10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C  20549

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FORM 10-Q

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

OR

(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

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Commission File Number 2-27985

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1^st Franklin Financial Corporation

A Georgia Corporation

I.R.S. Employer No. 58-0521233

135 East Tugalo Street

Post Office Box 880

Toccoa, Georgia 30577

(706) 886-7571

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Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),  and  (2) has been subject to such filing requirements for the past 90 days.  Yes  _X   No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes __  No__

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)  Large Accelerated Filer ___  Accelerated Filer ___  Non-Accelerated Filer   X_  Smaller Reporting Company   __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes __   No  X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at July 31, 2010

Voting Common Stock, par value $100 per share

1,700 Shares

Non-Voting Common Stock, no par value

168,300 Shares

PART I.  FINANCIAL INFORMATION
ITEM 1.		Financial Statements:
		The information contained under the following captions in the Company's Quarterly Report to Investors as of and for the Six Months Ended June 30, 2010 is incorporated by reference herein.  See Exhibit 19.
			Unaudited Condensed Consolidated Statements of Financial Position:
				June 30, 2010 and December 31, 2009
			Unaudited Condensed Consolidated Statements of Income and Retained Earnings:
				Three and Six Months Ended June 30, 2010 and June 30, 2009
			Unaudited Condensed Consolidated Statements of Cash Flows:
				Six Months Ended June 30, 2010 and June 30, 2009
			Notes to Unaudited Condensed Consolidated Financial Statements
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 Six Months Ended June 30, 2010 is incorporated by reference herein.  See Exhibit 19.
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 Six Months Ended June 30, 2010 is incorporated by reference herein.  See Exhibit 19.
ITEM 4T.	Controls And Procedures:
	We maintain a set of disclosure controls and procedures, as such term is defined in Rule 13a-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 June 30, 2010, the Company’s disclosure controls and procedures were effective.  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. <PAGE> 2
	There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II.  OTHER INFORMATION
ITEM 1.		Legal Proceedings:
		The Company is 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 effect on the Company’s financial position, liquidity or results of operations.

ITEM 6.	Exhibits:
	(a)	Exhibits:
			10.1 19 31.1 31.2 32.1 32.2	Second Amendment to Loan and Security Agreement. Quarterly Report to Investors as of and for the Six Months Ended June 30, 2010. Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. 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. 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.

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.
	1st FRANKLIN FINANCIAL CORPORATION
	Registrant
	__/s/  Ben F. Cheek, III____________
	Chairman and Chief Executive Officer
	__/s/  A. Roger Guimond__________
	Executive Vice President and Chief Financial Officer
Date: August 12, 2010
<PAGE> 3

1st FRANKLIN FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit No.	Description	Page No.
10.1 19 31.1 31.2 32.1 32.2	Second Amendment to Loan and Security Agreement. Quarterly Report to Investors as of and for the Six Months      Ended June 30, 2010 Certification of Principal Executive Officer Pursuant to      Rule 13a-14(a) / 15d-14(a) of the Securities Exchange      Act of 1934 Certification of Principal Financial Officer Pursuant to      Rule 13a-14(a) / 15d-14(a) of the Securities Exchange      Act of 1934 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 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	5 10 29 30 31 32

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EX-10

EXHIBIT 10.1

SECOND AMENDMENT TO

LOAN AND SECURITY AGREEMENT

This Second Amendment to Loan and Security Agreement (“Amendment”) is dated as of August 11, 2010 by and among 1^ST FRANKLIN FINANCIAL CORPORATION (“Borrower”), WELLS FARGO PREFERRED CAPITAL, INC., as agent for Lenders (in such capacity, “Agent”) and the financial institutions a party hereto as lenders (collectively, the “Lenders” and each is a “Lender”).

BACKGROUND

A.

Borrower, Lenders, and Agent are parties to a certain Loan and Security Agreement dated as of September 11, 2009 (as amended or modified from time to time, the “Loan Agreement”) and related agreements, instruments and documents (collectively with the Loan Agreement, the “Existing Loan Documents”).  Capitalized terms used but not otherwise defined in this Amendment shall have the meanings respectively ascribed to them in the Loan Agreement.

B.

Borrowers have requested and Agent and Lenders have agreed to amend the Loan Agreement in certain respects, all on the terms and conditions set forth herein.

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby promise and agree as follows:

1.

Amendments.   

(a)

Definition. The following definition contained in Section 1.1 of the Loan Agreement is hereby amended and restated as follows:

“Maturity Date” means September 11, 2013, as such date may be extended from time to time in accordance with the provisions of Section 2.4 of this Agreement.

(b)

Tangible Net Worth. Section 6.4(f) the Loan Agreement is hereby amended and restated as follows:

(f)

Tangible Net Worth.  As of the end of each calendar month, a Tangible Net Worth of at least $100,000,000 (such amount to be increased on an annual basis upon WFPC’s receipt of Borrowers’ audited financial statements by the positive amount, if any, equal to 75% of Borrowers’ net income (less Permitted Tax Distributions and Insurance Premium Dividends) for the prior fiscal year, commencing with the fiscal year ending December 31, 2010).

2.

Effectiveness Conditions.  This Amendment shall be effective upon the completion of the following conditions precedent (all agreements, documents and instruments to be in form and substance satisfactory to Agent and Agent’s counsel):

(a)

Execution and delivery by Borrower, Guarantors and Lenders of this Amendment to Agent;

(b)

Execution and/or delivery by the parties of all other agreements, instruments and documents requested by Agent to effectuate and implement the terms hereof and the Existing Loan Documents.

3.

Representations and Warranties.  Borrower represents and warrants to Agent and Lenders that:

(a)

All warranties and representations made to Agent and Lenders under the Loan Agreement and the Existing Loan Documents are true and correct in all material respects.

