First Franklin Financial Corporation 10-K

Accumulated

Common Stock

Comprehensive

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2011, included as Exhibit 13 hereto, are incorporated by reference into Parts I and II of this Form 10-K.

(Cover page 2 of 2 pages)

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PART I

Item 1.

BUSINESS:

The Company, Page 1 and Business, Pages 4-11, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 2011 (the “Annual Report”) are incorporated herein by reference.

Item 1A.

RISK FACTORS:

A potential investor should carefully consider the risks described below, as well as the other risks and information disclosed from time to time by 1^st Franklin, before deciding whether to invest in the Company. Additional risks and uncertainties not described below, not presently known to us or that we currently do not consider to be material could also adversely affect us. If any of the situations described in the following risk factors actually occur, our business, financial condition or results of operations could be materially adversely affected. In any of these events, an investor may lose part or all of his or her investment.

Because we require a substantial amount of cash to service our debt, we may not be able to pay all of the obligations under our indebtedness.

To service our indebtedness, including paying interest on the sale of outstanding debt securities and amounts due under our credit agreement, we require a significant amount of cash. Our ability to generate cash depends on many factors, including our successful financial and operating performance. We cannot assure you that our business strategy will continue to be successful, or that we will achieve our anticipated or required financial results.

If we do not achieve our anticipated or required results, we may not be able to generate sufficient cash flow from operations or to obtain sufficient funding to satisfy all of our obligations. The failure to do this would result in a material adverse effect on our business.

Because we depend on liquidity to operate our business, a decrease in the sale of our debt securities, an increase in requests for their redemption or the unavailability of borrowings under our credit facility may make it more difficult for us to operate our business and pay our obligations in a timely manner.

Our liquidity depends on, and we fund our operations through, the sale of our debt securities, the collection of our receivables and the continued availability of borrowings under our credit agreement. Numerous available investment alternatives have resulted in investors evaluating more critically their investment opportunities. We cannot assure you that our debt securities will offer interest rates and redemption terms which will generate sufficient sales to meet our liquidity requirements.

As described more fully elsewhere in this Annual Report, our senior demand notes can be redeemed at any time without penalty. Our variable rate subordinated debentures are subject to optional redemption by investors at various times prior to their maturity and holders may request that we redeem debentures during an interest adjustment period, although we are not obligated to accept such requests, and such requests are subject to interest penalties. It is possible that a significant number of redemption requests could adversely affect our liquidity.

Borrowings under our credit facility are subject to, among other things, a borrowing base. In the event we are not able to borrow amounts under our credit facility, whether as a result of having reached our maximum borrowing availability thereunder or otherwise, we may not be able to fund loans to customers, redeem securities when required or invest in our operations as needed.

Our failure to be able to obtain or maintain sufficient liquidity could have a material adverse effect on our business, financial condition and results of operations.

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Because most of our loans are made to salaried people and other wage earners who generally depend upon their earnings to meet their repayment obligations, continued high or further increased unemployment could adversely impact our liquidity, financial condition and results of operations.

Our business consists mainly of making loans to salaried people or other wage earners who generally depend on their earnings to meet their repayment obligations. As a result, the loss of employment by such borrowers is likely to make it more difficult for them to timely repay their obligations to the Company. Additionally, adverse general economic conditions, including high unemployment rates as currently exist, often result in additional challenges for both the Company and potential customers, resulting in an increased number of bankruptcy filings and a lower number of qualified borrowers. Continued high unemployment, or protracted adverse economic conditions, could result in the Company’s liquidity, financial condition and results of operations being materially adversely impacted.

In either event, any reduced liquidity could negatively impact our ability to be able to fund loans, or to pay the principal and interest on any of our outstanding debt securities at any time, including when due.

All of our offers and sales of securities must comply with applicable securities laws, or we could be liable for damages, which could impact our ability to make payments on our outstanding debt securities.

Offers and sales of all of our securities must comply with all applicable federal and state securities laws, including Section 5 of the Securities Act of 1933. If any of our offers, including those made pursuant to newspaper or radio advertisements, or sales are found not to be in compliance with any of these laws, we could be liable to certain purchasers of the security, could be required to offer to repurchase the security, or could be liable for damages or other penalties. If we are required to repurchase any of our securities other than in the ordinary course of our business as a result of any such violation, or otherwise are found to be liable for any damages or penalties as a result of any such violation, our financial condition could be materially adversely affected. Any such adverse effect on our financial condition could materially impair our ability to fund loans in the ordinary course of business or pay principal and interest on our outstanding debt securities.

Uncertain economic conditions could negatively affect our results and profitability.

Continued higher than historically normal unemployment levels and other factors typical of recessionary economic cycles could affect our investors’, customers’, and potential investors’ and customers’ disposable income, confidence, and spending patterns and preferences, which in turn could negatively impact the making of loans, our sales of investment securities and our customers’ ability to repay their obligations to us. We establish an allowance for loan losses at a level considered adequate by management to absorb probable loan losses inherent in the loan portfolio as of the balance sheet date. The amount of future loan losses is susceptible to changes in economic, operating and other conditions within our market, which may be beyond our control, and such losses may exceed current estimates. Although Management believes that the Company’s allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot estimate loan losses with certainty, and we cannot provide any assurances that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our financial condition and results of operations.

An increase in the interest we pay on our debt and borrowings can materially and adversely affect our net interest margin.

Net interest margin represents the difference between the amount that we earn on loans and investments and the amount that we pay on debt securities and other borrowings. The loans we make in the ordinary course of our business are subject to interest rate and regulatory provisions of each applicable state's lending laws and are made at fixed rates which are not

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adjustable during the term of the loan. Since our loans are made at fixed interest rates and are made using the proceeds from the sale of our fixed and variable rate securities, we may experience a decrease in our net interest margin because increased interest costs cannot be passed on to all of our loan customers. A reduction in our net interest margin could adversely affect our ability to make payments on our outstanding debt securities.

Neither the Company nor any of its debt securities are or will be rated by any nationally recognized statistical rating agency, and this may increase the risk of your investment.

Neither 1^st Franklin nor any of its debt securities are, or are expected to be, rated by any nationally recognized statistical rating organization. Typically, credit ratings assigned by such organizations are based upon an assessment of a company’s creditworthiness and are a measure used in establishing the interest rate that a company offers on debt securities it issues. Without any such rating, it is possible that fluctuations in general economic, or industry specific, business conditions, changes in results of operations, or other factors that affect the creditworthiness of a debt issuer may not be fully reflected in the interest rate on any outstanding indebtedness of that issuer. Investors in the Company’s securities must depend solely on the creditworthiness of 1^st Franklin for the payment of principal and interest on those securities. In the absence of any third party credit rating, it is possible that the interest rates offered by the Company on its debt securities may not represent the credit risk that an investor assumes in purchasing any of these securities.

Consumer finance companies and other companies that offer and sell securities to the public such as the Company are subject to an increasing number of laws and government regulations, and if we fail to comply with these laws or regulations, our business may suffer and our ability to pay our obligations may be impaired.

Our operations are subject to increasing focus by federal, state and local government authorities and state attorneys general and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on certain lending practices by companies in the consumer finance industry, sometimes referred to as "predatory lending" practices. These requirements and restrictions, among other things:

•

require that we obtain and maintain certain licenses and qualifications;

•

limit the interest rates, fees and other charges that we are allowed to charge;

•

require specified disclosures to borrowers;

•

limit or prescribe other terms of our loans;

•

govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and

•

define our rights to repossess and sell collateral.

In addition, all companies that offer and sell securities to the public or that are involved in lending are also becoming subject to increasing regulatory requirements. For instance, on July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This new law significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection as an independent entity given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear; however, we believe that it will increase our cost of doing business and time spent by Management on regulatory matters which may have a material adverse effect on the Company’s operations and results.

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In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the loans we make. Although, we believe that we are in compliance in all material respects with applicable federal, state and local laws, rules and regulations, there can be no assurance that a change in any of those laws, or in their interpretation, will not make our compliance therewith more difficult or expensive, restrict our ability to originate loans, further limit or restrict the amount of interest and other charges we earn under such loans, or otherwise adversely affect our financial condition or business operations. The burdens of complying with these laws and regulations, and the possible sanctions if we do not so comply, are significant, and may result in a downturn in our business or our inability to carry on our business in a manner similar to how we currently operate.

If we experience unfavorable litigation results, our ability to timely meet our obligations may be impaired.

