Exhibit 19

1^st

FRANKLIN

FINANCIAL

CORPORATION

QUARTERLY

REPORT TO INVESTORS

AS OF AND FOR THE

NINE MONTHS ENDED

SEPTEMBER 30, 2014

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, 2014 and 2013.  This analysis and the accompanying unaudited condensed consolidated financial information should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company’s 2013 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 2013 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, 2014, the Company’s business was operated through a network of 279 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:

At September 30, 2014, total assets of the Company were $592.1 million compared to $561.8 million at December 31, 2013.  Growth in the Company's cash and investment portfolios were the primary areas contributing to the 5% increase in assets.

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Cash and cash equivalents increased $2.0 million (8%) and investment securities increased $17.8 million (13%) at September 30, 2014 compared to December 31, 2013.  Investment of surplus funds generated by the operations of our insurance subsidiaries, and the related investment returns, resulted in the increase in the value of our investment portfolio.  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” (85% as of September 30, 2014 and 78% as of December 31, 2013) with any unrealized gain or loss, net of deferred income taxes, accounted for as other comprehensive income in the Company’s Condensed Consolidated Statements of Comprehensive Income.  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.  The Company has also placed surplus funds in an equity fund investment in efforts to increase yield returns on surplus cash.  On November 1, 2013, the Company made an initial investment of $10.0 million in an equity fund investment.  Effective April 1, 2014, an additional $15.0 million was invested.  The balance in the fund at September 30, 2014 was $26.3 million compared to $10.2 million at December 31, 2013.  The Company has no additional investment commitments to the Fund.  Management believes the Company has adequate funding available to meet liquidity needs for the foreseeable future.

Management maintains certain funds in restricted accounts held by the Company's insurance subsidiaries in order to comply with certain requirements imposed on insurance companies by the State of Georgia and to meet the reserve requirements of its reinsurance agreements.  Restricted cash also includes escrow deposits held by the Company on behalf of certain mortgage real estate customers.  At September 30, 2014, restricted cash decreased $.1 million (14%) compared to December 31, 2013.  The decline in restricted cash was due to a transition to the use of investment securities held in trust accounts to cover reserves required to be held by our insurance subsidiaries.  

Our net loan portfolio declined $5.2 million (1%) at September 30, 2014 compared to December 31, 2013.  Loan originations increased during the second and third quarter of 2014, offsetting a portion of the $23.4 million decline in the net loan portfolio reported in our Quarterly Report to Investors for the Three Months Ended March 31, 2014.  We project growth in our net loan portfolio during the fourth quarter.  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.  Based on current trends, Management increased the allowance for loan losses to $27.7 million at September 30, 2014 from $24.7 million at December 31, 2013.  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 September 30, 2014; however, unexpected changes in trends or deterioration in economic conditions could result in additional changes in the allowance.  Any additional increase could have a material adverse impact on our results of operations or financial condition in the future.

The Company sells senior and subordinated debt securities to investors which funds a significant portion of our operations.  The aggregate amount of senior and subordinated debt outstanding at September 30, 2014 was $367.4 million compared to $348.4 million at December 31, 2013, representing a 5% increase.  Higher sales of the Company's senior debt securities was responsible for the increase.

Accrued expenses and other liabilities increased $.8 million (4%) at September 30, 2014 compared to December 31, 2013 mainly due to increases in accrued deferred compensation, accrued self-insured health insurance claims and accrued payroll taxes.  The increase was partially off-set by a decrease in accrued bonus expense due to disbursement of the 2013 incentive bonus in February 2014 and a decrease in accrued salary expense.

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Results of Operations:

The Company generated $50.4 million and $148.5 million in total revenues during the three- and nine-month periods ended September 30, 2014, respectively, compared to $46.7 million and $136.8 million during the same periods a year ago.  Higher interest and finance charge income earned on our loan and investment portfolios was the primary factor responsible for the increase in revenues.  An increase in insurance commissions earned also contributed to the higher revenues.  Net income increased $1.8 million (7%) during the nine-month period ended September 30, 2014 compared to the same period in 2013.  During the three-month comparable periods, expenses increased at a higher level, offsetting the aforementioned increase in revenues, resulting in a $1.2 million (15%) decline in net income during the current three-month period.

Net Interest Income

Net interest income represents the difference between income on earning assets (loans and investments) and the cost of funds on interest bearing liabilities.  Our net interest income is affected by the size and mix of our loan and investment portfolios as well as the spread between interest and finance charges earned on the respective assets and interest incurred on our debt.  Our net interest income increased $2.8 million (9%) and $8.8 million (10%) during the three- and nine-month periods ended September 30, 2014, respectively, compared to the same periods in 2013.  Average net receivables increased approximately $25.6 million (7%) during the nine months just ended compared to the same period a year ago.  The higher level of average net receivables led to an increase in interest and finance charges earned of $2.9 million (9%) and $9.1 million (9%) during the three- and nine-month periods ended September 30, 2014, respectively, compared to the same periods in 2013.

 

Although average borrowings increased $29.4 million during the nine-month period ended September 30, 2014 compared to the same period in 2013, the lower interest rate environment has enabled management to minimize increases in borrowing costs.  The Company's average borrowing rate decreased to 3.27% during the nine-month period just ended compared to 3.44% during the same period a year ago.  Interest expense increased approximately $.3 million during same comparable period.

Management projects that, based on historical results, average net receivables will continue to grow during the fourth quarter 2014, and earnings are expected to increase accordingly.  However, a decrease in net receivables or an increase in interest rates on outstanding borrowings could negatively impact our net interest margin.  

