Exhibit 19

1^st

FRANKLIN

FINANCIAL

CORPORATION

QUARTERLY

REPORT TO INVESTORS

AS OF AND FOR THE

NINE MONTHS ENDED

SEPTEMBER 30, 2011

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following narrative is Management’s discussion and analysis of the foremost factors that influenced 1^st Franklin Financial Corporation’s and its consolidated subsidiaries’ (the “Company”, “our” or “we”) financial condition and operating results as of and for the three- and nine-month periods ended September 30, 2011 and 2010.  This analysis and the accompanying unaudited condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2010 Annual Report.  Results achieved in any interim period are not necessarily reflective of the results to be expected for any other interim or full year period.

Forward-Looking Statements:

Certain information in this discussion, and other statements contained in this Quarterly Report which are not historical facts, may be forward-looking statements within the meaning of the federal securities laws.  Such forward-looking statements involve known and unknown risks and uncertainties.  The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  Possible factors which could cause actual future results to differ from expectations include, but are not limited to, adverse general economic conditions, including changes in the interest rate environment, unexpected reductions in the size of or collectability of our loan portfolio, 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 2010 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.

The Company:

We are engaged in the consumer finance business, primarily in making consumer loans to individuals in relatively small amounts for short periods of time.  Other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage real estate loans on real estate.  As of September 30, 2011, the Company’s business was operated through a network of 255 branch offices located in Alabama, Georgia, Louisiana, Mississippi, South Carolina and Tennessee.

We also offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance.  Customers may request credit life insurance coverage to help assure 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.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance policies as an agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.

The Company's operations are subject to various state and federal laws and regulations.  We believe our operations are in compliance with applicable state and federal laws and regulations.

Financial Condition:

As of September 30, 2011, total assets of the Company were $452.7 million compared to $422.1 million at December 31, 2010, representing an increase of $30.7 million or 7%.  The growth in assets was mainly due to increases in the Company’s investment securities portfolio.  

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Increases in the Company’s cash position, loan portfolio and miscellaneous other assets also contributed to the overall increase in total assets.

Our investment portfolio increased $22.9 million (29%) at September 30, 2011 compared to the prior year end.  The Company's investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  A portion of these investment securities have been designated as “available for sale” (64% as of September 30, 2011 and 85% as of December 31, 2010) with any unrealized gain or loss, net of deferred income taxes, accounted for as accumulated other comprehensive income in the stockholders’ equity section of the Company’s Condensed Consolidated Statements of Financial Position.  The remainder of the Company’s investment portfolio represents securities carried at amortized cost and designated as “held to maturity,” as Management does not intend to sell, and does not believe that it is more likely than not that it would be required to sell, such securities before recovery of the amortized cost basis.

Higher loan originations during the second and third quarter of 2011 resulted in a $3.7 million increase in our net loan portfolio at September 30, 2011 as compared to the prior year end.    The loan portfolio, net of the allowance for loan losses, totaled $298.7 million at September 30, 2011 compared to $295.0 at December 31, 2010. The mix of the loan portfolio remained relatively consistent with the mix at December 31, 2010, with a continued concentration in direct cash consumer loans.  Included in our net loan portfolio is our allowance for loan losses which reflects Management’s estimate of the level of allowance adequate to cover probable losses inherent in the loan portfolio as of the date of the statement of financial position.  To evaluate the overall adequacy of our allowance for loan losses, we consider the level of loan receivables, historical loss trends, loan delinquency trends, bankruptcy trends and overall economic conditions.  As a result of improving trends, the allowance for loan losses was reduced during the current year.  At September 30, 2011, the allowance for loan losses was $23.4 million compared to $24.1 million at December 31, 2010.  See Note 2, “Allowance for Loan Losses,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for further discussion of the Company’s Allowance for Loan Losses.  Management believes the allowance for loan losses is adequate to cover probable losses inherent in the portfolio at both dates; however, unexpected changes in trends or deterioration in economic conditions could result in a change in the allowance.  Any increase could have a material adverse impact on our results of operations or financial condition in the future.

Cash and cash equivalents increased $1.3 million (4%) at September 30, 2011 compared to the prior year end.  Funds provided from our operating activities and financing activities were the primary factors contributing to the increases.  Management believes the current level of cash and cash equivalents, available borrowings under the Company’s credit facility and cash expected to be generated from operations will be sufficient to meet the Company’s present and foreseeable future liquidity needs.

