FIRST FRANKLIN FINANCIAL CORP
DIRECTORS        Position(s)  Name of Director Age Director Since   with Company       Ben F. Cheek, III  (3)(5) 69 1967 Chairman of Board / Chief Executive Officer       Ben F. Cheek, IV (3)(4)(5) 44 2001 Vice Chairman       A. Roger Guimond (3)(5) 51 2004 Executive Vice President / Chief Financial Officer       John G. Sample, Jr. (1)(2)(5) 49 2004 None       C. Dean Scarborough (1)(2)(5) 51 2004 None       Jack D. Stovall (1)(2)(5) 69 1983 None       Robert E. Thompson (1)(2)(5) 73 1970 None       Keith D. Watson (1)(2)(5) 48 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.  Prior thereto, he was a partner with Arthur Andersen LLP since 1990.   Mr. Scarborough is co-owner of Scarborough’s Men’s Store.  Mr. Stovall is President of Stovall Building Supplies, Inc., a building materials supplier.  Dr. Thompson is a retired physician.  Mr. Watson is Vice President and Corporate Secretary of Bowen & Watson, Inc., a general contracting company,  Messrs. Scarborough, Stovall and Watson have been in their respective positions 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.         11       The Audit Committee is composed of Messrs. Sample, Scarborough, Stovall 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, the Board of Directors has determined that Mr. Sample is “independent” (as such term is defined in the rules of the Securities and Exchange Commission (the “SEC”) and the National Association of Securities Dealers, Inc. (“NASDAQ”) Marketplace Rules) and is an “audit committee financial expert” as defined by the SEC in Rule 401(h) of Regulation S-K.  In making such determination, the Board of Directors took into consideration, among other things, the express provision in Item 401(h) of Regulation S-K that the designation of a person as an au dit 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.           EXECUTIVE OFFICERS     Name, Age, Position(s)   and Family Relationship Business Experience     Ben F. Cheek, III, 69 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,  44 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, 42 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, 51 Executive Vice President, Chief Financial 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.     A. Jarrell Coffee, 62 Executive Vice President and     Chief Operating Officer No Family Relationship Joined the Company in 1973, became Supervisor in 1975, Division Area Vice President in 1976, Vice President in 1989 and Executive Vice President and Chief Operating Officer in 2001.  Expected to retire in June 2006.     Phoebe J. Martin, 64 Former Executive Vice President - Human Resources No Family Relationship Joined the Company in 1983 as Account Executive in Investment Center. Became Personnel & Marketing Director in 1986.  In 2001, was named Executive Vice President - Human Resources. Retired effective December 31, 2005.         12      Name, Age, Position(s)   and Family Relationship Business Experience     C. Michael Haynie, 51 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, 47 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.     Lynn E. Cox, 48 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.        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 of the registrant 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 officers, principal financial officer, principal accounting officer or 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.  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.      13
(b) Summary Compensation Table:     Name    Other All  And    Annual Other  Principal  Salary Bonus Compensation Compensation  Position Year $ $ $  *      $  **         Ben F. Cheek, III  2005   $240,000   $    9,600   $11,783   $  33,157    Chairman and  2004   $240,000   $    9,600   $10,604   $  30,584    CEO  2003   $240,000   $    9,600   $9,552   $  48,692          Ben F. Cheek, IV  2005   $131,000   $  52,973   $16,661   $    6,624    Vice Chairman  2004   $119,333   $  82,473   $3,431   $    8,222    2003   $111,000   $  57,408   $4,694   $    9,481          Virginia C. Herring  2005   $131,000   $  52,973   $3,409   $    6,624    President  2004   $119,333   $  82,473   $2,400   $    8,222    2003   $111,000   $  57,314   $2,400   $    9,473          A. Roger Guimond  2005   $250,966   $188,135   $16,359   $  20,368    Executive Vice President  2004   $237,462   $158,618   $2,400   $  21,598    and CFO  2003   $213,028   $133,989   $2,400   $  20,064          A. Jarrell Coffee  2005   $293,016   $180,497   $4,003   $  29,179    Executive Vice President  2004   $281,293   $200,598   $3,810   $  30,694    and COO  2003   $270,494   $149,499   $3,786   $  31,947       * For Messrs. Cheek, IV and Guimond, 2005 includes amounts paid for service as a director of the Company.      ** Represents Company contributions to Company-sponsored retirement plans.  For 2003, also includes $1,081 in deemed compensation to Mr. Cheek, III from Company-paid insurance premiums.     (g) Compensation of Directors:  All directors of the Company, whether or not executive officers, are entitled to receive $12,000 per year for service as a member of the Board of Directors.  Mr. Cheek, III has elected to waive any fees otherwise due to him for his service as a director.    (j),(k) Additional Information with Respect to Compensation Committee Interlocks and Insider  Participation in Compensation Decisions; Board Compensation Committee Report on Executive   Compensation:    Compensation Committee Interlocks and Insider Participation    The Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions).  The Company is a family owned business with Ben F. Cheek, III being the majority shareholder.  The executive management team (the “EMT”) of the Company establishes the bases for all executive compensation, which compensation is approved by Mr. Cheek, III. The executive officers comprising the EMT are:  Messrs. Cheek, III, Cheek, IV, Guimond, Coffee, Haynie, and Mr. J. Michael Culpepper, and Ms. Herring and Ms. Lovern.  