | % |
90 Days or More Past Due | $ | 1,380 | | | $ | 1,118 | | | $ | 1,438 | | | $ | 1,592 | | | $ | 1,142 | |
Percentage of Principal Outstanding | 3.77 | % | | 2.47 | % | | 3.66 | % | | 4.35 | % | | 3.68 | % |
| | | | | | | | | |
SALES FINANCE CONTRACTS: | | | | | | | | | |
60-89 Days Past Due | $ | 2,066 | | | $ | 1,134 | | | $ | 1,341 | | | $ | 754 | | | $ | 573 | |
Percentage of Principal Outstanding | 1.42 | % | | 0.96 | % | | 1.31 | % | | 1.09 | % | | 1.14 | % |
90 Days or More Past Due | $ | 3,316 | | | $ | 2,385 | | | $ | 2,261 | | | $ | 1,755 | | | $ | 1,193 | |
Percentage of Principal Outstanding | 2.28 | % | | 2.02 | % | | 2.21 | % | | 2.53 | % | | 2.38 | % |
LOSS EXPERIENCE
Net losses (charge-offs less recoveries) and the percent such net losses represent of average net loans (loan Gross Outstandings 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 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| (in thousands, except % data) |
| | | | | | | | | |
| DIRECT CASH LOANS |
| | | | | | | | | |
Average Net Loans | $ | 782,093 | | | $ | 691,635 | | | $ | 577,978 | | | $ | 586,765 | | | $ | 500,754 | |
Liquidations | $ | 1,009,357 | | | $ | 952,290 | | | $ | 851,044 | | | $ | 867,185 | | | $ | 785,199 | |
Net Losses | $ | 70,567 | | | $ | 37,635 | | | $ | 42,143 | | | $ | 47,228 | | | $ | 37,131 | |
Net Losses as % of Average Net Loans | 9.02 | % | | 5.44 | % | | 7.29 | % | | 8.05 | % | | 7.42 | % |
Net Losses as % of Liquidations | 6.99 | % | | 3.95 | % | | 4.95 | % | | 5.45 | % | | 4.73 | % |
| | | | | | | | | |
| REAL ESTATE LOANS |
| | | | | | | | | |
Average Net Loans | $ | 41,384 | | | $ | 42,593 | | | $ | 36,128 | | | $ | 34,438 | | | $ | 28,924 | |
Liquidations | $ | 10,694 | | | $ | 11,407 | | | $ | 9,166 | | | $ | 7,823 | | | $ | 7,769 | |
Net Losses | $ | 20 | | | $ | 26 | | | $ | 42 | | | $ | 40 | | | $ | 27 | |
Net Losses as a % of Average Net Loans | 0.05 | % | | 0.06 | % | | 0.12 | % | | 0.12 | % | | 0.09 | % |
Net Losses as a % of Liquidations | 0.19 | % | | 0.23 | % | | 0.46 | % | | 0.51 | % | | 0.35 | % |
| | | | | | | | | |
| SALES FINANCE CONTRACTS |
| | | | | | | | | |
Average Net Loans | $ | 100,244 | | | $ | 82,192 | | | $ | 66,681 | | | $ | 49,001 | | | $ | 34,499 | |
Liquidations | $ | 79,285 | | | $ | 70,746 | | | $ | 64,132 | | | $ | 50,048 | | | $ | 39,344 | |
Net Losses | $ | 5,802 | | | $ | 3,539 | | | $ | 3,335 | | | $ | 2,428 | | | $ | 1,549 | |
Net Losses as % of Average Net Loans | 5.79 | % | | 4.31 | % | | 5.00 | % | | 4.96 | % | | 4.49 | % |
Net Losses as % of Liquidations | 7.32 | % | | 5.00 | % | | 5.20 | % | | 4.85 | % | | 3.94 | % |
ALLOWANCE FOR CREDIT LOSSES
We determine the allowance for credit 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 expected credit losses in the current loan portfolio. For additional information about Management's approach to estimating and evaluating the allowance for credit losses, see Note 2 "Loans" in the Notes to the Consolidated Financial Statements.
SEGMENT FINANCIAL INFORMATION
For additional financial information about our segments and the divisions of our operations, see Note 13 "Segment Financial Information" in the Notes to Consolidated Financial Statements.
CREDIT INSURANCE
On consumer loans (excluding real estate and sales finance contracts), we offer optional single premium credit insurance products to our customers when making a loan. Such products may include credit life insurance, credit accident and health insurance, credit 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 credit 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 request credit 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. 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.
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. State laws require each of our loan branch offices to be licensed by the state and to conduct business 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. 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. The Company has never had any of its licenses revoked and has never been subject to an enforcement order or regulatory settlement.
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 Truth-in-Lending Act ("TILA"), the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act ("FCRA") and the Federal Real Estate Settlement Procedures Act ("RESPA"). 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 regulation 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-prohibited household goods such as automobiles, boats and other exempt items of personal property. We continually monitor our compliance with these regulatory requirements.
Changes in the current regulatory environment, or in the interpretation or application of current regulations, could impact our business. Significant additional regulation or costs of compliance could materially adversely affect our business and financial condition.
HUMAN CAPITAL RESOURCES
As of December 31, 2022, the Company had 1,575 employees, located in Alabama, Georgia, Kentucky, Louisiana, Mississippi, South Carolina, Tennessee, Texas, and Virginia. The development, attraction and retention of employees is a strong focus of the Company, as is fostering and maintaining a strong, healthy corporate culture.
Our employees play an important role in the success of the Company. We are committed to attracting, retaining and promoting high quality talent regardless of sex, race, color, national origin, age or religion. The Company is dedicated to providing a place of work for employees that is supportive, free from discrimination and harassment, and rewarding for employees. Benefit programs offered to employees include competitive salaries, incentive awards and 401(k) retirement savings plans with company match. Various health insurance plans are also available for employees.
We are committed to advancing a safe work environment for our employees. We adhere, and expect all of our employees to adhere, to our Code of Business Conduct and Ethics, which, among other things, sets forth numerous policies designed to provide for a safe, ethical, respectful and compliant work environment. We expect our employees to follow our core values listed below:
| | | | | |
Team: | Be Trustworthy |
Impact: | Be Intentional |
People: | Be Exceptional |
Service: | Be Humble |
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 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Bank Borrowings | 5.81 | % | | 5.39 | % | | 11.73 | % | | 11.86 | % | | 6.68 | % |
Senior Debt | 63.37 | % | | 58.69 | % | | 51.19 | % | | 51.08 | % | | 56.15 | % |
Subordinated Debt | 2.49 | % | | 2.66 | % | | 2.97 | % | | 3.09 | % | | 3.80 | % |
Other Liabilities | 6.03 | % | | 6.73 | % | | 6.64 | % | | 6.13 | % | | 3.13 | % |
Stockholders’ Equity | 22.30 | % | | 26.53 | % | | 27.47 | % | | 27.84 | % | | 30.24 | % |
Total | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % |
| | | | | | | | | |
Number of Investors | 4,809 | | 4,713 | | 4,543 | | 4,555 | | 5,163 |
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 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Senior Borrowings | 3.50 | % | | 3.39 | % | | 3.42 | % | | 3.48 | % | | 2.92 | % |
Subordinated Borrowings | 3.16 | % | | 3.12 | % | | 3.01 | % | | 2.81 | % | | 2.66 | % |
All Borrowings | 3.49 | % | | 3.38 | % | | 3.40 | % | | 3.44 | % | | 2.90 | % |
Certain financial ratios relating to our debt have been as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
Total Liabilities to | | | | | | | | | |
Stockholders’ Equity | 3.48 | | 2.77 | | 2.64 | | 2.59 | | 2.31 |
| | | | | | | | | |
Unsubordinated Debt to | | | | | | | | | |
Subordinated Debt plus | | | | | | | | | |
Stockholders’ Equity | 2.79 | | 2.43 | | 2.29 | | 2.23 | | 1.94 |
As of April 11, 2023, 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 related 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 $102.86 and $117.72 per share were paid to shareholders in 2022 and 2021, 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 distributions 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.
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 during 2022 and 2021. 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. Discussion of 2020 results and year-to-year comparisons between 2021 and 2020 can be found in the Company’s 2021 Annual Report filed as Exhibit 13 to the Company’s Annual Report on Form 10-K which was filed with the SEC on March 31, 2022.
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 expressed or implied by 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 of our loans are at fixed rates, and contain fixed terms and fixed payments. We operate branch offices in nine southeastern states and had a total of 343 branch locations at December 31, 2022. 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 finance charges earned on loans outstanding. Additional revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.
During the year ended December 31, 2022, the Company suffered a cyber-attack against certain systems within the Company's network environment on or about November 17, 2022. The attack temporarily affected operations and caused delays in originating and servicing loans at some locations. During the incident, the attackers had access to personally identifiable information of certain Company employees, customers, and investors. The incident, which only affected systems, was contained to the Company’s onsite file directory system, but not its off-site core operating system. Full lending and investing operations were restored within days of the incident, and the Company provided notifications to all potentially-affected individuals. As of April 11, 2023, the Company is named as a Defendant in five consumer class action cases alleging harm from the cyber-attack. The Company maintained a cyber insurance policy that should mitigate the costs of investigation, remediation, business interruption, and costs pertaining to the breach.
Financial Condition:
The Company’s total assets increased $44.7 million to $1.2 billion as of December 31, 2022 compared to $1.1 billion at December 31, 2021. The increase in assets was primarily due to growth in the Company’s net loan portfolio, cash and cash equivalents, restricted cash and increases in other assets.
Cash and cash equivalents increased $16.6 million at December 31, 2022 compared to December 31, 2021
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, 2021, restricted cash was $15.8 million compared to $7.3 million at December 31, 2021. See Note 3, “Investment Securities” in the accompanying “Notes to Consolidated Financial Statements” for further discussion of amounts held in trust.
Gross Loan originations increased $5.8 million during 2022 compared to 2021. Our net loan portfolio increased $49.4 million (7%) at December 31, 2022 compared to December 31, 2021. Our allowance for credit losses reflects Management's estimate of expected credit losses in the loan portfolio as of the date of the statement of financial position. See Note 2, “Allowance for Credit Losses,” in the accompanying “Notes to Consolidated Financial Statements” for further discussion of the Company’s allowance for credit losses. Management believes the current allowance for credit losses is adequate to cover expected losses in our existing portfolio as of December 31, 2022; however, changes in trends or deterioration in economic conditions could result in additional changes 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.
Our investment securities portfolio decreased $41.6 million (16%) to $220.0 million at December 31, 2022 compared to $261.6 million at December 31, 2021. The portfolio consists primarily of invested surplus funds generated by the Company's insurance subsidiaries. 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. This investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds, and various municipal bonds. Investment securities have been designated as “available for sale” at December 31, 2022 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 as well as the statement of comprehensive income.
Other assets increased $11.8 million (18%) to $77.2 million at December 31, 2022 compared to $65.4 million at December 31, 2021. Increases in operating lease right-of-use assets, miscellaneous accounts receivables, deferred tax assets and prepaid expenses were main factors contributing to the increase in other assets. Offsetting a portion of the increase was a decline in amounts due from non-affiliated insurance company.
Our senior debt is comprised of a line of credit from three banks and the Company’s senior demand notes and commercial paper debt securities. Our subordinated debt is comprised of the variable rate subordinated debentures sold by the Company. The aggregate amount of senior and subordinated debt outstanding at December 31, 2022 increased $87.2 million (12%) to $833.4 million compared to $746.2 million outstanding at December 31, 2021. Higher sales of the Company’s debt securities was the primary factor contributing to the increase. The line of credit usage increased $7.2 million to $67.5 million at December 31, 2022 due to portfolio growth.
Accounts payables and accrued expenses decreased $5.1 million (7%) at December 31, 2022 compared to the prior year. The Company’s incentive bonus accrual and change in deferred tax position from a deferred tax liability to a deferred tax asset were the primary factors causing the decrease in accrued expenses and other liabilities.
Liquidity and Capital Resources:
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.
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 credit losses, liquidity, compliance with our debt covenants, and relationships with our customers.
As of December 31, 2022 and December 31, 2021, the Company had $49.7 million and $33.1 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 can be converted into cash, if necessary. As of December 31, 2022 and 2021, 97% and 99%, 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 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 individual insurance subsidiary during the prior year. Dividend payments to a parent company by its wholly-owned property and casualty subsidiary are subject to annual limitations and are restricted to the lessor of 10% of policyholder's surplus or the net statutory income before recognizing realized investment gains of the individual insurance subsidiary during the prior two years. 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 2022, without prior approval of the Georgia Insurance Commissioner, was approximately $40.8 million.
At December 31, 2021, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $132.0 million and $96.2 million, respectively. The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2022 without prior approval of the Georgia Insurance Commissioner is approximately $40.8 million. The Georgia Insurance Department approved the Company's request for transactions involving dividends and/or lines of credit of $75.0 million for Frandisco Life Insurance Company and $95.0 million for Frandisco Property and Casualty Insurance Company for transactions on or before December 31, 2022. Effective February 1, 2022, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company amended their respective $60.0 million unsecured revolving lines of credit available to the Company to extend the term to December 31, 2025 and define the interest rate as the rate of interest on outstanding balances as the prime rate of interest as published in the Wall Street Journal.