Net fixed assets grew approximately $1.3 million during the nine-month period ended September 30, 2011 mainly due to the replacement of computer equipment.  The growth in fixed assets was the main cause of the $2.0 million (14%) increase in other assets at September 30, 2011 compared to December 31, 2010.

Total liabilities of the Company increased $15.7 million (5%) to $305.1 million at September 30, 2011 compared to $289.4 million at December 31, 2010.  A $19.2 million net increase in the Company’s outstanding debt securities held by investors was the primary cause of the rise in total liabilities.  A $3.5 million decline in accrued expenses and other liabilities offset a portion of the overall increase.  Accrued expenses and other liabilities decreased mainly due to lower accrued interest in subordinated debt, lower accrued salary expense and disbursement of the 2010 incentive bonus paid in February, 2011.

Results of Operations:

Total revenues were $40.1 million for the three-month period ended September 30, 2011 compared to $36.7 million during the same period a year ago, representing a $3.4 million (9%) increase.  Net income earned during the same comparable periods was $7.7 million and $8.1 million, respectively.  Higher average outstanding receivables led to higher revenues; however,

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increased charge offs during the three-month period just ended compared to the same period a year ago resulted in a slight decline in net income during the current period.

During the nine-month comparable periods, total revenues were $116.3 million and $107.2 million, respectively, representing a $9.2 million (9%) increase.  Net income earned during the nine-month period just ended was $4.2 million (23%) higher than the same period a year ago.  Higher net interest income earned on higher average net receivables outstanding and a lower loan loss provision led to the increase in net income during the nine-month 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 was $25.4 million and $22.9 million for the three-month periods ended September 30, 2011 and 2010, respectively.  During the nine-month comparable periods, net interest income was $73.9 million and $66.9 million, respectively. The increase in net interest income was primarily due to additional interest and finance charges earned on a higher level of average net receivables outstanding.  Average net receivables outstanding were $19.1 million higher during the nine-month period just ended compared to the same period in 2010.

Lower borrowing costs also contributed to the aforementioned increase in our net interest income.  Although average borrowings increased $20.4 million during the nine-month period ended September 30, 2011 compared to the same period in 2010, the lower interest rate environment resulted in reduced interest expense.  Weighted average interest rates on the Company’s debt decreased to 4.16% during the nine-month period just ended compared to 4.90% during the same period a year ago.  This decrease in average borrowing rates led to the $.6 million (7%) decrease in interest expense during the nine-month comparable periods.  During the three-month period just ended, interest expense decreased $.1 million or 4% as compared to the same period a year ago.

Management projects that, based on historical results, average net receivables will continue to grow through the remainder of the year, and earnings are expected to increase accordingly.  However, a decrease in net receivables, or an increase in interest rates or outstanding borrowings could negatively impact our net interest margin.  

Insurance Income

Net insurance income is primarily impacted by the levels of insurance in-force and claims experience.  As average net receivables increase, the Company typically sees an increase in levels of insurance in-force as more loan customers opt for insurance coverage with their loan.  The Company’s net insurance income increased $.5 million (7%) and $1.5 million (7%) during the three- and nine-month periods ended September 30, 2011 compared to the same periods ended September 30, 2010.  

Provision for Loan Losses

The provision for loan losses totaled $5.5 million and $3.5 million for the three-month periods ended September 30, 2011 and 2010, respectively.  Higher net charge offs during the three-month period just ended and a $1.5 million reduction in the allowance for loan losses during the three-month period a year ago resulted in a $2.0 million (57%) increase in the provision for loan losses during current year.  During the nine-month period ended September 30, 2011, the provision for loan losses was $13.6 million compared the $13.8 million during the same period a year ago.  The reduction in the provision for loan losses for the nine-month period just ended was mainly due to lower net charge offs compared to the same period a year ago.  Also impacting the provision for loan losses during the nine-month period ended September 30, 2011 was a $.8 million reduction to the allowance for loan losses compared to a $1.5 million reduction during the same comparable period in 2010.

Determining a proper allowance for loan 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, current and expected net charge

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offs, delinquency levels, bankruptcy trends and overall general economic conditions.  As previously mentioned, Management lowered the allowance for loan losses during both the current and prior year.  The reductions were based primarily on lower trends in net charge off levels and delinquent account levels during the two year period just ended.

