1st Franklin Assets Surge 7% Amid Loan Growth, But Internal Controls Flail

TL;DR

**1st Franklin is growing loans like crazy, but their internal controls are a mess, making this a high-risk play despite the asset growth.**

AI Summary

1st Franklin Financial Corp. reported a significant increase in total assets, growing by $97.6 million (7%) to $1,409.3 million at September 30, 2025, compared to $1,311.7 million at December 31, 2024. This growth was primarily driven by an $82.9 million increase in the net loan portfolio, reaching $994.6 million, and a $13.8 million increase in investment securities to $269.8 million. Gross loan originations surged by $116.2 million for the three months ended September 30, 2025, and by $243.9 million for the nine months ended September 30, 2025, compared to the prior year periods. The company's allowance for credit losses increased by $2.1 million to $75.5 million. However, the company disclosed material weaknesses in internal control over financial reporting related to the conversion and implementation of a new loan servicing system, which began in June 2024 and continued into 2025. These weaknesses include a lack of formal risk assessment and monitoring processes, leading to incorrectly configured transaction codes and ineffective business process controls. Furthermore, 1st Franklin Financial Corp. was not in compliance with its consolidated tangible net worth ratio covenant for the three months ended September 30, 2025, exceeding the 3.75 to 1.00 maximum with a ratio of 3.76, though a waiver was obtained from BMO Bank, N.A.

Why It Matters

For investors, the robust asset growth and significant increase in loan originations signal strong business expansion and potential for future revenue, especially in a competitive consumer finance market. However, the disclosed material weaknesses in internal controls over financial reporting introduce substantial operational risk, potentially leading to financial misstatements and eroding investor confidence. The covenant breach with BMO Bank, N.A., despite the waiver, highlights financial leverage concerns and could impact future borrowing costs or access to capital. Employees might face increased scrutiny and workload as the company remediates control deficiencies, while customers could experience service disruptions if system issues persist. The broader market will watch how a non-accelerated filer navigates such significant internal control issues, setting a precedent for transparency and remediation efforts.

Risk Assessment

Risk Level: high — The company explicitly stated that its disclosure controls and procedures were "not effective" as of September 30, 2025, due to "material weaknesses in our internal control over financial reporting." These weaknesses stem from the new loan servicing system implementation, leading to incorrectly configured transaction codes and ineffective business process controls, creating a "reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis." Additionally, the company breached its consolidated tangible net worth ratio covenant with BMO Bank, N.A., reporting 3.76 against a maximum of 3.75, indicating financial leverage concerns.

Analyst Insight

Investors should exercise extreme caution and consider delaying any investment decisions until the material weaknesses in internal controls are fully remediated and independently verified. Current investors should closely monitor the company's progress on its remediation plan and assess the potential for restatements or further financial instability. The covenant breach, even with a waiver, warrants a deeper dive into the company's financial health and debt management.

Financial Highlights

total Assets

$1,409.3 million

total Debt

$1,076.2 million

Key Numbers

• $1,409.3 million — Total Assets (Increased by $97.6 million (7%) from December 31, 2024)
• $994.6 million — Net Loan Portfolio (Increased by $82.9 million from December 31, 2024)
• $116.2 million — Gross Loan Originations Increase (3 months) (Increase for the three months ended September 30, 2025, compared to prior year)
• $243.9 million — Gross Loan Originations Increase (9 months) (Increase for the nine months ended September 30, 2025, compared to prior year)
• $75.5 million — Allowance for Credit Losses (Increased by $2.1 million from December 31, 2024)
• $1,076.2 million — Aggregate Senior and Subordinated Debt (Increased by $83.7 million (8%) from December 31, 2024)
• 3.76 — Consolidated Tangible Net Worth Ratio (Exceeded the covenant maximum of 3.75 to 1.00 at September 30, 2025)
• 117 — Branch Offices in Georgia (Part of the company's strategic geographic expansion)

Key Players & Entities

• 1st FRANKLIN FINANCIAL CORPORATION (company) — Registrant
• BMO Bank, N.A. (company) — Lender in Loan and Security Agreement
• Virginia C. Herring (person) — President and Chief Executive Officer
• Jenna C. Hood (person) — Executive Vice President and Chief Financial Officer
• Frandisco Life Insurance Company (company) — Wholly-owned insurance subsidiary
• Frandisco Property and Casualty Insurance Company (company) — Wholly-owned insurance subsidiary
• Securities and Exchange Commission (regulator) — Regulatory body for filings

FAQ

Risk Factors

• Material Weaknesses in Internal Control [high — operational]: The company disclosed material weaknesses in internal control over financial reporting due to the conversion and implementation of a new loan servicing system. These weaknesses include a lack of formal risk assessment and monitoring processes, leading to incorrectly configured transaction codes and ineffective business process controls.
• Covenant Non-Compliance [medium — financial]: 1st Franklin Financial Corp. was not in compliance with its consolidated tangible net worth ratio covenant for the three months ended September 30, 2025, reporting a ratio of 3.76 against a maximum of 3.75 to 1.00. A waiver was obtained from BMO Bank, N.A., mitigating immediate risk.

