LOSS EXPERIENCE

Net losses (charge-offs less recoveries) and the percent of such net losses to average net loans (loans less unearned finance charges) and to liquidations (payments, refunds, renewals and charge-offs of customers' loans) are shown in the following table:

Year Ended December 31

2010

2009

2008

2007

2006

 (in thousands, except % data)

DIRECT CASH LOANS

Average Net Loans

$

282,750

$

274,275

$

266,753

$

242,576

$

217,919

Liquidations

$465,584

$435,146

$432,651

$405,782

$366,275

Net Losses

$

22,479

$

24,415

$

21,325

$

17,812

$

16,363

Net Losses as % of Average

   Net Loans

7.95%

8.90%

7.99%

7.34%

7.51%

Net Losses as % of Liquidations

4.83%

5.61%

4.93%

4.39%

4.47%

REAL ESTATE LOANS

Average Net Loans

$

23,351

$

24,042

$

25,451

$

25,015

$

23,557

Liquidations

$

9,798

$

8,543

$

15,324

$

13,436

$

12,579

Net Losses (Recoveries)

$

117

$

84

$

(23)

$

114

$

65

Net Losses (Recoveries)

    as a % of Average Net Loans

.50%

.35%

(.09%)

.46%

.28%

Net Losses (Recoveries)

    as a % of Liquidations

1.19%

.98%

(.15%)

.85%

.52%

SALES FINANCE CONTRACTS

Average Net Loans

$

19,369

$

21,334

$

25,486

$

28,721

$

27,950

Liquidations

$

27,642

$

28,304

$

35,070

$

42,031

$

40,093

Net Losses

$

811

$

1,203

$

1,448

$

1,557

$

1,481

Net Losses as % of Average

    Net Loans

4.19%

5.64%

5.68%

5.42%

5.30%

Net Losses as % of  Liquidations

2.93%

4.25%

4.13%

3.70%

3.69%

ALLOWANCE FOR LOAN LOSSES

We determine the allowance for loan losses by reviewing our previous loss experience, reviewing specifically identified loans where collection is believed to be doubtful and evaluating the inherent risks and changes in the composition of our loan portfolio.  Such allowance is, in our opinion, sufficient to provide adequate protection against probable loan losses on the current loan portfolio.  

SEGMENT FINANCIAL INFORMATION

For additional financial information about our segments, see Note 13 “Segment Financial Information” in the Notes to Consolidated Financial Statements.

CREDIT INSURANCE

We 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 any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request credit 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 products 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.

REGULATION AND SUPERVISION

In some jurisdictions, we are deemed to operate as a “small loan business.”  Generally, state laws require that each office in which a small loan business is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations.  The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show evidence of a need through convenience and advantage documentation.  As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies.  Licenses are revocable for cause, and their continuance depends upon an applicant’s continued compliance with applicable laws and in connection with its receipt of a license.  We believe we conduct our business in accordance with all applicable statutes and regulations.  The Company has never had any of its licenses revoked.

We conduct all of our lending operations under the provisions of the Federal Consumer Credit Protection Act (the "Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act and other federal and state lending laws.  The Truth-in-Lending Act requires, among other things, us to disclose to our customers the finance charge, the annual percentage rate, the total number and amount of payments and other material information on all loans.

A Federal Trade Commission ruling prevents consumer lenders such as the Company from using certain household goods as collateral on direct cash loans.  We seek to collateralize such loans with non-household goods such as automobiles, boats and other exempt items.

We are also subject to state regulations governing insurance agents in the states in which we sell credit insurance.  State insurance regulations require, among other things, that insurance agents be licensed and limit the premiums that insurance agents can charge.

Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business.  While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof.

SOURCES OF FUNDS AND COMMON STOCK MATTERS

The Company is dependent upon the availability of various sources of funds from various sources of in order to meet its ongoing financial obligations and to make new loans as a part of its business.  Our various sources of funds as a percent of total liabilities and stockholders’ equity and the number of persons investing in the Company's debt securities was as follows:

As of December 31

2010

2009

2008

2007

2006

Bank Borrowings

 --%

 4%

 6%

 4%

7%

Senior Debt

49  

43  

38  

41

43

Subordinated Debt

14  

19  

22  

23

19

Other Liabilities

5  

4  

4  

5  

4

Stockholders’ Equity

  32  

  30  

  30  

  27         

  27

    Total

100%

100%

100%

100%  

100%  

Number of Investors

5,418 

5,406 

5,508 

5,820 

5,868 

The average interest rates we pay on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, have been as follows:

Year Ended December 31

2010

2009

2008

2007

2006

Senior Borrowings

4.52%

4.93%

4.78%

5.81%

4.95%

Subordinated Borrowings

  5.33   

5.89   

6.27   

6.34   

5.18

All Borrowings

4.74   

5.24   

5.33   

5.98   

5.04

Certain financial ratios relating to our debt have been as follows:

As of December 31

2010

 2009

2008

2007

  2006

Total Liabilities to

Stockholders’ Equity

2.18

2.38

2.66

2.66

2.69

Unsubordinated Debt to

Subordinated Debt plus

Stockholders’ Equity

1.19

1.06

 .99

 .99

1.19

As of March 29, 2010, all of our common stock was closely held by five related individuals and none of our common stock was listed on any securities exchange or traded on any established public trading market.  The Company does not maintain any equity compensation plans, and did not repurchase any of its equity securities during the most recent fiscal year.  Cash distributions of $29.07 and $51.52 per share were paid in 2010 and 2009, respectively, primarily in amounts to enable the Company’s shareholders to pay their related income tax obligations, which arise as a result of the Company’s status as an S Corporation.  No other cash dividends were paid during the applicable periods.  For the foreseeable future, the Company expects to pay annual cash distributions equal to an amount sufficient to enable the Company’s shareholders to pay their respective income tax obligations as a result of the Company’s status as an S Corporation.

Expected Year of Maturity

2016 &

Fair

2011

2012

2013

2014

2015

Beyond

Total

Value

Assets:

(in millions)

   Marketable Debt Securities

$  13

$12

$ 14

$ 12

  $  9

$ 18

$  78

$  78

   Average Interest Rate

3.7%

3.7%

3.7%

2.7%

3.3%

3.6%

3.4%

Liabilities:

   Senior Debt:

      Senior Demand Notes

$40

—

—

—

—

—

$  40

$  40

      Average Interest Rate

2.1%

—

—

—

—

—

2.1%

      Commercial Paper

$167

—

—

—

—

—

$167

$167

      Average Interest Rate

4.5%

—

—

—

—

—

4.5%

      Notes Payable to Banks

$  —

—

$   1

—

—

—

$  1

$  1

      Average Interest Rate

—

—

3.8%

—

—

—

3.8%

   Subordinated Debentures

$  19

$  11

$ 13

$ 17

—

—

$  60

$  60

      Average Interest Rate

5.2%

3.8%

4.3%

3.6%

—

—

4.7%

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:

The Board of Directors and Shareholders

1^st Franklin Financial Corporation

We have audited the accompanying consolidated statements of financial position of 1^st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of 1^st Franklin Financial Corporation and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 29, 2011

1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2010 AND 2009

ASSETS

2010   

  2009     

CASH AND CASH EQUIVALENTS (Note 5):

   Cash and Due From Banks

$

3,635,920

$

3,725,236

   Short-term Investments

27,065,494

22,562,454

30,701,414

26,287,690

RESTRICTED CASH (Note 1)

3,778,734

3,067,695

LOANS (Note 2):

   Direct Cash Loans

347,445,192

327,424,876

   Real Estate Loans

22,967,279

24,336,405

   Sales Finance Contracts

21,694,633

23,071,118

392,107,104

374,832,399

   Less:

Unearned Finance Charges

45,811,133

43,331,239

Unearned Insurance Premiums

27,211,693

25,797,624

Allowance for Loan Losses

24,110,085

26,610,085

294,974,193

279,093,451

MARKETABLE DEBT SECURITIES (Note 3):

   Available for Sale, at fair market value

66,310,922

63,126,997

   Held to Maturity, at amortized cost

11,890,954

10,330,725

78,201,876

73,457,722

OTHER ASSETS:

   Land, Buildings, Equipment and Leasehold Improvements,

      less accumulated depreciation and amortization

         of $17,364,987 and $15,724,169 in 2010

         and 2009, respectively

6,687,456

7,807,112

   Deferred Acquisition Costs

1,563,629

1,459,782

   Due from Non-affiliated Insurance Company

1,903,137

2,000,256

   Miscellaneous

4,253,457

3,251,472

14,407,679

14,518,622

                TOTAL ASSETS

$

422,063,896

$

396,425,180

See Notes to Consolidated Financial Statements

1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2010 AND 2009

LIABILITIES AND STOCKHOLDERS' EQUITY

2010

 2009

SENIOR DEBT (Note 6):