(b)

The execution and delivery by Borrowers and Guarantors of this Amendment and the performance by each of them of the transactions herein and therein contemplated do not and will not violate any provisions of any law, rule, regulation, judgment, order, writ, decree, determination or award or breach any provisions of the charter, bylaws or other organizational documents of any Borrower or any Guarantor, or constitute a default or result in the creation or imposition of any security interest in, or lien or encumbrance upon, any assets of any Borrower or any Guarantor (immediately or with the passage of time or with the giving of notice and passage of time, or both) under any other contract, agreement, indenture or instrument to which a Borrower or a Guarantor is a party or by which a Borrower or a Guarantor or its property is bound with failure to comply resulting in a material adve rse change in the business, operations, property (including the Collateral), prospects or financial condition of any Borrower or any Guarantor.

(c)

This Amendment and any assignment, instrument, document, or agreement executed and delivered in connection herewith will be valid, binding and enforceable in accordance with its respective terms.

(d)

No Event of Default or Default has occurred under the Loan Agreement.

4.

Representations and Release of Claims.  Except as otherwise specified herein, the terms and provisions hereof shall in no manner impair, limit, restrict or otherwise affect the obligations of Borrower, any Guarantor or any third party to Agent and Lenders as evidenced by the Existing Loan Documents.  Borrower and each Guarantor hereby acknowledge, agree, and represent that (a) as of the date of this Amendment, there are no known claims or offsets against, or defenses or counterclaims to, the terms or provisions of the Existing Loan Documents or the other obligations created or evidenced by the Existing Loan Documents; (b) as of the date of this Amendment, neither Borrower nor any Guarantor has any known claims, offsets, defenses or counterclaims arising from any of Agent’s acts or omissions with respect to the Existing Loan Documents or Agent’s perform ance under the Existing Loan Documents; (c) as of the date of this Amendment, Borrower has reviewed and reconciled all Advances, calculations of interest due and principal owing, and agrees with and has no claims regarding any such matters and (d) Borrower promises to pay to the order of Agent and Lenders the indebtedness evidenced by the Note according to the terms thereof.  In consideration of the modification of certain provisions of the Existing Loan Documents, all as herein provided, and the other benefits received by Borrower hereunder, Borrower and each Guarantor hereby RELEASE, RELINQUISH and forever DISCHARGE Agent and Lenders, and their predecessors, successors, assigns, shareholders, principals, parents, subsidiaries, agents, officers, directors, employees, attorneys and representatives (collectively, the “Released Parties”), of and from any and all present known claims, demands, actions and causes of action of any and every kind or character, which Borrower or Guarantors, or any of them, has or may have against Released Parties arising out of or with respect to any and all transactions relating to the Loan Agreement, the Note, the Guaranties, and the other Existing Loan Documents occurring prior to the date hereof.  Further, Borrower and Guarantors warrant and represent that they are not now aware of any claims or potential claims against Agent or Lenders pursuant to the Loan Agreement.

5.

Collateral.  As security for the payment of the Obligations to Agent and Lenders under the Loan Agreement and satisfaction by Borrower of all covenants and undertakings contained in the Loan Agreement and the Existing Loan Documents, Borrower reconfirms the prior security interest and lien on, upon and to, its Collateral, whether now owned or hereafter acquired, created or arising and wherever located.  Borrower hereby confirms and agrees that all security interests and Liens granted to Agent for the ratable benefit of Lenders continue in full force and effect and shall continue to secure the Obligations.  All Collateral remains free and clear of any Liens other than Permitted Liens.  Nothing herein contained is intended to in any manner impair or limit the validity, priority and extent of Agent’s existing security interest in and Liens upon the C ollateral.

6.

Acknowledgment of Indebtedness and Obligations.  Borrower and Guarantors hereby acknowledge and confirm that as of the date hereof, Borrower is indebted to Agent and Lenders, without known defense, setoff or counterclaim, under the Loan Agreement  (in addition to any other indebtedness or obligations owed by Borrowers to WFPC Affiliates) in the aggregate principal amount of $0, plus continually accruing interest and all fees, costs, and expenses, including reasonable attorneys’ fees, incurred through the date hereof.

7.

Ratification of Existing Loan Documents.  This Amendment shall be incorporated into and deemed a part of the Loan Agreement.  Except as expressly set forth herein, all of the terms and conditions of the Loan Agreement and Existing Loan Documents are hereby ratified and confirmed and continue unchanged and in full force and effect.  All references to the Loan Agreement shall mean the Loan Agreement as modified by this Amendment.

8.

Acknowledgment of Guarantors.  By execution of this Amendment, each Guarantor hereby acknowledges the terms and conditions of this Amendment and confirms that such Guarantor guarantees, as surety, all of Borrower’s Obligations to Agent and Lenders pursuant to and subject to the terms, conditions and limitations contained in its respective Guaranty.

9.

Governing Law.  THIS AMENDMENT AND ALL DOCUMENTS EXECUTED IN CONNECTION HEREWITH SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

10.

Counterparts.  This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same respective agreement.  Signature by facsimile or PDF shall also bind the parties hereto.

11.

WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS AMENDMENT OR ANY CREDIT DOCUMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR AGENT AND LENDERS TO ENTER INTO THIS AMENDMENT.

SIGNATURES ON FOLLOWING PAGE

IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written.

BORROWER:	1ST FRANKLIN FINANCIAL CORPORATION By:    /s/ A. Roger Guimond Name:    A. Roger Guimond Title:    Executive Vice President and CFO
GUARANTORS:	FRANDISCO LIFE INSURANCE COMPANY By:    /s/ A. Roger Guimond Name:    A. Roger Guimond Title:    President
	FRANDISCO PROPERTY & CASUALTY LIFE INSURANCE COMPANY By:    /s/ A. Roger Guimond Name:    A. Roger Guimond Title:    President
	FRANKLIN SECURITIES, INC. By:    /s/ A. Roger Guimond Name:    A. Roger Guimond Title:    Vice President

AGENT: WELLS FARGO PREFERRED CAPITAL, INC.

By:    /s/ William M. Laird William M. Laird, Senior Vice President

LENDER: WELLS FARGO PREFERRED CAPITAL, INC.