Industry Context

The financial services industry, particularly for companies like 1st Franklin Financial Corp. focused on lending, is sensitive to interest rate environments and economic conditions. Growth in loan portfolios and originations suggests a potentially favorable lending market or successful market penetration. However, operational risks associated with system implementations and regulatory compliance remain critical.

Regulatory Implications

The disclosed material weaknesses in internal controls related to a new loan servicing system could attract regulatory scrutiny. Non-compliance with financial covenants, even with a waiver, highlights potential governance and risk management issues that regulators monitor closely.

What Investors Should Do

1. Monitor resolution of internal control weaknesses.
2. Assess the sustainability of loan growth.
3. Review covenant compliance and waiver terms.

Key Dates

• 2025-09-30: Quarterly Financial Reporting Period End — Key period for asset growth, loan portfolio expansion, and covenant compliance assessment.
• 2025-06-01: New Loan Servicing System Implementation Began — Initiation of a project that led to disclosed material weaknesses in internal controls.

Glossary

Allowance for Credit Losses

An estimate of the amount of uncollectible loans in a company's loan portfolio. It is a contra-asset account that reduces the carrying value of loans on the balance sheet. (An increase in this allowance suggests management's expectation of higher future loan defaults or a deterioration in loan quality.)

Consolidated Tangible Net Worth Ratio

A measure of a company's financial strength, calculated by dividing its tangible net worth (total equity minus intangible assets) by its total assets minus intangible assets. It is often used in loan covenants. (Non-compliance with this ratio indicates potential financial strain and a breach of debt agreements, though a waiver was obtained.)

Gross Loan Originations

The total amount of new loans issued by a financial institution during a specific period, before any deductions for repayments or sales. (A significant increase indicates strong business activity and growth in the core lending business.)

Year-Over-Year Comparison

The company reported substantial asset growth of 7% to $1,409.3 million, driven by an $82.9 million increase in the net loan portfolio. Gross loan originations saw significant increases of $116.2 million and $243.9 million for the three and nine months ended September 30, 2025, respectively, compared to prior periods. However, this period is marked by the disclosure of material weaknesses in internal controls and a breach of a key financial covenant, which were not present in the prior year's filings.

Key Financial Figures

• $100 — , 2025 Voting Common Stock, par value $100 per share 1,700 Shares Non-Voting Co
• $97.6 million — : The Company's total assets increased $97.6 million (7%) to $1,409.3 million at September 3
• $1,409.3 million — assets increased $97.6 million (7%) to $1,409.3 million at September 30, 2025 compared to $1,31
• $1,311.7 million — llion at September 30, 2025 compared to $1,311.7 million at December 31, 2024. Increases in our
• $1.9 million — s (excluding restricted cash) increased $1.9 million (5%) at September 30, 2025 while restri
• $8.7 million — 0, 2025 while restricted cash increased $8.7 million (99%) compared to December 31, 2024. Re
• $116.2 million — ers. Gross loan originations increased $116.2 million for the three months ended September 30
• $243.9 million — tember 30, 2025, originations increased $243.9 million compared to the same period last year.
• $82.9 million — year. Our net loan portfolio increased $82.9 million to $994.6 million at September 30, 2025
• $994.6 million — an portfolio increased $82.9 million to $994.6 million at September 30, 2025 compared to $911.
• $911.7 million — llion at September 30, 2025 compared to $911.7 million at December 31, 2024. Included in our n
• $2.1 million — ion. Management increased the allowance $2.1 million to $75.5 million at September 30, 2025,
• $75.5 million — increased the allowance $2.1 million to $75.5 million at September 30, 2025, compared to $73.
• $73.4 million — lion at September 30, 2025, compared to $73.4 million at December 31, 2024. See Note 2, Loans
• $13.8 million — vestment securities portfolio increased $13.8 million to $269.8 million at September 30, 2025

Filing Documents

• fil-20250930.htm (10-Q) — 1979KB
• a1ffc20250930-exx311.htm (EX-31.1) — 9KB
• a1ffc20250930-exx312.htm (EX-31.2) — 9KB
• a1ffc20250930-exx321.htm (EX-32.1) — 6KB
• a1ffc20250930-exx322.htm (EX-32.2) — 6KB
• 0000038723-25-000146.txt ( ) — 10744KB
• fil-20250930.xsd (EX-101.SCH) — 40KB
• fil-20250930_cal.xml (EX-101.CAL) — 73KB
• fil-20250930_def.xml (EX-101.DEF) — 270KB
• fil-20250930_lab.xml (EX-101.LAB) — 535KB
• fil-20250930_pre.xml (EX-101.PRE) — 428KB
• fil-20250930_htm.xml (XML) — 2747KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Financial Statements