Mr. Coffee is expected to retire from the Company in June 2006, after which time he will no longer participate in compensation decisions.        14      The Company leases its home office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2010.  Franklin Enterprises, Inc. is 66.67% owned by Ben F. Cheek, III, a Director and Executive Officer of the Company.  In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties.     The Company leases its Clarkesville, Georgia branch office for a total of $350 per month from Cheek Investments, Inc. under a lease which expires June 30, 2006. Cheek Investments, Inc. is owned by Ben F. Cheek, III.  In Management’s opinion, the lease is at a rate and on terms which approximate those obtainable from independent third parties.    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 (son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock.  The balance on this commercial loan (including principal and accrued interest) was $2,053,819 at December 31, 2005 and this amount was the maximum amount outstanding during the year.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. 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 is based on the federal mid-term Applicable Federal Rate.  The balance on this loan at December 31, 2005 was $180,510.  This was the maximum loan amount outstanding during the year.           15
(a) Security Ownership of Certain Beneficial Owners as of December 31, 2005:    Information listed below represents ownership in the Company with respect to any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company’s voting securities.       Name and Address of  Amount and Nature of  Percent  Beneficial Owner Title of Class Beneficial Ownership Class       Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24%  1855 Orchard Drive     Clarkesville, Georgia  30523          Ben F. Cheek, IV Voting Common Stock 180 Shares - Direct 10.59%  3946 Beaver Dam Rd.     Toccoa, Georgia  30577          Virginia C. Herring Voting Common Stock 180 Shares - Direct 10.59%  363 Summit Ridge Dr.     Toccoa, Georgia  30577          David W. Cheek Voting Common Stock 180 Shares - Direct 10.59%  4500 Barony Dr.     Suwanee, Georgia  30024        (b) Security Ownership of Management as of December 31, 2005:    Ownership listed below represents ownership in each class of equity securities of the Company, by (i) Directors and Executive Officers of the Company named in the summary compensation table and (ii) all Directors and Executive Officers of the Company as a group:       Amount and Nature of Percent  Name Title of Class Beneficial Ownership Class       Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24%   Non-Voting Common Stock        574 Shares - Direct(1)    .34%       Ben F. Cheek, IV Voting Common Stock 180 Shares - Direct 10.59%   Non-Voting Common Stock 18,011 Shares - Direct 10.70%   Non-Voting Common Stock 75,794 Shares - Indirect 45.04%       Virginia C. Herring Voting Common Stock 180 Shares - Direct 10.59%   Non-Voting Common Stock 18,012 Shares - Direct 10.70%   Non-Voting Common Stock 75,795 Shares - Indirect 45.04%       A. Roger Guimond Voting Common Stock None None   Non-Voting Common Stock None None      16           Amount and Nature of Percent  Name Title of Class Beneficial Ownership Of Class       A. Jarrell Coffee 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       Jack D. Stovall Voting Common Stock None None   Non-Voting Common Stock None None       Robert E. Thompson Voting Common Stock None None   Non-Voting Common Stock None None       Keith D. Watson Voting Common Stock None None   Non-Voting Common Stock None None       All Directors and      Executive Officers Voting Common Stock 1,520 Shares - Direct  89.41%    as a Group Non-Voting Common Stock 574 Shares - Direct (1)   .34%  (12 persons) Non-Voting Common Stock 151,589 - Indirect (1) 90.07%                                           (1) Effective January 1, 1997, the Company elected S Corporation status for income tax reporting purposes.  Because partnerships are ineligible to be S Corporation shareholders, Cheek Investments, L.P. distributed its shares of the non-voting common stock to its eight partners (Ben F. Cheek, III, Elizabeth Cheek, wife of Ben F. Cheek, III and six trusts).  Ben F. Cheek, III owns 574 shares, or .34%, of the Company’s non-voting common stock directly.        Ben F. Cheek, III and Elizabeth Cheek were the original grantors of the six trusts referred to above, which are irrevocable trusts.  Two trusts were established for the benefit of each of Ben F. Cheek, IV, Virginia C. Herring and David W. Cheek, children of Ben F. Cheek, III and Elizabeth 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 children 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.             17
The Company leases its home office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2010.  Franklin Enterprises, Inc. is 66.67% owned by Ben F. Cheek, III, a Director and Executive Officer of the Company.  In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties.    The Company leases its Clarkesville, Georgia branch office for a total of $350 per month from Cheek Investments, Inc. under a lease which expires June 30, 2006. Cheek Investments Inc. is owned by Ben F. Cheek, III.  In Management’s opinion, the lease is at a rate and on terms which approximate those obtainable from independent third parties.      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 (son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock.  The balance on this commercial loan (including principal and accrued interest) was $2,053,819 at December 31, 2005 and this amount was the maximum amount outstanding during the year.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. 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 is based on the federal mid-term Applicable Federal Rate.  The balance on this loan at December 31, 2005 was $180,510.  This was the maximum loan amount outstanding during the year.