By:    /s/ William M. Laird William M. Laird, Senior Vice President

[SIGNATURE PAGE TO SECOND AMENDMENT

TO LOAN AND SECURITY AGREEMENT]

S-1

EX-19

Exhibit 19

1^st

FRANKLIN

FINANCIAL

CORPORATION

QUARTERLY

REPORT TO INVESTORS

AS OF AND FOR THE

SIX MONTHS ENDED

JUNE 30, 2010

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”) operating results and financial condition as of and for the three- and six-month periods ended June 30, 2010 and 2009.  This analysis and the accompanying unaudited condensed consolidated interim financial information should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s December 31, 2009 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 se curities 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 amounts in our loan portfolio, reduced sales or increased redemptions of our securities, unavailability of amounts under our credit facility, federal and state regulatory changes affecting consumer finance companies and unfavorable outcomes in legal proceedings, 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 st atements, 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 June 30, 2010, the Company’s business was operated through a network of 245 branch offices located in Alabama, Georgia, Louisiana, Mississippi, South Carolina and Tennessee.

We also offer optional credit insuranc e 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 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.

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:

Higher levels of loan originations during the three-month period ended June 30, 2010 enabled the Company to regain approximately $10.2 million of the previously reported $18.5

1

million decline in our net loan portfolio experienced during the three-month period ended March 31, 2010.  Our net loan portfolio at June 30, 2010, net of allowance for loan losses, amounted to $270.7 million compared to $279.1 million at December 31, 2009.  The overall decline in our net loan portfolio during the six-month period just ended was not impacted by any fluctuation in the balance in allowance for loan losses.  Our allowance for loan losses reflects Management’s judgment of the level of allowance adequate to cover probable losses inherent in our 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.  The balance in our allowance for loan losses at June 30, 2010 was the same as the balance in the a llowance at December 31, 2009, as Management believes the allowance for loan losses continued to be adequate to cover probable losses; however, changes in trends or a deterioration in economic conditions could result in a re-evaluation, and possibly change in the allowance.  Any additional increase could have a material adverse impact on our results of operations or financial condition in the future.

Although our net loan portfolio continued to show a decline at the end of the reporting period as compared to the 2009 year end, increases in cash and cash equivalents and investment securities offset the majority of the decline, resulting in total assets returning to approximately the levels reported at the end of the prior year.  Total assets at June 30, 2010 were $396.1 million compared to $396.4 million at December 31, 2009.

Cash and cash equivalents increased to $30.9 million at June 30, 2010 compared to $26.3 million at December 31, 2009, representing a 17% increase.  The Company’s operating activities provided $21.1 million in net cash, of which $6.5 million and $10.0 million were used in investing activities and financing activities, respectively.  The $6.5 million was mainly used to fund the increase in loan originations and purchases of additional investment securities.  During the six-month period ended June 30, 2010, the Company reduced debt levels, which accounted for the net cash used for financing activities.  Management believes the current level of cash and cash equivalents and available borrowings under the Company’s credit facility will be sufficient to meet the Company’s present and foreseeable future liquidity needs.

Our investment portfolio increased $4.1 million (6%) as Management used a portion of the aforementioned cash surplus to purchase investment securities in an attempt to increase our potential yield. The Company's investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  A significant portion of these investment securities have been designated as “available for sale” (88% as of June 30, 2010 and 86% as of December 31, 2009) with any unrealized gain or loss, net of deferred income taxes, accounted for as accumulated other comprehensive income in the equity section of the Company’s balance sheet.  The remainder of the Company’s investment portfolio represents securities carried at amortized cost and designated as “held to maturity,” as Management has both the ability and intent to hold these securities to matur ity.

Senior and subordinated debt declined $7.5 million (3%) to $254.2 million at June 30, 2010 compared to $261.7 million at December 31, 2009.  The primary factor responsible for the decline was the payoff of our $16.8 million credit line balance outstanding at December 31, 2009.  A $6.6 million reduction in subordinated debt securities outstanding, due to redemptions by investors, was also a principal factor contributing to the decline.  Offsetting a portion of the decline in senior debt outstanding was a $14.8 million increase in commercial paper issued by the Company during the same period.

Disbursement of the Company’s annual incentive bonus in February 2010, which had previously been accrued in 2009, was the primary reason for t he $.4 million (2%) decrease in accrued expenses and other liabilities at June 30, 2010 compared to the prior year-end.  

Results of Operations:

Although weakened economic conditions persisted during the first half of 2010, the Company’s results of operations improved significantly during the current year as compared to

2

the same period a year ago.  Higher revenues and a lower provision for losses were the key drivers leading to the improvement in operat ing results.  During the three- and six-month periods ended June 30, 2010, total revenues were $35.1 million and $70.5 million, respectively, compared to $34.0 million and $68.9 million during the same comparable periods in 2009.  The provisions for loan losses declined $2.9 million (39%) and $4.9 million (32%) during the three- and six-month comparable periods in 2010 and 2009, respectively.  Net income increased $4.2 million (269%) and $6.8 million (221%) during the same comparable periods, respectively.  Management believes revenues and net income will continue to grow for the remainder of the year.

Net Interest Margin

The Company’s earnings are derived primarily from its net interest income, which represents the meas ure between interest and finance charges earned on loans and investments and interest incurred on the Company’s senior and subordinated debt.  Our net interest income increased $1.0 million (5%) during the three-month period ended June 30, 2010 compared to the same three-month period a year ago mainly due to higher earnings from the loan portfolio.  During the six-month period just ended, our net interest income increased $1.4 million (3%) as compared to the same period in 2009.  The higher earnings were attributed to average net loan receivables being approximately $1.5 million higher during the current year as compared to the same period a year ago.  A slight increase in the yield on our loan portfolio during the comparable periods also contributed to the higher interest income.

Lower interest expense was another factor contributing to the Company& #146;s increase in net interest income.  Total interest expense for the three- and six-month periods ended June 30, 2010 decreased $.3 million (8%) and $.2 million (4%), respectively, when compared to the same comparable periods in 2009.  Determining factors that impact interest expense are (1) the amount of average debt outstanding, and (2) the average interest rates paid on the Company’s debt. Although average debt outstanding increased $1.4 million during the first half of 2010 compared to the same period in 2009, the Company’s weighted average borrowing rate decreased to 5.07% during the current year compared to 5.16% during the same period a year ago.

