1st Franklin Financial Corp - 10-K

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 1st Franklin, before deciding whether to invest in the Company's securities. 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 financial 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.

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 individually such as unemployment, major medical expenses, bankruptcy, divorce or death, could adversely affect 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 statement of financial position 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.

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 has been, and in the future may be, subject to disruptions to 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, maintain the security and availability of our data, or operate our business 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 or harm our reputation.

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, investors and employees. We also 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") 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, are potentially vulnerable to unauthorized access, damage or interruption from a variety of threats, including cybersecurity breaches, computer viruses, 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 cyberattacks, including social engineering attacks, phishing attacks and denial-of-service attacks, as well as ransomware cyberattacks where hackers have requested “ransom” payments in exchange for not disclosing stolen electronic information or for unlocking or not disabling our computer or other information systems. Any disruption to the safety, integrity or accessibility of such information or systems could impact our ability to operate our business.

We continue to enhance our data security infrastructure 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 all 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. Such cyberattacks 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 future cyberattacks 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 cyberattacks or data security breaches, and 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 to otherwise protect us from liabilities or damages with respect to a particular claim in connection with a cyberattack, 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.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations.

As further described below in Part II, Item 9A. “Controls and Procedures,” management has identified material weaknesses in the Company’s internal control over financial reporting relating to the conversion of the Company’s loan servicing system. During this conversion process, certain transaction codes were not properly mapped to the Company’s general ledger accounts, which led to incomplete or inaccurate system-generated financial data. As a result, the Company was unable to provide sufficient audit evidence to support the completeness and accuracy of certain general ledger balances without performing extensive manual reconciliation procedures. The material weaknesses did not result in any identified material misstatements to our financial statements. As a result, there were no changes to any of our previously-released financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. Although we have initiated a comprehensive remediation plan to address the identified material weaknesses, we cannot assure you that these initiatives will ultimately have the intended effects or that we will implement and maintain adequate controls over our financial processes and reporting in the future in order to avoid additional material weaknesses or control deficiencies.

If we are unable to successfully remediate our existing or any future material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be negatively impacted, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and investors may lose confidence in our financial reporting. Moreover, ineffective controls could significantly hinder our ability to prevent fraud. The identified material weaknesses in our internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded through appropriate testing that these controls operate effectively. For further information, see Part II, Item 9A. “Controls and Procedures.”

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 st 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 1 st 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.

General Risk Factors

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. Widespread health emergencies can disrupt our operations through their impact on our employees, investors, customers and the communities in which we operate. Such impacts 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, which in turn may adversely affect our business, financial condition or 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 lending operations continue to be subject to significant focus by federal, state and local government authorities, and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on certain lending practices by companies in the consumer finance industry; sometimes referred to as "predatory lending" practices. These requirements and restrictions, among other things:

• require that we obtain and maintain certain licenses and qualifications;

• limit the interest rates, fees and other charges that we are allowed to charge;

• require specified disclosures to borrowers;

• limit or prescribe other terms of our loans;

• govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and

• define our rights to repossess and sell collateral.

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. The Dodd-Frank Act established the Consumer Financial Protection Bureau 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. These and other applicable 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 other 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 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 or proceedings, 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 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 affect our business, results of operations and financial condition.

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and accompanying notes in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The discussion of the components of our results of operations focuses on financial trends and events occurring during 2025 and 2024.

Additional information related to financial trends between 2024 and 2023 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2024, filed with the SEC on April 30, 2025, which information under that caption is incorporated herein by this reference. Historical results of operations are not necessarily predictive of future results.

OVERVIEW:

The Company is a privately-held Georgia corporation headquartered in Toccoa, Georgia. 1FFC has been engaged in the consumer finance business since 1941. Our operations focus primarily on making consumer loans to individuals for personal or family needs, in relatively small amounts with maturities of approximately 2 years. The Company historically extended real estate loans. Beginning in 2024, 1FFC discontinued the origination of real estate loans, and the portfolio is currently in runoff. The Company also purchases sales finance contracts from various dealers.