As a consumer finance company, in addition to being subject to stringent regulatory requirements, we may, from time to time, be subject to various consumer claims and litigation seeking damages and statutory penalties. The damages and penalties claimed by consumers and others can often be substantial. The relief requested varies but generally includes requests for compensatory, statutory and punitive damages. Unfavorable outcomes in any litigation or statutory proceedings could materially and adversely affect our results of operations, financial condition and cash flows and our ability to make payments on our outstanding obligations.

While we would expect to vigorously defend ourselves against any of these proceedings, there is a chance that our results of operations, financial condition and cash flows could be materially and adversely affected by unfavorable outcomes which, in turn, could affect our ability to fund loans or make payments on, or repay, our outstanding obligations, any of which could materially adversely effect our business, results of operations and financial condition.

We operate in a highly competitive environment.

The financing industry is highly competitive. We compete with, among others, large national and regional finance companies. Increased competition could adversely affect our ability to attract and retain business and reduce the profits that would otherwise arise from operations.

We are exposed to the risk of technology failures.

Our daily operations depend heavily on our computer systems, data system networks and service providers to consistently provide efficient and reliable service. The Company may be subject to disruptions in its operating systems arising from events that are wholly or partially beyond its control, which in turn may give rise to disruption of service to our customers. If our systems were to become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could materially adversely impact our business operations and financial condition.

A data security breach with regard to personally identifiable information about our customers or employees could negatively affect operations and result in high costs.

In the ordinary course of business, we receive personally identifiable information (“PII”) about our customers. We also receive PII from our employees. Numerous state and federal regulations, as well as other vendor standards, govern the collection and maintenance of PII from consumers and other individuals. There are numerous opportunities for a data security breach, including cyber-security breaches, burglary, lost or misplaced data, scams, or misappropriation of data by employees, vendors or unaffiliated third parties. Despite the security measures we have in place and any additional measures we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, could be

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vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, acts of vandalism, or other events. Alleged or actual data security breaches can increase costs of doing business, negatively affect customer satisfaction, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe in proprietary information.

Our business could be adversely affected by the loss of one or more key employees.

We are heavily dependent upon our senior management and the loss of services of any of our senior executives could adversely affect our business. Our success has been, and will continue to be, dependent on our ability to retain the services of existing key employees. The loss of the services of key employees or senior management could adversely affect the quality and profitability of our business operations.

Item 1B.

UNRESOLVED STAFF COMMENTS:

Not Applicable.

Item 2.

PROPERTIES:

Paragraph 1 of section “The Company”, Page 1; paragraph 1 (and the accompanying table) of Footnote 8 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements, Page 36; and map of branch offices, page 46 of the Company’s Annual Report for the year ended December 31, 2011, included herewith as Exhibit 13 (the “Annual Report”), are incorporated herein by reference.

Item 3.

LEGAL PROCEEDINGS:

From time to time, the Company is involved in various claims and lawsuits incidental to its business. In the opinion of Management based on currently available facts, the ultimate resolution of any such known claims and lawsuits is not expected to have a material effect on the Company’s financial position, liquidity, or results of operations.

Item 4.

MINE SAFETY DISCLOSURES:

Not Applicable.

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES:

Sources of Funds, Page 11 of the Annual Report is incorporated herein by reference.

Item 6.

SELECTED FINANCIAL DATA:

Selected Consolidated Financial Information, Page 3 of the Annual Report is incorporated herein by reference.

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS:

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Pages 12-19 of the Annual Report is incorporated herein by reference.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk sub-heading, Page 15 of the Annual Report is incorporated herein by reference.

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Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

Report of Independent Registered Public Accounting Firm and the Company’s Consolidated Financial Statements and Notes thereto, Pages 20-42 of the Annual Report are incorporated herein by reference.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE:

Not applicable.

Item 9A.

CONTROLS AND PROCEDURES:

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (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. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 were effective at December 31, 2011.

There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:

The Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. An internal control system over financial reporting has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management recognizes that there are inherent limitations in the effectiveness of any internal control system. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this evaluation, Management believes that internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), was effective as of December 31, 2011.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding the effectiveness of internal controls over financial reporting. Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to certain rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report.

Item 9B.

OTHER INFORMATION:

Not Applicable

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Forward Looking Statements:

Certain statements contained or incorporated by reference herein under the captions “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and elsewhere in this Annual Report may constitute “forward-looking statements” within the meaning of the federal securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those set out under the caption “Risk Factors”, the ability to manage cash flow and working capital, the accuracy of Management’s estimates and judgments, adverse economic conditions including the interest rate environment, unfavorable outcomes of litigation, federal and state regulatory changes and other factors referenced elsewhere herein or incorporated herein by reference.

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PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS


			Position(s)
Name of Director	Age	Director Since	with Company

Ben F. Cheek, III (3)(5)	75	1967	Chairman of Board / Chief Executive Officer

Ben F. Cheek, IV (3)(4)(5)	50	2001	Vice Chairman

A. Roger Guimond (3)(5)	57	2004	Executive Vice President / Chief Financial Officer

John G. Sample, Jr. (1)(2)(5)	55	2004	None

C. Dean Scarborough (1)(2)(5)	57	2004	None

Robert E. Thompson (1)(2)(5)	79	1970	None

Keith D. Watson (1)(2)(5)	54	2004	None

(1)

Member of Audit Committee.

(2)

Mr. Sample has been the Senior Vice President and Chief Financial Officer of Atlantic American Corporation, an insurance holding company, since 2002. Mr. Scarborough was involved in real estate sales during 2006-2008. Since 2009 he has served as a county commissioner for Stephens County. Dr. Thompson is a retired physician. Mr. Watson is Vice President and Corporate Secretary of Bowen & Watson, Inc., a general contracting company. Mr. Watson has been in his position of employment, and Dr. Thompson has been retired, for more than five years.

(3)

Reference is made to “Executive Officers” for a discussion of business experience.

(4)

Son of Ben F. Cheek, III.

(5)

The term of each director will expire when a successor to such director is elected and qualified.

There was no, nor is there presently any, arrangement or understanding between any director and any other person (except directors and officers of the registrant acting solely in their capacities as such) pursuant to which the director was selected.

Ben F. Cheek, III, a shareholder of the Company, and whose family directly or indirectly owns all of the shares of the Company’s stock, currently serves as both Chief Executive Officer and Chairman of the Board. Shares of the Company’s stock are not currently traded on any national securities exchange or listed for trading or quoted by any national securities association. The Company’s Board of Directors believes that, due to the fact that the Company’s shares are privately held and Mr. Cheek, III has significant knowledge of all aspects of its business and operations, the combination of these two positions fosters more consistent communication, accountability and alignment on corporate strategy.

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Given the relatively low historical turnover of members of the Board of Directors and the strong working relationship between such members, the Board has not appointed a lead independent director.

The day-to-day management of the Company, including identifying and evaluating current and potential risks within financial operations, compensation related and other processes and development is primarily the responsibility of the Company’s Executive Management Team (the “EMT”). The executive officers comprising the EMT are: Messrs. Cheek, III, Cheek, IV, Guimond, Haynie, Culpepper and Vercelli, and Ms. Herring and Ms. Lovern. The Board of Directors maintains the ultimate responsibility for oversight of the Company’s risks. In fulfilling its duties, the Board allocates a portion of its direct oversight responsibilities to various committees. The Audit Committee has specific responsibility for oversight of risks associated with financial accounting and audits, as well as internal control over financial reporting. The Board receives, evaluates and discusses presentations, at least quarterly, on the financial condition and operating results of the Company. Management discusses matters of particular importance or concern as they may be materially impacted by risk on an ongoing basis, and members of the EMT remain available to members of the Board for discussion and review both during meetings of the Board of Directors and at other times.

Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, the Board of Directors has determined that Messrs. Sample, Scarborough, and Watson, and Dr. Thompson, are “independent” (as such term is defined in the rules of the Securities and Exchange Commission (the “SEC”) and the NASDAQ Marketplace Rules). In making this determination, the Board concluded that none of such persons have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

The Audit Committee is composed of Messrs. Sample, Scarborough, and Watson, and Dr. Thompson. Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, in accordance with the provisions of the charter of the Audit Committee, the Board of Directors has determined that the members thereof are “independent” and that Mr. Sample is an “audit committee financial expert” as defined by the SEC in Rule 407(d)(5) of Regulation S-K. In making such determination, the Board of Directors took into consideration, among other things, the express provision in Item 407(d)(5) of Regulation S-K that the designation of a person as an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on that person as a member of the Audit Committee, nor shall it affect the duties or obligations of other Audit Committee members of the Board of Directors. A copy of the Company’s Audit Committee charter is publicly available on the Company’s website at: http//www.1ffc.com.