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

Insurance Income

Net insurance income during the three- and six-month periods ended June 30, 2010 increased $.2 million (3%) and $.1 million (1%) compared to the same periods a year ago.  Higher insurance claims and expenses offset a portion of the increase in net insurance income.

Provision for Loan Losses

The Company’s provision for loan losses represents the level of net charge offs and adjustments to the allowance for loan losses to cover credit losses inherent in the outstanding loan portfolio as of the balance sheet date.  As previously mentioned, the allowance for loan losses is an estimate of the probable credit losses inherent in our loan portfolio as of the balance sheet date.  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, local unemployment rates, current and expected net charge offs, delinquency levels, bankruptcy trends and overall economic conditions.

The provision for loan losses for the six-month period ended June 30, 20 10 was $10.3 million compared to $15.2 million for the six-month period ended June 30, 2009.  For the three-month period just ended, the provision for losses was $4.7 million compared to $7.6 million for the same period in 2009. The provision for loan losses during 2010 benefited from improved delinquency ratios and lower net charge offs. Net charge offs declined $1.3 million (21%) and

3

$1.9 million (16%) during the three- and six-month periods just ended compared to the same periods in 2009.  Although credit losses have been lower during the first half of 2010, continued high levels of unemployment, volatile market conditions and a lackluster economy influenced Management’s decision to maintain the allowance for loa n losses at an amount consistent with December 31, 2010. During the three- and six-month periods ended June 30, 2009, Management increased the allowance $1.5 million and $3.0 million, respectively, due to the deteriorating economic conditions, higher delinquency trends and higher credit losses.

As previously described, Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio as of June 30, 2010.  However, actual losses could vary from our estimated amounts.  If necessary, Management may determine it is appropriate to increase the allowance for loan losses in a future periods, which could have a material negative impact on our results of operations in the future.

Other Operating Expenses< /b>

The Company expects to meet and/or exceed most, if not all, previously established 2010 corporate performance goals, and accordingly, during the three- and six-month periods ended June 30, 2010, increased the current year incentive bonus accrual.  The increase in this accrual was the primary factor contributing to the $.2 million (3%) and $.3 million (3%) increase in personnel expense for the three- and six-month periods ended June 30, 2010 compared to the same periods a year ago.  Offsetting a portion of the increases in the respective periods were declines in net medical claim expenses associated with the Company’s self insured employee medical program and an increase in deferred salary expenses.  

Occupancy expense decreased $.1 million (3%) and $.5 million (9%) during the three- and six-month periods ended June 30, 2010 compared to the same periods a year ago.  The decreases were mainly due to a non-recurring charge incurred during first quarter of 2009 to buy-out certain operating leases on computer equipment.  A reduction in costs of maintenance agreements on equipment and lower depreciation expense on furniture and fixtures also contributed to the reduction in occupancy expenses.

Miscellaneous other operating expenses declined $.2 million (3%) and $.3 million (3%) during the three- and six-month periods ended June 30, 2010 compared to the same three- and six-month periods in 2009.  Reductions in advertising expenditures, collection expenses, legal and audit expenses, travel expenses and taxes and licenses were factors contributing to the decreases in miscellaneous o ther operating expenses. A reduction in lease payments on computer equipment due to the aforementioned buy-out of capital leases in the first quarter of 2009 also contributed to the decrease on other operating expenses during the six-month comparable periods.    

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 insuran ce subsidiaries as they are not allowed to be treated as S corporations, and for the Company’s state taxes in Louisiana, which does not recognize S Corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The deferred income tax assets and liabilities are due to certain temporary differences between reported income and expenses for financial statement and income tax purposes.  

Effective income tax rates were 11% and 27% during the six-month periods ended June 30, 2010 and 2009, respectively.  During the three-month periods ended June 30, 2010 and 2009, effective income tax rates were 9% and 26%, respectively.  The lower tax rate experienced during the current year period was due to higher income at the S Corpor ation level which was

4

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.

Quantitative and Qualitative Disclosures About Market Risk:

Interest rates continued to be at 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 impact on our net interest margin; however, no assurances can be given in this regard.  Please refer to the market risk analysis discussion contained in our annual report on Form 10-K as of and for the year ended December 31, 2009 for a more detailed analysis of our market risk exposure, which we do not believe has changed materially since such date.

Liquidity and Capital Resources:

As of June 30, 2010 and December 31, 2009, the Company had $30.9 million and $26.2 million, respectively, invested in cash and short-term investments, the majority of which was held by the Company’s insurance subsidiaries.  

The Company’s investments in marketable securities can be converted into cash, if necessary.  State insurance regulations limit the use an insurance company can make of its assets.  Dividend payments to a parent company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of policyholders’ surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  At December 31, 2009, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company, the Company’s wholly-owned insurance subsidiaries, had policyholders’ surpluses of $33.3 million and $35.0 million, respectively.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2010, without prior approval of the Georgia Insurance Commissioner, is approximately $8.5 million.

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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.  As amended to date, the credit agreement provides for borrowings of up to $100.0 million, subject to certain limitations, and all borrowings are secured by the finance receivables of the Company.  Available borrowings under the credit agreement were $100.0 million at June 30, 2010, at an interest rate of 3.75%. This compares to available borrowings of $83.8 million at Decem ber 31, 2009, at an interest rate of 3.75%.  The credit agreement contains covenants customary for financing transactions of this type.  At June 30, 2010, the Company was in compliance with all covenants.  Pursuant to an amendment to the credit agreement entered into on August 11, 2010, the agreement is scheduled to expire on September 11, 2013 and any amounts then outstanding will be due and payable on such date.  Management believes this credit facility should provide sufficient liquidity for the continued growth of the Company for the foreseeable future.

The Company was subject to the following contractual obligations and commitments at June 30, 2010:

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 more critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves.  

Allowance for Loan Losses

Provision for loan losses are ch arged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable 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, estimates of the value of the underlying collateral, economic trends such as unemployment rates 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

6

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 Com pany’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 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 t he event that the Company’s actual reported losses for any given period are materially in excess of the previous estimated amounts, such losses could have a material adverse effect on the Company’s results of operations.