All of 1FFC's loans are at fixed rates and contain fixed terms and fixed payments. The Company operates branch offices in ten southern states and had a total of 374 branch locations as of December 31, 2025. The Company and its operations are guided by a strategic plan which includes planned growth through strategic expansion of our branch office network. The majority of our revenues are derived from interest and finance charges earned on loans outstanding. Additional revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.

FACTORS IMPACTING RESULTS OF OPERATIONS:

1FFC's results of operations are affected by various factors that influence our revenues and costs, including the following:

Seasonality:

The Company's loan volume follows seasonal trends. The highest loan demand generally occurs during the second, third and fourth quarters, which we believe is primarily due to customers borrowing money for vacations and holiday spending. Loan demand is generally lowest and loan repayment highest during the first quarter, which we believe is primarily driven by the timing of income tax refunds.

Changes in quarterly growth or liquidation could result in larger allowance for credit loss releases in periods of portfolio liquidation, and larger provisions for credit losses in periods of portfolio growth. Consequently, 1FFC experiences seasonal fluctuations in our operating results. However, due to our reliance on the continued income stream of most of our loan customers, our ability to continue the profitable operation of our business depends to a large extent on the continued employment of our customers and their ability to meet their obligations as they become due. Therefore, changes in macroeconomic factors, including inflation, higher interest rates, and increases in unemployment, may have a material adverse effect on our profitability and may impact our typical seasonal trends for loan volume.

Growth in Loan Portfolio:

The Company's financial performance continues to be dependent in large part upon the growth in its loan portfolio. Portfolio growth has been driven by expanding 1FFC's geographic footprint and growing our loan portfolios within existing branches. In addition, an increased focus on mailing convenience checks has also contributed to portfolio growth in recent years.

Almost all loans, regardless of origination channel, are serviced through our branches, which allows us to build and maintain relationships with our customers throughout the life of each loan. We believe this relationship-driven model provides greater visibility into potential payment challenges, helps mitigate credit risk, and allows us to better understand and respond to our customers' evolving borrowing needs. 1FFC intends to continue capitalizing on opportunities in the marketplace to drive growth in the loan portfolio, increase revenue, and enhance the profitability of existing branches. Additionally, the Company plans to open new branches within our current geographic footprint and strategically expand operations into new states that we believe align well with our products, services, and operating model.

Allowance for Credit Losses:

Operating results are significantly influenced by the credit quality of the loan portfolio. The Company utilizes a Probability of Default (“PD”) / Loss Given Default (“LGD”) model to estimate the allowance for credit losses whereby estimated loss is equal to the product of PD and LGD. The allowance for credit losses model estimates instances of loss and the average severity of losses using the characteristics of the loan portfolio, along with incorporating a reasonable and supportable forecast which is utilized to support the adjustments to historical loss experience of loans with similar credit risk.

The allowance for credit losses recorded in the balance sheet reflects the Company’s best estimate of expected credit losses. See Note 2, Loans and Allowance for Credit Losses, in the accompanying Notes to Consolidated Financial Statements for further discussion.

Interest Rates:

1FFC's cost of funds is influenced by changes in interest rates, as certain of our liabilities bear interest at variable rates. Volatility in interest rates generally has more impact on income earned from investments and the Company's borrowing costs than on interest income earned on loans. All of 1FFC's loans are at fixed rates and, therefore, are not impacted by changes in the interest rate environment.

Operating Expenses:

The Company's financial results are significantly impacted by the costs associated with our operations and corporate office functions. These expenses include personnel-related costs as well as the infrastructure and administrative support necessary to manage our branch network, service the loan portfolio, oversee compliance and risk management, and support corporate governance and strategic initiatives.

