UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

OR

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Commission File Number 2-27985

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1st FRANKLIN FINANCIAL CORPORATION

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PART I. FINANCIAL INFORMATION

The information contained under the following captions in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 20222023 is incorporated by reference herein. See Exhibit 13.

Condensed Consolidated Statements of Financial Position (Unaudited): September 30, 20222023 and December 31, 20212022

Condensed Consolidated Statements of Income and Retained Earnings (Unaudited): Three and Nine Months Ended September 30, 20222023 and September 30, 20212022

Condensed Consolidated Statements of Comprehensive Income (Unaudited): Three and Nine Months Ended September 30, 20222023 and September 30, 20212022

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited): Three and Nine Months Ended September 30, 20222023 and September 30, 20212022

Condensed Consolidated Statements of Cash Flows (Unaudited): Nine Months Ended September 30, 20222023 and September 30, 20212022

Notes to Unaudited Condensed Consolidated Financial Statements

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations:

The information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 20222023 is incorporated by reference herein. See Exhibit 13.

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk:

The information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 20222023 is incorporated by reference herein. See Exhibit 13.

ITEM 4.    Controls and Procedures:

We maintain a set of disclosure controls and procedures, as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), designed to ensure that information required to be disclosed by the Company in reports that it files or submits under 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. An evaluation was carried out as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that, as of September 30, 2022,2023, the Company’s disclosure controls and procedures were effective. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 20222023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.    Legal Proceedings:

SIGNATURES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

Certain information in this discussion and other statements contained in this Quarterly Report are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are all statements other than those of historical fact. The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein, which involve known and unknown risks and uncertainties. Possible factors that could cause actual future results to differ from expectations include, but are not limited to, adverse general economic conditions, including changes in employment rates or in the interest rate environment, unexpected reductions in the size or collectability of our loan portfolio, unexpected increases in our allowance for credit losses, reduced sales or increased redemptions of our securities, unavailability of borrowings under our credit facility, federal and state regulatory changes affecting consumer finance companies, unfavorable outcomes in legal proceedings and adverse or unforeseen developments in any of the matters described under “Risk Factors” in our 20212022 Annual Report, as well as other factors referenced elsewhere in our filings with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to update any forward-looking statements, except as required by law.

We are engaged in the consumer finance business, primarily in making consumer installment loans to individuals. OtherOur other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage real estate loans on real estate. All of our loans are at fixed rates, and contain fixed terms and fixed payments. 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. The Company and its operations are guided by a strategic plan which includes planned growth through strategic geographic expansion of our branch office network. As of September 30, 2022,2023, the Company’s business was operated through a network of 336118 branch offices locatedin Georgia, 47 in Alabama, Georgia, Kentucky, Louisiana, Mississippi,43 in South Carolina, 40 in Mississippi, 39 in Tennessee, 37 in Louisiana, 18 in Texas, 13 in Kentucky, and Texas.2 in Virginia.

WeIn connection with our business, we also offer optional single premium credit insurance coverageproducts to our customers when making a loan. Such coverageproducts 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 that any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time. 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 policiesproducts 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 ofby this non-affiliated insurance company.

Financial Condition:

The Company’s total assets increased $28.1$24.5 million (2%) to $1,146.3$1,187.4 million at September 30, 20222023 compared to $1,118.2$1,162.9 million at December 31, 2021.2022. The increase was primarily due to increasesan increase in our net loan portfolio and other assets that was partially offset by a decrease in cash and cash equivalents, restricted cash, the net loan portfolio and our other assets. A decrease in investment securities partially offset a portion of the overall increase in total assets.equivalents.

Cash and cash equivalents (excluding restricted cash) increased $13.6decreased $29.6 million (41%(60%) at September 30, 20222023 while restricted cash decreased $1.3 million (8%) compared to prior year-end. Funds generated from operations and an increase in sales of the Company’s senior debt securities were responsible for the increase.