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

Recent Accounting Pronouncements:

See Note 1, “Recent Accounting Pronouncements,” in the accompanying “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of new accounting standards and the expected impact of accounting standards recently issued but not yet required to be adopted.  For pronouncements already adopted, any material impacts on the Company’s financial statements are discussed in the applicable section(s) of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Unaudited Condensed Consolidated Financial Statements.

7

	7/01/2010 thru 12/31/2010	2011	2012	2013	2014	2015 & Beyond	Total
	(in Millions)
Credit Line *	$ -	$ -	$ -	$ -	$ -	$ -< /p>	$ -
Bank Commitment Fee *	.3	.5	.5	.4	-	-	1.7
Senior Notes *	42.1	-	-	-	-	-	42.1
Commercial Paper *	127.2	19.0	-	-	-	-	146.2
Subordinated Debt *	12.5	24.7	16.3	18.1	9.8	-	81.4
Human Resource Insurance & Support Contracts	.5	.5	-	-	-	-	1.0
Operating Leases	2.2	3.5	2.6	1.6	.6	.2	10.7
Data Communication Lines Contract **	1.7	3.0	.4	-	-	-	5.1
Software Service Contract **	1.3	2.5	2.5	2.5	2.5	12.4	23.7
Total	$ 187.8	$ 53.7	$ 22.3	$ 22.6	$ 12.9	$ 12.6	$ 311.9
* Note:    Includes estimated interest at current rates ** Note:    Based on current usage

1st FRANKLIN FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
&nb sp;	June 30,	December 31,
	2010	2009
ASSETS
CASH AND CASH EQUIVALENTS	$ 30,860,481	$ 26,287,690
RESTRICTED CASH	3,106,054	3,067,695
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	316,838,801  23,162,472  22,704,234  362,705,507  41,201,097  24,170,485  26,610,085  270,723,840	327,424,876 24,336,405 23,071,118 374,832,399 43,331,239 25,797,624 26,610,085 279,093,451
INVESTMENT SECURITIES: Available for Sale, at fair market value Held to Maturity, at amortized cost	67,925,336  9,651,554  77,576,890	63,126,997 10,330,725 73,457,722
OTHER ASSETS	13,835,304	14,518,622
TOTAL ASSETS	$ 396,102,569	$ 396,425,180
LIABILITIES AND STOCKHOLDERS' EQUITY
SENIOR DEBT	$ 185,942, 104	$ 186,848,851
ACCRUED EXPENSES AND OTHER LIABILITIES	17,205,416	17,577,438
SUBORDINATED DEBT < /td>	68,277,321	74,883,979
Total Liabilities	271,424,841	279,310,268
STOCKHOLDERS' EQUITY:
Preferred Stock: $100 par val ue, 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 Income	1,946,530	1,696,845
Retained Earnings	122,561,198	115,248,067
Total Stockholders' Equity	124,677,728	117,114,912
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 396,102,569	$ 396,425,180
See Notes to Unaudited Condensed Consolidated Financial Statements

8

< td width=678 colspan=13 style=MARGIN-TOP:0px valign=top>

See Notes to Unaudited Consolidated Financial Statements

1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
	Three Months Ended		Six Months Ended
	June 30,		June 30,
	(Unaudited)		(Unaudited)
	2010	2009	2010	2009
INTEREST INCOME	$ 24,943,488	$ 24,210,273	$ 50,393,862	$ 49,252,807
INTEREST EXPENSE	3,133,926	3,393,130	6,422,373	6,656,659
NET INTEREST INCOME	21,809,562	20,817,143	43,971,489	42,596,148
Provision for Loan Losses	4,666,450	7,635,574	10,269,834	15,157,807
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	17,143,112	13,181,569	33,701,655	27,438,341
NET INSURANCE INCOME Premiums and Commissions Insurance Claims and Expenses	8,765,795 2,080,464 6,685,331	8,540,878 2,046,757 6,494,121	17,699,576 4,024,461 13,675,115	17,469,043 3,899,581 13,569,462
OTHER REVENUE	1,434,118	1,264,437	2,411,369	2,221,919
OTHER OPERATING EXPENSES: Personnel Expense Occupancy Expense Other Total	11,845,311 2,612,433 4,440,360 18,898,104	11,557,435 2,694,275 4,570,032 18,821,742	24,572,431 5,292,330 8,885,618 38,750,379	24,045,850 5,811,380 9,138,019 38,995,249
INCOME BEFORE INCOME TAXES	6,364,457	2,118,385	11,037,760	4,234,473
Provision for Income Taxes	596,667	554,911	1,195,664	1,170,843
NET INCOME	5,767,790	1,563,474	9,842,096	3,063,630
RETAINED EARNINGS, Beginning       of Period	118,945,113	109,984,727	115,248,067	115,633,371
Distributions on Common Stock	2,151,705	560,400	2,528,965	7,709,200
RETAINED EARNINGS, End of Period	$122,561,198	$110,987,801	$ 122,561,198	$ 110,987,801
&nb sp;
BASIC EARNINGS PER SHARE: 170,000 Shares Outstanding for All Periods (1,700 voting, 168,300 non-voting)	$33.93	$9.20	$57.89	$18.02
					;

9

1ST FRANKLIN FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Six Months Ended
	June 30 ,
	2010	2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$ 9,842,096	$ 3,063,630
Adjustments to reconcile net income to net ca sh provided by operating activities: Provision for Loan Losses Depreciation and Amortization Provision (Benefit) from Deferred Income Taxes Other, net Decrease in Miscellaneous Assets Decrease in Other Liabilities Net Cash Provided	10,269,834    1,254,454    45,611    149,871    (74,079)   (417,390)   21,070,397	15,157,807    1,294,556    (113,901)  164,166    335,873   (2,238,967)   17,663,164
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased Loan payments (Increase) decrease in restricted cash Purchases of marketable debt securities Redemptions of marketable debt securities Fixed asset additions, net Net Cash (Used) Provided	(108,765,625)   106,865,402    (38,359)   (9,115,276)  5,050,000    (451,378)   (6,455,236)	(96,303,429)   99,668,251    367    --    4,737,750    (485,077)   7,617,852
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in senior demand notes Advances on credit line Payments on credit line Commercial paper issued Commercial paper redeemed Subordinated debt securities issued Subordinated debt securities redeemed Dividends / Distributions Net Cash Used	485,840       8,823,669    (25,027,978)   23,871,839   (9,060,117)   5,791,973    (12,398,631)   (2,528,965)   (10,042,370)	3,944,041    40,267,000    (51,059,000)   24,308,284    (13,992,380)   5,434,701    (15,171,790)   (7,709,200)   (13,978,344)
NET INCREASE CASH AND CASH EQUIVALENTS	4,572,791	11,302,672
CASH AND CASH EQUIVALENTS, beginning	26,287,690	3,160,426  ;
CASH AND CASH EQUIVALENTS, ending	$ 30,860,481	$ 14,463,098
Cash paid during the period for:    Interest Income Taxes	$ 6,599,197    1,380,000	$ 6,664,189    1,515,415
See Notes to Unaudited Condensed Consolidated Financial Statements