At December 31, 2022, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $147.5 million and $103.0 million, respectively. The maximum aggregate amount of dividends these subsidiaries can pay to the Company during 2023 without prior approval of the Georgia Insurance Commissioner, is approximately $46.6 million. The Georgia Insurance Department approved the Company's request for transactions involving dividends and/or lines of credit of $75.0 million for Frandisco Life Insurance Company and $105.0 million for Frandisco Property and Casualty Insurance Company for transactions on or before December 31, 2023. . Effective March 31, 2023, Frandisco Life Insurance Company amended its previous unsecured revolving line of credit increasing the amount available to the Company to $75.0 million and extending the term to December 31, 2026. Effective March, 2023, Frandisco Property and Casualty Insurance Company amended its previous unsecured revolving line of credit increasing the amount available to the Company to $105.0 million and extending the term to December 31, 2026.
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.
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, N.A. This credit agreement (as amended, the "credit agreement") provides for borrowings or re-borrowings of up to $230.0 million or 70% of the Company's net finance receivables (as defined in the credit agreement), whichever is less, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company. At December 31, 2022 and 2021, $67.5 million and $60.3 million, respectively, were outstanding under the credit line. The credit agreement has a commitment termination date of February
28, 2025. 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 0.50% The interest rate under the credit agreement is equivalent to the greater of (a) 0.75% per annum plus the Applicable Margin or (b) the one month secured overnight financing rate (the “SOFR Rate”) plus the term SOFR adjustment (the "Adjusted Term SOFR Rate") plus the Applicable Margin. The Adjusted Term SOFR Rate is adjusted on the first day of each calendar month based upon the SOFR Rate as of the last day of the preceding calendar month. The Applicable Margin is 2.75%. The interest rate on the credit agreement at December 31, 2022 and 2021 was 6.97% and 3.50%, respectively.
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.
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.
Any increase in the Company's allowance for credit 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 materially impact the Company's liquidity in the future.
Results of Operations:
Total revenues, which include finance charge income, investment income, insurance income and miscellaneous other revenue, were $339.0 million and $304.3 million for 2022 and 2021, respectively. The aforementioned growth in our loan portfolio resulted in higher revenue across all categories.
Provision expense for credit losses increased $42.1 million (100%) during 2022 compared to 2021 due to higher net charge offs and an increase to the allowance for credit losses.
Higher revenues were offset by increases in provision expense, interest expense, personnel expense, travel expense and information technology and security expenses resulted in decreased net income for the Company during the year just ended. Net income decreased $25.7 million (61%) to $16.2 million during 2022 compared to $41.9 million during 2021.
Net Interest Income:
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 income 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.
Daily average Gross Outstanding less unearned finance was $913.5 million during 2022 compared to $806.6 million during 2021. Net finance charge income was $267.0 million during 2022, compared to $236.7 million in 2021.
As previously mentioned, higher sales of the Company’s debt securities and an increase in borrowings on the Company’s credit line resulted in an increase in senior and subordinated debt . The increase in senior and subordinated debt coupled with rising interest rates resulted in higher cost of funds. Average borrowings were $795.9 million during 2022 compared to $686.0 million during 2021. Interest expense increased $4.7 million (20%) during 2022 compared to 2021.
Net Insurance Income:
The Company offers certain optional credit insurance products to loan customers when closing a loan. Net insurance income (insurance revenues less claims and expenses) was $39.8 million during 2022 and $35.7 million during 2021. Net insurance income increased 11% with premium and commission revenue growth at 7% while claims and expenses decreased 2% during 2022.
Other Revenue:
Other revenue was $6.8 million and $6.9 million during 2022 and 2021. A significant component of other revenue is earnings from the sale of 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. An increase in sales of auto club memberships was the primary factor driving the growth in other revenue for the period just ended.
Provision for Credit Losses:
The Company’s provision for credit losses is a charge against earnings to maintain the allowance for credit losses at a level that Management estimates is adequate to cover expected losses as of the date of the statement of financial position. See Note 2. “Allowance for Credit Losses,” in the accompanying “Notes to Consolidated Financial Statements” for further discussion of the Company’s provision for credit losses. The Company’s provision for credit losses is a charge against earnings to maintain the allowance for credit losses at a level that Management estimates is adequate to cover expected losses as of the date of the statement of financial position.
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 in various locales, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions. The percent of the Gross Loan portfolio greater than 30 days delinquent is 9.44% at December 31, 2022 compared to 6.04% at December 31, 2021. The ratio of bankrupt accounts to the Gross Balance of loans was 1.25% and 1.27% at December 31, 2022 and December 31, 2021, respectively.
Management considers recent economic factors in its analysis. The central bank raised the Fed Funds Rate thought 2022 to ease inflation. Despite the central bank’s efforts prices of consumer goods have increased, although energy prices appear to have stabilized. Unemployment remains near historic lows at 3.6% in February. Recently two banks failed, one of which is the second largest bank to fail in history. It has been reported that the central bank’s rate hikes contributed to the failure the banks. Ultimately, it creates turmoil in the economy.
The Company’s core model continues to be influenced by charge off rates experienced while the government provided economic stimulus to assistance Americans during the COVID-19 pandemic. A qualitative adjustment for economic uncertainty was calculated by considering emerging credit loss rates on more recent pools. Management calculated a qualitative adjustment totaling $13.2 million by incorporating emerging post pandemic pool loss rates in an estimation model. The allowance for credit losses increased by $2.0 million and $7.9 million to $75.2 million for the quarter, and year ended December 31, 2022.
Management believes that the allowance for credit losses, as calculated in accordance with the Company’s current expected credit loss (“CECL”) methodology, are appropriate to cover expected credit losses on loans at December 31, 2022; however, because the allowance for credit losses is based on estimates, there can be no assurance that the ultimate charge off amount will match such estimates. Management may determine it is appropriate to increase or decrease the allowance for expected credit losses in future periods, or actual losses in any period, either of which events could have a material impact on our results of operations in the future.
Operating Expenses:
Operating expenses of the Company were $189.1 million during 2022 compared to $175.6 million during 2021. Personnel expense, occupancy expense and miscellaneous other expenses are the components included in operating expenses.
Personnel expense increased $4.7 million (4%) during 2022 compared to 2021 mainly due to merit salary increases, and an increase in base employment.
Occupancy expense increased $0.8 million (5%) during 2022 compared to 2021. Higher maintenance expenses and rent expense were the contributing factors to the increase in occupancy expense.
Other operating expenses increased $8.0 million (16%) during 2022 compared to 2021. Increases in consultant fees, postage, software conversion costs, advertising, and traveling costs contributed to the growth in other operating expenses.
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 certain states, which do 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.
Effective income tax rates for the years ended December 31, 2022 and 2021 were 21.5% and 8.6%, respectively. The tax rates of the Company’s insurance subsidiaries were also below statutory rates due to investments in tax exempt bonds.
Quantitative and Qualitative Disclosures About Market Risk:
Volatility in market interest rates can impact the Company’s investment portfolio and the interest rates paid on its bank borrowings and debt securities. Changes in interest rates have more impact on the income earned on investments and the Company’s borrowing costs than on interest income earned on loans, as Management does not normally change the rates charged on loans originated solely as a result of changes in the interest rate environment. These exposures are monitored and managed by the Company as an integral part of its overall cash management program. It is Management’s goal to minimize any adverse effect that movements in interest rates may have on the financial condition and operations of the Company. The information in the table below summarizes the Company’s risk associated with marketable debt securities and debt obligations as of December 31, 2022. Rates associated with the investment securities represent weighted averages based on the tax effected yield to maturity of each individual security. No adjustment has been made to yield, even though many of the investments are tax-exempt and, as a result, actual yield will be higher than that disclosed. For debt obligations, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates. The Company’s subordinated debt securities are sold with various interest adjustment periods, which is the time from sale until the interest rate adjusts, and which allows the holder to redeem that security prior to the contractual maturity without penalty. It is expected that actual maturities on a portion of the Company’s subordinated debentures will occur prior to the contractual maturity as a result of interest rate adjustments. Management estimates the carrying value of senior and subordinated debt approximates their fair values when compared to instruments of similar type, terms and maturity.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expected Year of Maturity |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 & Beyond | | Total | | Fair Value |
Assets: | (Dollars in millions) |
Investment Securities | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 2 | | | $ | 216 | | | $ | 220 | | | $ | 220 | |
Average Interest Rate | 3.02 | % | | — | % | | — | % | | 4.07 | % | | 3.95 | % | | 3.17 | % | | 3.07 | % | | |
Liabilities: | | | | | | | | | | | | | | | |
Senior Debt: | | | | | | | | | | | | | | | |
Note Payable to Bank | $ | — | | | $ | — | | | $ | 68 | | | $ | — | | | $ | — | | | $ | — | | | $ | 68 | | | $ | 68 | |
Average Interest Rate | — | % | | — | % | | 6.97 | % | | — | % | | — | % | | — | % | | 6.97 | % | | |
Senior Demand Notes | $ | 112 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 112 | | | $ | 112 | |
Average Interest Rate | 1.92 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 1.92 | % | | |
Commercial Paper | $ | 625 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 625 | | | $ | 625 | |
Average Interest Rate | 3.94 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.94 | % | | |
Subordinated Debentures | $ | 2 | | | $ | 6 | | | $ | 12 | | | $ | 11 | | | $ | — | | | $ | — | | | $ | 29 | | | $ | 29 | |
Average Interest Rate | 2.69 | % | | 2.98 | % | | 3.33 | % | | 3.53 | % | | — | % | | — | % | | 3.29 | % | | |
Critical Accounting Policies:
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 credit losses, revenue recognition and insurance claims reserves.
Allowance for Credit Losses:
Effective January 1, 2020 the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") using the modified retrospective method for all financial assets measured at amortized cost. 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 the amount of expected losses inherent in the loan portfolio as of the reporting date. Loans outstanding with similar risk characteristics are collectively evaluated in pools utilizing an open pool loss rate method, whereby a historical loss rate is calculated and applied to the balance of loans outstanding in the portfolio at each reporting period. This historical loss rate is then adjusted by a macroeconomic forecast and other qualitative factors, as appropriate, to fully reflect the expected losses in the loan portfolio.
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.
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.
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.
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.
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.
New Accounting Pronouncements:
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of 1st Franklin Financial Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of 1st Franklin Financial Corporation and subsidiaries (the "Company") as of December 31, 2022 and 2021, 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, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Refer to Note 2 to the consolidated financial statements
Critical Audit Matter Description
The Company estimates and records an allowance for credit losses based on the determination of the amount of expected losses inherent in the loan portfolio as of the reporting date. The Company calculates a snapshot of each specific loan segment at a point in history and tracks that loan segment’s performance in the subsequent periods until losses are substantially exhausted to derive an unadjusted lifetime historical charge-off rate by loan segment. The Company performs a correlation analysis between macroeconomic factors and prior charge-offs and evaluates if the economic environment affecting its customer base has changed from historical levels. This includes considerations of historical loss trends, loan delinquency trends, bankruptcy trends and overall economic conditions.
We identified the allowance for credit losses estimate as a critical audit matter because of the significant amount of complexity and judgment required by management to develop the model and evaluate whether adjustments are necessary based on internal, external and macro environmental trends. Performing audit procedures to evaluate the appropriateness of this model and whether adjustments are necessary required a high degree of auditor judgment and an increased extent of effort, specifically due to the effect of uncertainty in consumer payment patterns and general economic conditions on the estimate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit losses included the following, among others:
•We tested the completeness and accuracy of data utilized to determine the unadjusted lifetime historical charge-off rate by segment of the loan portfolio.
•We evaluated the reasonableness of the Company’s allowance for credit loss model and tested the model's computational accuracy by segment of the loan portfolio with the assistance of our credit specialists.
•We evaluated the reliability of the Company’s internal and external data and forecasts.
•We also evaluated the reasonableness of any associated quantitative or qualitative adjustments by segment of the loan portfolio, including assessing the basis for the adjustments.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
April 11, 2023
We have served as the Company’s auditor since 2002.