Gross loan originations increased $28.0 million for the three-month period ended September 30, 2023, compared to the same period last year. For the nine-month period ended September 30, 2023 originations were down $26.8 million compared to the same period last year. Our net loan portfolio increased $58.2 million (8%)5% to $809.1$842.3 million at September 30, 20222023 compared to $750.8$800.3 million at December 31, 2021.2022. Included in our net loan portfolio is our allowance for credit losses which reflects estimated current expected credit losses in the loan portfolio as of the date of the statement of financial position. Management increaseddecreased the allowance $5.9$4.2 million to $73.2$71.0 million asat September 30, 2022,2023, compared to $67.3$75.2 million at December 31, 2021.2022. See Note 2, “Allowance for Credit Losses,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for further discussion of the Company’s allowance for credit losses. Management believes the allowance for credit losses is adequate to cover expected losses inherent in the portfolio as of September 30, 2022;2023; however, unexpected changes in trends or deterioration in economic conditions could result in additional changes in the allowance. Any change in our allowance for credit losses could have a material impact on our results of operations or financial condition in the future.

The Company’s investment securities portfolio decreased $52.0$3.6 million (20%(2%) compared to the prior year-end. The majority of the decrease was due to a decrease in fair market values. Redemptions due to call options and maturities on certain securities also contributed to the decrease in the portfolio. 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 September 30, 20222023 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.

Operating lease right-of-use assets increased $3.1$3.6 million (9%) atin the nine months ended September 30, 2022 compared to December 31, 20212023 mainly due to an increasesincrease in the number branches in the Company's network.

Other assets remained flat. Increases inincreased by $13.4 million (34%) compared to the prior year-end. Capitalization of software development costs of $5.3 million and prepaid expenses and refundable income taxesof $4.1 million were offset by depreciation of fixed assets and a reductionthe primary drivers of the amount receivable from non-affiliated insurance companies.increase.

The Company's senior debt is comprised of a line of credit from a bank 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 September 30, 20222023 was $833.2$880.9 million compared to $746.2$833.4 million at December 31, 2021,2022, representing an increase of $86.9$47.5 million (12%(6%). TheThere was an increase of $18.9$41.8 million (62%) in senior demand notes and $71.6 million in commercial paper, together with operating cash flows, were used to reduce the outstanding balance on the bank line of credit and an increase of $22.3 million (4%) in commercial paper. Increases were partially offset by $2.9 million. Subordinated debentures decreased $0.6decreases of $15.7 million (14%) in 2022.senior demand notes and $0.8 million (3%) in subordinated debentures.

Operating lease liabilities increased $3.3$3.7 million (9%(10%) while accrued expenses and other liabilities decreased $14.9$12.4 million (37%(40%) to $24.9$18.8 million at September 30, 20222023 compared to $39.8$31.2 million at December 31, 2021.2022. Payment of $18.0$10.3 million for 20212022 incentive bonuses in February 20222023 was the primary factor causing the decrease in accrued expenses and other liabilities. Increases in accrued health insurance claims and rent expense offset a portion of the decrease.

During the three-three and nine-month periodsnine months ended September 30, 2022,2023, total revenues were $87.3$89.9 million and $253.1$259.5 million, respectively, compared to $77.1$87.3 million and $223.1$253.1 million during the same periods a year ago. Growth in the Company’s loan portfolio since the prior year comparable periods resulted in higher interest and finance charge revenue. Higher insurance revenues due to anThe increase in customers opting for credit insurance products at loan origination also contributed to the overall increase in total revenues during the comparable periods.

Net Interest Income

Net interest income represents the difference between income on earning assets (loans and investments) and the cost of funds on interest bearing liabilities. Our net interest income is affected by the size and mix of our loan and investment portfolios as well as the spread between interest and finance charges earned on the respective assets and interest incurred on our debt. Net interest income increased $7.9decreased $1.9 million (14%) and $22.5$3.3 million (14%) during the three-three and nine-month periodsnine months ended September 30, 2022,2023, respectively, compared to the same periods in 2021.2022. An increase in our average daily net principal loan balances of $115.7$23.9 million (15%(3%) during the nine-monthsnine months just ended compared to the same period a year ago resulted in higher interest and finance charges earned during the current year.was offset by increased borrowing costs.