Management continues to monitor unemployment rates, which have improved slightly, but remain higher than historical averages in the states in which we operate.  Rising gasoline prices are also being monitored.  These factors tend to adversely impact our customers which, in turn, could have an adverse impact on our allowance for loan losses. Based on present and expected overall economic conditions, however, Management believes the allowance for loan losses is adequate to absorb possible losses inherent in the loan portfolio as of September 30, 2011.  However, continued high levels of unemployment and/or volatile market conditions could cause actual losses to vary from our estimated amounts.  Management may determine it is appropriate to increase the allowance for loan losses in future periods, or actual losses could exceed allowances in any period, either of which events could have a material negative impact on our results of operations in the future.

Other Operating Expenses

The largest component of other operating expenses is personnel expense.  Our total personnel expense increased $1.4 million and $3.4 million, or 11% and 9%, respectively, during the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010.  The increase was mainly due to higher salary expense, increases in the accrual for the employee incentive bonus plan and increases in medical claim expenses associated with the  Company’s self-insured employee medical program in the 2011 periods.

Higher costs associated with maintenance expenses on office and equipment, communication expenses, utility expenses and rent expense contributed to the increase in occupancy expense during the current year compared to the same periods in 2010.  During the three- and nine-month periods ended September 30, 2011 and 2010, occupancy expense increased $.2 million (8%) and $.5 million (6%), respectively. The replacement of certain computer equipment during the second and third quarters of 2011 also contributed to the increase in occupancy expense, through increased depreciation, during the current year periods.

Miscellaneous other operating expenses increased $1.1 million (8%) during the nine-month period ended September 30, 2011 compared to the same period during 2010.  The increase in miscellaneous other operating expenses during the current year correlates with higher expenses related to advertising, technology, securities sales, office supplies, postage, and training expenses as compared to the 2010 periods.  During the nine-month period ended September 30, 2011, contributions to various charitable organizations increased $.3 million compared to the prior year comparable period.  Increases in taxes and license fees also contributed to the increase in other operating expenses during the nine-month period just ended.   Lower computer expenses, postage and travel expenses contributed a $.1 million decline in miscellaneous other operating expenses during the three-month period ended September 30, 2011 compared to the same period a year ago.

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 then being taxed at the corporate level.  Notwithstanding this election, however, income taxes continue to be reported for, and paid by, the Company's insurance subsidiaries as they are not allowed to be treated as S corporations, and for the Company’s state taxes in Louisiana, which does not recognize S corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences.  

Effective income tax rates were 9% and 10% during the nine-month periods ended September 30, 2011 and 2010, respectively.  The lower tax rate experienced during the current year nine month period was due to higher income at the S corporation level which was passed to

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the shareholders of the Company for tax reporting purposes, whereas income earned at the insurance subsidiary level was taxed at the corporate level.  During the three-month periods ended September 30, 2011 and 2010, effective income tax rates were 9% and 8%, respectively.  The higher tax rate experienced during the current year three-month period just ended as compared to the same period a year ago was due to lower income at the S corporation level compared to the insurance subsidiary income level.

Quantitative and Qualitative Disclosures About Market Risk:

Interest rates continued to be near historical low levels during the reporting period.  We currently expect only minimal fluctuations in market interest rates during the remainder of the year, thereby minimizing the expected impact on our net interest margin; however, no assurances can be given in this regard.  Please refer to the market risk analysis discussion contained in our annual report on Form 10-K as of and for the year ended December 31, 2010 for a more detailed analysis of our market risk exposure.

Liquidity and Capital Resources:

As of September 30, 2011 and December 31, 2010, the Company had $32.0 million and $30.7 million, respectively, invested in cash and cash equivalents, the majority of which was held by the Company’s 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 insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of policyholders’ surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  At December 31, 2010, Frandisco Property and Casualty Insurance Company (“Frandisco P&C”) and Frandisco Life Insurance Company (“Frandisco Life”), the Company’s wholly-owned insurance subsidiaries, had policyholders’ surpluses of $40.7 million and $41.4 million, respectively.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2011, without prior approval of the Georgia Insurance Commissioner, is approximately $8.2 million.  In May 2011, the Company filed a request with the Georgia Insurance Department for the insurance subsidiaries to be eligible to pay up to $45.0 million in additional extraordinary dividends during 2011. Management requested the approval to ensure the availability of additional liquidity in the event it was needed by the Company.  In July 2011, the request was approved by the Georgia Insurance Department.  No dividends have been paid during 2011.