COMPONENTS OF RESULTS OF OPERATIONS:

Interest Income:

Interest income is a principal component of the Company’s operating performance and resulting net income. It primarily represents income on earning assets and is affected by the size and mix of the loan and investment portfolios, as well as the related interest and finance charges.

Interest income on loans is recognized as revenue on an accrual basis using the effective interest method. Loans are generally placed on non-accrual status after two missed payments. For loans placed on non-accrual status, the Company ceases accruing interest and finance charges and previously accrued interest is reversed against interest income. 1FFC generally charges off a loan when a full contractual payment has not been received in the preceding 180 days.

Most states permit certain fees in connection with lending activities, such as loan origination fees and maintenance fees. Loan fees are deferred and amortized to interest income over the contractual life of the loan using methods that approximate the effective interest method. Depending on applicable state law, such fees may or may not be refundable to the customer in the event of an early payoff, depending on state law. If a loan liquidates before amortization is complete, the Company applies any unamortized fees and origination costs to interest income at the date of liquidation. The Company recognizes late charges and prepayment penalties as revenue when received.

Interest Expense:

Interest expense represents the cost of funds associated with interest-bearing liabilities, with debt securities comprising the majority of these obligations. Key factors affecting our interest expense include 1FFC's average outstanding debt as well as the general interest rate environment.

Provision for Credit Losses:

The Company’s provision for credit losses is a charge against earnings in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover expected losses in our loan portfolio.

Determining a proper allowance for credit losses is a critical accounting estimate which involves management’s judgment with respect to certain relevant factors, such as historical and expected loss trends, unemployment rates, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions. Changes in the provision are intended to ensure that the allowance for credit losses reported on the Consolidated Statements of Financial Position appropriately reflects expected credit losses over the remaining maturity of the portfolio.

While management believes its approach for determining the allowance for credit losses adequately considers the potential factors that could potentially result in credit losses, to the extent actual outcomes are worse than management’s estimates, additional provision for credit losses could be required which could adversely affect our earnings or financial position in future periods. See Note 2, Loans and Allowance for Credit Losses , in the accompanying Notes to Consolidated Financial Statements for further discussion.

Net Insurance Income :

The Company offers certain optional credit insurance products to customers when closing a loan. Net insurance income primarily represents earned premiums from these products, net of related insurance claims and associated expenses. In addition, net insurance income includes earned premiums and direct costs related to

non-file insurance that 1FFC purchases to protect us from credit losses, where following an event of default, we are unable to take possession of personal property collateral because our security interest is not perfected.

Other Revenue:

Other revenue consists mainly of earnings from the sale of auto club memberships and fees charges to customers for non-sufficient funds.

Operating Expenses:

The cost of operations impact 1FFC's financial results, which are comprised of personnel expenses, occupancy expenses, and other expenses.

Personnel expenses represent the largest component of our operating costs and consist largely of salaries and wages, overtime, contract labor, incentives, benefits, medical claims, and related payroll taxes associated with all of our operations.

Occupancy expenses primarily include the cost of leasing our facilities, as well as related expenses such as utilities, maintenance, and depreciation and amortization expenses.

Other expenses primarily include advertising and marketing costs, legal and audit fees, consulting, postage, computer and IT expenses, collection costs and credit bureau dues, conversion expenses, training and development, bank service charges, and the amortization of loans purchased at a premium.

Income Taxes:

The Company is an S corporation for income tax reporting purposes. Taxable income or loss of an S corporation is passed through to the shareholders of the Company. Accordingly, deferred income tax assets and liabilities have been eliminated and no provision for current and deferred income taxes were made by the Company except for amounts attributable to state income taxes for certain states which do not recognize S corporation status for income tax reporting purposes. Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company's subsidiaries as they are not permitted to be treated as S Corporations. The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences.