Insurance Income

 

Net insurance income increased $.7 million (8%) and $1.8 million (7%) during the three- and nine-month periods ended September 30, 2014 compared to the same periods a year ago.  The aforementioned increase in average net loans outstanding is directly attributable to the increase in net insurance income.  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 increase in net insurance income during the nine-month period ended September 30, 2014 was partially offset by higher claims expense during the same period.

 

Provision for Loan Losses

The Company’s provision for loan losses is a charge against earnings to maintain the allowance for loan losses at a level that Management estimates is adequate to cover probable losses inherent as of the date of the statement of financial position.  

During the three- and nine-month periods ended September 30, 2014, the Company’s loan loss provision increased $1.9 million (26%) and $3.8 million (20%) compared to the same periods in 2013, respectively.  Higher net charge offs, bankruptcy filings and delinquency rates  were the primary reasons for the increase in our provision.  Net charge offs increased $1.1 million during the three-month comparable period and $2.6 million during the nine-month comparable period.  Also contributing to the increase in the provision was Management's decision to increase

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the allowance for loan losses $3.0 million during the 2014 nine month period compared to $1.8 million during the nine-month period ending September 30, 2013.

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 offs, delinquency levels, bankruptcy trends and overall general and industry specific economic conditions.

Management continues to monitor unemployment rates, which have decreased slightly in recent periods, but remain higher than historical averages in the states in which we operate.  Volatility in gasoline prices is also being monitored.  Higher unemployment rates and gas prices 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, Management believes the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of September 30, 2014.  However, continued high levels of unemployment and/or volatile market conditions could cause actual losses to vary materially 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

Other operating expenses increased $2.8 million (11%) and $5.5 million (7%) during the three- and nine-month periods ended September 30, 2014, respectively, compared to the same periods a year ago.  Other operating expenses encompasses personnel expense, occupancy expense and miscellaneous other operating expenses.  

Personnel expense increased $2.0 million (13%) and $2.5 million (5%) during the three- and nine-month periods just ended compared to the same periods in 2013.  The increases were primarily due to annual merit salary increases, increases in the Company's incentive bonus accrual, increases in employee benefit expense, increases in contributions to the Company's 401(k) plan, increased fees on the Company's self-insured medical program and increased payroll taxes.  A decrease in claims associated with the Company's self-insured medical program and an increase in employee withholding for insurance offset a portion of the increase in personnel cost during the nine-month comparable periods.

Higher maintenance expense, utilities expense, depreciation expense and increased rent expense caused occupancy expense to increase $.2 million (8%) and $.6 million (7%) during the three- and nine-month periods ended September 30, 2014 compared to the same periods a year ago.

During the three- and nine-month periods ended September 30, 2014, miscellaneous other operating expenses increased $.5 million (10%) and $2.4 million (14%), respectively, compared to the same periods in 2013.  Costs were higher primarily due to increases in advertising expenses, charitable contributions and postage.  Other factors contributing to the higher miscellaneous other operating expenses were increases in: (i) credit bureau reporting expenses, (ii) computer expenses, (iii) consultant fees, and (iv) taxes and licenses.  Higher casualty losses, security sales expenses and travel expenses also contributed to the increase in miscellaneous other operating expenses during the nine-month period just ended.

 

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

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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 13% and 10% during the three-month periods ended September 30, 2014 and 2013, respectively.  During the nine-month comparable periods, effective tax rates were 10%. The Company’s effective tax rates during the reporting periods were lower than statutory rates due to income at the S corporation level being passed to the shareholders of the Company for tax reporting purposes, whereas income earned at the insurance subsidiary level was taxed at the corporate level.  The tax rates of the Company’s insurance subsidiaries are below statutory rates primarily due to investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

 

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 2013 Annual Report on Form 10-K as of and for the year ended December 31, 2013 for a more detailed analysis of our market risk exposure.  There were no material changes in our risk exposures in the nine months ended September 30, 2014 as compared to those at December 31, 2013.

Liquidity and Capital Resources:

As of September 30, 2014 and December 31, 2013, the Company had $28.4 million and $26.4 million, respectively, invested in cash and cash equivalents, the majority of which was held by the parent company.  

  

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 subsidiary.  At December 31, 2013, 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 $56.4 million and $56.7 million, respectively.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2014, without prior approval of the Georgia Insurance Commissioner, is approximately $11.3 million.  No dividends were paid during the nine-month period ended September 30, 2014.

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”).  The credit agreement, as amended, provides for borrowings of up to $100.0 million or 70% of the Company's net finance receivables (as defined in the Credit Agreement), whichever is less and has a maturity date of September 11, 2017.  Available borrowings under the credit agreement were $100.0 million at September 30, 2014 and December 31, 2013, at an interest rate of 3.75%.  The credit agreement contains covenants customary for financing transactions of this type.  At September 30, 2014, the Company was in compliance with all covenants.  Management believes this credit facility, when considered with the Company’s other expected sources of funds, should provide sufficient liquidity for the continued growth of the Company for the foreseeable future.

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

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allowance for loan losses, revenue recognition and insurance claims reserves.  During the nine- months ended September 30, 2014, there were no material changes to the critical accounting policies or related estimates previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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.  

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

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

Insurance Claims Reserves

Included in unearned insurance premiums and commissions on the Unaudited Condensed Consolidated Statements of Financial Position are reserves for incurred but unpaid credit insurance claims for policies written by the Company 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.