The Company is a family owned business. Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining the responsibilities thereof. The EMT establishes the basis for all executive compensation, which compensation is approved by shareholders Messrs. Cheek, III, Cheek, IV and Ms. Herring. Additional information concerning the processes and procedures for the consideration and determination of executive officer and director compensation is contained under the heading “Compensation Discussion and Analysis” below.

Because of the closely held nature of the ownership of the Company, the Board views that it is appropriate for the Company not to have a formal process for shareholders to send communications to the Board.

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Director Qualifications:

The members of the Board of Directors each have the qualifications we believe necessary and desirable to appropriately perform their duties. Each member has an exemplary record of professional integrity, a dedication to their respective professions and a strong work ethic.


Director	Summary of Qualifications

Ben F. Cheek, III	Executive officer of the Company. Extensive knowledge in the banking and consumer finance industry. Previously served as director of a Habersham Bancorp. Has legal background as an attorney. Has 50 years experience with the Company. Has previously served as board member on various consumer industry associations.

Ben F. Cheek, IV	Executive officer of the Company. Knowledgeable in the banking and consumer finance industry. Has been with the Company for 25 years. Currently serves on two of the industry’s state association boards and serves as a board member on our industry’s national association.

A. Roger Guimond	Executive officer of the Company. Knowledgeable in the banking and consumer finance industry. Has been with the Company for 35 years and is responsible for the accounting, audit and compliance, technology infrastructure and investment center operations of the Company. Significant experience in finance and related areas.

John G. Sample, Jr.	Independent director. Extensive knowledge in accounting and reporting standards. Prior experience as an audit partner in an international independent registered public accounting firm. Experience and knowledge of the insurance industry through executive management positions at operating companies. Has served as director of the Company for 7 years and is the Company’s audit committee chairman.

C. Dean Scarborough	Independent director. Previously served on board of a community bank. Currently serves as a county Commissioner for Stephens County, Georgia, where the Company maintains its headquarters. Has served as director of the Company for 7 years.

Robert E. Thompson	Independent director. Retired physician. Has served as director of Company for 41 years.

Keith D. Watson	Independent director. Previously served on board of a community bank. Has served as director of Company for 7 years. Maintains executive position in self-owned corporation.

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EXECUTIVE OFFICERS


Name, Age, Position(s)
and Family Relationship	Business Experience

Ben F. Cheek, III, 75 Chairman of Board and Chief Executive Officer	Joined the Company in 1961 as attorney and became Vice President in 1962, President in 1972 and Chairman of Board in 1989.

Ben F. Cheek, IV, 50 Vice Chairman Son of Ben F. Cheek, III	Joined the Company in 1988 working in Statistics and Planning. Became Vice Chairman in 2001.

Virginia C. Herring, 48 President Daughter of Ben F. Cheek, III	Joined the Company on a full time basis in April 1988 as Developmental Officer. Since then, she has worked throughout the Company in different departments on special assignments and consultant projects. Became President in 2001.

A. Roger Guimond, 57 Executive Vice President, Chief Financial Officer and Director No Family Relationship	Joined the Company in 1976 as an accountant and became Chief Accounting Officer in 1978, Chief Financial Officer in 1991 and Vice President in 1992. Was appointed Secretary in 1990 and Treasurer in 1992. Became Executive Vice President in 2001. Elected a Director in 2004.

J. Michael Culpepper, 57 Executive Vice President, Chief Operating Officer No Family Relationship	Joined the Company in 1979, became Supervisor in 1984, Area Vice President in 1996, Vice President in 2001 and Executive Vice President and Chief Operating Officer in 2006.

C. Michael Haynie, 57 Executive Vice President - Human Resources No Family Relationship	Joined the Company in 2005 as Vice President - Human Resources. Became Executive Vice President - Human Resources on January 1, 2006.

Karen S. Lovern, 53 Executive Vice President – Strategic and Organization Development No Family Relationship	Joined the Company in 2000 as Director of Training and Development. Became Executive Vice President – Strategic and Organization Development on January 1, 2006.

Charles E. Vercelli, Jr., 51 Executive Vice President – General Counsel No Family Relationship	Joined the Company in 2008 as Executive Vice President – General Counsel. Prior thereto, he provided legal services under his privately held law firm.

Lynn E. Cox, 54 Vice President - Secretary / Treasurer No Family Relationship	Joined the Company in 1983 and became Secretary in 1990. Appointed Treasurer in 2002. Became Area Vice President and Secretary in 2001. Promoted to Vice President in 2005.

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The term of office of each Executive Officer expires when a successor is elected and qualified. There was no, nor is there presently any, arrangement or understanding between any officer and any other person (except directors or officers acting solely in their capacities as such) pursuant to which the officer was selected.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or any persons performing similar functions, as well as to its Directors and other employees. A copy of this code of ethics is publicly available on the Company’s website at: http//www.1ffc.com. The Company will provide a copy of this code of ethics, free of charge, upon any written request. Requests should be directed to Lynn Cox, Secretary and Treasurer, 1^st Franklin Financial Corporation, P.O. Box 880, Toccoa, Georgia 30577. If we make any amendment to this code of ethics, other than a technical, administrative, or non-substantive amendment, or we grant any waiver from a provision of the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, we will disclose the nature of the amendment or waiver on our website. Also, we may elect to disclose the amendments or waiver in a report on Form 8-K filed with the SEC.

The Company has established an “Ethics Hotline” which enables employees to report any questionable ethics actions including, but not limited to, fraud or deliberate error in recording and/or maintaining accurate records, deficiencies or noncompliance with the Company’s policies. The reporting is strictly confidential and is reviewed by our Vice President of Human Resources and the Chairman of the Audit Committee. Ethics violations that are reported are promptly investigated and appropriate corrective action is taken as warranted by the results of the investigation.

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Item 11.

EXECUTIVE COMPENSATION:

Compensation Discussion and Analysis

Overall Philosophy:

The overall objective of the Company is to achieve specific annual and long-term strategic goals set by the Executive Management Team (the “EMT”) from time to time, while maintaining a healthy and stable financial position. It is part of the overall responsibility of our executive officers to successfully manage the Company to reach this objective. Our compensation philosophy revolves around the motivation to achieve, and achievement of, these goals and is designed to attract and retain top executives, and to incentivize and to reward the executive officers for their efforts and successes, while properly balancing the encouragement of risk-taking behavior.

Role of Executive Officers in Compensation Decisions:

The Company is a family-owned business. Because of the closely-held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions). The EMT, consisting of executive officers of the Company, establishes the basis for all executive officer compensation, which compensation is subject to approval by shareholders Messrs. Cheek, III, Cheek IV, and Ms. Herring. The EMT consists of Messrs. Cheek, III, Cheek IV, Guimond, Haynie, Culpepper and Vercelli, and Ms. Herring and Ms. Lovern. The Company has not historically engaged any consultant to advise on compensation related matters.

Components of Compensation:

The principal components of the Company’s executive compensation program include base salary, discretionary bonus awards and non-equity incentive plan compensation. The Company also expects that earnings on non-qualified deferred compensation amounts and other compensation, including certain perquisites as detailed below, will add to each executive officer’s overall total compensation each year. Given the closely-held nature of the Company, the Company does not have available for grant, and does not deem it appropriate to pay, any equity based compensation. The EMT takes into account this fact annually when determining other components and amounts of compensation.

Base Salary:

The Company provides executive officers, and other employees, with a base salary to compensate them for services rendered throughout the year. Salaries for all executive officers are established annually by Messrs. Cheek III and Cheek, IV and Ms. Herring, based on the level of each executive officer’s responsibility, tenure with the Company and certain publicly available market data with respect to salaries paid for like positions in comparable companies. In addition, base salary levels are set at a level designed to take into account the fact that the Company does not provide equity-based compensation, as described elsewhere. Each executive officer has goals set annually which are reviewed with the officer by the President, Vice Chairman and Chief Executive Officer throughout the year. These goals typically vary depending on the nature of the Executive’s responsibilities. A formal individual performance and development review is also held each year with each executive officer and Ms. Herring and Mr. Cheek, III, in which the level of achievement with respect to such goals is discussed. Merit based adjustments to salaries are based on the assessment of each executive’s performance review and overall Company performance.

Bonus Awards:

Bonus amounts paid to the executive officers include discretionary bonuses and may include certain cash bonuses from time to time for special recognition, each determined at the discretion of the EMT and approved by shareholders Messrs. Cheek, III, Cheek IV, and Ms. Herring. The EMT considers, among other factors, the Company’s inability to grant equity-based awards to its officers and employees, as described below, when determining whether and to what extent to make awards. In 2011, it was determined appropriate to award the executive officers a bonus of 4% of their respective base salaries, which was awarded and paid in November as a “holiday” bonus. In addition to this 4% bonus, Messrs.