RESULTS OF OPERATIONS:

Net loans are carried on an amortized cost basis which includes the remaining principal balance, accrued interest, and net unamortized deferred fees and costs. The following table summarizes our results of operations, both in dollars and as a percentage of average net loans (in thousands):

Year Ended December 31,

Amount

% of Average Net Loans

Amount

% of Average Net Loans

Interest income

Interest expense

Provision for credit losses

Net insurance income

Other revenue

Personnel

Occupancy

Other

Total operating expenses

Income before income taxes

Income taxes

Net income / (loss)

Information explaining the changes in our results of operations from year-to-year is provided in the following pages.

Comparison of December 31, 2025 Versus December 31, 2024

The following table describes the changes in loans by loan class (in thousands, except for %):

Loans Outstanding for the Year Ended December 31,

$ Change

% Change

Direct cash loans

Real estate loans

Sales finance contracts

Total loans outstanding

Comparison of the Year Ended December 31, 2025, Versus the Year Ended December 31, 2024

Net Income (Loss):

Net income increased $20.3 million (362%) to $14.7 million in 2025, compared to a net loss of $(5.6) million in 2024. The change in net income is explained in greater detail below.

Interest Income:

Interest income increased $52.2 million (17%) to $359.5 million in 2025, from $307.2 million in 2024. The increase in interest income was primarily due to growth in the average net loans outstanding in 2025 compared to 2024.

Average net loans outstanding increased $95.3 million (11%) to $959.3 million at December 31, 2025, compared to $864.0 million at December 31, 2024.

The average annual yield on loans we make (the percentage of finance charges earned to average net outstanding balance) has been as follows:

Year Ended December 31,

Change

Direct cash loans

Real estate loans

Sales finance contracts

Gross loan originations increased $321.7 million (24%) to $1.7 billion in 2025, from $1.3 billion in 2024. Origination volume increased during 2025 compared to the prior year due to increases in direct cash loans, an increased focus in convenience checks, and the Company’s expansion into a new state, which contributed to additional lending opportunities. 1FFC's net loan portfolio increased $136.3 million (15%) to $1.0 billion at December 31, 2025 compared to $911.7 million as of December, 31 2024. The following table represents the volume of loans originated or acquired (in thousands):

Year Ended December 31,

$ Change

% Change

Direct cash loans

Real estate loans

Sales finance contracts

Net bulk purchases

Total Loans Originated / Acquired

The following table shows the sources of our earned finance charges (in thousands):

Year Ended December 31,

$ Change

% Change

Direct Cash Loans

Real Estate Loans

Sales Finance Contracts

Total Finance Charges

Interest Expense:

Interest expense increased $3.1 million (6%) to $58.2 million in 2025, from $55.1 million in 2024. 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 debt, which both resulted in higher interest cost. Average borrowings were $1,084.1 million during 2025 compared to $893.5 million during 2024. The increase was partially offset by lower interest rates on the Company's credit line in 2025 compared to 2024.

Provision for Credit Losses:

The Company’s provision for credit losses increased $21.3 million (25%) to $104.6 million in 2025, from $83.4 million in 2024. The increase was primarily due to an increase in net charge-offs of $20.3 million (25%) to $101.7 million in 2025, from $81.4 million in 2024. The increase in net-charge-offs was primarily due to growth in the loan portfolio in 2025 compared to 2024.

Delinquency Performance:

The Company considers the loan portfolio to be a homogenous loan pool for purposes of calculating the allowance for credit losses due to similar risk characteristics, pricing, and term, among other factors. 1FFC also evaluates credit quality based on the aging status of the loan and by payment activity. Accounts are classified in delinquency categories of 30-59 days (1 installment), 60-89 days (2 installments), or 90 or more days (3+

installments) past due. The Company categorizes its loans into risk categories based on relevant information about the ability of borrowers to service their debt. 1FFC analyzes the loan portfolio by credit risk and updates the rating periodically based on current credit information.

The percent of the loan portfolio greater than 30 days delinquent is 7.00% at December 31, 2025 compared to 8.43% at December 31, 2024. The ratio of bankrupt accounts to the net principal balance was 1.30% and 1.38% at December 31, 2025 and December 31, 2024, respectively.