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2022 AND 2021
ASSETS
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
CASH AND CASH EQUIVALENTS (Note 1) | $ | 49,652,729 | | | $ | 33,060,390 | |
| | | |
RESTRICTED CASH (Note 1) | 15,781,499 | | | 7,306,430 | |
| | | |
LOANS (Note 2): | | | |
Direct Cash Loans | 911,821,593 | | | 873,432,972 | |
Real Estate Loans | 37,323,155 | | | 45,972,414 | |
Sales Finance Contracts | 146,507,130 | | | 118,959,994 | |
| 1,095,651,878 | | | 1,038,365,380 | |
| | | |
Less: Unearned Finance Charges | 154,630,023 | | | 151,081,033 | |
Unearned Insurance Premiums | 65,536,077 | | | 69,124,817 | |
Allowance for Credit Losses | 75,210,063 | | | 67,311,208 | |
| 800,275,715 | | | 750,848,322 | |
| | | |
INVESTMENT SECURITIES (Note 3): | | | |
Available for Sale, at fair value | 220,028,343 | | | 261,601,925 | |
| | | |
OTHER ASSETS: | | | |
Land, Buildings, Equipment and Leasehold Improvements, less accumulated depreciation and amortization of $50,116,238 and $46,347,589 in 2022 and 2021, respectively | 13,111,394 | | | 12,265,626 | |
Operating Lease Right-of-Use Assets (Note 8) | 38,153,238 | | | 34,768,208 | |
Deferred Acquisition Costs | 3,768,290 | | | 4,221,480 | |
Due from Non-affiliated Insurance Company | — | | | 2,912,499 | |
Other Miscellaneous | 22,153,048 | | | 11,237,055 | |
| 77,185,970 | | | 65,404,868 | |
| | | |
TOTAL ASSETS | $ | 1,162,924,256 | | | $ | 1,118,221,935 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2022 AND 2021
LIABILITIES AND STOCKHOLDERS' EQUITY
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
SENIOR DEBT (Note 6): | | | |
Bank Borrowings | $ | 67,531,000 | | | $ | 60,300,000 | |
Senior Demand Notes, including accrued interest | 112,325,674 | | | 104,043,479 | |
Commercial Paper | 624,585,553 | | | 552,192,882 | |
| 804,442,227 | | | 716,536,361 | |
| | | |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES: | | | |
Operating Lease Liabilities (Note 8) | 39,019,208 | | | 35,439,377 | |
Other Accounts Payable and Accrued Expenses | 31,163,971 | | | 39,796,100 | |
| 70,183,179 | | | 75,235,477 | |
| | | |
SUBORDINATED DEBT (Note 7) | 29,005,826 | | | 29,692,344 | |
| | | |
Total Liabilities | 903,631,232 | | | 821,464,182 | |
| | | |
COMMITMENTS AND CONTINGENCIES (Note 9) | | | |
| | | |
STOCKHOLDERS' EQUITY: | | | |
Preferred Stock; $100 par value 6,000 shares authorized; no shares outstanding | — | | | — | |
Common Stock: | | | |
Voting Shares; $100 par value; 2,000 shares authorized; 1,700 shares outstanding as of December 31, 2022 and 2021 | 170,000 | | | 170,000 | |
Non-Voting Shares; no par value; 198,000 shares authorized; 168,300 shares outstanding as of December 31, 2022 and 2021 | — | | | — | |
Accumulated Other Comprehensive (Loss) Income | (26,401,816) | | | 9,736,651 | |
Retained Earnings | 285,524,840 | | | 286,851,102 | |
Total Stockholders' Equity | 259,293,024 | | | 296,757,753 | |
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,162,924,256 | | | $ | 1,118,221,935 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
INTEREST INCOME: | | | | | |
Finance Charges | $ | 266,963,826 | | | $ | 236,651,728 | | | $ | 213,087,060 | |
Net Investment Income | 8,177,846 | | | 7,457,734 | | | 6,882,483 | |
| 275,141,672 | | | 244,109,462 | | | 219,969,543 | |
INTEREST EXPENSE: | | | | | |
Senior Debt | 26,875,546 | | | 22,213,128 | | | 20,281,290 | |
Subordinated Debt | 971,958 | | | 977,093 | | | 922,083 | |
| 27,847,504 | | | 23,190,221 | | | 21,203,373 | |
| | | | | |
NET INTEREST INCOME | 247,294,168 | | | 220,919,241 | | | 198,766,170 | |
| | | | | |
PROVISION FOR CREDIT LOSSES (Note 2) | 84,287,916 | | | 42,183,163 | | | 56,689,484 | |
| | | | | |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 163,006,252 | | | 178,736,078 | | | 142,076,686 | |
| | | | | |
NET INSURANCE INCOME: | | | | | |
Premiums | 56,984,335 | | | 53,231,581 | | | 49,780,940 | |
Insurance Claims and Expense | (17,164,735) | | | (17,516,066) | | | (15,489,876) | |
| 39,819,600 | | | 35,715,515 | | | 34,291,064 | |
| | | | | |
OTHER REVENUE | 6,831,179 | | | 6,921,120 | | | 5,419,562 | |
| | | | | |
OPERATING EXPENSES: | | | | | |
Personnel Expense | 113,732,789 | | | 109,011,575 | | | 99,684,473 | |
Occupancy Expense | 18,173,248 | | | 17,382,787 | | | 17,568,423 | |
Other Expense | 57,173,463 | | | 49,173,951 | | | 45,257,347 | |
| 189,079,500 | | | 175,568,313 | | | 162,510,243 | |
| | | | | |
INCOME BEFORE INCOME TAXES | 20,577,531 | | | 45,804,400 | | | 19,277,069 | |
| | | | | |
PROVISION FOR INCOME TAXES (Note 12) | 4,417,904 | | | 3,943,393 | | | 3,386,807 | |
| | | | | |
NET INCOME | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
| | | | | |
BASIC EARNINGS PER SHARE: | | | | | |
170,000 Shares Outstanding for All Periods (1,700 voting, 168,300 non-voting) | $ | 95.06 | | | $ | 246.24 | | | $ | 93.47 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net Income | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
| | | | | |
Other Comprehensive Income / (Loss): | | | | | |
Net changes related to available-for-sale Securities: | | | | | |
Unrealized (losses) gains | (45,165,474) | | | (3,858,538) | | | 4,658,116 | |
Income tax benefit (provision) | 9,479,082 | | | 816,053 | | | (989,588) | |
Net unrealized (losses) gains | (35,686,392) | | | (3,042,485) | | | 3,668,528 | |
| | | | | |
Less reclassification of gains to net income | 452,074 | | | 487,791 | | | 16,447 | |
| | | | | |
Total Other Comprehensive Income (Loss) | (36,138,467) | | | (3,530,276) | | | 3,652,081 | |
| | | | | |
Total Comprehensive Income (Loss) | $ | (19,978,840) | | | $ | 38,330,731 | | | $ | 19,542,343 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021, AND 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Shares | | Amount | | | |
| | | | | | | | | |
Balance at December 31, 2019 | 170,000 | | 170,000 | | | 251,711,270 | | | 9,614,846 | | | 261,496,116 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2020 | — | | — | | | 15,890,262 | | | — | | | |
Other Comprehensive Income | — | | — | | | — | | | 3,652,081 | | | |
Total Comprehensive Income | — | | — | | | — | | | — | | | 19,542,343 | |
Cumulative Change in Accounting Principle (Note 1) | — | | — | | | (2,158,161) | | | — | | | (2,158,161) | |
Cash Distributions Paid | — | | — | | | (440,970) | | | — | | | (440,970) | |
| | | | | | | | | |
Balance at December 31, 2020 | 170,000 | | 170,000 | | | 265,002,401 | | | 13,266,927 | | | 278,439,328 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2021 | — | | — | | | 41,861,007 | | | — | | | |
Other Comprehensive Loss | — | | — | | | — | | | (3,530,276) | | | |
Total Comprehensive Income | — | | — | | | — | | | — | | | 38,330,731 | |
Cash Distributions Paid | — | | — | | | (20,012,306) | | | — | | | (20,012,306) | |
| | | | | | | | | |
Balance at December 31, 2021 | 170,000 | | $ | 170,000 | | | $ | 286,851,102 | | | $ | 9,736,651 | | | $ | 296,757,753 | |
| | | | | | | | | |
Comprehensive Income: | | | | | | | | | |
Net Income for 2022 | — | | — | | | 16,159,627 | | | — | | | |
Other Comprehensive Loss | — | | — | | | — | | | (36,138,467) | | | |
Total Comprehensive Loss | — | | — | | | — | | | — | | | (19,978,840) | |
Cash Distributions Paid | — | | — | | | (17,485,889) | | | — | | | (17,485,889) | |
| | | | | | | | | |
Balance at December 31, 2022 | 170,000 | | $ | 170,000 | | | $ | 285,524,840 | | | $ | (26,401,816) | | | $ | 259,293,024 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net Income | $ | 16,159,627 | | | $ | 41,861,007 | | | $ | 15,890,262 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Provision for credit losses | 84,287,916 | | | 42,183,163 | | | 56,689,484 | |
Depreciation and amortization | 4,425,985 | | | 4,629,756 | | | 4,837,876 | |
Deferred tax expense (benefit) | (151,474) | | | 487,481 | | | 156,075 | |
Net (gains) losses due to called redemptions of marketable securities, gain on sales of equipment and amortization on securities | (830,011) | | | (763,017) | | | (214,898) | |
Increase in miscellaneous assets and other | (7,430,995) | | | (1,634,447) | | | (2,409,367) | |
Increase in other liabilities | 1,125,774 | | | 6,995,269 | | | 6,109,380 | |
Net Cash Provided | 97,586,822 | | | 93,759,212 | | | 81,058,812 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Loans originated or purchased | (602,792,430) | | | (588,636,277) | | | (516,978,375) | |
Loan payments | 469,077,122 | | | 456,342,806 | | | 412,553,076 | |
Purchases of securities, available for sale | (30,156,252) | | | (59,722,784) | | | (19,013,337) | |
Redemptions of securities, available for sale | 26,815,000 | | | 15,905,000 | | | 7,220,000 | |
Capital expenditures | (5,219,242) | | | (3,339,606) | | | (3,022,147) | |
Proceeds from sale of equipment | 22,929 | | | 35,088 | | | 67,462 | |
Net Cash Used | (142,252,873) | | | (179,415,773) | | | (119,173,321) | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net increase in Senior Demand Notes | 8,282,195 | | | 17,420,976 | | | 10,372,708 | |
Advances on credit line | 213,677,200 | | | 164,964,653 | | | 193,849,330 | |
Payments on credit line | (206,446,200) | | | (223,564,653) | | | (186,299,330) | |
Commercial paper issued | 135,878,572 | | | 161,768,917 | | | 139,155,810 | |
Commercial paper redeemed | (63,485,901) | | | (41,849,573) | | | (110,373,572) | |
Subordinated debt issued | 5,759,655 | | | 6,963,742 | | | 6,916,788 | |
Subordinated debt redeemed | (6,446,173) | | | (7,346,797) | | | (5,846,413) | |
Dividends / distributions paid | (17,485,889) | | | (20,012,306) | | | (440,970) | |
Net Cash Provided | 69,733,459 | | | 58,344,959 | | | 47,334,351 | |
| | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 25,067,408 | | | (27,311,602) | | | 9,219,842 | |
| | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning | 40,366,820 | | | 67,678,422 | | | 58,458,580 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ending | $ | 65,434,228 | | | $ | 40,366,820 | | | $ | 67,678,422 | |
| | | | | |
Cash paid during the period for - | | | | | |
Interest | $ | 27,264,793 | | | $ | 23,018,333 | | | $ | 21,119,661 | |
Income taxes, Net | $ | 4,156,000 | | | 3,050,638 | | | 3,178,625 | |
Non-Cash Transactions for - | | | | | |
ASC 842 - Lease Assets and Associated Liabilities | 9,553,566 | | | 7,069,375 | | | 7,785,716 | |
See Notes to Consolidated Financial Statements
1st FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
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 343 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, the credit unemployment 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. The Company may have deposits in excess of amounts covered by the Federal Deposits Insurance Corporation with its banking partners. 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.
Investment Securities. The fair value of investment 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. 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 investment securities and for information related to how these securities are valued.
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 the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary materially from these estimates.
Income Recognition:
The Company categorizes it primary sources of revenue into three categories: (1) interest related revenues, (2) insurance related revenue, and (3) revenue from contracts with customers.
(1)Interest related revenues are specifically excluded from the scope of ASC 606 and accounted for under ASC Topic 310, "Receivables".
(2)Insurance related revenues are subject to industry-specific guidance within the scope of ASC Topic 944, "Financial Services - Insurance".
(3)Other revenues primarily relate to commissions earned by the Company on sales of auto club memberships. Auto club commissions are revenue from contracts with customers and are accounted for in accordance with the guidance set forth in ASC 606.
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.
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.
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 $6.5 million and $5.3 million at December 31, 2022 and 2021, 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, 2022, 2021, and 2020 was $4.4 million, $4.6 million and $4.8 million, respectively.
Restricted Cash:
Restricted cash consists of funds maintained in restricted accounts 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 real estate mortgage customers.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, (In thousands) |
| 2022 | | 2021 | | 2020 |
Cash and cash equivalents | $ | 49,653 | | | $ | 33,061 | | | $ | 59,214 | |
Restricted cash | 15,781 | | | 7,306 | | | 8,465 | |
Total cash, cash equivalents and restricted cash | $ | 65,434 | | | $ | 40,367 | | | $ | 67,679 | |
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 was no impairment of the carrying value of the long-lived assets, including property and equipment at December 31, 2022 or 2021.
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, 2022 and December 31, 2021, 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, certain states do not recognize S Corporation status, and the Company has accrued amounts necessary to pay the required income taxes in such states.
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 Credit Losses.
Marketable Debt Securities:
Management has designated the Company’s investment securities held in the Company's investment portfolio at December 31, 2022 and 2021 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.
Earnings per Share Information:
The Company has no contingently issuable common shares, thus basic and diluted earnings per share amounts are the same.
Recent Accounting Pronouncements:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional accounting relief for the expected market transition from the use of the London Interchange Bank Offered Rate (“LIBOR”) to the proposed Secured Overnight Financing Rate (“SOFR”). The Company's benchmark rate transitioned to SOFR on December 1, 2022 with no impact to the condensed consolidated financial statements, (Note 6).
In March 2022 the FASB issued ASU No. 2022-02 "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The key provisions include (1) enhancements to disclosure requirements for certain loan refinancings and restructurings by creditor when borrower is experiencing financial difficulty, the creditor must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan (2) for public business entities, the entity is required to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The amendments in this update are effective for annual and interim periods beginning after December 15, 2022. The Company is currently evaluating the effect of disclosure updates to its footnotes, but believes implementation will not have a material financial effect on its 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.
Loan Renewals:
Loan renewals are accounted for in accordance with the applicable guidance in ASC Topic 310-20 Nonrefundable Fees and Other Costs. Loan renewals are a product the Company offers to existing customers that allows them to borrow additional funds from the Company. In evaluating a loan for renewal, in addition to our standard underwriting requirements, we may take into consideration the customer’s prior payment performance with us, which we believe to be an indicator of the customer’s future credit performance. If the terms of the new loan resulting from a loan renewal (other than a troubled debt restructuring) are at least as favorable to us as the terms for comparable loans to other customers with similar collection risks who are not renewing a loan, the renewal is accounted for as a new loan. The criteria is met if the new loan's effective yield is at least equal to the effective yield for such comparable loans and the modification of the original loan is more than minor. A modification of a loan is more than minor if the present value of the cash flows under the terms of the renewal is at least 10 percent different from the present value of the remaining cash flows under the terms of the original loan. Accordingly, when a renewal is generated, the original loan(s) are extinguished along with the associated unearned finance charges and a new loan is originated. Substantially all renewals include a non-cash component that represents the exchange of the original principal balance for the new principal balance and a cash component for the net proceeds distributed to the customer for the additional amount borrowed. The cash component is presented as outflows from investing activities and the non-cash component is presented as a non-cash investing activity.