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

Recent Accounting Pronouncements:

See “Recent Accounting Pronouncements” in Note 1 to the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of any applicable recently adopted accounting standards and the expected impact of accounting standards recently issued but not yet required to be adopted.  For pronouncements already adopted, any material impacts on the Company’s 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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1st FRANKLIN FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
	September 30,	December 31,
	2014	2013
ASSETS
CASH AND CASH EQUIVALENTS	$ 28,411,574	$ 26,399,839
RESTRICTED CASH	841,034	974,452
LOANS: Direct Cash Loans Real Estate Loans Sales Finance Contracts Less: Unearned Finance Charges Unearned Insurance Premiums and Commissions    Allowance for Loan Losses Net Loans	438,713,285  20,187,422  23,525,489  482,426,196  57,705,030  32,830,094  27,676,800  364,214,272	445,754,712 20,329,655 22,269,833 488,354,200 59,649,718 34,596,733 24,680,789 369,426,960
INVESTMENT SECURITIES: Available for Sale, at fair value Held to Maturity, at amortized cost	130,793,950  22,843,926  153,637,876	106,061,584 29,777,456 135,839,040
EQUITY METHOD INVESTMENT	26,320,161	10,211,635
OTHER ASSETS	18,687,589	18,909,135
TOTAL ASSETS	$ 592,112,506	$ 561,761,061
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT	$ 328,811,883	$ 308,015,152
ACCRUED EXPENSES AND OTHER LIABILITIES	21,825,391	21,014,769
SUBORDINATED DEBT	38,538,606	40,378,507
Total Liabilities	389,175,880	369,408,428
COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY:
Preferred Stock: $100 par value, 6,000 shares authorized;  no shares outstanding	--	--
Common Stock Voting Shares; $100 par value; 2,000 shares authorized; 1,700 shares outstanding Non-Voting Shares; no par value; 198,000 shares authorized; 168,300 shares outstanding	170,000  --	170,000 --
Accumulated Other Comprehensive (Loss) Income	2,664,107	(2,472,734)
Retained Earnings	200,102,519	194,655,367
Total Stockholders' Equity	202,936,626	192,352,633
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 592,112,506	$ 561,761,061
See Notes to Unaudited Condensed Consolidated Financial Statements

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1st FRANKLIN FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF  INCOME AND RETAINED EARNINGS (Unaudited)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
INTEREST INCOME		$36,242,696			$33,298,540			$ 107,014,316			$ 97,917,934
INTEREST EXPENSE		3,044,431			2,879,116			8,875,205			8,577,139
NET INTEREST INCOME		33,198,265			30,419,424			98,139,111			89,340,795
Provision for Loan Losses		9,184,293			7,268,188			22,250,160			18,492,721
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		24,013,972			23,151,236			75,888,951			70,848,074
INSURANCE INCOME Premiums and Commissions Insurance Claims and Expenses Total Net Insurance Income		12,164,655 2,566,013 9,598,642			11,564,708 2,643,271 8,921,437			35,664,596 7,458,158 28,206,438			33,715,417 7,337,330 26,378,087
OTHER REVENUE		1,974,173			1,818,869			5,792,270			5,116,753
OTHER OPERATING EXPENSES: Personnel Expense Occupancy Expense Other Total		17,745,525 3,363,695 6,101,232 27,210,452			15,715,176 3,122,083 5,568,212 24,405,471			49,841,998 9,856,083 19,119,603 78,817,684			47,368,694 9,207,501 16,768,298 73,344,493
INCOME BEFORE INCOME TAXES		8,376,335			9,486,071			31,069,975			28,998,421
Provision for Income Taxes		1,104,842			969,462			3,237,421			2,960,698
NET INCOME		7,271,493			8,516,609			27,832,554			26,037,723
RETAINED EARNINGS, Beginning       of Period		201,706,428			181,307,421			194,655,367			174,265,215
Distributions on Common Stock		8,875,402			3,538,701			22,385,402			14,017,609
RETAINED EARNINGS, End of Period		$200,102,519			$186,285,329			$ 200,102,519			$ 186,285,329
BASIC EARNINGS PER SHARE: 170,000 Shares Outstanding for All Periods (1,700 voting, 168,300 non-voting)		$42.77			$50.10			$163.72			$153.16
See Notes to Unaudited Condensed Consolidated Financial Statements

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1st FRANKLIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended		Nine Months Ended
	Sept. 30,	Sept. 30,	Sept. 30,	Sept. 30,
	2014	2013	2014	2013
Net Income	$ 7,271,493	$ 8,516,609	$ 27,832,554	$ 26,037,723
Other Comprehensive Income (Loss):
Net changes related to available-for-sale
Securities:
Unrealized gains (losses)	1,356,106	(110,649)	6,999,890	(5,432,363)
Income tax benefit (expense)	(370,489)	32,742	(1,863,042)	1,484,821
Net unrealized (losses) gains	985,617	(77,907)	5,136,848	(3,947,542)
Less reclassification of gain to
net income (1)	-	21,302	7	70,843
Total Other Comprehensive
Income (Loss)	985,617	(99,209)	5,136,841	(4,018,385)
Total Comprehensive Income	$ 8,257,110	$ 8,417,400	$ 32,969,395	$ 22,019,338

(1)

Reclassified $9 to other operating expenses and $2 to provision for income taxes on the Condensed Consolidated Statements of Income and Retained Earnings (Unaudited) during the nine months ended September 30, 2014.