   Notes Payable to Banks

$

900,000

$

16,204,309

   Senior Demand Notes, including accrued interest

 40,392,404

 41,209,099

   Commercial Paper

167,199,875

129,435,443

208,492,279

186,848,851

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

21,081,545

17,577,438

SUBORDINATED DEBT (Note 7)

59,779,620

74,883,979

        Total Liabilities

289,353,444

279,310,268

COMMITMENTS AND CONTINGENCIES (Note 8)

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 as of December 31, 2010 and 2009

170,000

170,000

Non-Voting Shares; no par value;

198,000 shares authorized; 168,300 shares

outstanding as of December 31, 2010 and 2009

--

--

   Accumulated Other Comprehensive Income

1,550,273

1,696,845

   Retained Earnings

130,990,179

115,248,067

               Total Stockholders' Equity

132,710,452

117,114,912

                    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

422,063,896

$

396,425,180

See Notes to Consolidated Financial Statements

1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

Accumulated

Other

Common Stock

Retained

Comprehensive

Shares

Amount

Earnings

Income

Total

Balance at December 31, 2007

170,000

 $170,000

$108,699,923 

$  970,603 

$109,840,526 

   Comprehensive Income:

       Net Income for 2008

—

—

10,664,776 

— 

       Net Change in Unrealized Gain

          On Available-For-Sale Securities

—

—

 —  

(537,502)  

   Total Comprehensive Income

—

—

—  

— 

10,127,274 

   Cash Distributions Paid

          —

            —

   (3,731,328)

               — 

    (3,731,328)

Balance at December 31, 2008

170,000

170,000

115,633,371 

433,101 

116,236,472 

   Comprehensive Income:

       Net Income for 2009

—

—

8,373,007 

— 

       Net Change in Unrealized Gain

          On Available-For-Sale Securities

—

—

— 

1,263,744  

   Total Comprehensive Income

—

—

— 

— 

9,636,751 

   Cash Distributions Paid

          —

            —

   (8,758,311)

              — 

   (8,758,311)

Balance at  December 31, 2009

170,000

170,000

115,248,067 

   1,696,845 

117,114,912 

    Comprehensive Income:

       Net Income for 2010

—

—

20,683,437

— 

       Net Change in Unrealized Gain

          On Available-For-Sale Securities

—

—

— 

(146,572)

     Total Comprehensive Income

—

—

— 

— 

20,536,865 

     Cash Distributions Paid

          —

            —

    (4,941,325)

              — 

    (4,941,325)

Balance at December 31, 2010

170,000

$170,000

$130,990,179 

$1,550,273 

$132,710,452 

Disclosure of reclassification amount:

2010

2009

2008

Unrealized holding (losses) gains arising during period, net of applicable income tax benefits (provision) of $55,313, $(368,964) and $10,512 for 2010, 2009 and 2008, respectively

$   (142,840)

$   1,267,302 

$   (525,701)

Less: Reclassification adjustment for net gains  included in income, net of applicable income taxes of $1,381, $1,201 and $3,095 for 2010, 2009 and 2008, respectively

           3,732 

           3,558 

         11,801 

Net unrealized (losses) gains on securities, net of applicable income tax benefits (provision) of $56,694, $(367,763) and $13,607 for 2010, 2009 and 2008, respectively

$   (146,572)

$   1,263,744 

$    (537,502)

See Notes to Consolidated Financial Statements

 1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

2010      

2009       

2008       

   Net Income

$

20,683,437

$

8,373,007

$

10,664,776

   Adjustments to reconcile net income to net

       cash provided by operating activities:

Provision for loan losses

20,907,373 

29,302,142 

25,725,394 

Depreciation and amortization

2,465,829 

2,577,539 

2,447,007 

Provision for deferred taxes

272,131 

15,771 

155,830 

Losses due to called redemptions on marketable

securities, loss on sales of equipment and

amortization on securities

379,558 

314,172 

263,242 

(Increase) decrease in miscellaneous

assets and other

(1,008,646)

198,125 

(290,247)

Increase (decrease) in other liabilities

3,288,604 

285,329 

(1,508,028)

Net Cash Provided

46,988,286 

41,066,085 

37,457,974 

CASH FLOWS FROM INVESTING ACTIVITIES:

   Loans originated or purchased

(241,803,898)