An age analysis of balances past due, segregated by loan class, as of December 31, 2025 and 2024 is as follows (in thousands):

December 31, 2025

30-59 Days

Past Due

60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

Direct Cash Loans

Real Estate Loans

Sales Finance Contracts

Total

December 31, 2024

30-59 Days

Past Due

60-89 Days

Past Due

90 Days or

More

Past Due

Total

Past Due

Loans

Direct Cash Loans

Real Estate Loans

Sales Finance Contracts

Total

Net Insurance Income:

Net insurance income (insurance revenues less claims and expenses) increased $4.9 million (10%) to $52.5 million in 2025, from $47.6 million in 2024.

The following table summarizes the components of insurance income net (in thousands):

Year Ended December 31,

$ Change

% Change

Earned premiums and commissions

Insurance claims and expenses

Net insurance income

Earned premiums and commissions increased $5.2 million during 2025 and insurance claims and expenses increased $0.2 million during 2025 compared to 2024. These increases were driven by growth in the direct cash loan portfolio and the corresponding rise in optional insurance products written. In addition, the increase in earned premiums and commissions reflects the receipt of 1FFC's business interruption insurance claim of $3.0 million in 2025 related to the 2022 cyber-attack.

Other Revenue:

Other revenue increased $2.1 million (31%) to $9.1 million in 2025, from $7.0 million in 2024. This was primarily driven by an increase in sales of our automobile club membership products of $1.5 million in 2025 compared to 2024, which resulted from growth in the loan portfolio.

Operating Expenses :

The Company's operating expenses increased $14.2 million (6%) to $237.4 million in 2025 compared to $223.2 million in 2024.

Personnel expenses represent the largest component of our operating costs, which increased $18.0 million (14%) to $142.6 million in 2025, from $124.6 million in 2024. An increase in the number of employees, higher bonus accrual, higher medical claims, higher payroll taxes, and salary adjustments were the primary reasons for the increase.

Occupancy expenses increased $1.8 million (8%) to $24.0 million in 2025, from $22.2 million in 2024. Increases in depreciation and amortization expense, rent expense, and new branch openings attributed to the increase in occupancy expenses partially offset by a decrease in maintenance and utilities expense.

Other expenses decreased $5.5 million (7%) to $70.8 million in 2025, from $76.3 million in 2024. Lower advertising, computer, and postage expenses were partially offset by increases in information technology consulting expenses, conversion expenses, stationary and supplies, and professional fees during 2025 compared to 2024.

Income Taxes:

Income taxes increased $0.5 million (9%) to $6.2 million in 2025, from $5.7 million in 2024. The increase was primarily due to a $20.8 million increase in income before income taxes compared to 2024.

Effective income tax rates for the years ended December 31, 2025 and 2024 were 29.8% and 6,268.6%, respectively. The effective income tax rate differs from the statutory rate due to changes in the proportion of income earned by the Company's insurance subsidiaries and the S Corporation tax effect of the 1FFC parent company.

LIQUIDITY AND CAPITAL RESOURCES:

Liquidity is the ability of the Company to meet its ongoing financial obligations, either through converting assets into cash or cash equivalents without significant loss or through raising additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, our primary goal is to maintain a sufficient level of liquidity in all expected economic environments.

Sources of Liquidity:

An important part of 1FFC's liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis. Liquidity is also available from cash and cash equivalents.

As of December 31, 2025 and December 31, 2024, the Company had $18.2 million and $35.9 million, respectively, invested in cash and short-term investments readily convertible into cash with original maturities of three months or less. The Company uses cash reserves to fund its operations, including providing funds for any increase in redemptions of debt securities by investors which may occur.