The majority of the Company’s liquidity requirements are financed through the collection of receivables and through the sale of short- and long-term debt securities.  The Company’s continued liquidity is therefore dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public.  In addition to its receivables and securities sales, the Company has an external source of funds available under a credit facility with Wells Fargo Preferred Capital, Inc. (the “credit agreement”).  As amended to date, the credit agreement provides for borrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company.  Available borrowings under the credit agreement were $100.0 million at September 30, 2011, at an interest rate of 3.75%. This compares to available borrowings of $99.1 million at December 31, 2010, at an interest rate of 3.75%.  The credit agreement previously had a commitment maturity date of September 11, 2013.  Effective September 20, 2011 the credit agreement was amended to extend the commitment maturity date to September 11, 2014.  The credit agreement contains covenants customary for financing transactions of this type.  At September 30, 2011, the Company was in compliance with all covenants.    Management believes this credit facility should provide sufficient liquidity for the continued growth of the Company for the foreseeable future.

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The Company was subject to the following contractual obligations and commitments at September 30, 2011:

Critical Accounting Policies:

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 loan losses, revenue recognition and insurance claims reserves.  

Allowance for Loan Losses

Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in our loan portfolio.  

The allowance for loan losses is established based on the determination of the amount of probable losses inherent in the loan portfolio as of the reporting date.  We review, among other things, historical charge off experience factors, delinquency reports, historical collection rates, economic trends such as unemployment rates, gasoline prices and bankruptcy filings and other information in order to make what we believe are the necessary judgments as to probable losses.  Assumptions regarding probable losses are reviewed periodically and may be impacted by our actual loss experience and changes in any of the factors discussed above.

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, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis.  Income is not accrued on 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.  

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

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 condensed consolidated statements of financial position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries.  These reserves are established based on 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 Note 1, “Recent Accounting Pronouncements,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of new accounting standards and the expected impact of accounting standards recently issued but not yet required to be adopted.  For pronouncements already adopted, any material impacts on the Company’s consolidated financial statements are discussed in the applicable section(s) of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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-NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of 1^st Franklin Financial Corporation and subsidiaries (the "Company") should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto as of December 31, 2010 and for the year then ended included in the Company's 2010 Annual Report filed with the Securities and Exchange Commission.

In the opinion of Management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of September 30, 2011 and December 31, 2010, the consolidated results of its operations for the three and nine month periods ended September 30, 2011 and 2010 and cash flows for the nine month periods ended September 30, 2011 and 2010. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, the Company believes that the disclosures herein are adequate to make the information presented not misleading.

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full fiscal year or any other future period.  The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities at and as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.

The computation of earnings per share is self-evident from the accompanying Unaudited Condensed Consolidated Statements of Income and Retained Earnings.

Recent Accounting Pronouncements:

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820) (“ASU No. 2010-06”).  ASU No. 2010-06 clarified two existing disclosure requirements and required two new disclosures as follows:  (1) a “gross” presentation of activities relating to financial instruments measured using Level 3 fair value criteria, which replaced the “net” presentation format; and (2) detailed disclosures about the transfers of financial instruments in and out of Level 1 and 2 of the fair value hierarchy.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross presentation of financial instruments measured using Level 3 criteria, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years.  The Company adopted the fair value disclosure guidance on January 1, 2010 and there was no material impact on the Company’s financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU No. 2010-20 requires a greater level of disaggregated information to be disclosed about the credit quality of a company’s loans and its allowance for loan losses.  Additional disclosure is required related to information such as credit quality indicators, nonaccrual and loan delinquency trends, and information related to impaired loans.  ASU 2010-20 became effective December 15, 2010.  The FASB has deferred the troubled debt restructuring disclosure requirements that were part of this ASU to be effective concurrent with the effective date of recently issued guidance for identifying a troubled debt restructuring (disclosed below), in the third quarter of 2011.  The adoption of the additional disclosures, that are currently effective, did not have a material impact on the Company’s financial statements.

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In April 2011, the FASB issued ASU No. 2011-02, to clarify the guidance for accounting for troubled debt restructurings (“TDRs”).  This ASU clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties, such as:

·

Creditors cannot assume that debt extensions at or above a borrower’s original contractual rate do not constitute troubled debt restructurings;

·

If a borrower doesn’t have access to funds at a market rate for debt with characteristics similar to the restructured debt, that may indicate that the creditor has granted a concession; and

·

A borrower that is not currently in default may still be considered to be experiencing financial difficulty when payment default is considered “probable in the foreseeable future.”