Cash, unearned finance charges, origination fees, discounts, premiums, deferred fees, and, in the instance of a loan renewal, the net payoff of the of the renewed loan are included in the loan origination amount. The cash component of the loan origination is included in the Statement of Cash Flows in the Cash Flows from Investing Activities as Loans Originated or Purchased.
Reconciliation of Gross Loans Originated / Acquired to Loans Originated or Purchased in Consolidated Statements of Cash Flows (Gross):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
Loans Originated/acquired per Business Section: | $ | 1,157,814 | | | $ | 1,152,021 | | | $ | 1,000,600 | |
Non-Cash Reconciling items: | | | | | |
Other Consumer (Live Check and Premier) Renewed Loans Payoff | 313,843 | | | 332,292 | | | 280,199 | |
Other non-cash activity: unearned finance charges, origination fees, discounts, premiums, and deferred fees | 241,179 | | | 231,093 | | | 203,423 | |
Loans originated or purchased per Consolidated Statements of Cash Flows: | $ | 602,792 | | | $ | 588,636 | | | $ | 516,978 | |
Contractual Maturities of Loans:
An estimate of contractual maturities stated as a percentage of the Gross Loan balances based upon an analysis of the Company's portfolio as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
Due In Calendar Year | | Direct Cash Loans | | Real Estate Loans | | Sales Finance Contracts |
2023 | | 61.1 | % | | 11.4 | % | | 27.7 | % |
2024 | | 30.3 | | | 11.2 | | | 26.9 | |
2025 | | 6.5 | | | 11.3 | | | 22.3 | |
2026 | | 1.7 | | | 10.4 | | | 15.8 | |
2027 | | 0.4 | | | 9.6 | | | 6.7 | |
2028 & beyond | | 0.1 | | | 46.1 | | | 0.5 | |
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
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.
Allowance for Credit Losses:
The allowance for credit losses is based on Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio. Management estimates and evaluates the allowance for credit losses utilizing an open pool loss rate method on collectively evaluated loans with similar risk characteristics in segments, whereby a historical loss rate is calculated and applied to the balance of loans outstanding in the portfolio at each reporting date. This historical loss rate then may be adjusted by macroeconomic forecast and other qualitative factors, as appropriate, to fully reflect the Company’s expected losses in its loan portfolio. The Company’s allowance for credit losses recorded in the balance sheet reflects Management’s best estimate of expected credit losses.
The Company calculates an expected credit loss by utilizing a snapshot of each specific loan segment at a point in history and tracing that segment’s performance until charge-offs were substantially exhausted for that particular segment. Charge-offs in subsequent periods are aggregated to derive an unadjusted lifetime historical charge-off rate by segment. The receivables balance at the balance sheet date is reviewed and adjustments to the allowance for credit losses are made if Management determines the receivables balance warrants an adjustment. The Company performs a correlation analysis between macroeconomic factors and
prior charge-offs for the following macroeconomic factors: Annual Unemployment Rates, Real Gross Domestic Product, Consumer Price Index (CPI), and US National Home Price Index (HPI). To evaluate the overall adequacy of the Company’s allowance for credit losses, Management considers the level of loan receivables, historical loss trends, loan delinquency trends, bankruptcy trends and overall economic conditions. Such allowance is, in the opinion of Management, adequate for expected losses in the current loan portfolio. As the estimates used in determining the loan loss reserve are influenced by outside factors, such as consumer payment patterns and general economic conditions, there is uncertainty inherent in these estimates. Actual results could vary based on future changes in significant assumptions.
Management disaggregates the Company’s loan portfolio by loan segment when evaluating loan performance and estimating the allowance for credit losses. Although most loans are similar in nature, the Company concluded that based on variations in loss experience (severity and duration) driven by product and customer type it is most relevant to segment the portfolio by loan product consisting of five different segments: live checks, premier loans, other consumer loans, real estate loans, and sales finance contracts.
The total segments are monitored for credit losses based on graded contractual delinquency and other economic conditions. The Company classifies delinquent accounts at the end of each month according to the Company’s graded delinquency rules which includes the number of installments past due at that time, based on the then-existing terms of the contract. Accounts are classified in delinquency categories of 30-59 days past due, 60-89 days past due, or 90 or more days past due based on the Company’s graded delinquency policy. When a loan meets the Company’s charge-off policy, the loan is charged off, unless Management directs that it be retained as an active loan. In making this charge-off evaluation, Management considers factors such as pending insurance, bankruptcy status and other indicators of collectability. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.
Management ceases accruing finance charges on loans that meet the Company’s non-accrual policy based on graded delinquency rules, generally when two payments remain unpaid on precomputed loans or when an interest-bearing loan is 60 days or more past due. Finance charges are then only recognized to the extent there is a loan payment received or when the account qualifies for return to accrual status. Accounts qualify for return to accrual status when the graded delinquency on a precomputed loan is less than two payments and on an interest-bearing loan when it is less than 60 days past due. There were no loans past due 60 days or more and still accruing interest at December 31, 2022 or December 31, 2021.
The Company’s Gross Balances on non-accrual loans by loan class at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
Loan Class | | December 31, 2022 | | December 31, 2021 |
| | | | |
Live Check Consumer Loans | | $ | 13,526,548 | | | $ | 6,254,394 | |
Premier Consumer Loans | | 4,738,297 | | | 2,253,818 | |
Other Consumer Loans | | 41,240,279 | | | 25,229,846 | |
Real Estate Loans | | 1,869,737 | | | 1,286,609 | |
Sales Finance Contracts | | 5,656,143 | | | 3,532,183 | |
Total | | $ | 67,031,004 | | | $ | 38,556,850 | |
An age analysis of Gross Balances past due, segregated by loan class, as of December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due Loans |
| | | | | | | | |
Live Check Loans | | $ | 6,216,951 | | | $ | 4,523,944 | | | $ | 8,232,387 | | | $ | 18,973,282 | |
Premier Loans | | 2,164,484 | | | 1,301,917 | | | 2,415,621 | | | 5,882,022 | |
Other Consumer Loans | | 24,681,141 | | | 14,373,393 | | | 26,817,773 | | | 65,872,307 | |
Real Estate Loans | | 894,141 | | | 436,415 | | | 1,379,878 | | | 2,710,434 | |
Sales Finance Contracts | | 4,256,920 | | | 2,066,105 | | | 3,315,491 | | | 9,638,516 | |
Total | | $ | 38,213,637 | | | $ | 22,701,774 | | | $ | 42,161,150 | | | $ | 103,076,561 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due Loans |
| | | | | | | | |
Live Check Loans | | $ | 2,752,871 | | | $ | 2,446,703 | | | $ | 3,597,241 | | | $ | 8,796,815 | |
Premier Loans | | 915,525 | | | 554,662 | | | 1,260,027 | | | 2,730,215 | |
Other Consumer Loans | | 15,190,957 | | | 9,270,399 | | | 18,579,878 | | | 43,041,233 | |
Real Estate Loans | | 656,780 | | | 440,155 | | | 1,117,924 | | | 2,214,859 | |
Sales Finance Contracts | | 2,176,581 | | | 1,134,376 | | | 2,385,007 | | | 5,695,964 | |
Total | | $ | 21,692,714 | | | $ | 13,846,295 | | | $ | 26,940,077 | | | $ | 62,479,086 | |
While delinquency rating analysis is the primary credit quality indicator, we also consider the ratio of bankrupt accounts to the total loan portfolio in evaluating whether any qualitative adjustments were necessary to the allowance for credit losses. The ratio of bankrupt accounts to total principal loan balances outstanding at December 31, 2022 and December 31, 2021 was 1.25% and 1.27% respectively.
The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For each segment in the portfolio, the Company also evaluates credit quality based on the aging status of the loan and by payment activity.
The following table presents the net balance (principal balance less unearned finance charges and unearned insurance) in each segment in the portfolio as of December 31, 2022 based on year of origination.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Performance – Principal Balance by Origination Year |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total Net Balance |
| (in Millions) |
Live Checks: | | | | | | | | | | | | | |
Performing | $ | 117.5 | | | $ | 13.7 | | | $ | 2.1 | | | $ | 0.3 | | | $ | — | | | $ | — | | | $ | 133.6 | |
Nonperforming | 11.6 | | | 1.8 | | | 0.1 | | | — | | | — | | | — | | | 13.5 | |
| $ | 129.1 | | | $ | 15.5 | | | $ | 2.2 | | | $ | 0.3 | | | $ | — | | | $ | — | | | $ | 147.1 | |
Premier Loans: | | | | | | | | | | | | | |
Performing | $ | 65.9 | | | $ | 27.3 | | | $ | 6.8 | | | $ | 1.9 | | | $ | 0.5 | | | $ | 0.1 | | | $ | 102.5 | |
Nonperforming | 2.3 | | | 1.9 | | | 0.4 | | | 0.2 | | | — | | | — | | | 4.8 | |
| $ | 68.2 | | | $ | 29.2 | | | $ | 7.2 | | | $ | 2.1 | | | $ | 0.5 | | | $ | 0.1 | | | $ | 107.3 | |
Other Consumer Loans: | | | | | | | | | | | | | |
Performing | $ | 458.8 | | | $ | 122.5 | | | $ | 22.7 | | | $ | 7.3 | | | $ | 2.1 | | | $ | 0.5 | | | $ | 613.9 | |
Nonperforming | 23.8 | | | 14.0 | | | 2.2 | | | 0.9 | | | 0.2 | | | 0.1 | | | 41.2 | |
| $ | 482.6 | | | $ | 136.5 | | | $ | 24.9 | | | $ | 8.2 | | | $ | 2.3 | | | $ | 0.6 | | | $ | 655.1 | |
Real Estate Loans: | | | | | | | | | | | | | |
Performing | $ | 3.5 | | | $ | 12.6 | | | $ | 5.7 | | | $ | 5.0 | | | $ | 3.6 | | | $ | 4.3 | | | $ | 34.7 | |
Nonperforming | 0.1 | | | 0.7 | | | 0.4 | | | 0.3 | | | 0.2 | | | 0.2 | | | 1.9 | |
| $ | 3.6 | | | $ | 13.3 | | | $ | 6.1 | | | $ | 5.3 | | | $ | 3.8 | | | $ | 4.5 | | | $ | 36.6 | |
Sales Finance Contracts: | | | | | | | | | | | | | |
Performing | $ | 82.8 | | | $ | 35.1 | | | $ | 18.0 | | | $ | 3.5 | | | $ | 0.5 | | | $ | 0.1 | | | $ | 140.0 | |
Nonperforming | 2.1 | | | 2.0 | | | 1.2 | | | 0.3 | | | 0.1 | | | — | | | 5.7 | |
| $ | 84.9 | | | $ | 37.1 | | | $ | 19.2 | | | $ | 3.8 | | | $ | 0.6 | | | $ | 0.1 | | | $ | 145.7 | |
Due to the composition of the loan portfolio, the Company determines and monitors the allowance for credit losses on a portfolio segment basis. As of December 31, 2022, a historical look back period of five quarters was utilized for live checks; six quarters for other consumer loans, premier loans, and sales finance contracts; and a look back period of five years was utilized for real estate loans. Expected look back periods are determined based on analyzing the history of each segment’s snapshot at a point in history and tracing performance until charge-offs are mostly exhausted. The Company addresses seasonality primarily through the use of an average in quarterly historical loss rates over a 4-quarter snapshot time span instead of using one specific snapshot quarter’s historical loss rates.
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 in various locales, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions.
The Company considered factors such as rising energy, food and services prices and the potential market disruptions resulting from recent bank failures. The Company also considered the potential impact of increased central bank interest rates. Despite increase to the Federal Funds Rate, the economy has been resilient with unemployment remaining historically low. 1st Franklin loans are contracted at a fixed rate; therefore, borrowers will not be directly affected by rising interest rates.
Management determined that certain snapshot periods included in the estimation model benefited from government stimulus actions. 1st Franklin’s expected credit loss model incorporates periods that may have benefited from economic stimulus. Based on recent increased charge offs, increased delinquency and the aforementioned economic uncertainty, management concluded that an adjustment was required to sufficiently provide for expected credit losses. Management estimated an adjustment totaling $13.2 million by incorporating
pre-pandemic loss rate curves to more recent loss experience as a proxy for current and expected economic conditions in the estimation model. The allowance for credit losses increased by $7.9 million to $75.2 million at December 31, 2022 compared to $67.3 million at December 31, 2021.