10

-NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-

Note 1 – Basis of Presentation

The accompanying unaudited interim financial information 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, 2009 and for the year then ended included in the Company's December 31 , 2009 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 financial position as of June 30, 2010 and December 31, 2009 and the results of its operations and cash flows for the three and six months ended June 30, 2010 and 2009. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, the Company believes that the disclosures herein are adequate to make the information presented not misleading.

The results of operations for the six months ended June 30, 2010 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 Unaudited Condensed Consolidated Statements of Income and Retained Earnings.

Recent Accounting Pronouncements:

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

Note 2 – Allowance for Loan Losses

An analysis of the allowance for loan losses for the six-month periods ended June 30, 2010 and 2009 is shown in the following table:

	Three Months Ended		Six Months Ended
	June 30, 2010	June 30, 2009	June 30, 2010	June 30, 2009
Beginning Balance	$ 26,610,085	$ 24,510,085	$ 26,610,085	$ 24,510,085
Provision for L oan Losses	4,666,450	7,635,574	10,269,834	7,635,574
Charge-offs	(6,318,351)	(7,794,727)	(14,021,302)	(7,794,727)
Recoveries	1,651,901	1,659,153	3,751,468	1,659,153
Ending Balance	$ 26,610,085	$ 26,010,085	$ 26,610,085	$ 26,010,085

Note 3 – Investment Securities

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

11

	As of June 30, 2010		As of December 31, 2009
	Amortized Cost	Estimated Fair Market Value	Amortized Cost	Estimated Fair Market Value
Available-for-Sale: Obligations of states and political subdivisions Corporate securities	$ 65,419,647 130,316 $ 65,549,963	$ 67,605,334 320,002 $ 67,925,336	$ 60,870,751 130,316 $ 61,001,067	$ 62,724,471 402,526 $ 63,126,997
Held to Maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions	$ -- 9,651,554 $ 9,651,554	$ -- 9,931,443 $ 9,931,443	$ 499,618 9,831,107 $ 10,330,725	$ 507,073 10,129,762 $ 10,636,835

Gross unrealized losses on investment securities totaled $30,164 and $86,688 at June 30, 2010 and December 31, 2009, 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 June 30, 2010:

	Less than 12 Months		12 Months or Longer		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Available for Sale:
Obligations of states and political subdivisions	$ 5,233,235	$ 17,900	$ 2,041,998	$ 10,122	$ 7,275,233	$ 28,022
Total	5,233,235	17,900	2,041,998	10,122	7,275,233	28,022
Held to Maturity:
Obligations of states and political subdivisions	$ --	$ --	$ 253,050	$ 2,142	$ 253,050	$ 2,142
Total	--	--	253,050	2,142	253,050	2,142
Overall Total	$ 5,233,235	$ 17,900	$ 2,295,048	$ 12,264	$ 7,528,283	$ 30,164

The table above consists of 15 investments held by the Company, the majority of which are rated “A” or higher by Standard & Poor’s.  The unrealized losses on the Company’s investments listed in the above table were primarily the result of interest rate increases.  The total impairment was less than .50% of the fair value of the affected investments at June 30, 2010.  Based on the credit ratings of these investments, the Company’s ability and intent to hold these investments until a recovery of fair value along with the consideration of whether the Company will be more likely than not required to sell th e applicable investment before recovery of fair value, and after considering the severity and duration of the impairments, the Company does not consider the impairment of any of these investments to be other-than-temporary at June 30, 2010.

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

12

Note 4 – Fair Value

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 sh ort-term highly liquid investments with original maturities of three months or less.   The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between origination of the instruments and their expected realization.

Loans:  The fair value of the Company’s direct cash loans and sales finance contracts approximates 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 of marketable debt securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  See additional information below regarding fair value under ASC No. 820 (SFAS No. 157).

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 variable rate subordinated debt approximates fair value due to the re-pricing frequency of the securities.

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

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

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

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

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 corroborates the reasonableness of external inputs in the valuation process.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determina tion of fair value requires significantly more judgment.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the observation of prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified between levels.

Assets measured at fair value as of June 30, 2010 and December 31, 2009 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
		Assets	Inputs	Inputs
Description	6/30/2010	(Level 1)	(Level 2)	(Level 3)
Corporate securities Obligations of states and      political subdivisions              Total	$ 320,002   67,605,334 $  67,925,336	$ 320,002 -- $ 320,002	$ -- 67,605,334 $ 67,605,334	$         -- -- $ --

13

		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		In Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
	< p style="PADDING-BOTTOM:0px; MARGIN:0px; PADDING-LEFT:0px; PADDING-RIGHT:0px; FONT-SIZE:9pt; PADDING-TOP:0px">	Assets	Inputs	Inputs
Description	12/31/2009	(Level 1)	(Level 2)	(Level 3)
Corporate securities Obligations of states and      political subdivisions              Total	$ 402,525   62,724,472 $ 63,126,997	$ 402,525 -- $ 402,525	$ -- 62,724,472 $ 62,724,472	$ -- -- $ --

Note 5 – Commitments and Contingencies

The Company is 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.