The guidance was effective beginning with disclosures in the Company’s third quarter 2011 Form 10-Q and was applied retrospectively to restructurings occurring on or after January 1, 2011.  The adoption of the disclosures did not have a material impact on the Company’s financial statements.  See Note 2 for disclosure of TDRs.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurements, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The guidance was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and IFRS.  The guidance changes certain fair value measurement principles and expands disclosure requirements, particularly for assets valued using Level 3 fair value measurements. The ASU is effective for interim and annual periods beginning after December 31, 2011.  The Company is currently assessing the impact of the guidance but does not believe that the adoption thereof will have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”.  ASU 2011-05 requires entities to present comprehensive income in one continuous statement or in two separate but consecutive statements presenting the components of net income ant its total, the components of other comprehensive income and its total, and total comprehensive income.  The guidance also requires that reclassification adjustments from other comprehensive income to net income be presented in both the components of net income and the components of other comprehensive income.  The ASU is effective for interim and annual periods beginning after December 31, 2011.  The Company is currently assessing the impact of the guidance but does not believe that the adoption thereof will have a material impact on the consolidated financial statements.

Note 2 – Allowance for Loan Losses

The Allowance for Loan Losses is based on Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Management’s approach to estimating and evaluating the allowance for loan losses is on a total portfolio level based on historical loss trends, bankruptcy trends, the level of receivables at the balance sheet date, payment patterns and economic conditions primarily including, but not limited to, unemployment levels and gasoline prices.  Historical loss trends are tracked on an on going basis.  The trend analysis includes statistical analysis of the correlation between loan date and charge off date, charge off statistics by the total loan portfolio, and charge off statistics by branch, division and state.  If trends indicate credit losses are increasing or decreasing, Management will evaluate to ensure the allowance for loan losses remains at proper levels.  Delinquency and bankruptcy filing trends are also tracked.  If these trends indicate an adjustment to the allowance for loan losses is warranted, Management will make what it considers to be appropriate adjustments.  The level of receivables at the balance sheet date is reviewed and adjustments to the allowance for loan losses are made, if Management determines increases or decreases in the level of receivables warrants an adjustment.  The Company uses monthly unemployment statistics, and various other monthly or periodic economic statistics, published by departments of the U.S. government and

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other economic statistics providers to determine the economic component of the allowance for loan losses.  Such allowance is, in the opinion of Management, sufficiently adequate for probable losses in the current loan portfolio.  As the estimates used in determining the loan loss reserve are influenced by outside factors, such as consumer payment patterns and general economic conditions, there is uncertainty inherent in these estimates.  Actual results could vary based on future changes in significant assumptions.

Management does not disaggregate the Company’s loan portfolio by loan category when evaluating loan performance.  The total portfolio is evaluated for credit losses based on contractual delinquency, and other economic conditions. The Company classifies delinquent accounts at the end of each month according to the number of installments past due at that time, based on the then-existing terms of the contract.  Accounts are classified in delinquency categories based on the number of days past due.  When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due, we classify the account as being 90 days or more past due.  When a loan becomes five installments past due, it is charged off unless Management directs that it be retained as an active loan. In making this charge off evaluation, Management considers factors such as pending insurance, bankruptcy status and other indicators of collectability.  In connection with any bankruptcy court-initiated repayment plan and as allowed by state regulatory authorities, the Company effectively resets the delinquency rating of each account to coincide with the court initiated repayment plan.  In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid.  The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable.

When a loan becomes 60 days or more past due based on its original terms, it is placed in nonaccrual status.  At such time, the accrual of any additional finance charges is discontinued.  Finance charges are then only recognized to the extent there is a loan payment received or when the account qualifies for return to accrual status.  Nonaccrual loans return to accrual status when the loan becomes less than 60 days past due.  There were no loans past due 60 days or more and still accruing interest at September 30, 2011 or December 31, 2010.  The Company’s principal balances on non-accrual loans by loan category as of September 30, 2011 and December 31, 2010 are as follows:

An age analysis of principal balances on past due loans, segregated by loan category, as of September 30, 2011 and December 31, 2010 follows:

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In addition to the delinquency rating analysis, the ratio of bankrupt accounts to the total portfolio is also used as a credit quality indicator.  The ratio of bankrupt accounts to total principal loan balances outstanding at September 30, 2011 and December 31, 2010 was 3.14% and 3.05%, respectively.