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Cheek III and Cheek, IV and Ms. Herring, retains the discretion to award certain additional amounts. In 2011, Mr. Guimond was awarded an additional discretionary bonus in recognition of his continued significant contributions and service to the Company and its subsidiaries (for which he received no separate compensation during such period).

Non-Equity Incentive Compensation:

As described elsewhere herein, the Company’s stock is not traded or quoted on any national securities exchange or association, but is closely held by Mr. Cheek, III, and his family. As a result, the Company does not grant stock or other equity based awards. In consideration of this and other factors, and in order to provide certain known targets, the achievement of which would trigger the payment of additional compensation, the EMT has, historically, adopted annual incentive compensation plans. For example, at the beginning of 2011 the EMT approved the Company’s 2011 Bonus Plan (the “2011 Bonus Plan”).

The 2011 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 2011 Bonus Plan, at inception, a minimum pre-tax income threshold of $11.5 million was established as a baseline goal to be achieved in order for any payouts to be made under such Plan. The EMT determined that pre-tax income was an appropriate measure upon which to provide a threshold evaluation of our annual performance because the EMT believes pre-tax income represents an appropriate measure of profitability of the Company to be achieved for the year in order to award non-equity incentive awards.

If that threshold was met, payouts under the 2011 Bonus Plan were based on the number of strategic goals met, as established by the EMT. For 2011, the EMT identified five strategic goals in addition to the minimum pre-tax income threshold goal. Each goal was chosen as a critical metric for the continued growth and financial soundness of the Company based on the impact the achievement of each such goal has on the Company’s results of operations and financial condition. The quantifiable amounts in each of the goals (including the threshold minimum pre-tax income) were determined by the EMT after review and consideration of various internal budgets and forecasts. The goals were:

(i)

Minimum 5.00% corporate net receivables growth;

(ii)

Delinquency control – Percent of accounts with balances 30 days or more

past due, not to exceed 10.50% of outstanding receivables;

(iii) $19.0 million minimum pre-tax income (separate from minimum threshold goal);

(iv) Maximum corporate expense / revenue ratio of 90.00% or less; and

(v) Minimum 3.25% return on assets.

Bonus payouts under the 2011 Plan depended on the number of goals met as follows:

No. of Strategic Goals Met

Bonus Payout (% of Salary)

5% - 25%

5% - 35%

5% - 45%

5% - 55%

5% - 65%

In 2011, the Company exceeded the $11.5 million pre-tax threshold goal. In addition, the Company met all five strategic goals as set out in the 2011 Bonus Plan.

In accordance with discretion afforded the EMT under the 2011 Bonus Plan, amounts paid to each executive officer varied within the payout range depending on personal performance milestones as determined by the EMT. The actual amounts paid to each executive officer are set out in the Summary Compensation Table which follows, under the heading “Non-Equity Incentive Plan Compensation”.

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Deferred Compensation:

The Company offers all eligible employees the opportunity to participate in a Company-sponsored deferred compensation plan in accordance with Section 401(k) of the Internal Revenue Code of 1986 as amended (the “Code”). The Company “matches” employee contributions of up to 6% of their salary, using the following formula: 100% of first 1% and 70% of next 5% of salary deferred.

As a result of certain federal limitations on the ability of management or highly compensated employees (within the respective meanings of Section 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974) to participate in such plans, Management determined to establish the Company’s Executive Nonqualified Deferred Compensation Plan), (the “Deferred Compensation Plan”). Pursuant to the plan, the Company annually credits the account of each participant who received more than the Section 401(a)(17) salary limit (as described in the Code) with a discretionary amount that is usually, but not always, equal to the amount the participant would have received as a 401(k) Company matching contribution on the amount of their salary above the 401(a)(17) limit had they been allowed to defer 6% of that amount into the qualified plan. The EMT determined that it was appropriate to offer the Deferred Compensation Plan, and the matching contribution consistent with the level provided by employees generally, to such persons as if they were eligible to participate in Company sponsored plans open to other employees.

Perquisites and Other Compensation:

The Company believes that providing its executive officers with certain reasonable perquisites and other compensation is consistent with the Company’s overall compensation philosophy designed to attract and retain top executives. The EMT periodically reviews the types and amounts of perquisites and other compensation provided to the Company’s executive officers. In conducting this review, the EMT considers, among other things, the types and ranges of compensation provided at various similar sized or situated companies.

The Company’s executive officers are provided the use of Company-owned automobiles and granted a travel allowance to cover certain costs of business-related travel when an overnight stay is not required and the Company’s travel expense policy is not otherwise involved. These amounts are included in the taxable income of the executive officers. In addition, the Company generally provides certain insurance benefits to its employees and executive officers. This includes long-term disability and travel accident insurance (which pays a benefit upon the occurrence of certain specific events), as well as basic life and accidental death insurance coverage, which coverage is provided on a graduated scale based on seniority. In addition, in recognition of the commitment to the Company by those individuals with twenty or more years of service to the Company, the Company pays the premiums for their personal medical benefits. In 2011 Messrs. Cheek, III, Cheek, IV, Guimond and Culpepper received this benefit. In addition, during 2011, Messrs. Cheek, III and Cheek, IV, and Ms. Herring, based on positions as shareholders and executive officers, were determined eligible to participate in the Company’s medical expenses reimbursement program (“MERP”), which provides reimbursement for amounts not otherwise covered under policies for which these officers are eligible to participate in.

These amounts are reflected in the Summary Compensation Table and related notes below.

Employment Agreements and Change in Control Arrangements:

The Company does not enter into employment agreements with its executive officers. Given the nature and location of its business, and the fact that the Company is a family owned business whose stock is not publicly traded, the Company has not had significant turnover among its senior management, and has determined that it is not necessary to enter into such agreements with its executives.

For similar reasons, due to the nature of compensation and the fact that a change in control of the Company is unlikely without significant input and approval from the EMT and the Company’s closely-held ownership, the EMT has determined that it is not necessary to condition any payments upon, or make any amounts contractually payable upon, any change in control of the Company.

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Compensation Committee Report:

In the absence of a standing compensation committee, the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with Management and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

The Board of Directors:

Ben F. Cheek, III

C. Dean Scarborough

Ben F. Cheek, IV

Robert E. Thompson

A. Roger Guimond

Keith D. Watson

John G. Sample, Jr.


		Amount and Nature of	Percent of
Name	Title of Class	Beneficial Ownership	Class

Ben F. Cheek, III	Voting Common Stock	None	None
	Non-Voting Common Stock	14,674 Shares - Direct	8.72%

Ben F. Cheek, IV	Voting Common Stock	644 Shares - Direct	10.59%
	Non-Voting Common Stock	18,011 Shares - Direct	10.70%
	Non-Voting Common Stock	75,794 Shares – Indirect (1)	45.04%

Virginia C. Herring	Voting Common Stock	644 Shares - Direct	10.59%
	Non-Voting Common Stock	18,012 Shares - Direct	10.70%
	Non-Voting Common Stock	75,794 Shares – Indirect (1)	45.04%

A. Roger Guimond	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

J. Michael Culpepper	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

John G. Sample, Jr.	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

C. Dean Scarborough	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

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Robert E. Thompson	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

		Amount and Nature of	Percent of
Name	Title of Class	Beneficial Ownership	Class

Keith D. Watson	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None

All Directors and
Executive Officers	Voting Common Stock	1,288 Shares - Direct	.76%
as a Group	Non-Voting Common Stock	50,697 Shares - Direct	29.82%
(12 persons)	Non-Voting Common Stock	66,394- Indirect (1)	39.06%

(1)

Ben F. Cheek, III and Elizabeth Cheek were the grantors of six irrevocable trusts. Two trusts were established for the benefit of each of Ben F. Cheek, IV, Virginia C. Herring and David W. Cheek. The trustees of each of the trusts, who by virtue of dispositive power over the assets thereof are deemed to be the beneficial owners of shares of the Company’s non-voting common stock contained therein, are the two persons named above who are not the named beneficiaries of each of the respective trusts.

(c)

The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE:

In accordance with the provisions of the written charter of the Audit Committee of the Board of Directors, the Audit Committee is to approve all related party transactions that are required to be disclosed pursuant to the rules and regulations of the SEC.