Reclassified $28,468 to other operating expenses and $7,166 to provision for income taxes on the Condensed Consolidated Statements of Income and Retained Earnings (Unaudited) during the three months ended September 30, 2013.

Reclassified $97,076 to other operating expenses and $26,233 to provision for income taxes on the Condensed Consolidated Statements of Income and Retained Earnings (Unaudited) during the nine months ended September 30, 2013.  

See Notes to Unaudited Condensed Consolidated Financial Statements

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1ST FRANKLIN FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine Months Ended
	September 30,
	2014	2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$ 27,832,554	$ 26,037,723
Adjustments to reconcile net income to net cash Provided by operating activities:
Provision for loan losses	22,250,160	18,492,721
Depreciation and amortization	2,327,098	2,164,317
Provision for deferred income taxes	(17,473)	11,724
Earnings in equity method investment	(1,108,526)	-
Other	914,369	746,312
Decrease (Increase) in miscellaneous other assets	540,464	(31,057)
Decrease in other liabilities	(818,875)	(1,863,024)
Net Cash Provided	51,919,771	45,558,716
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased	(243,173,102)	(235,164,889)
Loan payments	226,135,630	214,234,003
Decrease in restricted cash	133,418	1,567,998
Purchases of marketable debt securities	(25,428,772)	(26,158,802)
Purchase of equity fund investment	(15,000,000)	-
Sales of marketable debt securities	-	1,799,597
Redemptions of marketable debt securities	13,690,000	11,130,000
Fixed asset additions, net	(2,836,638)	(1,872,681)
Net Cash Used	(46,479,464)	(34,464,774)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in senior demand notes	4,571,954	4,593,441
Advances on credit line	398,603	398,921
Payments on credit line	(398,603)	(398,921)
Commercial paper issued	53,257,284	45,290,688
Commercial paper redeemed	(37,032,507)	(25,794,813)
Subordinated debt securities issued	5,348,824	6,735,603
Subordinated debt securities redeemed	(7,188,725)	(8,909,432)
Dividends / Distributions	(22,385,402)	(14,017,609)
Net Cash (Used) Provided	(3,428,572)	7,897,878
NET INCREASE CASH AND CASH EQUIVALENTS	2,011,735	18,991,820
CASH AND CASH EQUIVALENTS, beginning	26,399,839	28,186,035
CASH AND CASH EQUIVALENTS, ending	$ 28,411,574	$ 47,177,855
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest	$ 8,856,306	$ 8,612,416
Income Taxes	3,332,000	2,724,000
Non-cash Exchange of Investment Securities	-	1,909,148
See 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, 2013 and for the year then ended included in the Company's 2013 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, 2014 and December 31, 2013, and its consolidated results of operations and comprehensive income for the three and nine-month periods ended September 30, 2014 and 2013 and its consolidated cash flows for the nine months ended September 30, 2014 and 2013. 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 Company’s financial condition and results of operations as of and for the nine months ended September 30, 2014 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 Condensed Consolidated Statements of Income and Retained Earnings (Unaudited).  The Company has no dilutive securities outstanding.

Recent Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09 “Revenue from Contracts with Customers.” ASU 2014-09 applies to most contracts with customers. Finance receivable and insurance contracts are excluded from the scope of this pronouncement. ASU 2014-09 prescribes a five step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligations under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligations and (e) recognition of revenues as the identified performance obligations are satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 is effective for public entities in annual reporting periods beginning after December 15, 2016. Early application is not permitted. ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Management is currently evaluating the effect the adoption of this standard is expected to have on our consolidated financial statements.

In August 2014, FASB issued ASU 2014 "Presentation of Financial Statements - Going Concern".  ASU 2014-15 provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for fiscal yeares and interim periods ending after December 15, 2016.  Management is currently evaluating the effect the adoption of this standard will have on our consolidated financial statements.

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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.  Delinquency and bankruptcy filing trends are also tracked.  If 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 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 class 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, Management classifies the account as being 60-89 days past due; when four or more installments are past due, Management classifies 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 addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid. 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. 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 60 days or more past due and still accruing interest at September 30, 2014 or December 31, 2013.  The Company’s principal balances on non-accrual loans by loan class as of September 30, 2014 and December 31, 2013 are as follows:

Loan Class	September 30,  2014	December 31, 2013
Consumer Loans	$ 24,800,568	$ 33,680,602
Real Estate Loans	977,380	969,149
Sales Finance Contracts	788,448	816,196
Total	$ 26,566,396	$ 35,465,947

An age analysis of principal balances on past due loans, segregated by loan class, as of September 30, 2014 and December 31, 2013 follows:

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September 30, 2014	30-59 Days Past Due	60-89 Days Past Due	90 Days or More Past Due	Total Past Due Loans
Consumer Loans	$ 14,379,252	$ 7,352,779	$ 15,305,181	$ 37,037,212
Real Estate Loans	416,853	184,809	659,533	1,261,195
Sales Finance Contracts	358,246	226,343	503,282	1,087,871
Total	$ 15,154,351	$  7,763,931	$ 16,467,996	$ 39,386,278

December 31, 2013	30-59 Days Past Due	60-89 Days Past Due	90 Days or More Past Due	Total Past Due Loans
Consumer Loans	$ 11,939,226	$ 6,542,571	$ 13,438,184	$ 31,919,981
Real Estate Loans	299,094	173,842	547,012	1,019,948
Sales Finance Contracts	391,658	203,821	448,991	1,044,470
Total	$ 12,629,978	$ 6,920,234	$ 14,434,187	$ 33,984,399

In addition to the delinquency rating analysis, the ratio of bankrupt accounts to the total loan portfolio is also used as a credit quality indicator.  The ratio of bankrupt accounts outstanding to total principal loan balances outstanding at September 30, 2014 and December 31, 2013 was 2.89% and 2.54%, respectively.