Average daily borrowings increased $111.7$9.7 million (17%(1%) and $13.3 million (2%) for the three months ended September 30, 2023 and September 30, 2022, respectively. For the nine-month period ended September 30, 2023 average daily borrowings increased $63.9 million (8%), compared to the same period in 2022. The Company's average borrowing rates were 4.75% and 3.39% during the nine-month period ended September 30, 2023, and 2022, respectively. Interest expense increased $4.6 million (64%) and $10.4 million (52%) during the three and nine months just ended, respectively, compared to the same period in 2021. The Company's average borrowing rates were 3.39% and 3.37% during the nine-month periods ended September 30, 2022, and 2021, respectively. Interest expense increased $1.2 million (20%) and $3.0 million (17%) during the three- and nine-month periods just ended compared to the same period a year ago due to the higher average daily borrowings.borrowings and higher cost of funds.

Management projects that, based on historical results and current estimates, average net receivables will grow during the remainder of 2022,2023, and net interest income is expected to increase accordingly. However, a decrease in net receivables or an increase in interest rates on outstanding borrowings could negatively impact our net interest income.

Insurance IncomeRevenue

Insurance revenues were $1.1$0.3 million (8%(2%) higherand $1.0 million (2%) lower during the three-month periodthree and nine months ended September 30, 2022,2023, respectively, compared to September 30, 2021. During the nine-month comparablesame periods insurance revenues were $3.6 million (9%) higher during the period just ended mainly due to higher premiums written.a year ago. Insurance claims and expenses increased $0.4decreased $0.7 million (11%(16%) duringfor the three-month period just ended; however,ended and there was an increasea decrease of $1.5$1.4 million (13%(10%) during the nine-month period just ended, as compared to the same periods a year ago.

Other revenue increased $0.2 million (9%) for the three months ended September 30, 2023, compared to the same period last year. For the nine months ended September 30, 2023, other revenue increased $0.3 million (5%) compared to the same period a year ago. The increase in claims and expenses during the nine-month period ended September 30, 2022 was primarily the result of changes in the actuarial estimate of losses that resulted in an adjustment of $1.0 million to the Company's reserve for Accident and Health claims.

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 provision for credit losses increased $15.2decreased $10.1 million (157%(41%) and $33.2 million (139%) duringfor the three- and nine-month periodsthree-month period ended September 30, 20222023, compared to September 30, 2022. For the nine-month period ended September 30, 2023 the provision for credit losses increased $5.2 million (9%) compared to the same period last year. Net charge-offs increased $0.1 million (0%) and $15.4 million (30%) to $20.1 million and $66.5 million during the three and nine months ended September 30, 2023, respectively, compared to the same periods last year. Net charge-offs were $20.0 million and $10.0 million during the three-month periods ended September 30, 2022, and 2021, respectively. Net charge-offs were $51.1 million and $26.9 million during the nine-month periods ended September 30, 2022, and 2021, respectively.

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. Management attributes the credit loss increase to inflation driven increases to the cost goods and services consumed by borrowers in the segment. The cyber-attack on the Company impacted its ability to service past due accounts in accordance with standard business practices, resulting higher delinquency.

Delinquency, bankruptcy, non-performing loans, and debt restructurings are returning to levels experienced prior to the third quarter of 2022. The percent of the gross loan portfolio greater than 30 days delinquent is 7.73%7.71% at September 30, 20222023, compared to 6.04%9.44% at December 31, 2021.2022. The ratio of bankrupt accounts to the gross loan portfolio balance was 1.51% at September 30, 20222023 and 1.27%1.56% at December 31, 2021, respectively.2022.

Management believes that the allowance for credit losses, as calculatedestimated in accordance with the

Company’s current expected credit loss (“CECL”) methodology, is appropriate to cover expected credit losses on loans at September 30, 2022;2023; 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.

During the quarter ended September 30, 2023, the Company selected a new technique to estimate the allowance for credit losses. For further information regarding the change in technique, refer to the Critical Accounting Policies section below. In addition, please see Note 2, "Loans" in the accompanying "Notes to Unaudited Condensed Consolidated Financial Statements" for further discussion of estimated credit losses. Management may determine it is appropriate to increase or decrease the allowance for expected credit losses in future periods,period, or actual losses in any period, either of which events could have a material impact on our results of operations in the future.

Other Operating Expenses

Other operating expenses increased $1.6$1.4 million (3%) and $7.2increased $5.7 million (5%(4%) during the three-three and nine-month periodsnine months ended September 30, 2022,2023, respectively, compared to the same periods a year ago. Other operating expenses encompass personnel expense, occupancy expense and miscellaneous other expenses.