The Company leases its home office building and print shop for a total of $151,200 per year from Franklin Enterprises, Inc. under leases which expire December 31, 2015. Certain shareholders of Franklin Enterprises, Inc. are also shareholders of the Company. Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own 66.67% and 11.11% of the shares of Franklin Enterprises, Inc., respectively. Ms. Herring, an Executive Officer, owns 11.11% of the shares of Franklin Enterprises, Inc. In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties. The aggregate dollar amount of all remaining periodic payments due during the lease term is $604,800.

The Company leases its Clarkesville, Georgia branch office for a total of $5,400 per year from Cheek Investments, Inc. under a lease which expires June 30, 2015. Certain shareholders of Cheek Investments, Inc. are also shareholders of the Company. Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own .50% and 33.17% of the shares of Cheek Investments, Inc., respectively. Ms. Herring, an Executive Officer, owns 33.17% of the shares of Cheek Investments, Inc. In Management’s opinion, the lease is at a rate and on terms which approximate those obtainable from independent third parties. The aggregate dollar amount of all remaining periodic payments due during the lease term is $18,900.

During 1999, a loan was extended to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner. David Cheek (the adult son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock. The loan was renewed on July 20, 2011. The balance on this commercial loan (including principal and accrued interest) was $1,283,106 at December 31, 2011. The maximum amount outstanding during the year was $1,283,106. No principal or interest payments were applied against this loan during 2011. The

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loan is a variable-rate loan with the interest based on the prime rate plus 1%. Interest is currently computed at an annual rate of 4.25%. The interest rate adjusts whenever the prime rate changes.

Effective September 23, 1995, the Company and Deborah A. Guimond, Trustee of the Guimond Trust (an irrevocable life insurance trust, the “Trust”) entered into a Split-Dollar Life Insurance Agreement. The life insurance policy insures A. Roger Guimond, Executive Vice President and Chief Financial Officer of the Company. As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust. The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate. A payment of $5,071 for interest accrued during 2011 was applied to the loan on December 31, 2011. No principal payments on this loan were made in 2011. The balance on this loan at December 31, 2011 was $282,324. This was the maximum amount outstanding during the year.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES:

The Company was billed for professional services provided during fiscal years 2011 and 2010 by Deloitte & Touche LLP in the amounts set out in the following table, all of which were pre-approved by the Audit Committee. Other than as set out below, the Company was not billed for any services provided by Deloitte & Touche LLP.

The Audit Committee of the Board of Directors has considered the services rendered by Deloitte & Touche LLP for services other than the audit of the Company’s financial statements and has determined that the provision of these services is compatible with maintaining the independence of Deloitte & Touche LLP.


		Fee	Fee
		Amount	Amount
		2011	2010
Services Provided:
Audit Fees (1)		$ 210,572	$ 303,198
Tax Fees (2)		110,925	67,550
Total		$ 321,497	$ 370,748

(1)	Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2011 and 2010, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2011 and 2010 fiscal years. Included in these amounts are fees of $32,000 and $5,000 for 2011 and 2010, respectively, related to the review of certain registration statements.

(2)	Fees billed by Deloitte & Touche LLP for professional services rendered for tax compliance, tax advice and tax planning. The services included the preparation of the Company’s and its subsidiaries’ tax returns.

All audit and non-audit services to be performed by the Company’s independent registered public accounting firm must be approved in advance by the Audit Committee. Pursuant to the Audit Committee Pre-Approval Policy (the “Policy”), and as permitted by SEC rules, the Audit Committee may delegate pre-approval authority to any of its members, provided that any service approved in this manner is reported to the full Audit Committee at its next meeting. The Policy provides for a general pre-approval of certain specifically enumerated services that are to be provided within specified fee levels. With

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respect to requests to provide services not specifically pre-approved pursuant to the general grant, such requests must be submitted to the Audit Committee by the Company’s independent registered public accounting firm and its Chief Financial Officer and must include a joint statement as to whether, in their view, the request is consistent with SEC rules on auditor independence.

- 25 -


Georgia	58-0521233
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

135 East Tugalo Street
Post Office Box 880
Toccoa, Georgia	30577
(Address of principal executive offices)	(Zip Code)


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

Class	Outstanding at February 29, 2012
Common Stock, $100 Par Value	1,700 Shares
Non-Voting Common Stock, No Par Value	168,300 Shares


		Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1)
Name	Grant Date	Threshold $	Target $	Maximum $

Ben F. Cheek, III	3/28/2011	$ -	$ -	$ -
Ben F. Cheek, IV	3/28/2011	$ 12,292	$ 86,042	$ 159,792
Virginia C. Herring	3/28/2011	$ 13,125	$ 91,875	$ 170,625
A. Roger Guimond	3/28/2011	$ 16,131	$ 112,914	$ 209,707
J. Michael Culpepper	3/28/2011	$ 14,013	$ 98,093	$ 182,172


Director Compensation

Name	Fees Earned Or Paid In Cash	All Other Compensation	Total
Ben F. Cheek, III	$ --	$ --	$ --
Ben F. Cheek, IV	$20,000	$ --	$20,000
A. Roger Guimond	$20,000	$ --	$20,000
John G. Sample, Jr.	$20,000	$1,000	$21,000
C. Dean Scarborough	$20,000	$ --	$20,000
Robert E. Thompson	$20,000	$ --	$20,000
Keith D. Watson	$20,000	$ --	$20,000


PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:

(a) (1) Financial Statements:

Report of Independent Registered Public Accounting Firm.

Consolidated Statements of Financial Position at December 31, 2011 and 2010

Consolidated Statements of Income for the three years ended December 31, 2011

Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2011

Consolidated Statements of Cash Flows for the three years ended December 31, 2011

Notes to Consolidated Financial Statements.

(2) Financial Statement Schedule:

Report of Independent Registered Public Accounting Firm.

Condensed Statements of Financial Position at December 31, 2011 and 2010.

Condensed Statements of Income for the three years ended December 31, 2011.

Condensed Statements of Cash Flows for the three years ended December 31, 2011.

(3) Exhibits:

	3.	(a)	Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(a) to Form 10-K for the fiscal year ended December 31, 1995).

		(b)	Bylaws (incorporated herein by reference to Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1995).

	4.	(a)	Indenture dated October 31, 1984, between the Company and The First National Bank of Gainesville, Trustee (incorporated by reference to Exhibit 4(a) to the Company’s Amendment No. 1 dated April 24, 1998 to the Registration Statement on Form S-2, File No. 333-47515).

		(b)	Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Amendment No. 3 to the Registration Statement on Form S-2 dated November 14, 2005, File No. 333-126589).

		(c)	Agreement of Resignation, Appointment and Acceptance dated as of May 28, 1993 between the Company, The First National Bank of Gainesville, and Columbus Bank and Trust Company (incorporated by reference to Exhibit 4(c) to the Company’s Post-Effective Amendment No. 1 dated June 8, 1993 to the Registration Statement on Form S-2, File No. 33-49151).


Name and Address of		Amount and Nature of	Percent of
Beneficial Owner	Title of Class	Beneficial Ownership	Class

Ben F. Cheek, IV	Voting Common Stock	644 Shares - Direct	37.88%
837 Beaver Dam Rd.
Toccoa, Georgia 30577

Virginia C. Herring	Voting Common Stock	644 Shares - Direct	37.88%
1135 Summit Ridge Dr.
Toccoa, Georgia 30577

David W. Cheek	Voting Common Stock	412 Shares - Direct	24.24%
4500 Barony Dr.
Suwanee, Georgia 30024


		(d)	Modification of Indenture, dated March 30, 1995, by and among Columbus Bank and Trust Company, Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(b) to the Company’s Form 10-K for the year ended December 31, 1994).

		(e)	Second Modification of Indenture dated December 2, 2004 by and among Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-2 dated July 14, 2005, File No. 333-126589).

		(f)	Form of Indenture by and between the Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form S-1 dated December 27, 2007, File No. 333-148331).

		(g)	Third Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(h) to the Company’s Form 10-K for the year ended December 31, 2009).

		(h)	Tri-party Agreement by and among the Company, Synovus Trust Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(i) to the Company’s Form 10-K for the year ended December 31, 2009).

		(i)	Fourth Modification of Indenture dated March 26, 2010 by and between U.S. Bank National Association and the Company (incorporated by reference to Exhibit 4(j) to the Company’s Form 10-K for the year ended December 31, 2009).

		(j)	Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173684).

		(k)	Form of Indenture by and between the Company and U.S. Bank National Association as of April 3, 2008 (incorporated by reference to Exhibit 4(a) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685).

		(l)	Form of Senior Demand Note (incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685).

		(m)	Form of Overdraft Protection Agreement, Security Agreement and Assignment (incorporated by reference to Exhibit 4(c) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685).

		(n)	Form of Senior Demand Note Check Redemption Agreement (incorporated by reference to Exhibit 4(d) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685).