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

September 30, 2014	Principal Balance	% Portfolio	9 Months Net Charge Offs	% Net Charge Offs
Consumer Loans	$ 436,692,703	91.0%	$ 18,714,148	97.2
Real Estate Loans	19,855,487	4.1	23,283	.1
Sales Finance Contracts	23,298,783	4.9	516,718	2.7
Total	$ 479,846,973	100.0%	$ 19,254,149	100.0%

September 30, 2013	Principal Balance	% Portfolio	9 Months Net Charge Offs	% Net Charge Offs
Consumer Loans	$ 408,511,052	90.7%	$ 16,399,446	98.2%
Real Estate Loans	20,152,393	4.5	(4,024)	(.1)
Sales Finance Contracts	21,871,014	4.8	297,299	1.9
Total	$ 450,534,459	100.0%	$ 16,692,721	100.0%

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 96% of the Company’s loan portfolio at September 30, 2014 and 2013.  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:

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	Three Months Ended		Nine Months Ended
	Sept. 30, 2014	Sept. 30, 2013	Sept. 30, 2014	Sept. 30, 2013
Allowance for Credit Losses:
Beginning Balance	$ 25,876,800	$ 22,810,085	$ 24,680,789	$ 22,010,085
Provision for Loan Losses	9,184,293	7,268,188	22,250,160	18,492,721
Charge-offs	(9,542,987)	(8,403,389)	(26,286,287)	(23,596,878)
Recoveries	2,158,694	2,135,201	7,032,138	6,904,157
Ending Balance	$ 27,676,800	$ 23,810,085	$ 27,676,800	$ 23,810,085
Ending balance; collectively evaluated for impairment	$ 27,676,800	$ 23,810,085	$ 27,676,800	$ 23,810,085

	Three Months Ended		Nine Months Ended
	Sept. 30, 2014	Sept. 30, 2013	Sept. 30, 2014	Sept. 30, 2013
Finance receivables:
Ending balance	$ 479,846,973	$ 450,534,459	$ 479,846,973	$ 450,534,459
Ending balance; collectively evaluated for impairment	$ 479,846,973	$ 450,534,459	$ 479,846,973	$ 450,534,459

Troubled Debt Restructings ("TDR's") 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 owed by the borrower.  

The following table presents a summary of loans that were restructured during the three months ended September 30, 2014.

	Number Of Loans	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Consumer Loans	1,008	$ 3,238,641	$ 3,046,786
Real Estate Loans	8	87,548	80,548
Sales Finance Contracts	48	125,818	119,834
Total	1,064	$ 3,452,007	$ 3,247,168

The following table presents a summary of loans that were restructured during the three months ended September 30, 2013.

	Number Of Loans	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Consumer Loans	1,090	$ 3,319,113	$ 3,077,259
Real Estate Loans	13	98,077	98,077
Sales Finance Contracts	45	90,740	86,593
Total	1,148	$ 3,507,930	$ 3,261,929

The following table presents a summary of loans that were restructured during the nine months ended September 30, 2014.

	Number Of Loans	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Consumer Loans	2,659	$ 8,455,145	$ 7,826,633
Real Estate Loans	44	382,487	375,431
Sales Finance Contracts	120	299,921	285,205
Total	2,823	$ 9,137,553	$ 8,487,269

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The following table presents a summary of loans that were restructured during the nine months ended September 30, 2013.

	Number Of Loans	Pre-Modification Recorded Investment	Post-Modification Recorded Investment
Consumer Loans	2,682	$ 8,258,864	$ 7,598,031
Real Estate Loans	44	329,983	325,681
Sales Finance Contracts	125	242,193	226,547
Total	2,851	$ 8,831,040	$ 8,150,259

TDRs that occurred during the previous twelve months and subsequently defaulted during the three months ended September 30, 2014 are listed below.  

	Number Of Loans	Pre-Modification Recorded Investment
Consumer Loans	204	$ 370,132
Real Estate Loans	2	3,768
Sales Finance Contracts	13	16,822
Total	219	$ 390,722

TDRs that occurred during the twelve months ended September 30, 2013 and subsequently defaulted during the three months ended September 30, 2013 are listed below.

	Number Of Loans	Pre-Modification Recorded Investment
Consumer Loans	181	$ 347,757
Real Estate Loans	-	-
Sales Finance Contracts	11	11,091
Total	192	$ 358,848

TDRs that occurred during the previous twelve months and subsequently defaulted during the nine months ended September 30, 2014 are listed below.

	Number Of Loans	Pre-Modification Recorded Investment
Consumer Loans	512	$ 930,070
Real Estate Loans	3	7,294
Sales Finance Contracts	23	26,475
Total	538	$ 963,839

TDRs that occurred during the twelve months ended September 30, 2013 and subsequently defaulted during the nine months ended September 30, 2013 are listed below.