(214,933,802)

(236,634,867)

   Loan payments

205,015,783 

192,118,149 

201,984,749 

   Increase in restricted cash

(711,039)

(700,916)

(179,757)

   Purchases of securities, available for sale

(9,969,266)

(2,428,840)

(27,465,879)

   Purchases of securities, held to maturity

(4,659,094)

-- 

(1,202,870)

   Redemptions of securities, available for sale

6,189,950 

8,490,750 

18,813,950 

   Redemptions of securities, held to maturity

3,065,000 

3,790,000 

5,101,000 

   Purchase of joint venture interest

-- 

(27,601)

-- 

   Capital expenditures

(1,430,092)

(997,083)

(2,777,574)

   Proceeds from sale of equipment

130,350 

53,331 

25,234 

Net Cash Used

(44,172,306)

(14,636,012)

(42,336,014)

CASH FLOWS FROM FINANCING ACTIVITIES:

   Net decrease in Senior Demand Notes

(816,695)

(132,740)

(7,268,898)

   Advances on Credit Line

11,240,082 

90,246,309 

103,563,000 

   Payments on Credit Line

(26,544,391)

(96,309,681)

(97,980,000)

   Commercial Paper issued

53,169,908 

396,342,906 

35,766,727 

   Commercial Paper redeemed

(15,405,476)

(372,970,262)

(46,781,459)

   Subordinated Debt issued

12,182,268 

11,623,006 

21,619,938 

   Subordinated Debt redeemed

(27,286,627)

(23,344,036)

(26,980,643)

   Dividends / Distributions paid

(4,941,325)

(8,758,311)

(3,731,328)

Net Cash Provided (Used)

1,597,744 

(3,302,809)

(21,792,663)

NET INCREASE (DECREASE) IN

     CASH AND CASH EQUIVALENTS

4,413,724 

23,127,264 

(26,670,703)

CASH AND CASH EQUIVALENTS, beginning

26,287,690 

3,160,426 

29,831,129 

CASH AND CASH EQUIVALENTS, ending

$

30,701,414 

$

26,287,690 

$

3,160,426 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest

$

12,519,354 

$

13,607,180 

$

14,830,353 

Income Taxes

2,488,000 

2,663,225 

2,972,200 

Assets Assumed (Note 12)

-- 

289,746 

-- 

See Notes to Consolidated Financial Statements

1^st FRANKLIN FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business:

1^st Franklin Financial Corporation (the "Company") is a consumer finance company which originates and services direct cash loans, real estate loans and sales finance contracts through 252 branch offices located throughout the southeastern United States.  In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance.  Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the credit life, the credit accident and health and the credit property insurance so written.

Basis of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  Inter-company accounts and transactions have been eliminated.

Fair Values of Financial Instruments:

The following methods and assumptions are used by the Company in estimating fair values for 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 the origination of the instruments and their expected realization.

Loans.  The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying 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 rates.

Marketable Debt Securities.  The fair value ofr marketable debt securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  See Note 3 for the fair value of marketable debt securities and Note 4 for information related to how these securities are valued.

Senior Debt.  The carrying value of the Company's senior debt securities approximate fair value due to the relatively short period of time between the origination of the instruments and their expected payment.

Subordinated Debt.  The carrying value of the Company's subordinated debt approximates fair value due to the re-pricing frequency of the securities.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could vary from these estimates; however, in the opinion of Management, such variances would not be material.

Income Recognition:

Accounting principles generally accepted in the United States of America 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 on-going 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 the accounts with precomputed charges 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.  Any loan which becomes 60 days or more past due, based on original contractual term, is placed in a non-accrual status.  When a loan is placed in non-accrual status, income accruals are discontinued.  Accrued income prior to the date an account becomes 60 days or more past due is not reversed.  Income on loans in non-accrual status is earned only if payments are received.  A loan in nonaccrual status is restored to accrual status when it becomes less than 60 days past due.

Loan fees and origination costs are deferred and recognized as an adjustment 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 an unrelated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums 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 policies written by the Company, as agent for an unrelated 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 policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.

Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported (IBNR) claims.  Reserves for claims totaled $1,253,688 and $1,350,559 at December 31, 2010 and 2009, respectively, and are included in unearned insurance premiums on the balance sheet.

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

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

Depreciation and Amortization:

Office machines, equipment (including equipment and capital leases) and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years.  Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the applicable lease.  Depreciation and amortization expense for the three years ended December 31, 2010 was $2,465,829, $2,577,539 and $2,447,006, respectively.