The Company was billed for professional services provided during fiscal years 2005 and 2004 by Deloitte & Touche LLP in the amounts set out in the following table.  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   2005 2004  Services Provided:    Audit Fees (1)  $ 194,972 $ 168,653  Tax Fees (2)  66,699 67,155  All Other Fees  -- --  Total  $ 261,671 $ 235,808      (1) Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2005 and December 31, 2004, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2005 and 2004 fiscal years.         18      (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 Securities and Exchange Commission 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 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 jo int statement as to whether, in their view, the request is consistent with Securities and Exchange Commission rules on auditor independence.       19     PART IV    Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:    (a) (1) Financial Statements:    Incorporated by reference from the Annual Report:    Report of Independent Registered Public Accounting Firm.    Consolidated Statements of Financial Position at December 31, 2005 and 2004.    Consolidated Statements of Income for the three years ended December 31, 2005.    Consolidated Statements of Stockholders’ Equity for the three years ended  December 31, 2005.    Consolidated Statements of Cash Flows for the three years ended December 31, 2005.    Notes to Consolidated Financial Statements.    (2) Financial Statement Schedule:    Report of Independent Registered Public Accounting Firm.    Condensed Statements of Financial Position at December 31, 2005 and 2004.    Condensed Statements of Income for the three years ended December 31, 2005.    Condensed Statements of Cash Flows for the three years ended December 31, 2005.    (3) Exhibits:     2. (a) Articles of Merger of 1st Franklin Corporation with and into 1st Franklin Financial Corporation dated December 31, 1994 (incorporated herein by reference to Exhibit 3(2)(a) to Form 10-K for the fiscal year ended December 31, 1994).        3. (a) Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(3)(a) to Form 10-K for the fiscal year ended December 31, 1995).         (b) Bylaws (incorporated herein by reference to Exhibit 3(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).           20        (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).         (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).        9. Not applicable        10. (a) Credit Agreement dated May 1993, between the Company and SouthTrust Bank of Georgia, N.A.  (incorporated herein by reference to Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 1993).         (b) Credit Agreement dated September 25, 2001, between the Company and SouthTrust Bank of Georgia, N.A.  (incorporated herein by reference to Exhibit 10 from Form 10-Q for the quarter ended September 30, 2001).         (c) First Amendment to Loan Agreement and Line of Credit Promissory Note dated September 25, 2002, between the Company and SouthTrust Bank of Georgia, N.A.  (incorporated herein by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2002).         (d) Loan Documents Modification Agreement dated September 25, 2003, between the Company and SouthTrust Bank of Georgia, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2003).         (e) Loan Documents Modification Agreement dated September 24, 2004, between the Company and SouthTrust Bank of Georgia, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004).         (f) Amended and Restated Line of Credit Promissory Note dated September 24, 2004, between the Company and SouthTrust Bank of Georgia, N.A. (incorporated herein by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004).         (g) Loan Documents Modification Agreement, dated as of September 23, 2005, by and among the Company, Wachovia Bank, National Association and Franklin Securities, Inc. (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated November 9, 2005).         (h) Form of the Company’s 2006 Executive Bonus Plan. *         (i) Director Compensation Summary Term Sheet. *        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.           21       12. Ratio of Earnings to Fixed Charges.        13. The Annual Report.        15. Financial Statement Schedules.       18. Not applicable.        19 Not applicable.        21. Subsidiaries of the Company.        22. Not applicable.        23. Consent of Independent Registered Public Accounting Firm.        24. Not applicable.        27. Not applicable.        28. Not applicable.        31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.        31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.        32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        * Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.       (b) See “Index to Exhibits”.     (c) Not applicable.      22      SIGNATURES    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:      1st FRANKLIN FINANCIAL CORPORATION     March  22,  2006 By:           /s/ Ben F. Cheek, III  Date Ben F. Cheek, III   Chairman of Board      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:      Signatures Title Date          /s/ Ben F. Cheek, III  March 22, 2006  (Ben F. Cheek, III) Chairman of Board;    Chief Executive Officer       /s/ Ben F. Cheek, IV    (Ben F. Cheek, IV) Vice Chairman March 22, 2006          /s/ Virginia C. Herring    (Virginia C. Herring) President March 22, 2006          /s/ A. Roger Guimond    (A. Roger Guimond) Executive Vice President; March 22, 2006   Principal Financial Officer    Principal Accounting Officer; Director       /s/ John G. Sample,. Jr.    (John G. Sample, Jr.) Director March 22, 2006      /s/ C. Dean Scarborough    (C. Dean Scarborough) Director March 22, 2006      /s/ Jack D. Stovall    (Jack D. Stovall) Director March 22, 2006          /s/ Robert E. Thompson    (Robert E. Thompson) Director March 22, 2006      /S/ Keith D. Watson    (Keith D. Watson) Director March 22, 2006        23    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-23(b), 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, 2005, which is filed as Exhibit 13 hereto.  Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements.        24        1st FRANKLIN FINANCIAL CORPORATION INDEX TO EXHIBITS      Exhibit No.  Description Page No.          10(h) Form of the Company’s 2006 Executive Bonus Plan  26     10(i) Director Compensation Summary Term Sheet  28  12 Ratio of Earnings to Fixed Charges  29  13 The Company’s Annual Report to security holders  for the fiscal year ended December 31, 2005   30  15 Financial Statement Schedule  75  21 Subsidiaries of Registrant  80  23  Consent of Independent Registered Public Accounting Firm  81    31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934   82    31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934   83    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     84    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     85                    25       EX-10 2 exhibit10hexecutivebonusplan.htm SEC FORM 10-K / EXHIBIT 10(H)     1st Franklin Financial Executive Bonus Plan:  2003        Exhibit 10(h)    1st Franklin Financial Corporation  Executive Bonus Plan:  2006     Plan Overview:    As we analyze the results from 2005, and the success of the year, our key challenge still remains the same for 2006: to balance the need for short-term results – growth and profit, with the need for long-term positioning – new product development and improved systems.  Both of these issues remain critical to 1st Franklin’s success.    The goal of our five-year strategic plan, which we are 4 years into at this point, is designed to map out what direction we want the Company to go.  The goals that are set for the Company each year, which are reflected in the Executive Bonus Plan, are the milestones which will drive the overall performance to achieve the current five-year plan and lay the groundwork and positioning for the new plan and 5 year goals to be set during the 3rd quarter of this year.      The Executive Bonus Plan for 2006 will focus first on ONE “threshold” goal, and secondly four strategic goals.  The combination of these goals will provide a balance measurement of 1st Franklin’s Company performance and also support the achievement of long term goals.     The goals that are set are identified and agreed upon by the Executive Management Team.  These goals are based on achieving the five-year Corporate goals set in conjunction with our Strategic Plan.  Below are the four strategic goals, as well as the threshold goal for 2006.    THRESHOLD GOAL:  The Company must achieve certain pre-tax income for 2006.     1. Corporate Net Receivables Growth  2. Corporate Delinquency Control  3. Corporate Expenses to Revenue  4. Corporate Return on Assets (ROA)         PROGRAM ELIGIBILITY:    Company:  The threshold goal of pre-tax income must be achieved for the Executive Bonus Plan to be activated.  After this goal is reached, the achievement of the strategic goals will be paid according to the following scale on an individual basis as a percentage paid of their annual salary.     No. of Strategic Goals Met % Bonus Paid Based on Annual Salary   (in increments of 5 percentage points)  1 Up to 35% (5% - 35%)  2 Up to 45% (5% - 45%)  3 Up to 60% (5% - 60%)  4 Up to 75% (5% - 75%)     The range of percentage is based on many factors, including but not limited to: achieving budget projections, achieving monthly / quarterly objectives, training (both individually and their employees), IPDR ratings and achievement of IPDR goals, employee retention, managing human resources issues, audit and compliance guidelines, etc.           Example:  if we achieve the threshold goal and two strategic goals, the range of bonus paid will be from 5% to 45% of a participant’s annual salary. INDIVIDUAL EXCEPTIONS:    If 1st Franklin fails to achieve the threshold goal – the Executive Bonus Plan will not be activated.  However, the Executive Management Team, consisting of;  Ben Cheek, Chairman; Buddy Cheek, Vice-Chairman; Ginger Herring, President; Roger Guimond, EVP/Chief Financial Officer; Mike Culpepper, EVP/Chief Operating Officer; Kay Lovern, EVP/Strategic and Operational Development, and Mike Haynie, EVP/Human Resources, may choose to award individual bonuses to a select number of executives.  These exceptions will only be made if those said individuals have achieved an outstanding year by ALL standards.  In such a case, a bonus may be awarded but based on a lower scale than the above plan.     Executive Management Team Review    The Executive Management Team will review all executive and Regional Directors performance ratings and bonus recommendations and determine the final bonus awarded:      AREA RECOMMENDATION COMMITTEE MEMBERS  Regional Operations Directors Direct Report Vice President Mike Culpepper, Ginger Herring, Buddy Cheek, Roger Guimond, Mike Haynie, Kay Lovern  Field Vice Presidents Mike Culpepper Mike Culpepper, Ginger Herring, Buddy Cheek, Roger Guimond, Mike Haynie, Kay Lovern  Home Office Supervisors, Area Vice Presidents, Vice Presidents Direct Report Mike Culpepper, Ginger Herring, Buddy Cheek, Roger Guimond, Mike Haynie, Kay Lovern  Mike Culpepper, Roger Guimond, Mike Haynie, Kay Lovern Ginger Herring Ginger Herring, Buddy Cheek, Ben Cheek     Communication of Measurement    How well the Company is doing in achieving its goals will be communicated to all employees on a periodic basis monthly through e-mail. This progress will need to be communicated to the branch employees as well, through the Regional Directors.                EX-10 3 exhibit10idirectorcompensati.htm SEC FORM 10-K / EXHIBIT 10(I)     Exhibit 10(i)         Exhibit 10(i)      1st FRANKLIN FINANCIAL CORPORATION  Director Compensation Summary Term Sheet    Compensation to be paid to all directors, whether or not executive officers of the Company, at an annualized rate of $12,000.             