Segmentation of the portfolio began with the adoption of ASC 326 on January 1, 2020. The following table provides additional information on our allowance for credit losses based on a collective evaluation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Live Checks | | Premier Loans | | Other Consumer Loans | | Real Estate Loans | | Sales Finance Contracts | | Total |
| (in 000's) |
Allowance for Credit Losses: | | | | | | | | | | | |
Balance at January 1, 2022 | $ | 10,649 | | | $ | 6,216 | | | $ | 44,646 | | | $ | 265 | | | $ | 5,535 | | | $ | 67,311 | |
Provision for Credit Losses | 24,044 | | | 4,452 | | | 47,976 | | | (102) | | | 7,918 | | | 84,288 | |
Charge-offs | (23,207) | | | (5,630) | | | (61,787) | | | (28) | | | (7,353) | | | (98,005) | |
Recoveries | 3,410 | | | 1,070 | | | 15,577 | | | 8 | | | 1,551 | | | 21,616 | |
Ending Balance | $ | 14,896 | | | $ | 6,108 | | | $ | 46,412 | | | $ | 143 | | | $ | 7,651 | | | $ | 75,210 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | |
| Live Checks | | Premier Loans | | Other Consumer Loans | | Real Estate Loans | | Sales Finance Contracts | | Total | |
| (in 000's) | |
Allowance for Credit Losses: | | | | | | | | | | | | |
Balance at January 1, 2021 | $ | 10,765 | | | $ | 5,838 | | | $ | 43,833 | | | $ | 267 | | | $ | 5,625 | | | $ | 66,328 | | |
Provision for Credit Losses | 8,170 | | | 3,343 | | | 27,198 | | | 24 | | | 3,448 | | | 42,183 | | |
Charge-offs | (11,324) | | | (3,823) | | | (41,534) | | | (31) | | | (4,950) | | | (61,662) | | |
Recoveries | 3,038 | | | 858 | | | 15,149 | | | 5 | | | 1,412 | | | 20,462 | | |
Ending Balance | $ | 10,649 | | | $ | 6,216 | | | $ | 44,646 | | | $ | 265 | | | $ | 5,535 | | | $ | 67,311 | | |
Troubled Debt Restructurings (TDRs)
TDRs are accounted for in accordance with the applicable guidance in ASC 310-40 Troubled Debt Restructurings by Creditors. 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. We do not consider TDRs as new loans because the restructuring is part of our ongoing effort to recover its investment in the original loan. The Company allows refinancing of delinquent loans on a case-by-case basis for those who satisfy certain eligibility requirements. The eligible customers can include those experiencing temporary hardships, lawsuits, or customers who have declared bankruptcy. In most cases, the loans that eligible for restructuring are between 90 and 180 days past due. We do not allow the amount of the new loan to exceed the original amount of the existing loan and we believe that refinancing the delinquent loans for certain customers provides the Company with an opportunity to increase its average loans outstanding and its interest, fees, and other income without experiencing a significant increase in loan losses. These refinancings also provide a resolution to temporary financial setbacks for these borrowers and sustain their credit rating.
Legal fees and other direct costs incurred by the Company during a restructuring are expensed when incurred. The effective interest rate for restructured loan is based on the original contractual rate, not the rate specified in the restructuring agreement. The modified loans are adjusted to be recorded at the value of expected cash flows to be received in the future. Modifications that lower the principal balance experience a direct charge off for the difference of the original and modified principal amount. Substantially all of the restructurings relate to fee and interest rate concessions. The Company only lowers the principal balance due in the event of a court order which are immaterial to each period presented.
The following table presents a summary of Gross Loans that were restructured during the year ended December 31, 2022.
| | | | | | | | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment | | Post-Modification Recorded Investment |
| | | | | | |
Live Check Consumer Loans | | 6,238 | | $ | 11,025,593 | | | $ | 10,869,297 | |
Premier Consumer Loans | | 999 | | 6,521,316 | | | 6,367,261 | |
Other Consumer Loans | | 21,599 | | 85,662,652 | | | 83,162,166 | |
Real Estate Loans | | 26 | | 238,274 | | | 236,228 | |
Sales Finance Contracts | | 1,165 | | 8,921,572 | | | 8,663,893 | |
Total | | 30,027 | | $ | 112,369,407 | | | $ | 109,298,845 | |
TDRs that subsequently defaulted during the year ended December 31, 2022 are listed below.
| | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment |
| | | | |
Live Check Consumer Loans | | 2,252 | | $ | 3,883,391 | |
Premier Consumer Loans | | 182 | | 1,065,631 | |
Other Consumer Loans | | 5,196 | | 13,211,867 | |
Real Estate Loans | | 2 | | 5,217 | |
Sales Finance Contracts | | 183 | | 1,060,841 | |
Total | | 7,815 | | $ | 19,226,947 | |
The following table presents a summary of Gross Loans that were restructured during the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment | | Post-Modification Recorded Investment |
| | | | | | |
Live Check Consumer Loans | | 2,303 | | $ | 4,357,450 | | | $ | 4,265,687 | |
Premier Consumer Loans | | 476 | | 2,951,288 | | | 2,850,034 | |
Other Consumer Loans | | 12,752 | | 46,992,778 | | | 45,056,454 | |
Real Estate Loans | | 28 | | 346,960 | | | 346,735 | |
Sales Finance Contracts | | 745 | | 4,800,447 | | | 4,632,933 | |
Total | | 16,304 | | $ | 59,448,923 | | | $ | 57,151,843 | |
TDRs that subsequently defaulted during the year ended December 31, 2021 are listed below.
| | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment |
| | | | |
Live Check Consumer Loans | | 844 | | $ | 1,568,070 | |
Premier Consumer Loans | | 99 | | 516,895 | |
Other Consumer Loans | | 3,094 | | 7,082,463 | |
Real Estate Loans | | 0 | | — | |
Sales Finance Contracts | | 142 | | 613,181 | |
Total | | 4,179 | | $ | 9,780,609 | |
The following table presents a summary of Gross Loans that were restructured during the year ended December 31, 2020.
| | | | | | | | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment | | Post-Modification Recorded Investment |
| | | | | | |
Live Check Consumer Loans | | 2,127 | | $ | 3,688,912 | | | $ | 3,588,117 | |
Premier Consumer Loans | | 485 | | 3,185,328 | | | 3,090,506 | |
Other Consumer Loans | | 11,463 | | 41,709,966 | | | 39,405,511 | |
Real Estate Loans | | 39 | | 465,759 | | | 453,611 | |
Sales Finance Contracts | | 846 | | 4,379,561 | | | 4,215,137 | |
Total | | 14,960 | | $ | 53,429,526 | | | $ | 50,752,882 | |
TDRs that subsequently defaulted during the year ended December 31, 2020 are listed below.
| | | | | | | | | | | | | | |
Loan Class | | Number of Loans | | Pre-Modification Recorded Investment |
| | | | |
Live Check Consumer Loans | | 787 | | $ | 1,248,879 | |
Premier Consumer Loans | | 92 | | 480,080 | |
Other Consumer Loans | | 2,735 | | 5,523,962 | |
Real Estate Loans | | 4 | | 27,476 | |
Sales Finance Contracts | | 183 | | 475,188 | |
Total | | 3,801 | | $ | 7,755,585 | |
The level of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.
3. INVESTMENT SECURITIES
Investment securities available for sale are carried at estimated fair market value. The amortized cost and estimated fair values of these investment securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
December 31, 2022: | | | | | | | | |
Obligations of states and political subdivisions | | $ | 253,068,048 | | | $ | 1,033,647 | | | $ | (34,453,668) | | | $ | 219,648,027 | |
Corporate securities | | 380,316 | | | — | | | — | | | 380,316 | |
Total | | $ | 253,448,364 | | | $ | 1,033,647 | | | $ | (34,453,668) | | | $ | 220,028,343 | |
| | | | | | | | |
December 31, 2021: | | | | | | | | |
Obligations of states and political subdivisions | | $ | 248,858,502 | | | $ | 13,273,291 | | | $ | (948,416) | | | $ | 261,183,377 | |
Corporate securities | | 418,548 | | | — | | | — | | | 418,548 | |
Total | | $ | 249,277,050 | | | $ | 13,273,291 | | | $ | (948,416) | | | $ | 261,601,925 | |
The amortized cost and estimated fair values of investment securities at December 31, 2022, by contractual maturity, are shown below:
| | | | | | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| | | |
Due in one year or less | $ | 1,240,317 | | | $ | 1,239,689 | |
Due after one year through five years | 2,597,874 | | | 2,609,629 | |
Due after five years through ten years | 24,770,364 | | | 25,139,757 | |
Due after ten years | 224,839,809 | | | 191,039,268 | |
Total | $ | 253,448,364 | | | $ | 220,028,343 | |
The following table provides an analysis of available for sale investment securities in an unrealized loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2022 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Obligations of states and political subdivisions | $ | 118,495,346 | | | $ | (9,327,370) | | | $ | 42,313,572 | | | $ | (25,126,298) | | | $ | 160,808,918 | | | $ | (34,453,668) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2021 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Obligations of states and political subdivisions | | $ | 41,660,651 | | | $ | (896,338) | | | $ | 652,921 | | | $ | (52,078) | | | $ | 42,313,572 | | | $ | (948,416) | |
The previous two tables represent 184 investments and 34 investment held by the Company at December 31, 2022 and 2021, respectively, the majority of which were rated "A" or higher. The unrealized losses on the Company's investments were the result of interest rate and market fluctuations. 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, Management concluded that an allowance for credit losses was not required at December 31, 2022 or at December 31, 2021.
There were no sales of securities during 2022. Proceeds from redemption of investments due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2022 were $26,815,000 Gross and net gains of $606,417 were realized on these redemptions.
There were no sales of securities during 2021. Proceeds from redemption of investments due to the exercise of call provisions by the issuers thereof and regularly scheduled maturities during 2021 were $15.9 million Gross and net gains of $0.3 million were realized on 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. The fair values of common stocks and mutual funds are based on unadjusted quoted market prices in active markets. 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, 2022 and 2021 are available-for-sale investment securities which are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
Description | | December 31, 2022 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | | | | |
Corporate securities | | $ | 380,316 | | | $ | 380,316 | | | $ | — | | | $ | — | |
Obligations of states and political subdivisions | | 219,648,027 | | | — | | | 219,648,027 | | | — | |
Available-for-sale investment securities | | $ | 220,028,343 | | | $ | 380,316 | | | $ | 219,648,027 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
Description | | December 31, 2021 | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | | | | |
Corporate securities | | $ | 418,548 | | | $ | 418,548 | | | $ | — | | | $ | — | |
Obligations of states and political subdivisions | | 261,183,377 | | | — | | | 261,183,377 | | | — | |
Available-for-sale investment securities | | $ | 261,601,925 | | | $ | 418,548 | | | $ | 261,183,377 | | | $ | — | |
5. INSURANCE SUBSIDIARY RESTRICTIONS
As of December 31, 2022 and 2021, 97% and 99%, respectively, of 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 life insurance subsidiary are subject to annual limitations and are restricted to the lesser of 10% of policyholders’ surplus or the net statutory gain from operations before recognizing realized investment gains of the individual insurance subsidiary during the prior year. Dividend payments to the Company by its wholly-owned property and casualty insurance subsidiary are also 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. At December 31, 2021, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $132.0 million and $96.2 million, respectively. The maximum aggregate amount of dividends these subsidiaries could pay to the Company during 2022, without prior approval of the Georgia Insurance Commissioner, was approximately $40.8 million. On November 30, 2021, the Company filed a request with the Georgia Insurance Department for approval of two separate transactions involving dividends and/or lines of credit with maximum amounts of $75.0 million from the Company’s life insurance subsidiary and $95.0 million from the Company’s property and casualty insurance company. The request was approved by the Georgia Insurance Department on January 20, 2022 for transactions on or before December 31, 2022. Effective January 20, 2022, Frandisco Life Insurance Company amended it previous unsecured revolving line of credit available to the Company for a maximum amount up to $60.0 million. Frandisco Property and Casualty Insurance Company also amended an unsecured revolving line of credit available to the Company for a maximum amount up to $60.0 million. No borrowings have been utilized on either of these lines as of December 31, 2022.
At December 31, 2022, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $147.5 million and $103.0 million, respectively. The maximum aggregate amount of dividends these subsidiaries could pay to the Company during 2023, without prior approval of the Georgia Insurance Commissioner, is approximately $46.6 million. On December 6, 2022, Management submitted a request for approval of two separate transactions involving dividends and/or lines of credit with maximum amounts of $75.0 million from Frandisco Life Insurance Company and $105.0 million from Frandisco Property and Casualty Insurance Company. The request was approved by the Georgia Insurance Department on March 16, 2023 for transactions on or before December 31, 2023. Effective March 31, 2023, Frandisco Life Insurance Company amended its previous unsecured revolving line of credit available to the Company for a maximum amount up to $105.0 million and extended the maturity date to December 31, 2026. Frandisco Property and Casualty Insurance Company also amended an unsecured revolving line of credit available to the Company for a maximum amount up to $75.0 million and extended the maturity date to December 31, 2026.
6. 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 reborrowing’s of up to $230.0 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. The credit agreement contains covenants customary for financing transactions of this type. Available borrowings under the credit agreement were $162.5 million and $169.7 million at December 31, 2022 and 2021, at an interest rate of 6.97% and 3.50%, respectively. At December 31, 2022, the Company had borrowings of $67.5 million under the credit agreement. The Company had borrowings of $60.3 million under the credit agreement at December 31, 2021.
Available but unborrowed amounts under the credit agreement are subject to a periodic unused line fee of 0.50% The interest rate under the credit agreement is equivalent to the greater of (a) 0.75% per annum plus the Applicable Margin or (b) the one month secured overnight financing rate (the “SOFR Rate”) plus the term SOFR adjustment (the "Adjusted Term SOFR Rate") plus the Applicable Margin. The Adjusted Term SOFR Rate is adjusted on the first day of each calendar month based upon the SOFR Rate as of the last day of the preceding calendar month. The Applicable Margin is 2.75%. The interest rate on the credit agreement at December 31, 2022 and 2021 was 6.97% and 3.50%, respectively.