Nearly our entire loan portfolio consists of small homogeneous consumer loans (of the product types set forth in the table below).  

Sales finance contracts are similar to consumer loans in nature of loan product, terms, customer base to whom these products are marketed, factors contributing to risk of loss and historical payment performance, and together with consumer loans, represented approximately 94% of the Company’s loan portfolio at both September 30, 2011 and 2010.  As a result of these similarities, which have resulted in similar historical performance, consumer loans and sales finance contracts represent substantially all loan losses.  Real estate loans and related losses have historically been insignificant, and, as a result, we do not stratify the loan portfolio for purposes of determining and evaluating our loan loss allowance.  Due to the composition of the loan portfolio, the Company determines and monitors the allowance for loan losses on a collectively evaluated, single portfolio segment basis.  Therefore, a roll forward of the allowance for loan loss activity at the portfolio segment level is the same as at the total portfolio level.  We have not acquired any impaired loans with deteriorating quality during any period reported.  The following table provides additional information on our allowance for loan losses based on a collective evaluation:  

Troubled debt restructurings (“TDRs”) represent loans on which the original terms of the loans have been modified as a result of the following conditions: (i) the restructuring constitutes a concession and (ii) the borrower is experiencing financial difficulties.   Loan modifications by the Company involve payment alterations, interest rate concessions and/ or reductions in the amount

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owed by the customer.  The following table presents a summary of loans that were restructured during the nine months ended September 30, 2011.

TDRs that subsequently defaulted during the nine months ended September 30, 2011 are listed below.  

The level of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance of loan losses.

Note 3 – Investment Securities

Debt securities available-for-sale are carried at estimated fair market value. Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity.  The amortized cost and estimated fair market values of these debt securities were as follows:

Gross unrealized losses on investment securities totaled $65,771 and $161,889 at September 30, 2011 and December 31, 2010, respectively.  The following table provides an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of September 30, 2011:

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The table above consists of 17 investments held by the Company, the majority of which are rated “A” or higher by Standard & Poor’s.  The unrealized losses on the Company’s investments listed in the above table were primarily the result of interest rate increases.  The total impairment was less than approximately .67% of the fair value of the affected investments at September 30, 2011.  Based on the credit ratings of these investments, along with the consideration of whether the Company has the intent to sell or will be more likely than not required to sell the applicable investment before recovery of amortized cost basis, the Company does not consider the impairment of any of these investments to be other-than-temporary at September 30, 2011.

The Company’s insurance subsidiaries internally designate certain investments as restricted to cover their policy reserves and loss reserves.  On June 19, 2008, the Company’s property and casualty insurance subsidiary (“Frandisco P&C”) entered into a trust agreement with Synovus Trust Company, N.A. and Voyager Indemnity Insurance Company (“Voyager”).  The trust was created to hold deposits to cover policy reserves and loss reserves of Frandisco P&C.  In July 2008, Frandisco P&C funded the trust with approximately $20.0 million of investment securities.  This amount changes as required reserves change.  All earnings on assets in the trust are remitted to Frandisco P&C.  Any charges associated with the trust are paid by Voyager.

Note 4 – Fair Value

The following methods and assumptions are used by the Company in estimating fair values of its financial instruments:

Cash and Cash Equivalents:  Cash includes cash on hand and with banks.  Cash equivalents are short-term highly liquid investments with original maturities of three months or less.   The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between origination of the instruments and their expected realization.

Loans:  The carrying value of the Company’s direct cash loans and sales finance contracts approximates the fair value since the estimated life, assuming prepayments, is short-term in nature.  The fair value of the Company’s real estate loans approximate the carrying value since the interest rate charged by the Company approximates market rate.

Marketable Debt Securities:  The fair value of marketable debt securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  See additional information below regarding fair value under ASC No. 820.

Senior Debt Securities:  The carrying value of the Company’s senior debt securities approximates fair value due to the relatively short period of time between the origination of the instruments and their expected repayment.

Subordinated Debt Securities:  The carrying value of the Company’s variable rate subordinated debt securities approximates fair value due to the re-pricing frequency of the securities.

Under ASC No. 820, fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following fair value hierarchy is used in selecting inputs used to determine the fair value of an asset or liability, with the highest priority given to Level 1, as these are the most transparent or reliable.

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

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Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurements.