		(o)	Form of Check (incorporated by reference to Exhibit 4(e) to Pre-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the SEC on June 30, 2011, File No. 333-173685).



10.	(a)	Credit Agreement, dated as of December 15, 2006, by and among the Company, Wachovia Bank, National Association, as administrative agent and as a lender, and BMO Capital Markets Financing, Inc., as lender (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated December 21, 2006).

	(b)	Loan and Security Agreement, dated September 11, 2009, by and among the Company and Wells Fargo Preferred Capital, Inc., as agent for Lenders (“Agent”) and a lender, and the other financial institutions from time to time party thereto (collectively, the “Lenders” and each individually is referred to as a “Lender”) (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated September 17, 2009).

	(c)	First Amendment to Loan and Security Agreement dated as of November 3, 2009, by and among the Company, Wells Fargo Preferred Capital, Inc., as agent for lenders, and the other financial institutions from time to time party thereto (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated November 5, 2009).

	(d)	Second Amendment to Loan and Security Agreement dated as of August 11, 2010, by and among the Company, Wells Fargo Preferred Capital, Inc., as agent for lenders, and the financial institutions a party thereto as lenders (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2010).

	(e)	Third Amendment to Loan and Security Agreement, dated as of September 20, 2011, by and among the Company, Wells Fargo Preferred Capital, Inc. and the financial institutions a party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-k filed with the SEC on September 21, 2011).

	(f)	Director Compensation Summary Term Sheet.

	(g)	Form of the Company’s 2012 Executive Bonus Plan. *

11.	Computation of Earnings per Share is self-evident from the Consolidated Statement of Income and Retained Earnings in the Annual Report, incorporated by reference herein.

12.	Ratio of Earnings to Fixed Charges.

13.	Annual Report.

15.	Financial Statement Schedules.

21.	Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Form 10-K for the year ended December 31, 2010).

23.	Consent of Independent Registered Public Accounting Firm.

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.



	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF	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. XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document XBLR Taxonomy Extension Definition Linkbase Document

	*	Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

(b)	See “Index to Exhibits”.


	1st FRANKLIN FINANCIAL CORPORATION

March 29, 2012	By: /s/ Ben F. Cheek, III
Date	Ben F. Cheek, III
	Chairman of Board


Signatures	Title	Date


/s/ Ben F. Cheek, III		March 29, 2012
(Ben F. Cheek, III)	Chairman of Board;
	Chief Executive Officer

/s/ Ben F. Cheek, IV
(Ben F. Cheek, IV)	Vice Chairman	March 29, 2012


/s/ Virginia C. Herring
(Virginia C. Herring)	President	March 29, 2012


/s/ A. Roger Guimond
(A. Roger Guimond)	Executive Vice President;	March 29, 2012
	Principal Financial Officer
	Principal Accounting Officer; Director

/s/ John G. Sample, Jr.
(John G. Sample, Jr.)	Director	March 29, 2012

/s/ C. Dean Scarborough
(C. Dean Scarborough)	Director	March 29, 2012

/s/ Robert E. Thompson
(Robert E. Thompson)	Director	March 29, 2012

/S/ Keith D. Watson
(Keith D. Watson)	Director	March 29, 2012


Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.

(a)	Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23b), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following:

	(1)	Any annual report to security holders covering the registrant's last fiscal year; and

	(2)	Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders.

(b)	The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference.

(c)	This Annual Report on Form 10-K incorporates by reference portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2011, which is filed as Exhibit 13 hereto. Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements to its shareholders.


Schedule I



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To: The Board of Directors and Shareholders 1^st Franklin Financial Corporation

We have audited the consolidated financial statements of 1^st Franklin Financial Corporation and subsidiaries (the "Company") as of December 31, 2011 and 2010, and for each of the three years in the period ended December 31, 2011, and have issued our report thereon dated March 29, 2012; such consolidated financial statements and report are included in your 2011 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company listed in Item 15. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 29, 2012


SCHEDULE I


CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1^st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)

DECEMBER 31, 2011 AND 2010

ASSETS
				2011		2010
	CASH AND CASH EQUIVALENTS		$ 9,056,167		$ 3,579,814

	SHORT-TERM INVESTMENTS		250,000		1,547

	RESTRICTED CASH		178,652		81,661

	LOANS:
	Direct Cash Loans		376,568,048		347,445,192
	Real Estate Loans		22,123,077		22,967,279
	Sales Finance Contracts		19,764,821		21,694,633
			418,455,946		392,107,104

	Less:	Unearned Finance Charges	49,206,783		45,811,133
		Unearned Insurance Commissions	14,327,409		12,951,586
		Allowance for Loan Losses	21,360,085		24,110,085
			333,561,669		309,234,300

	INVESTMENTS IN SUBSIDIARIES		103,284,161		93,547,530

	MARKETABLE DEBT SECURITIES:
	Available for Sale, at fair market value		233,088		377,067

	OTHER ASSETS:
	Land, Buildings, Equipment and Leasehold Improvements,
	less accumulated depreciation and amortization
	of $17,608,651 and $17,364,987 in 2011 and 2010, respectively		9,342,174		6,687,456
	Miscellaneous		3,155,183		3,749,978
			12,497,357		10,437,434

	TOTAL ASSETS		$ 459,061,094		$ 417,259,353


SENIOR DEBT:
Notes Payable to Banks	$ --	$ 900,000
Senior Demand Notes, including accrued interest	46,606,960	40,392,404
Commercial Paper	197,194,186	167,199,875
	243,801,146	208,492,279



ACCOUNTS PAYABLE AND ACCRUED EXPENSES	16,839,206	17,580,525


SUBORDINATED DEBT	46,870,076	59,779,620


Total Liabilities	307,510,428	285,852,424



STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value
6,000 shares authorized; no shares issued or outstanding	--	--
Common Stock:
Voting Shares; $100 par value;
2,000 shares authorized; 1,700 shares issued and outstanding as of December 31, 2011 and 2010	170,000	170,000
Non-Voting Shares; no par value;
198,000 shares authorized; 168,300 shares issued and
outstanding as of December 31, 2011 and 2010	--	--
Accumulated Other Comprehensive Income	102,772	246,750
Retained Earnings	151,277,894	130,990,179
Total Stockholders' Equity	151,550,666	131,406,929

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 459,061,094	$ 417,259,353


SCHEDULE I


CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1^st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

	2011	2010	2009
INTEREST INCOME:
Finance Charges	$ 108,858,812	$ 100,475,533	$ 96,494,760
Investment Income	12,884	29,917	15,089
	108,871,696	100,505,450	96,509,849

INTEREST EXPENSE:
Senior Debt	9,323,864	8,583,664	8,745,154
Subordinated Debt	2,316,933	3,855,020	4,936,793
	11,640,797	12,438,684	13,681,947

NET INTEREST INCOME	97,230,899	88,066,766	82,827,902

PROVISION FOR LOAN LOSSES	19,008,749	20,907,373	29,302,142

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	78,222,150	67,159,393	53,525,760

NET INSURANCE INCOME	19,024,591	17,610,978	16,773,235

OTHER REVENUE	6,831,655	5,897,444	5,223,733

OPERATING EXPENSES:
Personnel Expense	55,399,302	51,566,673	48,366,010
Occupancy Expense	11,455,842	10,752,842	11,186,780
Other Expense	17,832,265	16,641,626	16,455,343
	84,687,409	78,961,141	76,008,133

INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES	19,390,987	11,706,674	(485,405)


Net Income	$ 29,123,118	$ 20,683,437	$ 8,373,007
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses	19,008,749	20,907,373	29,302,142
Depreciation and Amortization	2,586,017	2,465,829	2,577,539
Equity in undistributed earnings of subsidiaries	(9,736,631)	(8,697,229)	(8,834,493)
Gain on sale of marketable securities and
equipment and premium amortization on securities	(229,967)	(46,431)	(18,572)
Decrease (Increase) in Miscellaneous Assets	594,795	(967,115)	415,355
(Decrease) Increase in Other Liabilities	(741,318)	3,316,425	283,152
Net Cash Provided	40,604,763	37,662,289	32,098,130