The credit agreement has a commitment termination date of February 28, 2025. 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, a minimum EBITDA ratio and a minimum debt to equity ratio, among others. At December 31, 2022, 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 260 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31 | | Weighted Average Interest Rate at End of Year | | Maximum Amount Outstanding During Year | | Average Amount Outstanding During Year | | Weighted Average Interest Rate During Year (1) |
| | (In thousands, except % data) |
2022 | | | | | | | | |
Bank Borrowings | | 6.97 | % | | $ | 81,942 | | | $ | 47,083 | | | 7.07 | % |
Senior Demand Notes | | 1.92 | | | 122,860 | | | 113,151 | | | 1.92 | |
Commercial Paper | | 3.94 | | | 633,534 | | | 604,980 | | | 3.54 | |
| | | | | | | | |
2021 | | | | | | | | |
Bank Borrowings | | 3.50 | % | | $ | 119,304 | | | $ | 68,080 | | | 4.83 | % |
Senior Demand Notes | | 1.91 | | | 103,979 | | | 95,143 | | | 1.90 | |
Commercial Paper | | 3.46 | | | 550,929 | | | 491,431 | | | 3.48 | |
| | | | | | | | |
2020 | | | | | | | | |
Bank Borrowings | | 3.50 | % | | $ | 123,256 | | | $ | 104,206 | | | 4.38 | % |
Senior Demand Notes | | 1.90 | | | 87,413 | | | 82,509 | | | 1.90 | |
Commercial Paper | | 3.45 | | | 431,314 | | | 407,156 | | | 3.48 | |
(1)Includes unused line fee and administrative fee.
7. 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 End of Year | | Weighted Average Interest Rate During Year |
2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
3.29% | | 3.16% | | 3.10% | | 3.16% | | 3.12% | | 3.01% |
Maturity and redemption information relating to the Company's subordinated debt at December 31, 2022 is as follows:
| | | | | | | | | | | |
| Amount Maturing or Redeemable at Option of Holder |
| Based on Maturity Date | | Based on Interest Adjustment Period |
| | | |
2023 | $ | 6,039,363 | | | $ | 15,497,719 | |
2024 | 6,215,892 | | | 8,620,385 | |
2025 | 8,387,815 | | | 3,076,825 | |
2026 | 8,362,756 | | | 1,810,897 | |
| $ | 29,005,826 | | | $ | 29,005,826 | |
8. LEASES
The Company's operations are carried on in locations which are occupied under operating lease agreements. These lease agreements are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities. Actual lease payment were $9.2 million, $8.7 million, and $8.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company’s minimum aggregate future lease commitments at December 31, 2022 and 2021 are presented in the tables that follow.
ROU assets represent the Company’s right to use an underlying asset during the lease term and the operating lease liabilities represent the Company’s obligations for lease payments in accordance with the lease. Recognition of ROU assets and liabilities are recognized at the lease commitment based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commitment date or adoption. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy expense in the consolidated statement of income.
Remaining lease terms range from 1 to 10 years and typically include extension options. The Company’s leases are not complex and do not contain residual value guarantees, variable lease payments, or significant assumptions or judgments made in applying the requirements of Topic 842. Operating leases with a term of 12 months or less are not recorded on the statement of financial condition and the related lease expense is recognized on a straight-line basis over the lease term.
The table below summarizes our lease expense and other information related to the Company’s operating leases with respect to FASB ASC 842:
| | | | | |
| Twelve Months Ended Dec 31, 2022 |
| |
Operating lease expense | $ | 7,843,282 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | 7,706,605 | |
Weighted-average remaining lease term – operating leases (in years) | 7.09 |
Weighted-average discount rate – operating leases | 4.84 | % |
| |
Lease Maturity Schedule as of December 31, 2022: | Amount |
2023 | 7,785,034 | |
2024 | 7,003,616 | |
2025 | 6,642,211 | |
2026 | 6,086,452 | |
2027 | 5,296,864 | |
2028 and beyond | 13,308,568 | |
Total | 46,122,745 | |
Less: Discount | (7,103,537) | |
Present Value of Lease Liability | $ | 39,019,208 | |
| |
Present Value of Lease Asset | $ | 38,153,238 | |
| | | | | |
| Twelve Months Ended Dec 31, 2021 |
| |
Operating lease expense | $ | 7,499,568 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | 7,381,898 | |
Weighted-average remaining lease term – operating leases (in years) | 7.05 |
Weighted-average discount rate – operating leases | 4.47 | % |
| |
Lease Maturity Schedule as of December 31, 2021: | Amount |
2022 | 7,260,471 | |
2023 | 6,385,647 | |
2024 | 5,604,799 | |
2025 | 5,249,730 | |
2026 | 4,696,343 | |
2027 and beyond | 11,956,205 | |
Total | 41,153,195 | |
Less: Discount | (5,713,818) | |
Present Value of Lease Liability | $ | 35,439,377 | |
| |
Present Value of Lease Asset | $ | 34,768,208 | |
9. COMMITMENTS AND CONTINGENCIES
We conduct our lending operations under the provisions of various federal and state laws, implementing regulations, and insurance regulations. Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business.
The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of its business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable, the peril or claim is uninsured or underinsured, and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the uninsured or underinsured loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the uninsured or underinsured loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated uninsured or underinsured loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss (whether on the merits or by virtue of the existence of collectible insurance) would not be material. Based on current expectations, such matters, both individually and in aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
During the year ended December 31, 2022, the Company suffered a cyber-attack against certain systems within the Company's network environment on or about November 17, 2022. The attack temporarily affected operations and caused delays in originating and servicing loans at some locations. During the incident, the attackers had access to personally identifiable information of certain Company employees, customers, and investors. The incident, which only affected systems, was contained to the Company’s onsite file directory system, but not its off-site core operating system. Full lending and investing operations were restored within days of the incident, and the Company provided notifications to all potentially affected individuals. As of April 11, 2023, the Company is named as a Defendant in five consumer class action cases alleging harm from the cyber-attack.
The Company maintains a cyber insurance policy applicable to most of the costs of investigation, remediation, business interruption, and other costs pertaining to the breach. Insurance recoveries are only recognized when uncertainties related to the timing and amount of recovery are resolved.The Company incurred investigation and remediation costs totaling $2.5 million as of December 31, 2022. This amount is recognized in the Company's consolidated statements of financial position as receivable from insurance company in miscellaneous assets. Additional insurance recoveries from the cyber insurance policy are expected; however, the Company is currently unable to estimate the timing and amount of such recoveries.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan, which is 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 2022, 2021 and 2020, the Company contributed $2.9 million, $2.6 million and $2.5 million, 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 leased a portion of its properties (see Note 8) for an aggregate of $160,800 per year from certain officers or stockholders.
The Company has an outstanding loan to a real estate development partnership of which David Cheek (son of Ben F. Cheek, III) who beneficially owns 24.24% of the Company’s voting stock, is a partner. The balance on this commercial loan (including principal and accrued interest) was $1,959,772 at December 31, 2022. 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.
Certain directors, officers and stockholders have funds personally invested in the Company’s debt securities. The rates on these debt securities are the same rates provided to other customers.
Effective September 23, 1995, the Company entered into a Split-Dollar Life Insurance Agreement with the Trustee of a now retired 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 $12,187 for interest accrued during 2022 was applied to the loan on December 31, 2022. No principal payments on this loan were made in 2022. The balance on this loan at December 31, 2022 was $468,422. 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 certain states, which do 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.
We account for income taxes under the asset and liability method, which requires the recognition of Deferred Tax Assets, “DTAs”, and Deferred Tax Liabilities, “DTLs”, for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date.
We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. If we determine that we would be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the DTA valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits, “UTBs”, on the interest expense line and other expense line, respectively, in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related liability lines in the consolidated balance sheet.
The provision for income taxes for the years ended December 31, 2022, 2021 and 2020 is made up of the following components:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
Current – Federal | $ | 4,280,033 | | | $ | 2,859,997 | | | $ | 3,024,953 | |
Current – State | 289,345 | | | 595,915 | | | 205,779 | |
Total Current | 4,569,378 | | | 3,455,912 | | | 3,230,732 | |
| | | | | |
Deferred tax expense (benefit) | (151,474) | | | 487,481 | | | 156,075 | |
| | | | | |
Total Provision | $ | 4,417,904 | | | $ | 3,943,393 | | | $ | 3,386,807 | |
Temporary differences create deferred federal tax assets and liabilities, which are detailed below as of December 31, 2022 and 2021. As of December 31, 2022 net deferred tax assets of $3.1 million are included in other miscellaneous assets in the accompanying consolidated statements of financial position. As of December 31, 2021 net deferred tax liabilities of $6.6 million are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position.
| | | | | | | | | | | |
| As Of December 31, |
| 2022 | | 2021 |
Deferred Tax Assets: | | | |
Unearned Premium Reserves | $ | 2,042,304 | | | $ | 2,239,933 | |
Unrealized Loss (Gain) on | | | |
Marketable Debt Securities | 7,018,205 | | | — | |
SPAE Capitalization | 31,643 | | | 33,713 | |
STAT & Tax Reserve | 643,782 | | | 671,836 | |
Total Deferred Tax Assets | $ | 9,735,934 | | | $ | 2,945,482 | |
| | | |
Deferred Tax Liabilities: | | | |
Insurance Commissions | (4,774,456) | | | (5,034,729) | |
Deferred Acquisition Cost Amortization | (1,554,166) | | | (1,637,230) | |
GAAP/STAT Premium Tax | (198,450) | | | (230,665) | |
Unrealized Loss (Gain) on | | | |
Marketable Debt Securities | — | | | (2,588,224) | |
Other | (66,235) | | | (69,944) | |
Total Deferred Tax Liabilities | (6,593,307) | | | (9,560,792) | |
Net Deferred Tax Asset (Liability) | $ | 3,142,627 | | | $ | (6,615,310) | |
The Company's effective tax rate for the years ended December 31, 2022, 2021 and 2020 is analyzed as follows.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Statutory Federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Tax effect of S corporation status | 5.0 | | | (11.3) | | | 1.0 | |
Tax exempt income | (5.9) | | | (2.4) | | | (5.5) | |
State income taxes | 1.4 | | | 1.3 | | | 1.1 | |
Effective Tax Rate | 21.5 | % | | 8.6 | % | | 17.6 | % |
Enactment of the Inflation Reduction Act of 2022
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (IRA) which, among other changes, created a new 15% corporate alternative minimum tax (CAMT) based on adjusted financial statement income (AFSI) and imposes a 1% excise tax on corporate stock repurchases. The effective date of these provisions is January 1, 2023. The enactment of the IRA did not have any impact on the Company’s financial statements in 2022. The Company will not be an applicable corporation subject to the AMT tax beginning in 2023 based on its reported GAAP earnings for the past three years being less than 1 billion dollars. Any excise tax incurred on corporate stock repurchases will generally be recognized as part of the cost basis of the treasury stock acquired and not reported as part of income tax expense.
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 has nine divisions which comprise its operations: Division I through Division IX. Each division consists of branch offices that are aggregated based on vice president responsibility and geographic location. Division I consists of offices located in South Carolina. Prior to 2020, offices in North Georgia comprised Division II, Division III consisted of offices in South Georgia and Division IX consisted of offices in West Georgia. Effective January 1, 2020, the Company geographically realigned the Georgia Divisions into Division II consisting of Middle Georgia, Division III consisting of South Georgia and Division IX consisting of North Georgia. Various branches were realigned in order to be in the appropriate geographic division. Division IV represents our Alabama offices, Division V represents our Mississippi offices, Division VI represents our Virginia offices, Division VII represents our Kentucky and Tennessee offices and Division VIII represents our Louisiana and Texas offices. The following division financial data has been retrospectively presented to give effect to the current structure. The change in the Georgia reporting structure had no impact on the previously reported consolidated results.