The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value.  The Company performs due diligence to understand the inputs and how the data was calculated or derived.  The Company employs a market approach in the valuation of its obligations of states, political subdivisions and municipal revenue bonds that are available-for-sale.  These investments are valued on the basis of current market quotations provided by independent pricing services selected by Management based on the advice of an investment manager.  To determine the value of a particular investment, these independent pricing services may use certain information with respect to market transactions in such investment or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. Quoted prices are subject to our internal price verification procedures.  We validate prices received using a variety of methods, including, but not limited to comparison to other pricing services or corroboration of pricing by reference to independent market data such as a secondary broker.  There was no change in this methodology during any period reported.

Assets measured at fair value as of September 30, 2011 and December 31, 2010 were available-for-sale investment securities which are summarized below:

Note 5 – Commitments and Contingencies

The Company is involved in various legal proceedings incidental to its business from time to time.  Management makes provisions in its financial statements for legal, regulatory, and other contingencies when, in the opinion of Management, a loss is probable and reasonably estimable.  At September 30, 2011, no such known proceedings or amounts, individually or in the aggregate, were expected to have a material impact on the Company or its financial condition or results of operations.

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Note 6 – Income Taxes

Effective income tax rates were 9% and 8% during the three-month periods ended September 30, 2011 and 2010, respectively and 9% and 10% during the nine-month periods then ended.  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, income taxes are reported for, and paid by, the Company's insurance subsidiaries, as they are not allowed by law to be treated as S corporations, as well as for the Company in Louisiana, which does not recognize S corporation status.  The tax rates of the Company’s insurance subsidiaries are below statutory rates due to (i) certain benefits provided by law to life insurance companies, which reduce the effective tax rates and (ii) investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

Note 7 – Other Comprehensive Income

Total comprehensive income was $7.8 million and $22.6 million for the three- and nine-month periods ended September 30, 2011, as compared to $8.5 million and $18.6 million for the same periods in 2010.

Accumulated other comprehensive income consisted solely of unrealized gains and losses on investment securities available for sale, net of applicable deferred taxes.  The Company recorded $.1 million and $.5 million in other comprehensive income for 2011 during the three-month periods ended September 30, 2011 and 2010, respectively.  During the nine-month period ended September 30, 2011 the Company recorded $.5 million in other comprehensive income compared to $.7 million during the same period a year ago.

Note 8 – Credit Agreement

Effective September 11, 2009, the Company entered into a loan and security agreement with Wells Fargo Preferred Capital, Inc., as agent and lender (“Wells Fargo”) (the “credit agreement”), which provides for maximum borrowings of $100.0 million or 80% of the Company’s net finance receivables (as defined in the credit agreement), whichever is less.    The credit agreement previously had a commitment maturity date of September 11, 2013.  Effective September 20, 2011, the credit agreement was amended to extend the commitment maturity date to September 11, 2014.  The credit agreement contains covenants customary for financing transactions of this type.  The Company was in compliance with all covenants at September 30, 2011.  Borrowings under the credit agreement are secured by the Company’s finance receivables.  Available borrowings under the credit agreement were $100.0 million at September 30, 2011, at an interest rate of 3.75%. This compares to available borrowings of $99.1 million at December 31, 2010, at an interest rate of 3.75%.

Note 9 – Related Party Transactions

The Company engages from time to time in transactions with related parties.  Please refer to the disclosure contained under the heading “Certain Relationships and Related Transactions” in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2010 for additional information on such transactions.

Note 10 – Segment Financial Information

Effective January 1, 2011, Management realigned its business.  The Company now has five reportable segments:  Division I through Division V.  Each segment consists of a number of branch offices that are aggregated based on vice president responsibility and geographic location.  Division I consists of offices located in South Carolina.  Offices in North Georgia comprise Division II, Division III consists of offices in South Georgia.  Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.  

Accounting policies of each of the segments are the same as those described in the summary of significant accounting policies.  Performance is measured based on objectives set at the

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beginning of each year and include various factors such as segment profit, growth in earning assets and delinquency and loan loss management.  All segment revenues result from transactions with third parties.  The Company does not allocate income taxes or corporate headquarter expenses to the segments.

In accordance with the requirements of ASC 280, “Segment Reporting,” the following table summarizes revenues, profit and assets by business segment.  Also in accordance therewith, a  reconciliation to consolidated net income is provided.  Reported amounts for periods in 2010 have been reclassified to confirm to the correct presentation, with no changes to consolidated results.

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