	Number Of Loans	Pre-Modification Recorded Investment
Consumer Loans	443	$ 813,951
Real Estate Loans	2	6,464
Sales Finance Contracts	19	16,773
Total	464	$ 837,188

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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 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 values of these debt securities were as follows:

		As of September 30, 2014		As of December 31, 2013
		Amortized Cost	Estimated Fair Value	Amortized Cost	Estimated Fair Value
	Available-for-Sale: Obligations of states and political subdivisions Corporate securities	$ 127,145,109 130,316 $ 127,275,425	$ 130,371,451 422,499 $ 130,793,950	$ 109,412,622 130,316 $ 109,542,938	$ 105,628,550 433,034 $ 106,061,584
	Held to Maturity: Obligations of states and political subdivisions	$ 22,843,926	$ 23,354,660	$ 29,777,456	$ 30,169,874

Gross unrealized losses on investment securities totaled $754,351 and $5,195,856 at September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013:

	Less than 12 Months			12 Months or Longer		Total
September 30, 2014	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Available for Sale:
Obligations of states and political subdivisions		$ 10,476,959	$ 66,349	$ 21,857,841	$ 596,178	$ 32,334,800	$ 662,527
Held to Maturity:
Obligations of states and political subdivisions		1,994,175	27,987	1,404,200	63,837	3,398,375	91,824
Overall Total		$ 12,471,134	$ 94,336	$ 23,262,041	$ 660,015	$ 35,733,175	$ 754,351

	Less than 12 Months		12 Months or Longer		Total
December 31, 2013	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Available for Sale:
Obligations of states and political subdivisions	$ 51,088,253	$ 3,354,098	$ 9,763,723	$ 1,671,183	$  60,851,976	$ 5,025,281
Held to Maturity:
Obligations of states and political subdivisions	2,229,451	38,968	3,168,698	131,607	5,398,149	170,575
Overall Total	$ 53,317,704	$ 3,393,066	$ 12,932,421	$ 1,802,790	$ 66,250,125	$ 5,195,856

The previous two tables consist of 57 and 112 investments held by the Company at September 30, 2014 and December 31, 2013, respectively, 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 and market fluctuations.  Based on the credit ratings of these investments, along with the consideration of whether the Company has the intent to sell or will be more likely than not required to sell the applicable investment before recovery of amortized cost basis, the Company does not consider the impairment of any of these investments to be other-than-temporary at September 30, 2014 or December 31, 2013.

The Company’s insurance subsidiaries internally designate certain investments as restricted to cover their policy reserves and loss reserves.  Funds are held in separate trusts for the benefit of each insurance subsidiary at U.S. Bank National Association ("US Bank").  US Bank serves

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as trustee under a trust agreement with the Company's property and casualty insurance company subsidiary ("Frandisco P&C"), as grantor, and American Bankers Insurance Company of Florida, as beneficiary.  At September 30, 2014, this trust held $23.8 million in available-for-sale investment securities at market value and $7.9 million in held-to-maturity investment securities at amortized cost.  US Bank also serves as trustee under a trust agreement with the Company's life insurance subsidiary (“Frandisco Life”), as grantor, and American Bankers Life Assurance Company, as beneficiary.  At September 30, 2014, the trust for Frandisco Life held $3.1 million in available-for-sale investment securities at market value and $1.0 million in held-to-maturity investment securities at amortized cost.  The amounts required to be in each Trust change as required reserves change.  All earnings on assets in the trusts are remitted to Frandisco P&C and Frandisco Life, respectively.  Any charges associated with the trust are paid by the beneficiaries of each trust.

Note 4 – Fair Value

Under Accounting Standards Codification No. 820 ("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.  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.

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

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

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

The 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.  The estimate of the fair value of cash and cash equivalents is classified as Level 1 in the fair value hierarchy.

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.  The estimate of fair value of loans is classified as Level 3 in the fair value hierarchy.

Marketable Debt Securities:  The fair value of marketable debt securities is based on quoted market prices, when available.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  The estimate of fair value of held-to-maturity marketable debt securities is classified as Level 2 in the fair value hierarchy.  See additional information, including the table below, regarding fair value under ASC No. 820, and the fair value measurement of available-for-sale marketable debt securities.

Equity Method Investment:  The fair value of equity method investments is estimated based on the Company's allocable share of the investee net asset value as of the reporting date.  Equity method investment is a Level 2 financial asset.

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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.  The estimate of fair value of senior debt securities is classified as Level 2 in the fair value hierarchy.

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.  The estimate of fair value of subordinated debt securities is classified as Level 2 in the fair value hierarchy.

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, 2014 and December 31, 2013 were available-for-sale investment securities which are summarized below:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		In Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	September 30,	Assets	Inputs	Inputs
Description	2014	(Level 1)	(Level 2)	(Level 3)
Corporate securities Obligations of states and      political subdivisions              Total	$ 422,499 130,371,451 $ 130,793,950	$ 422,429 -- $ 422,429	$ -- 130,371,451 $ 130,371,451	$ -- -- $ --

		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		In Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	December 31,	Assets	Inputs	Inputs
Description	2013	(Level 1)	(Level 2)	(Level 3)
Corporate securities Obligations of states and      political subdivisions              Total	$ 433,034 105,628,550 $ 106,061,584	$ 433,034 -- $ 433,034	$ -- 105,628,550 $ 105,628,550	$ -- -- $ --

Note 5 – Equity Method Investment

The Company has one investment accounted for using the equity method of accounting.  On November 1, 2013, the Company invested $10.0 million in Meritage Capital, Centennial Absolute Return Fund, L.P. (the "Fund").  An additional $15.0 million was invested on April 1, 2014.  The Company has no investment commitments to the Fund.  The carrying value of this investment

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was $26.3 million and $10.2 million as of September 30, 2014 and December 31, 2013, respectively.  The Company's equity in earnings of the Fund were $1.1 million during the nine months ended September 30, 2014 and is included in Other Revenue in the Condensed Consolidated Statements of Income and Retained Earnings.  Withdrawal of funds may be done at the end of any calendar quarter with a 60 day notice.  The Company's ownership interest in the Fund was 25.78% and 12.14% at August 31, 2014 (the latest available data) and December 31, 2013, respectively.  