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased	(268,745,548)	(241,803,898)	(214,933,802)
Loan payments	225,409,430	204,177,086	190,367,098
Purchase of joint venture interest	--	--	(171,471)
Increase in restricted cash	(96,991)	(81,661)	--
Capital expenditures	(5,565,398)	(1,610,695)	(997,083)
Proceeds from sale of equipment	554,630	130,350	53,331
Net Cash Used	(48,443,877)	(39,188,818)	(25,681,927)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in Senior Demand Notes	6,214,556	(816,695)	(132,740)
Advances on credit line	4,308,977	11,240,082	90,246,309
Payments on credit line	(5,208,977)	(26,544,391)	(96,309,681)
Commercial Paper issued	51,932,342	53,169,908	396,342,906
Commercial Paper redeemed	(21,938,031)	(15,405,476)	(372,970,262)
Subordinated Debt issued	10,518,270	18,218,840	11,623,006
Subordinated Debt redeemed	(23,427,814)	(33,323,199)	(23,344,036)
Dividends / Distributions paid	(8,835,403)	(4,941,325)	(8,758,311)
Net Cash Provided (Used)	13,563,920	1,597,744	(3,302,809)

NET INCREASE IN
CASH AND CASH EQUIVALENTS	5,724,806	71,215	3,113,394

CASH AND CASH EQUIVALENTS, beginning	3,581,361	3,510,146	396,752

CASH AND CASH EQUIVALENTS, ending	$ 9,306,167	$ 3,581,361	$ 3,510,146


No. of Strategic Goals Met	% Bonus Paid Based on Annual Salary
	(in increments of 5 percentage points)
1	Up to 25% (0% - 25%)
2	Up to 35% (0% - 35%)
3	Up to 45% (0% - 45%)
4	Up to 55% (0% - 55%)
5	Up to 65% (0% - 65%)



1^st FRANKLIN FINANCIAL CORPORATION INDEX TO EXHIBITS


Exhibit No.	Description	Page No.

10(f)	Director Compensation Summary Term Sheet.	36
10(g)	Form of the Company’s 2012 Executive Bonus Plan	37
12	Ratio of Earnings to Fixed Charges	39
13	Annual Report	40
23	Consent of Independent Registered Public Accounting Firm	88
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934	89
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934	90
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	91
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	92

101.INS	XBLR Instance Document *
101.SCH	XBRL Taxonomy Extension Schema Document *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *
	* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.


STRATEGIC GOALS:

	1.	Corporate Net Receivables Growth – a target of 5.0% annual growth;
	2.	Corporate Delinquency Control – 30 days or more delinquency (including bankrupt accounts) not to exceed 9.50% of receivables;


	3.	Corporate Expenses to Revenue – less than or equal to 86.0%;
	4.	Corporate Return on Assets (ROA) – greater than or equal to 4.25%;
	5.	Corporate Pre-tax Income (separate from the threshold goal) - $27.0 million.


AREA	RECOMMENDATION	COMMITTEE MEMBERS
Home Office Supervisors, Home Office Vice Presidents	Direct Report	Ginger Herring, Buddy Cheek, Roger Guimond, Mike Culpepper Mike Haynie, Kay Lovern


Executive Vice Presidents, General Counsel	Ginger Herring	Ginger Herring, Buddy Cheek, Ben Cheek



	TABLE OF CONTENTS


	The Company		1

	Chairman's Letter		2

	Selected Consolidated Financial Information		3

	Business		4

	Management's Discussion and Analysis of Financial Condition and Results of Operations		12

	Report of Independent Registered Public Accounting Firm		20

	Consolidated Financial Statements		21

	Directors and Executive Officers		43

	Corporate Information		43

	Ben F. Cheek, Jr. Office of the Year		45


	Year Ended December 31
	2011	2010	2009	2008	2007
Selected Income Statement Data:	(In 000's, except ratio data)

Revenues:
Interest and Finance Charges	$ 111,730	$ 103,150	$ 99,337	$ 98,212	$ 91,415
Insurance	39,440	36,521	35,375	35,191	33,799
Other	6,724	5,790	5,134	5,207	5,083

Net Interest Income	100,089	90,711	85,655	83,484	75,669
Interest Expense	11,641	12,439	13,682	14,728	15,746
Provision for Loan Losses	19,009	20,907	29,302	25,725	21,434
Income Before Income Taxes	32,229	23,423	11,050	13,761	15,754
Net Income	29,123	20,683	8,373	10,665	12,205
Ratio of Earnings to Fixed Charges	3.42	2.67	1.72	1.86	1.92


	As of December 31
	2011	2010	2009	2008	2007
Selected Balance Sheet Data:	(In 000's, except ratio data)

Net Loans	$ 317,959	$ 294,974	$ 279,093	$ 285,580	$ 276,655
Total Assets	464,885	422,064	396,425	389,422	402,454
Senior Debt	243,801	208,492	186,849	169,672	182,373
Subordinated Debt	46,870	59,780	74,884	86,605	91,966
Stockholders’ Equity	153,585	132,710	117,115	116,236	109,841
Ratio of Total Liabilities to Stockholders’ Equity	2.03	2.18	2.38	2.35	2.66


	LOANS ACQUIRED

Direct Cash Loans	$ 550,078	$ 483,989	$ 437,323	$ 453,968	$ 441,462
Real Estate Loans	9,010	8,429	8,703	14,448	14,924
Sales Finance Contracts	23,705	24,555	21,372	30,232	38,997
Net Bulk Purchases	1,618	3,326	2,669	677	1,057

Total Loans Acquired	$ 584,411	$ 520,299	$ 470,067	$ 499,325	$ 496,440


	LOANS LIQUIDATED *

Direct Cash Loans	$ 520,997	$ 465,584	$ 435,146	$ 432,651	$ 405,782
Real Estate Loans	9,854	9,798	8,543	15,324	13,436
Sales Finance Contracts	27,211	27,642	28,304	35,070	42,031

Total Loans Liquidated	$ 558,062	$ 503,024	$ 471,993	$ 483,045	$ 461,249


	LOANS OUTSTANDING

Direct Cash Loans	$376,568	$347,445	$ 327,425	$ 324,996	$ 303,679
Real Estate Loans	22,123	22,967	24,336	24,176	25,052
Sales Finance Contracts	19,765	21,695	23,071	27,586	31,747

Total Loans Outstanding	$418,456	$392,107	$ 374,832	$ 376,758	$ 360,478


	UNEARNED FINANCE CHARGES

Direct Cash Loans	$ 46,297	$ 42,724	$ 40,002	$ 39,933	$ 35,850
Real Estate Loans	317	284	208	41	118
Sales Finance Contracts	2,593	2,803	3,121	4,058	4,753

Total Unearned Finance Charges	$ 49,207	$ 45,811	$ 43,331	$ 44,032	$ 40,721


DIRECT CASH LOANS:
	60-89 Days Past Due	$ 5,712	$ 5,766	$ 6,382	$ 7,247	$ 6,589
	Percentage of Principal Outstanding	1.53%	1.67%	1.97%	2.25%	2.19%
	90 Days or More Past Due	$ 11,911	$ 12,596	$ 15,158	$ 16,407	$ 13,100
	Percentage of Principal Outstanding	3.19%	3.66%	4.67%	5.10%	4.36%


REAL ESTATE LOANS:
	60-89 Days Past Due	$ 115	$ 271	$ 278	$ 282	$ 179
	Percentage of Principal Outstanding	.53%	1.20%	1.16%	1.19%	.73%
	90 Days or More Past Due	$ 656	$ 561	$ 585	$ 480	$ 452
	Percentage of Principal Outstanding	3.01%	2.48%	2.44%	2.02%	1.84%


SALES FINANCE CONTRACTS:
	60-89 Days Past Due	$ 204	$ 266	$ 346	$ 518	$ 468
	Percentage of Principal Outstanding	1.04%	1.22%	1.50%	1.90%	1.48%
	90 Days or More Past Due	$ 492	$ 644	$ 739	$ 1,080	$ 1,089
	Percentage of Principal Outstanding	2.49%	2.97%	3.21%	3.96%	3.45%


	DIRECT CASH LOANS

Average Net Loans	$ 305,152	$ 282,750	$ 274,275	$ 266,753	$ 242,576
Liquidations	$520,997	$465,584	$435,146	$432,651	$ 405,782
Net Losses	$ 21,014	$ 22,479	$ 24,415	$ 21,325	$ 17,812
Net Losses as % of Average Net Loans	6.89%	7.95%	8.90%	7.99%	7.34%
Net Losses as % of Liquidations	4.03%	4.83%	5.61%	4.93%	4.39%


	REAL ESTATE LOANS

Average Net Loans	$ 22,253	$ 23,351	$ 24,042	$ 25,451	$ 25,015
Liquidations	$ 9,854	$ 9,798	$ 8,543	$ 15,324	$ 13,436
Net Losses (Recoveries)	$ 75	$ 117	$ 84	$ (23)	$ 114
Net Losses (Recoveries) as a % of Average Net Loans	.34%	.50%	.35%	(.09%)	.46%
Net Losses (Recoveries) as a % of Liquidations	.76%	1.19%	.98%	(.15%)	.85%