EX-12 4 exhibit12earningstofixedchar.htm SEC FORM 10-K / EXHIBIT 12     Converted by EDGARwiz       Exhibit 12       RATIO OF EARNINGS TO FIXED CHARGES       2005 2004 2003 2002 2001   (In thousands, except ratio data)  Income before income taxes  $ 7,621 $ 7,527 $ 11,160 $ 10,802 $ 3,468         Interest on indebtedness  8,016 7,137 6,813 7,952 11,311         Portion of rents representative       of the interest factor  1,161 1,106 1,046 949 883         Earnings as adjusted  $ 16,798 $ 15,770 $ 19,019 $ 19,703 $ 15,662                Fixed charges:              Interest on indebtedness  $  8,016 $  7,137 $ 6,813 $ 7,952 $ 11,311         Portion of rents representative       of the interest factor  1,161 1,106 1.046 949 883         Fixed charges  $  9,177 $  8,243 $ 7,859 $ 8,901 $ 12,194                Ratio of earnings       to fixed charges  1.83 1.91 2.42 2.01 1.28                  EX-13 5 exhibit13annualreportedgar.htm SEC FORM 10-K / EXHIBIT 13     Form 10K  1993        Exhibit 13                      1st FRANKLIN FINANCIAL CORPORATION    ANNUAL REPORT      DECEMBER 31, 2005       0         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        Management's Report   20        Report of Independent Registered Public Accounting Firm   21        Financial Statements   22        Directors and Executive Officers   41        Corporate Information   41        Ben F. Cheek, Jr.  Office of the Year   43               THE COMPANY    1st Franklin Financial Corporation has been engaged in the consumer finance business since 1941, particularly in direct cash loans and real estate loans.  The business is operated through 105 branch offices in Georgia, 34 in Alabama, 35 in South Carolina, 29 in Mississippi and 16 in Louisiana.  At December 31, 2005, the Company had 964 employees.    As of December 31, 2005, the resources of the Company were invested principally in loans, which comprised 69% of the Company's assets.  The majority of the Company's revenues are derived from finance charges earned on loans and other outstanding receivables.  Remaining revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.       1       To Our Investors, Co-workers and Friends:    An event filled year started for us on the very first day of January when we converted to our new on-line computer system and ended with many good things having been accomplished toward the attainment of our five-year strategic plan.      The Hurricane season of 2005 is one that none of us will forget anytime soon.  Katrina and Rita caused devastation and destruction that most of us have never experienced before.  Fortunately, none of our co-workers were seriously injured but a number of them lost their homes and property or had relatives who were injured or lost their lives.  Twenty-eight of our offices in Mississippi and Louisiana were affected and had some damage.  Only one, our office in Bay St. Louis, Mississippi, was totally destroyed.  Our customers from Bay St. Louis are being temporarily served from the office in Gulfport until the building in Bay St. Louis can be restored.  All of our offices were back in operation within just a few days after the hurricanes hit.  Everyone is working very hard in an effort to return these offices to “business as usual” as quickly as possible.    It seems that often times when good people are asked to work a little harder to overcome new obstacles in their path, they always do.  The hurricanes destruction and the vital need to become more comfortable and proficient with our new computer operating system as quickly as possible could have totally turned our attention away from “making and collecting loans.”  For a few months early in 2005 our loan volume did slow down.  However, everyone became re-energized the last six months of the year and kept our long-term growth and expansion plans moving ahead.    When you review the information on the pages that follow, you will notice that our assets grew by 4% to $325 million, our net loans grew by 3% to $260 million and for the first time in our Company’s history our revenues were in excess of $100 million.  The growth in the Investment Center continued with a year over year increase of $11 million or approximately 5.5%.  In addition seven new branch offices were added; North Greenville, Barnwell and Boling Springs in South Carolina, Meridian and Corinth in Mississippi, Opelika in Alabama and Blairsville in Georgia.  We feel that the momentum is with us and everyone is excited and enthusiastic as we move into 2006.    I am always delighted to have this opportunity each year to thank all of you who are such an important part of the 1st Franklin team.  To each of our investors, our co-workers, our bankers and our friends, thank you for your commitment, your confidence and your support.      Very sincerely yours,                            /s/ Ben F. Cheek, III    Ben F. Cheek, III                                  Chairman of the Board and CEO                  2     SELECTED CONSOLIDATED FINANCIAL INFORMATION     Set forth below is selected consolidated financial information of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more detailed financial statements and notes thereto included herein.      Year Ended December 31   2005  2004  2003  2002  2001   (In 000's, except ratio data)   Selected Income Statement Data:   Revenues  $ 101,826 $ 98,459 $ 91,367 $ 90,356 $ 84,683  Net Interest Income  64,387 61,541 56,698 55,491 47,182  Interest Expense  8,016 7,137 6,813 7,952 11,311  Provision for Loan Losses  19,484 18,097 15,245 14,159 15,203  Income Before Income Taxes  7,621 7,527 11,159 10,802 3,468  Net Income  5,109 4,981 8,654 8,415 1,197  Ratio of Earnings to    Fixed Charges   1.83  1.91  2.42  2.21  1.28                       Selected Balance Sheet Data:              Net Loans  $ 224,660 $ 218,893 $ 206,462 $ 188,083 $169,958  Total Assets  324,910 312,366 292,868 278,258 262,938  Senior Debt  180,713 168,668 148,204 135,429 124,845  Subordinated Debt  38,902 41,311 44,076 46,778 52,769  Stockholders’ Equity  91,185 87,102 83,844 80,222 71,319  Ratio of Total Liabilities    to Stockholders’ Equity   2.56  2.59  2.49  2.47  2.69       3     BUSINESS     References in this Annual Report to “1st Franklin”, “we”, “our” and “us” refer to 1st Franklin Financial Corporation and its subsidiaries.    