Condensed financial statement information of the equity method investment is as follows:

	August 31, 2014	December 31,2013
Company's equity method investment	$ 26,149,480	$ 10,211,635
Partnership assets	$ 105,165,819	$ 88,602,340
Partnership liabilities	$ 2,301,339	$ 2,873,918
Partnership net income	$ 5,347,248	$ 7,983,103

Note 6 – Commitments and Contingencies

The Company is, and expects in the future to be, 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, 2014, 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.

Note 7 – Income Taxes

Effective income tax rates were 13% and 10% during the three-month periods ended September 30, 2014 and 2013, respectively.  During the nine-month period comparable periods, effective income tax rates were 10%.  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 investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

  

 Note 8 – Credit Agreement

Effective September 11, 2009, the Company entered into a credit facility with Wells Fargo Preferred Capital, Inc.  The credit agreement, as amended, provides for borrowings of up to $100.0 million or 70% of the Company's net finance receivables (as defined in the Credit Agreement), whichever is less and has a maturity date of September 11, 2017.  Available borrowings under the credit agreement were $100.0 million at September 30, 2014 and December 31, 2013, at an interest rate of 3.75%.  The credit agreement contains covenants customary for financing transactions of this type.  At September 30, 2014, the Company was in compliance with all covenants.  

 

Note 9 – Related Party Transactions

The Company engages from time to time in transactions with related parties.  Please refer to the disclosure contained in Note 10 “Related Party Transactions” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2013 for additional information on such transactions.

Note 10 – Segment Financial Information

The Company 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

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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 for the Company as a whole.  Performance is measured based on objectives set at the 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 No. 280, “Segment Reporting,” the following table summarizes revenues, profit and assets by business segment.  Also in accordance therewith, reconciliation to consolidated net income is provided.  

	Division	Division	Division	Division	Division
	I	II	III	IV	V	Total
	(in thousands)
Segment Revenues:
3 Months ended 9/30/2014	$ 6,617	$ 11,456	$ 10,739	$ 9,770	$ 8,397	$ 46,979
3 Months ended 9/30/2013	5,969	10,691	10,208	8,864	7,887	43,619
9 Months ended 9/30/2014	$ 19,362	$ 33,737	$ 31,945	$ 28,458	$ 25,126	$ 138,628
9 Months ended 9/30/2013	17,382	31,282	29,999	26,041	23,378	128,082
Segment Profit:
3 Months ended 9/30/2014	$ 2,297	$ 5,399	$ 4,502	$ 3,753	$ 2,876	$ 18,827
3 Months ended 9/30/2013	2,233	5,262	4,629	3,474	2,912	18,510
9 Months ended 9/30/2014	$ 7,339	$ 16,505	$ 14,783	$ 11,610	$ 9,645	$ 59,882
9 Months ended 9/30/2013	6,312	15,739	14,113	10,437	9,176	55,777

Segment Assets:
9/30/2014		$ 53,855	$ 99,582	$ 94,055	$ 98,243	$ 71,540	$ 417,275
12/31/2013		53,529	100,646	97,290	96,440	70,898	418,803
				3 Months Ended 9/30/2014 (in Thousands)	3 Months Ended 9/30/2013 (in Thousands)	9 Months Ended 9/30/2014 (in Thousands)	9 Months Ended 9/30/2013 (in Thousands)
Reconciliation of Profit:
Profit per segment				$18,827	$ 18,510	$ 59,882	$ 55,777
Corporate earnings not allocated				3,401	3,063	9,842	8,668
Corporate expenses not allocated				(13,852)	(12,086)	(38,654)	(35,446)
Income taxes not allocated				(1,104)	(970)	(3,237)	(2,961)
Net income				$ 7,272	$ 8,517	$ 27,833	$ 26,038

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BRANCH OPERATIONS
Ronald F. Morrow	Vice President
Virginia K. Palmer	Vice President
J. Patrick Smith, III	Vice President
Marcus C. Thomas	Vice President
Michael J. Whitaker	Vice President
Joseph R. Cherry	Area Vice President
John B. Gray	Area Vice President

REGIONAL OPERATIONS DIRECTORS
Sonya Acosta	Joe Daniel	Steve Knotts	Marty Miskelly
Michelle Rentz Benton	Loy Davis	Judy Landon	Larry Mixson
Bert Brown	Carla Eldridge	Sharon Langford	William Murillo
Ron Byerly	Jimmy Fairbanks	Jeff Lee	Mike Olive
Keith Chavis	Chad Frederick	Tommy Lennon	Hilda Phillips
Janice Childers	Shelia Garrett	Lynn Lewis	Jennifer Purser
Rick Childress	Brian Hill	Jimmy Mahaffey	Summer Rhodes
Bryan Cook	David Hoard	John Massey	Mike Shankles
Richard Corirossi Jeremy Cranfield	Gail Huff Jerry Hughes	Vicky McCleod Brian McSwain	Harriet Welch