	SALES FINANCE CONTRACTS

Average Net Loans	$ 17,863	$ 19,369	$ 21,334	$ 25,486	$ 28,721
Liquidations	$ 27,211	$ 27,642	$ 28,304	$ 35,070	$ 42,031
Net Losses	$ 670	$ 811	$ 1,203	$ 1,448	$ 1,557
Net Losses as % of Average Net Loans	3.75%	4.19%	5.64%	5.68%	5.42%
Net Losses as % of Liquidations	2.46%	2.93%	4.25%	4.13%	3.70%


Bank Borrowings	--%	--%	4%	6%	4%
Senior Debt	53	49	43	38	41
Subordinated Debt	10	14	19	22	23
Other Liabilities	4	5	4	4	5
Stockholders’ Equity	33	32	30	30	27
Total	100%	100%	100%	100%	100%

Number of Investors	5,406	5,418	5,406	5,508	5,820


Senior Borrowings	4.08%	4.52%	4.93%	4.78%	5.81%
Subordinated Borrowings	4.20	5.33	5.89	6.27	6.34
All Borrowings	4.11	4.74	5.24	5.33	5.98


Total Liabilities to
Stockholders’ Equity	2.03	2.18	2.38	2.66	2.18

Unsubordinated Debt to
Subordinated Debt plus
Stockholders’ Equity	1.32	1.19	1.06	.99	1.19
As of March 29, 2012, 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 $51.97 and $29.07 per share were paid in 2011 and 2010, 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
											2017 &		Fair
	2012		2013	2014			2015		2016		Beyond	Total	Value
Assets:	(in millions)
Marketable Debt Securities	$ 9	$ 13			$ 13	$ 10		$ 10		$ 52		$107	$107
Average Interest Rate	3.5%	3.4%			2.6%	3.2%		3.3%		2.5%		3.4%
Liabilities:
Senior Debt:
Senior Demand Notes	$47	—			—	—		—		—		$ 47	$ 47
Average Interest Rate	2.1%	—			—	—		—		—		2.1%
Commercial Paper	$197	—			—	—		—		—		$197	$197
Average Interest Rate	4.0%	—			—	—		—		—		4.0%
Subordinated Debentures	$ 9	$ 10			$ 12	$ 16		—		—		$ 47	$ 47
Average Interest Rate	3.4%	3.7%			3.3%	3.1%		—		—		3.5%


	Payment due by period
Contractual Obligations	Total	Less Than 1 Year	1 to 2 Years	3 to 5 Years	More than 5 Years
	(in millions)
Bank Commitment Fee **	$ 1.5	$ .6	$ .5	$ .4	$ -
Senior Demand Notes *	47.6	47.6	-	-	-
Commercial Paper *	204.5	204.5	-	-	-
Subordinated Debt *	53.4	10.7	11.2	31.5	-
Human resource insurance and support contracts **	.6	.6	-	-	-
Operating leases (offices)	13.3	4.7	3.7	4.9	-
Communication lines contract **	4.1	2.7	1.4	-	-
Software service contract **	22.1	2.8	2.8	8.5	8.0
Total	$347.1	$274.2	$19.6	$45.3	$ 8.0

* Includes estimated interest at current rates.
** Based on current usage.


CASH AND CASH EQUIVALENTS (Note 5):
Cash and Due From Banks		$ 9,130,030	$ 3,635,920
Short-term Investments		7,221,111	27,065,494
		16,351,141	30,701,414

RESTRICTED CASH (Note 1)		5,568,529	3,778,734

LOANS (Note 2):
Direct Cash Loans		376,568,048	347,445,192
Real Estate Loans		22,123,077	22,967,279
Sales Finance Contracts		19,764,821	21,694,633
		418,455,946	392,107,104

Less:	Unearned Finance Charges	49,206,783	45,811,133
	Unearned Insurance Premiums	29,929,658	27,211,693
	Allowance for Loan Losses	21,360,085	24,110,085
		317,959,420	294,974,193

MARKETABLE DEBT SECURITIES (Note 3):
Available for Sale, at fair value		70,882,334	66,310,922
Held to Maturity, at amortized cost		36,780,206	11,890,954
		107,662,540	78,201,876

OTHER ASSETS:
Land, Buildings, Equipment and Leasehold Improvements,
less accumulated depreciation and amortization
of $17,608,651 and $17,364,987 in 2011 and 2010, respectively		9,342,174	6,687,456
Deferred Acquisition Costs		1,718,297	1,563,629
Due from Non-affiliated Insurance Company		2,246,092	1,903,137
Miscellaneous		4,036,392	4,253,457
		17,342,955	14,407,679

TOTAL ASSETS		$ 464,884,585	$ 422,063,896




See Notes to Consolidated Financial Statements


SENIOR DEBT (Note 6):
Note Payable to Banks	$ --	$ 900,000
Senior Demand Notes, including accrued interest	46,606,960	40,392,404
Commercial Paper	197,194,186	167,199,875
	243,801,146	208,492,279



ACCOUNTS PAYABLE AND ACCRUED EXPENSES	20,628,730	21,081,545


SUBORDINATED DEBT (Note 7)	46,870,076	59,779,620


Total Liabilities	311,299,952	289,353,444


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, 2011 and 2010	170,000	170,000
Non-Voting Shares; no par value;
198,000 shares authorized; 168,300 shares
outstanding as of December 31, 2011 and 2010	--	--
Accumulated Other Comprehensive Income	2,136,739	1,550,273
Retained Earnings	151,277,894	130,990,179
Total Stockholders' Equity	153,584,633	132,710,452

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 464,884,585	$ 422,063,896




See Notes to Consolidated Financial Statements


1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009


	2011	2010	2009
INTEREST INCOME: Finance Charges Net Investment Income	$ 108,858,812 2,871,386 111,730,198	$ 100,475,533 2,674,611 103,150,144	$ 96,494,760 2,842,125 99,336,885
INTEREST EXPENSE: Senior Debt Subordinated Debt	9,323,864 2,316,933 11,640,797	8,583,664 3,855,020 12,438,684	8,745,154 4,936,793 13,681,947

NET INTEREST INCOME	100,089,401	90,711,460	85,654,938

PROVISION FOR LOAN LOSSES (Note 2)	19,008,749	20,907,373	29,302,142

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	81,080,652	69,804,087	56,352,796

NET INSURANCE INCOME: Premiums Insurance Claims and Expense	39,439,993 (8,940,319) 30,499,674	36,521,076 (8,466,903) 28,054,173	35,375,453 (8,565,929) 26,809,524

OTHER REVENUE	6,723,655	5,789,444	5,133,530

OPERATING EXPENSES: Personnel Expense Occupancy Expense Other Expense	55,399,302 11,455,842 19,219,788 86,074,932	51,566,673 10,752,842 17,905,308 80,224,823	48,366,010 11,187,160 17,692,331 77,245,501

INCOME BEFORE INCOME TAXES	32,229,049	23,422,881	11,050,349

PROVISION FOR INCOME TAXES (Note 11)	3,105,931	2,739,444	2,677,342

NET INCOME	$ 29,123,118	$ 20,683,437	$ 8,373,007

BASIC EARNINGS PER SHARE: 170,000 Shares Outstanding for All Periods (1,700 voting, 168,300 non-voting)	$171.31	$121.67	$49.25


See Notes to Consolidated Financial Statements


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

Comprehensive Income:
Net Income for 2011	—	—	29,123,118	—
Net Change in Unrealized Gain On Available-For-Sale Securities	—	—	—	586,466
Total Comprehensive Income	—	—	—	—	29,709,584
Cash Distributions Paid	—	—	(8,835,403)	—	(8,835,403)

Balance at December 31, 2011	170,000	$170,000	$151,277,894	$2,136,739	$153,584,633


Disclosure of reclassification amount:			2011	2010	2009

Unrealized holding gains (losses) arising during period, net of applicable income tax benefits (provision) of $(260,943) $55,313 and $(368,964) for 2011, 2010 and 2009, respectively
			$ 597,641	$ (142,840)	$ 1,267,302

Less: Reclassification adjustment for net gains included in income, net of applicable income taxes of $1,869, $1,381 and $1,201 for 2011, 2010 and 2009, respectively			11,175	3,732	3,558

Net unrealized gains (losses)on securities, net of applicable income tax benefits (provision) of $(259,074), $56,694 and $(367,763) for 2011, 2010 and 2009, respectively			$ 586,466	$ (146,572)	$ 1,263,744