The Company's investment securities portfolio increased $19.4 million (8%) to $275.3 million at December 31, 2025 compared to $255.9 million at December 31, 2024. The portfolio consists primarily of invested surplus funds generated by the Company's insurance subsidiaries, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company (collectively, "the Frandiscos"). Management maintains what it believes to be a conservative approach when formulating its investment strategy. The Company does not participate in hedging programs, interest rate swaps or other similar activities. The investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds, and various municipal bonds. See Note 3, Investment Securities, in the accompanying Notes to Consolidated Financial Statements for further discussion.

As of December 31, 2025 and 2024, 99% and 99%, respectively, of the Company's cash and cash equivalents and investment securities were maintained by the Company's insurance subsidiaries. Georgia state insurance

regulations limit the use an insurance company can make of its assets. See Note 6, Insurance Subsidiary Restrictions, in the accompanying Notes to Consolidated Financial Statements for further discussion.

Another primary source of 1FFC's liquidity is cash flows generated from its loan portfolio, including scheduled principal repayments, collections of outstanding receivables, and interest income earned on such loans. The Company actively manages its portfolio to support ongoing liquidity needs, and contractual principal and interest payments provide a recurring source of cash inflows. The timing and amount of these cash flows are influenced by portfolio performance, borrower repayment behavior, and economic conditions. Any increase in the Company's allowance for credit losses would not directly affect the Company's liquidity, as adjustments to the allowance have no impact on cash. However, an increase in the actual loss rate may have a material adverse effect on the Company's liquidity. As such, the inability to collect loans could materially impact the Company's future liquidity.

Most of the Company's loan portfolio is financed through sales of its various debt securities, which have shorter average maturities than the loan portfolio as a whole. The difference in maturities may adversely affect liquidity if the Company is not able to continue to sell debt securities at interest rates and on terms that are responsive to the demands of the marketplace. The Company's continued liquidity is therefore also dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public.

The Company's debt securities are comprised of senior demand notes, commercial paper debt securities, and variable rate subordinated debentures. Debt securities increased $47.5 million (6%) to $888.1 million as of December 31, 2025, compared to $840.6 million as of December 31, 2024. See Note 7, Senior Debt , and Note 8, Subordinated Debt , in the accompanying Notes to Consolidated Financial Statements for further discussion.

In addition to its receivables and securities sales, the Company has an external source of funds available under a revolving credit facility (the "Credit Agreement") with BMO Bank, N.A. The Credit Agreement with BMO Bank, N.A. executed on December 6, 2024, provides for borrowings of up to $300.0 million or 75% of the Company's net loans, whichever is less, subject to certain limitations. All borrowings are secured by the loans of the Company. 1FFC had $79.3 million and $148.1 million of availability to draw down cash from our Credit Agreement as of December 31, 2025 and December 31, 2024 at interest rates of 6.87% and 7.52%, respectively. Outstanding borrowings under the Credit Agreement were $220.7 million and $151.9 million at December 31, 2025 and 2024, respectively.

The Credit Agreement contains covenants customary for financing transactions of this type. The Company is required, under the Credit Agreement, to report on its performance as it relates to the covenants contained therein. The Credit Agreement has a termination date of December 6, 2027. Management believes the current credit facility, when considered with funds expected to be available from operations, should provide sufficient liquidity for the Company. See Note 7, Senior Debt , in the accompanying Notes to Consolidated Financial Statements for further discussion.

1FFC continues to monitor and review current economic conditions and the related potential implications on the Company, including with respect to, among other things, changes in credit losses, liquidity, compliance with debt covenants, and customer relationships.

Internal Liquidity Management:

Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company can make dividends and/or lines of credit with maximum amounts of $115.0 million and $135.0 million, respectively, which are subject to approval by the Georgia Commissioner of Insurance and Safety Fire annually. The outstanding balance on the lines of credit with the Frandiscos are eliminated upon consolidation. See Note 6, Insurance Subsidiary Restrictions , in the accompanying Notes to Consolidated Financial Statements for further discussion.