Note 6 – Income Taxes

Effective income tax rates were 9% and 26% during the three-month periods ended June 30, 2010 and 2009, respectively, and 11% and 28% during the six-month periods then ended.  The Company has elected to be, and is, treated as an S Corporation for income tax r eporting purposes.  Taxable income or loss of an S Corporation is passed through to, and included in the individual tax returns of the stockholders of the Company, rather than being taxed at the corporate level.  Notwithstanding this election, income taxes are reported for, and paid by, the Company's insurance subsidiaries, as they are not allowed by law to be treated as S Corporations, as well as for the Company in Louisiana, which does not recognize S Corporation status.  The tax rates of the Company’s insurance subsidiaries are below statutory rates due to (i) certain benefits provided by law to life insurance companies, which reduce the effective tax rates and (ii) investments in tax exempt bonds held by the Company’s property insurance subsidiary.  

Note 7 – Other Comprehensive Income

Total comprehensive income was $6.1 million and $10.1 million for the three- and six-month periods ended June 30, 2010, as compared to $1.6 million and $3.6 million for the same periods in 2009.

Accumulated other comprehensive income consisted solely of unrealized gains and losses on investment securities available for sale, net of applicable deferred taxes.  The Company recorded $57,134 and $9,706 in other comprehensive losses during the three-month periods ended June 30, 2010 and 2009, respectively.  During the six-month period ended June 30, 2010 the Company recorded $249,685 in other comprehensive income compared to $580,440 during the same period a year ago.

Note 8 – Credit Agreement

Effective September 11, 2009, the Company entered into a loan and security agreement with Wells Fargo Preferred Capital, Inc., as agent and lender (“Wells Fargo”) (the “credit agreement”) as amended to date, which initially provides for maximum borrowings of $100.0 million or 80% of the Company’s net finance receivables (as defined in the credit agreement), whichever is less.  As of June 30, 2010, the credit agreement had a commitment termination date of September 11, 2012 and contains covenants customary for financing transactions of this type.  The Company was in compliance with all covenants at June 30, 2010.  Borrowings under the credit agreement are secured by the Company’s finance receivables.  Available borrowings under the credit agreement were $100.0 million at June 30, 2010 compared to $83.8 million at December 31, 2009.

Effective August 11, 2010, the credit agreement was amended.  See Note 11.

Note 9 – Related Party Transactions

The Company engages from time to time in transactions with related parties.  Please refer to the disclosure contained under the heading “Certain Relationships and Related Transactions” in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2009 for additional information on such trans actions.

14

Note 10 – Segment Financial Information

The Company has six reportable segments.  Division I through Division V and Division VII.  Each segment consists of a number of branch offices that are aggregated based on vice president responsibility and geographic location.  Division I consists of offices located in South Carolina.  Offices in North Georgia comprise Division II, Division III consists of offices in South Georgia, and Division VII consists of offices in West Geo rgia.  Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.  Division VI is reserved for future use.

Accounting policies of each of the segments are the same as those described in the summary of significant accounting policies.  Performance is measured based on objectives set at the 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 SFAS No. 131 (Now ASC 280), “Segment Reporting,” the following table summarizes revenues, profit and assets by business segment.  Also in accordance therewith, a reconciliation to consolidated net income is also provided.  

	Division	Division	Division	Division	Division	Division
	I	II	III	IV	V	VII	Total
	(in Thousands)
Segment Revenues:
3 Months ended 6/30/2010	$ 4,225	$ 6,231	$ 6,185	$ 6,285	$ 5,362	$ 4,135	$ 32,423
3 Months ended 6/30/2009	4,103	5,839	6,116	6,042	5,245	4,123	31,468
6 Months ended 6/30/2010	$ 8,491	$ 12,445	$ 12,525	$ 12,668	$ 10,982	$ 8,415	$ 65,526
6 Months ended 6/30/2009	8,498	11,848	12,574	12,172	10,758	8,495	64,345
Segment Profit:
3 Months ended 6/30/2010	$ 1,185	$ 2,705	$ 2,468	$ 2,131< /p>	$ 1,721	$ 1,571	$ 11,781
3 Months ended 6/30/2009	718	2,041	1,965	1,398	1,592	1,326	9,040
6 Months ended 6/30/2010	$ 2,268	$ 4,932	$ 4,883	$ 3,403	$ 3,418	$ 3,144	$ 22,048
6 Months ended 6/30/2009	1,250	3,959	3,898	3,139	3,200	2,541	17,987
Segment Assets:
6/30/2010	$ 37,914	$61,073	$60,623	$ 68,725	$46,454	$40,711	$ 315,500
6/30/2009	37,329	59,488	60,352	65,853	44,926	42,210	310,158
			3 Months Ended 6/30/2010 (in Thousands)	3 Months Ended 6/30/2009 (in Thousands)	6 Months Ended 6/30/2010 (in Thousands)	6 Months Ended 6/30/2009 (in Thousands)
Reconciliation of Profit:
Profit per segments			$ 11,781	$ 9,040	$ 22,048	$17,987
Corporate earnings not allocated			2,721	2,547	4,979	4,599
Corporate expenses not allocated			(8,137)	(9,468)	(15,989)	(18,351)
Income taxes not allocated			(597)	(555)	(1,196)	(1,171)
Net income			$ 5,768	$ 1,564	$ 9,842	$ 3,064

Note 11 – Subsequent Event

Effective August 11, 2010, the Company, Wells Fargo and the other lenders party to the credit agreement entered into that certain second amendment to the loan and security agreement (“the Amendment”).  Pursuant to the Amendment, the commitment maturity date under the credit agreement was extended to September 11, 2013, and the tangible net worth covenant there under was amended such that the Company is required to maintain a tangible net worth (as defined in the credit agreement) of at least $100.0 million (subject to increase) as of the end of each calendar month.  All other material terms and conditions of the credit agreement remain unchanged.