Personnel expense increased $0.6 million (2%) and decreased $0.5$2.1 million (2%) during the three-month period compared to an increase of $0.4 million (0%) during the nine-month periodthree and nine months ended September 30, 2022,2023, respectively, compared to the same periods in 2021. A lower bonus accrual during the three-month period offset increased base salaries and medical expenses.2022. Inflation-based salary adjustments for certain team members and an increase in claims associated with the Company’s self-insured medical program were offset by the lower bonus accrual and capitalization of employee salaries attributable to software development for the three and nine-month period.periods.

Occupancy expenses increased $0.2 million (4%) during the three-month period and increased $0.2$1.4 million (2%(11%) during the nine-month period justthree and nine months ended September 30, 2023, respectively, compared to the same periods a year ago. Lower depreciationIncreases in monthly rent expenses, maintenance expenses, and amortization was offset by increased rent and maintenancenew branch openings attributed to the increase in occupancy expenses.

Other expenses increased $1.8$0.7 million (14%(4%) and $6.6$6.4 million (18%(15%) during the three-three and nine-month periodsnine months ended September 30, 2022,2023, respectively, compared to the same periods in 2021.2022. Higher travel expenses related to the Company’s return to an in-person annual managers meeting (which had been held via remote communication the prior year due to the COVID-19 pandemic), marketing expenses, postage expenses, andfees for

Income Taxes

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

The possibility of market fluctuations in market interest rates during the remainder of the year could have an impact on our net interest margin. Please refer to the market risk analysis discussion contained in our Annual Report as of and for the year ended December 31, 20212022 for a more detailed analysis of our market risk exposure. There have been no material changes to our market risk during the three-monthsnine months ended September 30, 2022.2023.

As of September 30, 20222023 and December 31, 2021,2022, the Company had $46.7$20.0 million and $33.1$49.7 million, respectively, invested in cash and cash equivalents (excluding restricted cash), the majority of which was held by the insurance subsidiaries.

The Company’s investments in marketable securities can be readily converted into cash, if necessary. State insurance regulations limit the use an insurance company can make of its assets. Dividend payments to a parent company by its wholly-owned 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 a parent company by its wholly-owned property and casualty insurance subsidiary are subject to annual limitations and are restricted to the lesser of 10% of policyholders’ surplus or the net statutory income before recognizing realized investment gains of the individual insurance subsidiary during the prior two years.

At December 31, 2021,2022, 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 during 2022,2023, without prior approval of the Georgia Insurance Commissioner, is approximately $40.8$46.8 million. On November 30, 2021, Management submitted a requestThe Company requested and received approval from 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 Frandisco Life Insurance Company and $95.0$105.0 million from Frandisco Property and Casualty Insurance Company. The request was approved by the Georgia Insurance Department on January 20, 2022Company for transactions on or before December 31, 2022.2023. Effective February 1, 2022,March 31, 2023, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company amended their previous $60.0 million unsecured revolving lines of credit available to the Company extendingto $105.0 million and $75.0 million, respectively and extended the term of each respective line of credit to December 31, 20252026. At September 30, 2023, an advance of $30 million and defining theaccrued interest rateof $0.4 million on outstanding balances as the prime rate of interest as published in the Wall Street Journal. No amounts are currentlythis advance was outstanding on these lines.the Parent's credit line with Frandisco Property and Casualty Insurance Company.

Most of the Company’s liquidity requirements are financed through the collection of receivables and through the sale of short-term and long-term debt securities. The Company’s continued liquidity is therefore dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public. Overall, debt securities increased $89.8$5.7 million (13%(1%) between December 31, 20212022 and September 30, 2022.2023. In addition to its receivables and securities sales, the Company has an external

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

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.

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry. The Company’s critical accounting and reporting policies include the allowance for credit losses, revenue recognition and insurance claims reserves.

Allowance for Credit Losses

The Company adopted Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments 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.

Revenue Recognition

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

Precomputed finance charges are included in the gross amount of certain direct cash loans and sales finance contracts and certain real estate loans.contracts. These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method. Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis. Income is not accrued on any loan that is more than 60 days past due.

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

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

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

Insurance Claims Reserves

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

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

Recent Accounting Pronouncements:

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

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

1st FRANKLIN FINANCIAL CORPORATION

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

-NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-