Restricted Cash:

At December 31, 2010, 2009 and 2008, the Company had cash of $3,778,734, $3,067,695 and $2,366,779, respectively, that was held in restricted accounts at its insurance subsidiaries in order to meet certain deposit requirements imposed by the State of Georgia on insurance companies and to meet the reserve requirements of its reinsurance agreements.  During 2010, restricted cash also included escrow deposits held by the Company on behalf of certain mortgage real estate customers.

Impairment of Long-Lived Assets:

The Company annually evaluates whether events and circumstances have occurred or triggering events have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable.  When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition.  Based on Management’s evaluation, there has been no impairment of carrying value of the long-lived assets, including property and equipment at December 31, 2010.

Income Taxes:

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 740-10.  FASB ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized.  FASB ASC 740-10 also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  At December 31, 2010, the Company had no uncertain tax positions.  

The Company’s insurance subsidiaries are treated as taxable entities and income taxes are provided for where applicable (Note 11).  No provision for income taxes has been made by the Company since it has elected to be treated as an S Corporation for income tax reporting purposes. However, the state of Louisiana does not recognize S Corporation status, and the Company has accrued amounts necessary to pay the required income taxes in such state.

Collateral Held for Resale:

When the Company takes possession of the collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance.  Any losses incurred at that time are charged against the Allowance for Loan Losses.

Marketable Debt Securities:  

Management has designated a significant portion of the Company’s marketable debt securities held in the Company's investment portfolio at December 31, 2010 and 2009 as being available-for-sale.  This portion of the investment portfolio is reported at fair market value with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income, which is a separate component of stockholders' equity.  Gains and losses on sales of securities available-for-sale are determined based on the specific identification method.  The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity.

Earnings per Share Information:

The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same.

New Accounting Pronouncements:

On July 21, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, which requires expanded disclosures related to the credit quality of finance receivables and loans.  This disclosure is effective for the Company during the December 31, 2010 reporting period.  FASB ASU 2010-20 also requires a roll-forward of the allowance for loan losses, additional activity based disclosures for both financing receivables, and the allowance for each reporting period and certain new disclosures about troubled debt restructuring, all of which would be effective for the Company during the March 31, 2011 reporting period.  As of January 19, 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which effectively defers the disclosure requirements in ASU 2010-20 related to trouble debt restructurings while they deliberate other potential changes to the accounting for troubled debt restructurings.  This deferral will end when the deliberations conclude and the guidance is issued.

In March 2010, the FASB issued new guidance impacting receivables.  The new guidance clarifies that a modification to a loan that is part of a pool of loans that were acquired with deteriorated credit quality should not result in the removal of the loan from the pool.  This guidance is effective for any modification of loans accounted for within a pool in the first interim or annual reporting period ending after July 15, 2010. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

In February 2010, the FASB issued Accounting Standards Update No. 2010-09 which was codified into ASC 855.  ASC 855 establishes principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  This position requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date.  In addition, ASC 855 requires companies to disclose the date through which the Company has evaluated subsequent events to be the date the financial statements are issued.

In January 2010, FASB issued guidance to improve disclosures about fair value measurements.  The guidance requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair measurements and describe the reasons for those transfers.  It also requires the Level 3 reconciliation to be presented on a gross basis, while disclosing purchases, sales, issuances and settlements separately.  The guidance became effective for interim and annual financial periods beginning after December 15, 2009 except for the requirement to present the Level 3 reconciliation on a gross basis, which is effective for interim and annual periods beginning after December 15, 2010.  The Company adopted the new disclosure requirements during 2010.  There were not significant transfers in and out of Level 1 or Level 2, and there was no activity in Level 3.

On June 29, 2009, the FASB issued an accounting pronouncement establishing “The FASB Accounting Standards Codification (the “ASC”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities.  ASC supersedes existing non-SEC accounting and reporting standards.  The Company adopted this new accounting pronouncement for the quarterly period ended September 30, 2009, as required, and the adoption did not have a material impact on the Company’s financial statements or results of operations.

In April 2009, the FASB issued FASB ASC 825.  ASC 825 amends SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  ASC 825 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The Company adopted ASC 825 during the quarter ended June 30, 2009 and has included the required disclosures in Note 4.  Due to the fact that ASC 825 required only additional disclosures, its adoption did not impact our financial position or results of operations.