15

BRANCH OPERATIONS
Ronald E. Byerly	Vice President
Dianne H. Moore	Vice President
Ronald F. Morrow	Vice President
J. Patrick Smith, III	Vice President
Virginia K. Palmer	Vice President
Michael J. Whitaker	Vice President

REGIONAL OPERATIONS DIRECTORS
Sonya Acosta	Joe Daniel	Judy Landon	Marty Miskelly
Bert Brown	Loy Davis	Sharon Langford	Larry Mixson
Keith Chavis	Carla Eldridge	Jeff Lee	Mike Olive
Joe Cherry	Shelia Garrett	Tommy Lennon	Hilda Phillips
Janice Childers	Brian Gray	Jimmy Mahaffey	Jennifer Purser
Rick Childress	Harriet Healey	John Massey	Henrietta Reathford
Bryan Cook	David Hoard	Judy Mayben	Michelle Rentz
Richard Corirossi	Gail Huff	Vicky McCleod	Marc Thomas
Jeremy Cranfield	Jerry Hughes	Brian McSwain	Lynn Vaughan

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	Tro y
Arab	Decatur	Gadsden	Muscle Shoals	Prattville	Tuscaloosa
Athens	Dothan (2)	Hamilton	Opelika	Russellville (2)	Wetumpka
GEORGIA
Adel	Canton	Dahlonega	Gray	Madison	Statesboro
Albany	Carrollton	Dalton	Greensboro	Manchester	Stockbridge
Alma	Cartersville	Dawson	Griffin	McDonough	Swainsboro
Americus	Cedartown	Douglas (2)	Hartwell	Milledgeville	Sylvania
Athens (2)	Chatsworth	Douglasville	Hawkinsville	Monroe	Sylvester
Bainbridge	Clarkesville	East Ellijay	Hazlehurst	Montezuma	Thomaston
Barnesville	Claxton	Eastman	Helena	Monticello	Thomson
Baxley	Clayton	Eatonton	Hinesville (2)	Moultrie	Tifton
Blairsville	Cleveland	Elberton	Hiram	Nashville	Toccoa
Blakely	Cochran	Fitzgerald	Hogansville	Newnan	Va ldosta
Blue Ridge	Colquitt	Flowery Branch	Jackson	Perry	Vidalia
Bremen	Commerce	Forsyth	Jasper	Pooler	Villa Rica
Brunswick	Conyers	Fort Valley	Jefferson	Richmond Hill	Warner Robins
Buford	Cordele	Gainesville	Jesup	Rome	Washington
Butler	Cornelia	Garden City	LaGrange	Royston	Waycross
Cairo	Covington	Georgetown	Lavonia	Sandersville	Waynesboro
Calhoun	Cumming	Glennville	Lawrenceville	Savannah	Winder
BRANCH OPERATIONS
(Continued)
LOUISIANA
Alexandria	DeRidder	Houma	Marksville	New Iberia	Prairieville
Bossier City	Eunice	Jena	Minden	Opelousas	Ruston
Crowley	Franklin	Lafayette	Morgan City	Pineville	Slidell
Denham Springs	Hammond	Leesville	Natchitoches
MISSISSIPPI
Batesville	Columbus	Hattiesburg	Jackson	New Albany	Ripley
Bay St. Louis	Corinth	Hazlehurst	Kosciusko	Newton	Senatobia
Booneville	Forest	Hernando	Magee	Oxford	Starkville
Brookhaven	Grenada	Houston	McComb	Pearl	Tupelo
Carthage	Gulfport	Iuka	Meridian	Picayune	Winona
Columbia	&nbs p;
SOUTH CAROLINA
Aiken	Chester	Greenville	Manning	North Greenville	Summerville
Anderson	Columbia	Greenwood	Marion	Orangeburg	Sumter
Batesburg-    Leesvile	Conway	Greer	Moncks Corner	Rock Hill	Union
Cayce	Dillon	Lancaster	Newberry	Seneca	Walterboro
Camden	Easley	Laurens	North Augusta	Simpsonville	Winnsboro
Charleston	Florence	Lexington	North Charleston	Spartanburg	York
Cheraw	Gaffney
TENNESSEE
Athens	< p style="MARGIN:0px; FONT-FAMILY:Arial,Times New Roman">Cleveland	Johnson City	Lenoir City	Madisonville	Sparta
Bristol	Elizabethton	Kingsport

17

DIRECTORS
	&n bsp;
Ben F. Cheek, III Chairman and Chief Executive Officer 1st Franklin Financial Corporation	C. Dean Scarborough Realtor
Ben F. Cheek, IV Vice Chairman 1st Franklin Financial Corporation	Dr. Robert E. Thompson Retired Physician
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.
John G. Sample, Jr. Senior Vice President and Chief Financial Officer Atlantic American Corporation

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< /p>

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

18

EX-31

Exhibit 31.1

RULE 13a-14(a)/15d-14(a)

CERTIFICATIONS

I,  Ben F. Cheek, III, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of 1^st Franklin Financial Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

1.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:

August 12, 2010

/s/ Ben F. Cheek, III  

Ben F. Cheek, III, Chairman and

Chief Executive Officer

EX-31

Exhibit 31.2

RULE 13a-14(a)/15d-14(a)

CERTIFICATIONS

I,  A. Roger Guimond, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of 1^st Franklin Financial Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:

August 12, 2010

/s/ A. Roger Guimond   

A. Roger Guimond,  Executive Vice   

President and Chief Financial Officer

EX-32

Exhibit 32.1

1^st FRANKLIN FINANCIAL CORPORATION

135 EAST TUGALO STREET

P.O. BOX 880

TOCCOA, GEORGIA  30577

TELEPHONE:  (706) 886-7571

August 12, 2010

Re:

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

Ladies and Gentlemen:

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the quarterly report of 1^st Franklin Financial Corporation (the "Company") for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on Form 10-Q on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d)

of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ Ben F. Cheek, III

Name:  Ben F. Cheek, III

Title:  Chairman and Chief Executive Officer

EX-32

Exhibit 32.2

1^st FRANKLIN FINANCIAL CORPORATION

135 EAST TUGALO STREET

P.O. BOX 880

TOCCOA, GEORGIA  30577

TELEPHONE:  (706) 886-7571

August 12, 2010

Re:

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

Ladies and Gentlemen:

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the quarterly report of 1^st Franklin Financial Corporation (the "Company") for the quarter ended June 30, 2010, as filed with the Securities and Exchange Commission on Form 10-Q on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d)

of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ A. Roger Guimond

Name:  A. Roger Guimond

Title:  Executive Vice President and

           Chief Financial Officer