BRANCH OPERATIONS
ALABAMA
Adamsville	Bessemer	Enterprise	Huntsville (2)	Opp	Scottsboro
Albertville	Center Point	Fayette	Jasper	Oxford	Selma
Alexander City	Clanton	Florence	Moody	Ozark	Sylacauga
Andalusia	Cullman	Fort Payne	Moulton	Pelham	Troy
Arab	Decatur	Gadsden	Muscle Shoals	Prattville	Tuscaloosa
Athens	Dothan (2)	Hamilton	Opelika	Russellville (2)	Wetumpka
GEORGIA
Adel	Carrollton	Dalton	Gray	Macon	Statesboro
Albany	Cartersville	Dawson	Greensboro	Madison	Stockbridge
Alma	Cedartown	Douglas (2)	Griffin	Manchester	Swainsboro
Americus	Chatsworth	Douglasville	Hartwell	McDonough	Sylvania
Athens (2)	Clarkesville	Dublin	Hawkinsville	Milledgeville	Sylvester
Bainbridge	Claxton	East Ellijay	Hazlehurst	Monroe	Thomaston
Barnesville	Clayton	Eastman	Helena	Montezuma	Thomson
Baxley	Cleveland	Eatonton	Hinesville (2)	Monticello	Tifton
Blairsville	Cochran	Elberton	Hiram	Moultrie	Toccoa
Blakely	Colquitt	Fayetteville	Hogansville	Nashville	Valdosta
Blue Ridge	Columbus	Fitzgerald	Jackson	Newnan	Vidalia
Bremen	Commerce	Flowery Branch	Jasper	Perry	Villa Rica
Brunswick	Conyers	Forsyth	Jefferson	Pooler	Warner Robins
Buford	Cordele	Fort Valley	Jesup	Richmond Hill	Washington
Butler	Cornelia	Ft. Oglethorpe	Kennesaw	Rome	Waycross
Cairo	Covington	Gainesville	LaGrange	Royston	Waynesboro
Calhoun	Cumming	Garden City	Lavonia	Sandersville	Winder
Canton	Dahlonega	Georgetown	Lawrenceville	Savannah

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BRANCH OPERATIONS
(Continued)
LOUISIANA
Abbeville	Denham Springs	Houma	Marksville	New Iberia	Slidell
Alexandria	DeRidder	Jena	Minden	Opelousas	Springhill
Bastrop	Eunice	Lafayette	Monroe	Pineville	Sulphur
Bossier City	Franklin	LaPlace	Morgan City	Prairieville	Thibodaux
Crowley Covington	Hammond	Leesville	Natchitoches	Ruston	Winnsboro
MISSISSIPPI
Batesville	Columbus	Hazlehurst	Magee	Oxford	Ripley
Bay St. Louis	Corinth	Hernando	McComb	Pearl	Senatobia
Booneville	Forest	Houston	Meridian	Philadelphia	Starkville
Brookhaven	Grenada	Iuka	New Albany	Picayune	Tupelo
Carthage	Gulfport	Jackson	Newton	Pontotoc	Winona
Columbia	Hattiesburg	Kosciusko	Olive Branch
SOUTH CAROLINA
Aiken	Chester	Greenville	Lexington	North Charleston	Spartanburg
Anderson	Columbia	Greenwood	Manning	North Greenville	Summerville
Batesburg-    Leesvile	Conway	Greer	Marion	North Myrtle    Beach	Sumter
Beaufort	Dillon	Hartsville	Moncks Corner	Orangeburg	Union
Camden	Easley	Irmo	Myrtle Beach	Rock Hill	Walterboro
Cayce	Florence	Lake City	Newberry	Seneca	Winnsboro
Charleston	Gaffney	Lancaster	North Augusta	Simpsonville	York
Cheraw	Georgetown	Laurens
TENNESSEE
Alcoa	Crossville	Greenville	Kingsport	Lenior City	Sevierville
Athens	Dayton	Hixson	Knoxville	Madisonville	Sparta
Bristol	Elizabethton	Johnson City	LaFollette	Newport	Winchester
Cleveland

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DIRECTORS
Ben F. Cheek, III Chairman and Chief Executive Officer 1st Franklin Financial Corporation	John G. Sample, Jr. Senior Vice President and Chief Financial Officer Atlantic American Corporation
Ben F. Cheek, IV Vice Chairman 1st Franklin Financial Corporation	C. Dean Scarborough Realtor
A. Roger Guimond Executive Vice President and Chief Financial Officer 1st Franklin Financial Corporation	Keith D. Watson Vice President and Corporate Secretary Bowen & Watson, Inc.
Jim H. Harris, III Founder / Co-owner Unichem Technologies Founder / Owner / President Moonrise Distillery

EXECUTIVE OFFICERS

Ben F. Cheek, III Chairman and Chief Executive Officer

Ben F. Cheek, IV Vice Chairman

Virginia C. Herring President

A. Roger Guimond Executive Vice President and Chief Financial Officer

J. Michael Culpepper Executive Vice President and Chief Operating Officer

C. Michael Haynie Executive Vice President - Human Resources

Kay S. Lovern Executive Vice President – Strategic and Organization Development

Chip Vercelli Executive Vice President – General Counsel

Lynn E. Cox Vice President / Corporate Secretary and Treasurer

LEGAL COUNSEL

Jones Day 1420 Peachtree Street, N.E. Suite 800 Atlanta, Georgia  30309-3053

AUDITORS

Deloitte & Touche LLP 191 Peachtree Street, N.E. Atlanta, Georgia  30303

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