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 credit 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, 2022 followed by a reconciliation to consolidated Company data.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year 2022 | Division I | | Division II | | Division III | | Division IV | | Division V | | Division VI | Division VII | | Division VIII | | Division IX | | Total |
| (In Millions) |
Revenues: | | | | | | | | | | | | | | | | | | |
Finance Charges Earned | $ | 38 | | | $ | 35 | | | $ | 35 | | | $ | 43 | | | $ | 29 | | | $ | — | | $ | 29 | | | $ | 27 | | | $ | 31 | | | $ | 267 | |
Insurance Income | $ | 6 | | | $ | 7 | | | $ | 9 | | | $ | 5 | | | $ | 5 | | | $ | — | | $ | 4 | | | $ | 6 | | | $ | 6 | | | $ | 48 | |
Other | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 6 | |
| $ | 44 | | | $ | 43 | | | $ | 45 | | | $ | 48 | | | $ | 35 | | | $ | — | | $ | 34 | | | $ | 34 | | | $ | 38 | | | $ | 321 | |
| | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | |
Interest Cost | $ | 4 | | | $ | 4 | | | $ | 4 | | | $ | 4 | | | $ | 3 | | | $ | — | | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 28 | |
Provision for Loan Losses | $ | 12 | | | $ | 8 | | | $ | 9 | | | $ | 12 | | | $ | 9 | | | $ | — | | $ | 10 | | | $ | 9 | | | $ | 7 | | | $ | 76 | |
Depreciation | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | $ | — | | | $ | 1 | | | $ | — | | | $ | 2 | |
Other | $ | 14 | | | $ | 14 | | | $ | 13 | | | $ | 16 | | | $ | 12 | | | $ | — | | $ | 12 | | | $ | 14 | | | $ | 14 | | | $ | 109 | |
| $ | 30 | | | $ | 26 | | | $ | 26 | | | $ | 33 | | | $ | 24 | | | $ | — | | $ | 25 | | | $ | 27 | | | $ | 24 | | | $ | 215 | |
| | | | | | | | | | | | | | | | | | |
Division Profit | $ | 14 | | | $ | 17 | | | $ | 19 | | | $ | 15 | | | $ | 11 | | | $ | — | | $ | 9 | | | $ | 7 | | | $ | 14 | | | $ | 106 | |
| | | | | | | | | | | | | | | | | | |
Division Assets: | | | | | | | | | | | | | | | | | | |
Net Receivables | $ | 118 | | | $ | 126 | | | $ | 123 | | | $ | 149 | | | $ | 92 | | | $ | — | | $ | 99 | | | $ | 93 | | | $ | 111 | | | $ | 911 | |
Cash | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 8 | |
Net Fixed Assets | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | $ | 1 | | | $ | 2 | | | $ | 1 | | | $ | 9 | |
Other Assets | $ | 2 | | | $ | 5 | | | $ | 4 | | | $ | 6 | | | $ | 4 | | | $ | — | | $ | (1) | | | $ | 6 | | | $ | 5 | | | $ | 31 | |
Total Division Assets | $ | 122 | | | $ | 133 | | | $ | 129 | | | $ | 157 | | | $ | 98 | | | $ | — | | $ | 100 | | | $ | 102 | | | $ | 118 | | | $ | 959 | |
| | | | | |
RECONCILIATION: | 2022 |
| (In Millions) |
Revenues: | |
Total revenues from reportable divisions | $ | 321 | |
Corporate investment income earned not allocated to divisions | $ | 8 | |
Timing difference of insurance income allocation to divisions | $ | 10 | |
Consolidated Revenues (1) | $ | 339 | |
| |
Net Income: | |
Total profit or loss for reportable divisions | $ | 106 | |
Corporate earnings not allocated | $ | 18 | |
Corporate expenses not allocated | $ | (103) | |
Consolidated Income Before Income Taxes | $ | 21 | |
| |
Assets: | |
Total assets for reportable divisions | $ | 959 | |
Loans held at corporate level | $ | 2 | |
Unearned insurance at corporate level | $ | (37) | |
Allowance for loan losses at corporate level | $ | (75) | |
Cash and cash equivalents held at corporate level | $ | 58 | |
Investment securities at corporate level | $ | 220 | |
Fixed assets at corporate level | $ | 4 | |
Other assets at corporate level | $ | 32 | |
Consolidated Assets | $ | 1,163 | |
Note 1: Includes Finance Charge Income, Investment Income, Insurance Premium Revenues and Other Revenue.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2021 followed by a reconciliation to consolidated Company data.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year 2021 | Division I | | Division II | | Division III | | Division IV | | Division V | | Division VII | | Division VIII | | Division IX | | Total |
| (In Millions) |
Revenues: | | | | | | | | | | | | | | | | | |
Finance Charges Earned | $ | 35 | | | $ | 32 | | | $ | 33 | | | $ | 38 | | | $ | 25 | | | $ | 25 | | | $ | 20 | | | $ | 29 | | | $ | 237 | |
Insurance Income | $ | 5 | | | $ | 7 | | | $ | 8 | | | $ | 5 | | | $ | 4 | | | $ | 3 | | | $ | 5 | | | $ | 6 | | | $ | 43 | |
Other | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 7 | |
| $ | 40 | | | $ | 40 | | | $ | 42 | | | $ | 44 | | | $ | 30 | | | $ | 29 | | | $ | 26 | | | $ | 36 | | | $ | 287 | |
| | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | |
Interest Cost | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 4 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 3 | | | $ | 22 | |
Provision for Loan Losses | $ | 8 | | | $ | 4 | | | $ | 5 | | | $ | 6 | | | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | 43 | |
Depreciation | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
Other | $ | 14 | | | $ | 13 | | | $ | 13 | | | $ | 14 | | | $ | 11 | | | $ | 11 | | | $ | 13 | | | $ | 13 | | | $ | 102 | |
| $ | 25 | | | $ | 20 | | | $ | 21 | | | $ | 25 | | | $ | 19 | | | $ | 18 | | | $ | 20 | | | $ | 21 | | | $ | 169 | |
| | | | | | | | | | | | | | | | | |
Division Profit | $ | 15 | | | $ | 20 | | | $ | 21 | | | $ | 19 | | | $ | 11 | | | $ | 11 | | | $ | 6 | | | $ | 15 | | | $ | 118 | |
| | | | | | | | | | | | | | | | | |
Division Assets: | | | | | | | | | | | | | | | | | |
Net Receivables | $ | 111 | | | $ | 118 | | | $ | 120 | | | $ | 145 | | | $ | 86 | | | $ | 87 | | | $ | 85 | | | $ | 104 | | | $ | 856 | |
Cash | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | |
Net Fixed Assets | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 8 | |
Other Assets | $ | 3 | | | $ | 5 | | | $ | 5 | | | $ | 6 | | | $ | 4 | | | $ | 4 | | | $ | 4 | | | $ | 5 | | | $ | 36 | |
Total Division Assets | $ | 116 | | | $ | 125 | | | $ | 127 | | | $ | 153 | | | $ | 92 | | | $ | 92 | | | $ | 90 | | | $ | 110 | | | $ | 905 | |
| | | | | |
RECONCILIATION: | 2021 |
| (In Millions) |
Revenues: | |
Total revenues from reportable divisions | $ | 287 | |
Corporate investment income earned not allocated to divisions | $ | 8 | |
Timing difference of insurance income allocation to divisions | $ | 9 | |
Consolidated Revenues (1) | $ | 304 | |
| |
Net Income: | |
Total profit or loss for reportable divisions | $ | 118 | |
Corporate earnings not allocated | $ | 20 | |
Corporate expenses not allocated | $ | (92) | |
Consolidated Income Before Income Taxes | $ | 46 | |
| |
Assets: | |
Total assets for reportable divisions | $ | 905 | |
Loans held at corporate level | $ | 2 | |
Unearned insurance at corporate level | $ | (39) | |
Allowance for loan losses at corporate level | $ | (67) | |
Cash and cash equivalents held at corporate level | $ | 36 | |
Investment securities at corporate level | $ | 262 | |
Fixed assets at corporate level | $ | 5 | |
Other assets at corporate level | $ | 14 | |
Consolidated Assets | $ | 1,118 | |
Note 1: Includes Finance Charge Income, Investment Income, Insurance Premium Revenues and Other Revenue.
Below is a performance recap of each of the Company's divisions for the year ended December 31, 2020 followed by a reconciliation to consolidated Company data.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year 2020 | Division I | | Division II | | Division III | | Division IV | | Division V | | Division VII | | Division VIII | | Division IX | | Total |
| (In Millions) |
Revenues: | | | | | | | | | | | | | | | | | |
Finance Charges Earned | $ | 33 | | | $ | 29 | | | $ | 30 | | | $ | 34 | | | $ | 22 | | | $ | 22 | | | $ | 17 | | | $ | 27 | | | $ | 214 | |
Insurance Income | $ | 5 | | | $ | 7 | | | $ | 8 | | | $ | 4 | | | $ | 4 | | | $ | 3 | | | $ | 4 | | | $ | 5 | | | $ | 40 | |
Other | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 6 | |
| $ | 38 | | | $ | 37 | | | $ | 39 | | | $ | 39 | | | $ | 27 | | | $ | 26 | | | $ | 21 | | | $ | 33 | | | $ | 260 | |
| | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | |
Interest Cost | $ | 3 | | | $ | 3 | | | $ | 3 | | | $ | 4 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 3 | | | $ | 22 | |
Provision for Loan Losses | $ | 9 | | | $ | 5 | | | $ | 6 | | | $ | 7 | | | $ | 4 | | | $ | 6 | | | $ | 5 | | | $ | 5 | | | $ | 47 | |
Depreciation | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 4 | |
Other | $ | 14 | | | $ | 13 | | | $ | 13 | | | $ | 14 | | | $ | 10 | | | $ | 10 | | | $ | 11 | | | $ | 13 | | | $ | 98 | |
| $ | 26 | | | $ | 21 | | | $ | 22 | | | $ | 26 | | | $ | 17 | | | $ | 19 | | | $ | 18 | | | $ | 22 | | | $ | 171 | |
| | | | | | | | | | | | | | | | | |
Division Profit | $ | 12 | | | $ | 16 | | | $ | 17 | | | $ | 13 | | | $ | 10 | | | $ | 7 | | | $ | 3 | | | $ | 11 | | | $ | 89 | |
| | | | | | | | | | | | | | | | | |
Division Assets: | | | | | | | | | | | | | | | | | |
Net Receivables | $ | 103 | | | $ | 106 | | | $ | 111 | | | $ | 129 | | | $ | 71 | | | $ | 77 | | | $ | 65 | | | $ | 97 | | | $ | 759 | |
Cash | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | |
Net Fixed Assets | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 9 | |
Other Assets | $ | 3 | | | $ | 5 | | | $ | 4 | | | $ | 6 | | | $ | 4 | | | $ | 4 | | | $ | 3 | | | $ | 5 | | | $ | 34 | |
Total Division Assets | $ | 108 | | | $ | 113 | | | $ | 117 | | | $ | 137 | | | $ | 78 | | | $ | 82 | | | $ | 69 | | | $ | 103 | | | $ | 807 | |
| | | | | |
RECONCILIATION: | 2020 |
| (In Millions) |
Revenues: | |
Total revenues from reportable divisions | $ | 260 | |
Corporate investment income earned not allocated to divisions | $ | 7 | |
Timing difference of insurance income allocation to divisions | $ | 8 | |
Consolidated Revenues (1) | $ | 275 | |
| |
Net Income: | |
Total profit or loss for reportable divisions | $ | 89 | |
Corporate earnings not allocated | $ | 17 | |
Corporate expenses not allocated | $ | (87) | |
Consolidated Income Before Income Taxes | $ | 19 | |
| |
Assets: | |
Total assets for reportable divisions | $ | 807 | |
Loans held at corporate level | $ | 2 | |
Unearned insurance at corporate level | $ | (34) | |
Allowance for loan losses at corporate level | $ | (66) | |
Cash and cash equivalents held at corporate level | $ | 64 | |
Investment securities at corporate level | $ | 221 | |
Fixed assets at corporate level | $ | 5 | |
Other assets at corporate level | $ | 15 | |
Consolidated Assets | $ | 1,014 | |
Note 1: Includes Finance Charge Income, Investment Income, Insurance Premium Revenues and Other Revenue.
14. SUBSEQUENT EVENTS
Management has evaluated subsequent events through the filing of this Form 10-K, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the following:
Due to a variety of macroeconomic and bank-specific factors, there was a small number of large bank failures in the first quarter of 2023. These events created concerns among depositors, investors, and other bank stakeholders that the banking system could be subject to an overall drain on liquidity. The Company has no current direct investment in or contractual relationships with the institutions and expects no material impact related to these events on the Company’s operations or investments.
DIRECTORS AND EXECUTIVE OFFICERS
| | | | | | | | | | | | | | |
Directors | | | | |
Name | | Principal Occupation, Title and Company | | Director Since |
| | | | |
Ben F. Cheek, IV | | Chairman of Board, 1st Franklin Financial Corporation | | 2001 |
| | | | |
Ben F. Cheek, III | | Chairman Emeritus, 1st Franklin Financial Corporation | | 1967 |
| | | | |
Virginia C. Herring | | President and Chief Executive Officer 1st Franklin Financial Corporation | | 2020 |
| | | | |
A. Roger Guimond | | Retired Executive Vice President and Chief Financial Officer, 1st Franklin Financial Corporation | | 2004 |
| | | | |
James H. Harris, III | | Retired Owner, Unichem Technologies, Inc. and Moonrise Distillery | | 2014 |
| | | | |
Jerry J. Harrison, Jr. | | Project Engineer - Special Projects 1st Franklin Financial Corporation | | 2020 |
| | | | |
Donata Ison | | VP Finance Controller Libra Solutions | | 2023 |
| | | | |
John G. Sample, Jr. | | CPA | | 2004 |
| | | | |
C. Dean Scarborough | | Retired Retail Business Owner | | 2004 |
| | | | |
Keith D. Watson | | Chairman Bowen & Watson, Inc. | | 2004 |
| | | | |
Executive Officers | | | | |
| | | | |
Name | | Position with Company | | Position Since |
| | | | |
Ben F. Cheek, IV | | Chairman of Board | | 2015 |
| | | | |
Virginia C. Herring | | President and Chief Executive Officer | | 2015 |
| | | | |
Gary L. McQuain | | Executive Vice President and Chief Operating Officer | | 2020 |
| | | | |
Brian J. Gyomory | | Executive Vice President and Chief Financial Officer | | 2021 |
| | | | |
Charles E. Vercelli, Jr. | | Executive Vice President and Chief Governmental and Regulatory Affairs Officer | | 2021 |
| | | | |
Daniel E. Clevenger, II | | Executive Vice President and Chief Compliance Officer | | 2015 |
| | | | |
Joseph A. Shaw | | Executive Vice President and Chief Information Officer | | 2018 |
| | | | |
Julie I. Baker | | Executive Vice President and Chief Information Security Officer | | 2023 |
| | | | |
Mark J. Scarpitti | | Executive Vice President and General Counsel | | 2021 |
| | | | |
Jeffrey R. Thompson | | Executive Vice President and Chief Human Resources Officer | | 2020 |
CORPORATE INFORMATION
| | | | | | | | |
Corporate Offices | Legal Counsel | Independent Registered Public Accounting Firm |
P.O. Box 880 | Jones Day |
135 East Tugalo Street | Atlanta, Georgia | Deloitte & Touche LLP |
Toccoa, Georgia 30577 | | Atlanta, Georgia |
(706) 886-7571 | | |
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.