1st Franklin is engaged in the consumer finance business, particularly in making consumer loans to individuals in relatively small amounts for relatively short periods of time, and in making first and second mortgage loans on real estate in larger amounts and for longer periods of time.  We also purchase sales finance contracts from various retail dealers.  At December 31, 2005, direct cash loans comprised 82% of our outstanding loans, real estate loans comprised 8% and sales finance contracts comprised 10%.    In connection with this business, we also offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance.  Customers may request credit life insurance coverage to help assure any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance products as an agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and F randisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.    The following table shows the sources of our earned finance charges over each of the past five annual periods:      Year Ended December 31    2005     2004     2003     2002     2001   (in thousands)          Direct Cash Loans  $60,361 $56,363 $51,172 $49,985 $45,137   Real Estate Loans  4,083 4,823 5,793 7,069 6,780   Sales Finance Contracts      4,785     4,882     3,808     3,249     2,872      Total Finance Charges  $69,229 $66,069 $60,773 $60,303 $54,789     We make direct cash loans primarily to people who need money for some unusual or unforeseen expense, for the purpose of debt consolidation or for the purchase of furniture and appliances.  These loans are generally repayable in 6 to 60 monthly installments and generally do not exceed $10,000 in principal amount.  The loans are generally secured by personal property, motor vehicles and/or real estate. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.    First and second mortgage loans on real estate are made to homeowners who wish to improve their property or who wish to restructure their financial obligations.  We generally make such loans in amounts from $3,000 to $50,000 and with maturities of 35 to 180 months. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.    Sales finance contracts are purchased from retail dealers.  These contracts have maturities that generally range from 3 to 60 months and generally do not individually exceed $7,500 in principal amount. We believe that the interest rates we charge on these contracts are in compliance with applicable federal and state laws.       4       Prior to the making of a loan, we complete a credit investigation to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning a potential customer.  In making most loans, we receive a security interest in the real or personal property of the borrower. In making direct cash loans, we focus on the customer's ability to repay his or her loan to us rather than on the potential resale value of the underlying security.     1st Franklin competes with several national and regional finance companies, as well as a variety of local finance companies, in the communities we serve.  Competition is based primarily on interest rates and terms offered and on customer service.  We believe that our emphasis on customer service helps us compete effectively in the markets we serve.    Our business consists mainly of making loans to salaried people and wage earners who depend on their earnings to make their repayments.  Our ability to continue the profitable operation of our business therefore depends to a large extent on the continued employment of these people and their ability to meet their obligations as they become due. Therefore, a sustained recession or a significant downturn in business with consequent unemployment or continued increases in the number of personal bankruptcies within our typical customer base may have a material adverse effect on our collection ratios and profitability.    The average annual yield on loans we make (the percentage of finance charges earned to average net outstanding balance) has been as follows:       Year Ended December 31        2005      2004      2003      2002      2001         Direct Cash Loans  31.61% 30.26% 30.28% 32.82% 31.82%  Real Estate Loans  17.29    17.13    17.65    20.37    21.02     Sales Finance Contracts  18.96    19.35    19.61    23.65    22.47           The following table contains information about our operations:                                                          As of December 31        2005      2004        2003        2002        2001                Number of Branch Offices  219   212   203   195   189    Number of Employees  964   989   921   805   783    Average Total Loans     Outstanding Per Branch (in 000's)                $1,347      $1,352      $1,327      $1,263    $1,180    Average Number of Loans     Outstanding Per Branch   699    709    686    654    645            5      DESCRIPTION OF LOANS       Year Ended December 31        2005 2004 2003 2002 2001  DIRECT CASH LOANS:              Number of Loans  Made to  New Borrowers   29,332  45,251  39,215  35,439  35,605         Number of Loans Made to  Former Borrowers   20,694  20,965  19,012  19,048  17,934         Number of Loans Made to  Present Borrowers   122,261  105,824  99,665  95,286  90,800         Total Number of Loans Made  172,287 172,040 157,892 149,773 144,339         Total Volume of Loans  Made (in 000’s)   $348,620  $342,842  $313,361  $287,108  $268,856         Average Size of Loans Made  $2,023 $1,993 $1,985 $1,917 $1,863          Number of Loans Outstanding  128,794 124,599 115,590 108,811 104,385         Total of Loans Outstanding (000’s)  $241,313 $229,044 $211,203 $191,819 $176,442         Percent of Total Loans Outstanding  82% 80% 78% 78% 79%  Average Balance on  Outstanding Loans   $1,874  $1,838  $1,827  $1,763  $1,690                REAL ESTATE LOANS:              Total Number of Loans Made  683 735 960 2,104 2,099         Total Volume of Loans Made (in 000’s)  $8,018 $9,183 $9,829 $21,938 $16,116         Average Size of Loans  $11,739 $12,493 $10,239 $10,427 $7,678         Number of Loans Outstanding  2,441 2,895 3,389 3,842 4,181         Total of Loans Outstanding (in 000’s)  $23,382 $26,989 $31,520 $36,613 $32,295         Percent of Total Loans Outstanding  8% 9% 12% 15% 15%  Average Balance on  Outstanding Loans   $9,579  $9,323  $9,301  $9,530  $7,724                SALES FINANCE CONTRACTS:              Number of Contracts Purchased  22,413 25,642 24,166 16,282 15,204         Total Volume of Contracts  Purchased (in 000’s)   $37,201  $41,489  $37,858  $23,750  $19,637         Average Size of Contracts  Purchased   $1,660  $1,618  $1,567  $1,459  $1,292         Number of Contracts Outstanding  21,879 22,721 20,194 14,829 13,304         Total of Contracts  Outstanding (in 000’s)   $30,346  $30,511  $26,678  $17,788  $14,307         Percent of Total Loans Outstanding  10% 11% 10% 7% 6%  Average Balance on  Outstanding Contracts   $1,387  $1,343  $1,321  $1,200  $1,075     6     LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING            Year Ended December 31   2005 2004 2003 2002 2001   (in thousands)    LOANS ACQUIRED         DIRECT CASH LOANS  $ 348,501 $ 342,812 $ 313,322 $ 287,077 $ 268,615  REAL ESTATE LOANS  8,018 9,183 9,612 21,694 16,017  SALES FINANCE CONTRACTS  35,618 39,473 35,441 21,302 17,959  NET BULK PURCHASES  1,702 2,046 2,674 2,723 2,018          TOTAL LOANS ACQUIRED  $ 393,839 $ 393,514 $ 361,049 $ 332,796 $ 304,609                 LOANS LIQUIDATED         DIRECT CASH LOANS  $ 336,351 $ 325,001 $ 293,978 $ 271,731 $ 254,548  REAL ESTATE LOANS  11,625 13,714 14,922 17,620 17,321  SALES FINANCE CONTRACTS  37,366 37,656 28,968 20,269 20,110         TOTAL LOANS LIQUIDATED  $ 385,342 $ 376,371 $ 337,868 $ 309,620 $ 291,979                 LOANS OUTSTANDING         DIRECT CASH LOANS  $ 241,313 $ 229,044 $ 211,203 $ 191,819 $ 176,442  REAL ESTATE LOANS  23,382 26,989 31,520 36,613 32,295  SALES FINANCE CONTRACTS  30,346 30,511 26,678 17,788 14,307         TOTAL LOANS OUTSTANDING  $ 295,041 $ 286,544 $ 269,401 $ 246,220 $ 223,044                 UNEARNED FINANCE CHARGES         DIRECT CASH LOANS  $ 29,709 $ 28,795 $ 26,329 $ 24,637 $ 24,637  REAL ESTATE LOANS  529 1,094 1,245 752 752  SALES FINANCE CONTRACTS  4,423 4,454 3,945 2,006 2,006         TOTAL UNEARNED      FINANCE CHARGES   $ 34,661  $ 34,343  $ 31,519  $ 27,395  $ 27,395                     7      DELINQUENCIES    We classify delinquent accounts at the end of each month according to the number of installments past due at that time, based on the original or extended terms of the contract.  Accounts are classified in delinquency categories based on the number of days past due.  When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due, we classify the account as being 90 days or more past due.    In 2003 the Company implemented a change in how bankrupt accounts are categorized for delinquency.  Prior to 2003, a bankrupt account’s delinquency rating was not changed, even though the repayment plan initiated by the bankruptcy court may have been at different payment amounts and terms than the original terms of the loan.  Management implemented a policy change in 2003, which effectively resets the delinquency rating to coincide with the new court initiated repayment plan.  Effectively, the account’s delinquency rating is changed going forward under normal grading parameters.     The following table shows the amount of certain classifications of delinquencies and the ratio such delinquencies bear to related outstanding loans:      Year Ended December 31   2005 2004 2003 2002 2001   (in thousands, except % data)     DIRECT CASH LOANS:        60-89 Days Past Due  $ 5,829 $ 4,594 $ 4,000 $ 3,792 $  3,580   Percentage of Principal Outstanding  2.44% 2.02% 1.90% 1.99% 2.03%   90 Days or More Past Due  $11,206 $  7,290 $  7,285 $  9,602 $ 8,235   Percentage of Principal Outstanding  4.70% 3.20% 3.47% 5.03% 4.67%                  REAL ESTATE LOANS:        60-89 Days Past Due  $ 350 $ 241 $ 416 $ 422 $ 541   Percentage of Principal Outstanding  1.55% .91 1.33% 1.17% 1.68%   90 Days or More Past Due  $ 768 $ 689 $ 1,089 $ 1,616 $ 1,744   Percentage of Principal Outstanding  3.39% 2.58% 3.49% 4.47% 5.40%                  SALES FINANCE CONTRACTS:        60-89 Days Past Due  $ 620 $ 556 $ 329 $ 293 $ 249   Percentage of Principal Outstanding  2.05% 1.84% 1.25% 1.66% 1.74%   90 Days or More Past Due  $ 1,060 $ 745 $ 681 $ 785 $   673   Percentage of Principal Outstanding  3.51% 2.46% 2.58% 4.46% 4.70%              8     LOSS EXPERIENCE    Net losses (charge-offs less recoveries) and the percent of such net losses to average net loans (loans less unearned finance charges) and to liquidations (payments, refunds, renewals and charge-offs of customers' loans) are shown in the following table:         Year Ended December 31     2005 2004 2003 2002 2001      (in thousands, except % data)      DIRECT CASH LOANS         Average Net Loans  $ 195,563 $ 186,271 $ 168,998 $ 152,321 $ 141,863  Liquidations  $336,351 $325,001 $ 293,978 $ 271,731 $ 254,548  Net Losses  $ 16,074 $ 14,782 $ 12,944 $ 11,053 $ 13,015  Net Losses as % of Average     Net Loans   8.22%  7.94%  7.66%  7.26%  9.17%  Net Losses as % of Liquidations  4.78% 4.55% 4.40% 4.07% 5.11%                 REAL ESTATE LOANS         Average Net Loans  $ 24,403 $ 28,155 $ 32,822 $ 34,698 $ 32,262  Liquidations  $ 11,625 $ 13,714 $ 14,922 $ 17,620 $ 17,321  Net Losses  $ 130 $ 205 $ 221 $ 227 $ 326  Net Losses as % of Average     Net Loans   .53%  .73%  .67%  .65%  1.01%  Net Losses as % of  Liquidations  1.12% 1.49% 1.48% 1.29% 1.88%                 SALES FINANCE CONTRACTS         Average Net Loans  $ 25,802 $ 25,236 $ 19,425 $ 13,734 $ 12,784  Liquidations  $ 37,366 $ 37,656 $ 28,968 $ 20,269 $ 20,110  Net Losses  $ 1,680 $ 1,339 $ 760 $ 856 $ 785  Net Losses as % of Average     Net Loans   6.51%  5.31%  3.91%  6.23%  6.14%  Net Losses as % of  Liquidations  4.50% 3.56% 2.62% 4.22% 3.90%       ALLOWANCE FOR LOAN LOSSES      We determine the allowance for loan losses by reviewing our previous loss experience, reviewing specifically identified loans where collection is doubtful and evaluating the inherent risks and change in the composition of our loan portfolio.  