ITEM 1. Financial Statements: The information contained under the following captions in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 2025 is incorporated by reference herein. See Exhibit 13. Condensed Consolidated Statements of Financial Position (Unaudited): September 30, 2025 and December 31, 2024 Condensed Consolidated Statements of Income (Unaudited): Three and Nine Months Ended September 30, 2025 and September 30, 2024 Condensed Consolidated Statements of Comprehensive Income (Unaudited): Three and Nine Months Ended September 30, 2025 and September 30, 2024 Condensed Consolidated Statements of Stockholders' Equity (Unaudited): Three and Nine Months Ended September 30, 2025 and September 30, 2024 Condensed Consolidated Statements of Cash Flows (Unaudited): Nine Months Ended September 30, 2025 and September 30, 2024 Notes to Condensed Consolidated Financial Statements (Unaudited)

Management's Discussion and Analysis of Financial Condition and Results of Operations

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 2025 is incorporated by reference herein. See Exhibit 13.

Quantitative and Qualitative Disclosures About Market Risk

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk: The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" in the Company's Quarterly Report to Investors as of and for the three and nine months ended September 30, 2025 is incorporated by reference herein. See Exhibit 13.

Controls and Procedures

ITEM 4. Controls and Procedures: We maintain a set of disclosure controls and procedures, as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that, as of September 30, 2025, the Company's disclosure controls and procedures were not effective, because of the material weaknesses in our internal control over financial reporting further described below. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Material Weakness in Internal Control over Financial Reporting A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, su

OTHER INFORMATION

PART II. OTHER INFORMATION

Legal Proceedings

ITEM 1. Legal Proceedings: The Company is, and expects to be, involved in various legal proceedings incidental to its business from time to time. In the opinion of management, the ultimate resolution of any such known claims or proceedings is not expected to have a material adverse effect on the Company's financial position, liquidity or results of operations.

Defaults Upon Senior Securities

ITEM 3. Defaults Upon Senior Securities: The Company is party to a Loan and Security Agreement, dated as of December 6, 2024 (the "credit agreement"), with BMO Bank, N.A. The credit agreement requires the Company to comply with certain covenants, including maintaining, as of the end of each calendar month, a funded debt to adjusted tangible net worth ratio (the "consolidated tangible net worth ratio") of not more than 3.75 to 1.00. The Company informed BMO Bank, N.A. that it was not in compliance with the consolidated tangible net worth ratio covenant for each of the three months in the period ended September 30, 2025, each instance of which constituted an event of default under the credit agreement. At September 30, 2025, the Company exceeded the maximum consolidated tangible net worth ratio of 3.75 , with a ratio of 3.76 . The Company requested and received a waiver of the designated defaults from the bank syndicate. Although the Company believes that it will be in compliance with this covenant for future periods, any failure to comply with such covenant or other covenants under the credit agreement could result in an event of default that would entitle BMO Bank, N.A. to request immediate repayment of the outstanding loan amount.

Exhibits

ITEM 6. Exhibits: (a) Exhibits: 13 Quarterly Report to Investors as of and for the Three and Nine Months Ended September 30, 2025. 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). <PAGE> 4

SIGNATURES

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1 st FRANKLIN FINANCIAL CORPORATION Registrant /s/ Virginia C. Herring President and Chief Executive Officer (Principal Executive Officer) /s/ Jenna C. Hood Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 19, 2025 <PAGE> 5 Exhibit 13 1 st FRANKLIN FINANCIAL CORPORATION QUARTERLY REPORT TO INVESTORS AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2025

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

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 months ended September 30, 2025 and 2024. This discussion and 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 2024 Annual Report. Results achieved in any interim period are not necessarily indicative of the results to be expected for any other interim or full year period.

Forward-Looking Statements

Forward-Looking Statements : Certain information in this discussion and other statements contained in this Quarterly Report are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are all statements other than those of historical fact. The Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein, which involve known and unknown risks and uncertainties. Possible factors that could cause actual future results to differ from expectations include, but are not limited to, the ability to manage cash flow and working capital, the accuracy of management's estimates and judgments, adverse general economic conditions, including changes in employment rates or in the interest rate environment, unexpected reductions in the size or collectability of our loan portfolio, unexpected increases in our allowance for credit losses, reduced sales or increased redemptions of our securities, unavailability of borrowings under our credit facility, federal and state regulatory changes affecting consumer finance companies, unfavorable outcomes in legal proceedings and those risks and uncertainties described under "Risk Factors" in our 2024 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 installment loans to individuals. Our other lending-related activities include the purchase of sales finance contracts from various dealers and the making of first and second mortgage real estate loans on real estate. All of our loans are at fixed rates, and contain fixed terms and fixed payments. The majority of our revenues are derived from finance char

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