Cash Flow:

Operating Activities:

Net cash provided by operating activities in 2025 was $144.2 million, compared to $84.2 million in 2024, which represents a net increase of $60.0 million. The increase in cash provided was primarily driven by growth in the loan portfolio, which contributed to higher net income.

Investing Activities:

Investing activities include the origination and repayment of loans, purchases and sales / redemptions of available for sale securities, and purchases of property and equipment for both new and existing branches. Net cash used in investing activities in 2025 was $258.9 million, compared to $154.0 million in 2024, which represents a net increase of $104.9 million. The increase in cash used was primarily due to higher loan originations associated with the growth of our loan portfolio, partially offset by increased repayments of loans.

Financing Activities:

Financing activities consist of borrowings and payments on our outstanding indebtedness. Net cash provided by financing activities in 2025 was $116.3 million, compared to $79.7 million in 2024, which represents a net increase of $36.6 million. The increase in cash provided was primarily due to lower payments and advances on the Company's credit line, reflecting repayment of the prior line of credit, and higher commercial paper redemptions in 2025.

The Company anticipates that its cash and cash equivalents, cash flows from operations, sales of debt securities, available lines of credit, and borrowings under the Credit Agreement will be sufficient to fund its liquidity needs for the next 12 months and thereafter for the foreseeable future.

CRITICAL ACCOUNTING POLICIES:

The accounting and reporting policies of 1st Franklin are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the financial services industry. The more critical accounting and reporting policies include the allowance for credit losses, revenue recognition and insurance claims reserves.

Allowance for Credit Losses:

Provisions for credit losses are charged to operations in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover expected credit losses in our loan portfolio. The allowance for credit losses is established based on the determination of the amount of expected losses inherent in the loan portfolio as of the reporting date.

1FFC considers the loan portfolio to be a single homogenous loan pool for purposes of the allowance for credit losses calculation based upon the consistent risk characteristics inherent in the portfolio. No loans are reviewed on an individual basis for potential credit risk. The Company utilizes a PD/LGD model to estimate the allowance for credit losses whereby estimated loss is equal to the product of PD and LGD. The allowance for credit losses model estimates instances of loss and the average severity of losses using the characteristics of the loan portfolio, along with incorporating a reasonable and supportable forecast which is utilized to support the adjustments to historical loss experience of loans with similar credit risk.

Management’s periodic evaluation of the adequacy of the allowance for credit losses takes into consideration the Company’s probable inherent risks in the homogeneous loan portfolio and current economic conditions, including those geographic regions where the Company has a concentration.

Key segmentation in the calculation is origination vintage, remaining contractual term, risk score and state of origination. The allowance for credit loss methodology produces a variety of alternative economic scenarios. The Company considers how macroeconomic and/or other factors might impact expected credit losses over the remaining maturity of the portfolio and determine which scenario(s) and specific scenario weights are applied within the estimation. The allowance for credit losses recorded in the balance sheet reflects the Company’s best estimate of expected credit losses.

Revenue Recognition:

Interest income is recognized using the effective interest method, whereby the Company recognizes interest revenue equitably over the term of the loan. Unearned finance charges on pre-compute loans are rebated utilizing statutory methods, which often is the Rule of 78's method. The difference between income recognized under the effective interest and Rule of 78's method is recognized at the time of rebate as an adjustment to interest income.

Premiums on property and casualty credit, credit life and accident and health insurance policies are deferred and earned over the insurance coverage term using either the pro-rata method or the effective yield method. Rebates are computed using statutory methods. The difference between income recognized under the effective interest and statutory method is recognized at the time of rebate as an adjustment to income.

Policy acquisition costs of the Frandiscos are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.

The Company sells auto club memberships as an agent for a third party. The Company has no further obligations after the date of sale as all claims for benefits are paid and administered by the third party. Commissions received from the sale of auto club memberships are earned at the time the membership is sold.

Insurance Claims Reserves:

Included in unearned insurance premiums and commissions on the 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.