| | | | | | | | | | | | | | | | | | | | |
BRANCH OPERATIONS |
| | | | |
DIVISION I – SOUTH CAROLINA | | DIVISION II – MIDDLE GEORGIA |
| | | | |
M. Summer Clevenger | Vice President | | Michael J. Whitaker | Vice President |
| | | | | | |
Regional Operations Directors | | Regional Operations Directors |
| | | | |
Nicholas D. Blevins | Gerald D. Rhoden | | Janet R. Brownlee | James A. Mahaffey |
Jenna L. Henderson | Gregory A. Shealy | | Ronald E. Byerly | Deloris O’Neal |
Becki B. Lawhon | Louise S. Stokes | | Kathryn Landry | Harriet H. Welch |
Tammy T. Lee | | | | |
| | | | |
| | |
DIVISION III – SOUTH GEORGIA | | DIVISION IX – NORTH GEORGIA |
| | | | |
Michael E. Shankles | Vice President | | Jennifer C. Purser | Vice President |
| | | | |
Regional Operations Directors | | Regional Operations Directors |
| | | | |
Stacy M. Courson | Sylvia J. McClung | | James D. Blalock | Nokie Moore |
Deirdre A. Dunnam | Wanda Parham | | Kimberly L. Golka | April Pelphrey |
Jeffrey C. Lee | Robert D. Whitlock | | Kevin M. Gray | F. Cliff Snyder |
| | | | |
| | | | |
DIVISION IV – ALABAMA | | DIVISION V – MISSISSIPPI |
| | | | |
Jerry W. Hughes | Vice President | | Marty B. Miskelly | Vice President |
| | | | |
Regional Operations Directors | | Regional Operations Directors |
| | | | |
M. Peyton Givens | Johnny M. Olive | | Maurice J. Bize, Jr. | Teresa Grantham |
Tomerria S. Iser | Tonya Slaten | | Carla A. Eldridge | Rebecca L. Holloway |
Jonathan M. Kendrick | Michael L. Spriggs | | Jimmy R. Fairbanks, Jr. | |
Jeffrey A. Lindberg | | | | |
| | | | |
| | | | |
DIVISION VII – KENTUCKY and TENNESSEE | | DIVISION VIII – LOUISIANA and TEXAS |
| | | | |
Joseph R. Cherry | Vice President | | John B. Gray | Vice President |
| | |
Chad Frederick | Assistant Vice President | | Lori Sanchez | Assistant Vice President |
| | | | | | |
Regional Operations Directors | | Regional Operations Directors |
Brian M. Hill | William N. Murillo | | Sonya L. Acosta | Lauren M. Munoz |
Tammy R. Hood | Joshua C. Nickerson | | Bryan W. Cook | Anthony B. Seney |
J. Steven Knotts | Melissa D. Storck | | L. Christopher Deakle | Chadd Stewart |
| | | Tabatha A. Green | |
| | | | |
DIVISION VI - VIRGINIA | | | |
Lee Wright | Assistant Vice President | | | |
| | | | |
| | | | | | | | | | | | | | | | | | | | |
HOME OFFICE ADMINISTRATION |
| | | | |
Virginia K Palmer | Senior Vice President – Operations Administration | | Shelby J. Gober | Vice President - Employee Development |
James P. Smith | Senior Vice President – Branch Operations | | John-Mark Jones | Vice President – Information Security |
Kelly Abernathy | Vice President - Fair and Responsible Lending | | Brian D. Lingle | Vice President – Controller |
Richard J. Brandt | Vice President – Internal Audit | | Timothy E. Ott | Vice President – Information Technology Applications |
Angela C. Brock | Vice President – Compliance | | Kenneth B. Proctor | Vice President – State Regulatory Compliance |
Richard C. Chapman | Vice President – Financial Planning and Analysis | | Edmund V. Tanner | Vice President – Real Estate Compliance |
Brian K. Davis | Vice President – Marketing | | Justin K. Wiles | Vice President - Enterprise Project Management Office |
Stacey K. Estes | Vice President - Real Estate and Property Management | | Valerie B. Younts | Vice President – Regulatory Counsel |
___________________
2022 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 Swainsboro, Georgia staff for this significant achievement. The Friendly Franklin Folks salute you!
(Graphic showing state maps of Alabama, Georgia, Kentucky, Louisiana, Mississippi, South Carolina, Tennessee, Texas, and Virginia which is regional operating territory of Company and listing of branch offices)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES | | | |
| | | | | | | | |
ALABAMA | | | |
Adamsville | Brewton | Fort Payne | Moody | Prattville | Talladega | | | |
Albertville | Clanton | Gadsden | Moulton | Robertsdale | Tallassee | | | |
Alexander City | Cullman | Hamilton | Muscle Shoals | Russellville (2) | Troy | | | |
Andalusia | Decatur | Huntsville (2) | Opelika | Saraland | Trussville | | | |
Arab | Dothan (2) | Jackson | Oxford | Scottsboro | Tuscaloosa | | | |
Athens | Enterprise | Jasper | Ozark | Selma | Wetumpka | | | |
Bay Minette | Fayette | Mobile | Pelham | Sylacauga | | | | |
Bessemer | Florence | | | | | | | |
| | | | | | | | |
GEORGIA | | | |
Acworth | Canton | Dalton | Greensboro | Manchester | Swainsboro | | | |
Adel | Carrollton | Dawson | Griffin | McDonough | Sylvania | | | |
Albany (2) | Cartersville | Douglas (2) | Hartwell | Milledgeville | Sylvester | | | |
Alma | Cedartown | Douglasville | Hawkinsville | Monroe | Thomaston | | | |
Americus | Chatsworth | Dublin | Hazlehurst | Montezuma | Thomasville | | | |
Athens (2) | Clarkesville | East Ellijay | Helena | Monticello | Thomson | | | |
Augusta | Claxton | Eastman | Hinesville (2) | Moultrie | Tifton | | | |
Bainbridge | Clayton | Eatonton | Hiram | Nashville | Toccoa | | | |
Barnesville | Cleveland | Elberton | Hogansville | Newnan | Tucker | | | |
Baxley | Cochran | Fayetteville | Jackson | Perry | Valdosta | | | |
Blairsville | Colquitt | Fitzgerald | Jasper | Pooler | Vidalia | | | |
Blakely | Columbus (2) | Flowery Branch | Jefferson | Richmond Hill | Villa Rica | | | |
Blue Ridge | Commerce | Forest Park | Jesup | Rome | Warner Robins (2) | | | |
Bremen | Conyers | Forsyth | Kennesaw | Royston | Washington | | | |
Brunswick | Cordele | Fort Valley | LaGrange | Sandersville | Waycross | | | |
Buford | Cornelia | Fort Oglethorpe | Lavonia | Sandy Springs | Waynesboro | | | |
Butler | Covington | Gainesville | Lawrenceville | Savannah | Winder | | | |
Cairo | Cumming | Garden City | Macon (2) | Statesboro | | | | |
Calhoun | Dahlonega | Georgetown | Madison | Stockbridge | | | | |
| | | | | | | | |
KENTUCKY | | | |
Elizabethtown | Louisville | Paducah | Shelbyville | Shepherdsville | Somerset | | | |
| | | | | | | | |
LOUISIANA | | | |
Abbeville | Covington | Hammond | LaPlace | Morgan City | Ruston | | | |
Alexandria | Crowley | Houma | Leesville | Natchitoches | Slidell | | | |
Baker | Denham Springs | Jena | Marksville | New Iberia | Sulphur | | | |
Bastrop | DeRidder | Kenner | Marrero | Opelousas | Thibodaux | | | |
Baton Rouge | Eunice | Lafayette | Minden | Pineville | West Monroe | | | |
Bossier City | Franklin | Lake Charles | Monroe | Prairieville | Winnsboro | | | |
| | | | | | | | |
MISSISSIPPI | | | |
Amory | Columbia | Gulfport | Laurel | Olive Branch | Ridgeland | | | |
Batesville | Columbus | Hattiesburg | Louisville | Oxford | Ripley | | | |
Bay St. Louis | Corinth | Hazlehurst | Magee | Pearl | Senatobia | | | |
Booneville | D’Iberville | Hernando | McComb | Philadelphia | Starkville | | | |
Brookhaven | Forest | Houston | Meridian | Picayune | Tupelo | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES (Continued) | | | |
Carthage | Greenwood | Iuka | New Albany | Pontotoc | Winona | | | |
Clinton | Grenada | Kosciusko | Newton | | | | | |
| | | | | | | | |
SOUTH CAROLINA | | | |
Aiken | Cheraw | Georgetown | Laurens | North Charleston | Summerville | | | |
Anderson | Chester | Greenwood | Lexington | North Greenville | Sumter | | | |
Batesburg-Leesville | Columbia | Greer | Manning | Orangeburg | Union | | | |
Beaufort | Conway | Hartsville | Marion | Rock Hill | Walterboro | | | |
Boiling Springs | Dillon | Irmo | Moncks Corner | Seneca | Winnsboro | | | |
Camden | Easley | Lake City | Myrtle Beach | Simpsonville | York | | | |
Cayce | Florence | Lancaster | Newberry | Spartanburg | | | | |
Charleston | Gaffney | | | | | | | |
| | | | | | | | |
TENNESSEE | | | |
Athens | Crossville | Gallatin | LaFollette | Morristown | Springfield | | | |
Bristol | Dayton | Greeneville | Lebanon | Murfreesboro | Smyrna | | | |
Clarksville | Dickson | Hixson | Lenoir City | Newport | Tazewell | | | |
Cleveland | Dyersburg | Jackson | Lexington | Powell | Tullahoma | | | |
Columbia | Elizabethton | Johnson City | Madisonville | Pulaski | Winchester | | | |
Cookeville | Fayetteville | Kingsport | Maryville | Savannah | | | | |
Cordova | Fayetteville | Lafayette | Millington | Sevierville | | | | |
| | | | | | | | |
TEXAS | | | |
Austin (2) | Conroe | Missouri City | Pasadena | San Antonio | Texarkana | | | |
Bastrop | Longview | New Braunfels | Pearland | Temple | | | | |
| | | | | | | | |
VIRGINIA | | | |
Abingdon | | | | | | | | |
1st FRANKLIN FINANCIAL CORPORATION
MISSION STATEMENT:
"Serving communities by offering opportunities to individuals and families through financial services.”
CORE VALUES:
Ø Team: Be Trustworthy
Ø Impact: Be Intentional
Ø People: Be Exceptional
Ø Service: Be Humble
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-237643 and 333-237642 on Form S-1 of our reports dated MarchApril 3111, 20222023, relating to the consolidated financial statements and financial statement schedule of 1st Franklin Financial Corporation appearing in this Annual Report on Form 10-K of 1st Franklin Financial Corporation for the year ended December 31, 2021.
/s/2022.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 31, 2022
& Touche LLP
April 11, 2023
Exhibit 31.1
RULE 13a-14(a)//15d-14(a)
|
CERTIFICATIONS
|
I, Virginia C. Herring, certify that:
1. |
I, Virginia C. Herring, certify that:
1.I have reviewed this annual report on Form 10-K of 1st1st Franklin Financial Corporation;
2.;
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.;
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.;
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):
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);
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);
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); 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.; 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):
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); 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 31, 2022 Date: April 11, 2023 | /s//s/ Virginia C. Herring
|
| Virginia C. Herring, President and
Chief Executive Officer
|
Exhibit 31.2
RULE 13a-14(a)//15d-14(a)
|
CERTIFICATIONS
|
I, Brian Gyomory, certify that:
1. |
I, Brian J. Gyomory, certify that:
1.I have reviewed this annual report on Form 10-K of 1st1st Franklin Financial Corporation;
2.;
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.;
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.;
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):
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);
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);
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); 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.; 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):
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); 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 31, 2022 Date: April 11, 2023 | /s//s/ Brian J. Gyomory
Brian |
| Brian J. Gyomory
, Executive Vice President and
|
Exhibit 32.1
|
|
|
1st FRANKLIN FINANCIAL CORPORATION
|
135 EAST TUGALO STREET
|
P.O. BOX 880
|
TOCCOA, GEORGIA 30577
|
TELEPHONE: (706) 886-7571
|
|
|
March 31, 2022
|
|
|
Re:Certification Pursuant to § |
Exhibit 32.1
1st FRANKLIN FINANCIAL CORPORATION
135 EAST TUGALO STREET
P.O. BOX 880
TOCCOA, GEORGIA 30577
TELEPHONE: (706) 886-7571
April 11, 2023
Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
|
Ladies and Gentlemen:
|
|
Pursuant to 18 U.S.C. |
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 1st1st Franklin Financial Corporation (the ""Company"") for the year ended December 31, 20212022, 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): |
(1)The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
|
(2); 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//s/ Virginia C. Herring
|
| Name:Name: Virginia C. Herring
| |
Title: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 31, 2022
|
|
|
Re:Certification Pursuant to § |
Exhibit 32.2
1st FRANKLIN FINANCIAL CORPORATION
135 EAST TUGALO STREET
P.O. BOX 880
TOCCOA, GEORGIA 30577
TELEPHONE: (706) 886-7571
April 11, 2023
Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
|
Ladies and Gentlemen:
|
|
Pursuant to 18 U.S.C. |
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 1st1st Franklin Financial Corporation (the ""Company"") for the year ended December 31, 20212022, 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): |
(1)The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
|
(2); 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.
| | | | | |
|
|
|
| Name: | |
Title: Title: Executive Vice President and
| |
Chief Financial Officer
|
|
|
|
|
Chief Financial Officer
|
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