Such allowance is, in our opinion, sufficient to provide adequate protection against probable loan losses on the current loan portfolio.        9      CREDIT INSURANCE    We offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance and/or credit property insurance.  Customers may request credit life insurance coverage to help assure any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance products as agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance  Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.      REGULATION AND SUPERVISION    State laws require that each office in which a small loan business is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations.  The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show evidence of a need through convenience and advantage documentation.  As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies.  Licenses are revocable for cause, and their continuance depends upon an applicant’s compliance with applicable  laws and in connection with its receipt of a license.  The Company has never had any of its licenses revoked.    We conduct all of our lending operations under the provisions of the Federal Consumer Credit Protection Act (the "Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act and other federal and state lending laws.  The Truth-in-Lending Act requires us to disclose to our customers the finance charge, the annual percentage rate, the total of payments and other material information on all loans.    A Federal Trade Commission ruling prevents us and other consumer lenders from using certain household goods as collateral on direct cash loans.  We collateralize such loans with non-household goods such as automobiles, boats and other exempt items.    We are also subject to state regulations governing insurance agents in the states in which we sell credit insurance.  State insurance regulations require that insurance agents be licensed and limit the premiums that insurance agents can charge.    Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business.  While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof.      10      SOURCES OF FUNDS    Our sources of funds as a percent of total liabilities and stockholders’ equity and the number of persons investing in the Company's debt securities was as follows:       As of December 31   2005 2004 2003 2002 2001     Bank Borrowings  3% -% -%  -%  -%  Public Senior Debt  53    51    50    49       48        Public Subordinated Debt  12       13       15       17       18        Other Liabilities  4       5       6       5       6        Stockholders’ Equity    28         28         29         27         28            Total  100% 100% 100% 100% 100%         Number of Investors  6,011     6,517     6,391      6,502    6,577          As of March 22, 2006 all of our common stock was held by five related individuals and none of our common stock was traded in an established public trading market.  Cash dividends of $2.75 and $8.82 per share were paid in 2005 and 2004, respectively, primarily for the purpose of enabling the Company’s shareholders to pay their income tax obligations as a result of the Company’s status as an S Corporation.  No other cash dividends were paid during the applicable periods.  The Company maintains no equity compensation plans.    The average interest rates we pay on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, have been as follows:      Year Ended December 31   2005 2004 2003 2002 2001     Senior Borrowings  3.74% 3.25%  3.23%  3.65% 6.07%  Subordinated Borrowings  3.97    4.22     4.50     5.79    7.07  All Borrowings  3.78    3.49     3.57     4.31    6.39        Certain financial ratios relating to debt have been as follows:                                     At December 31   2005  2004 2003 2002   2001     Total Liabilities to        Stockholders’ Equity  2.56 2.59 2.49 2.47 2.69         Unsubordinated Debt to       Subordinated Debt plus       Stockholders’ Equity  1.50 1.43 1.29 1.19 1.12      11     MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS     Management’s Discussion and Analysis provides a narrative on the Company’s financial condition and performance.  The narrative reviews the Company’s results of operations, liquidity and capital resources, critical accounting policies and estimates, and certain other matters. It includes Management’s interpretation of our financial results, the factors affecting these results and the major factors expected to affect future operating results. This discussion should be read in conjunction with the consolidated financial statements and notes thereto, contained elsewhere in this Annual Report.    Certain information in this discussion and other statements contained in this Annual Report which are not historical facts may be forward-looking statements that involve risks and uncertainties.  Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  Possible factors which could cause future results to differ from expectations include, but are not limited to, the ability to manage cash flow, the accuracy of Management’s estimates and judgements, adverse economic conditions including the interest rate environment, federal and state regulatory changes, unfavorable outcome of litigation and other factors referenced in the “Risk Factors” section of the Company’s Form 10-K and elsewhere herein.    Overview:      The 2005 year was a challenging period for the Company due to certain atypical events which impacted our performance.  We began the year by converting our entire accounting and loan operations to a new computer system, culminating a two-year project for the Company.  During the months of January and February, we were significantly focused on system integration.  We worked on fine-tuning our procedures and our employees worked diligently on becoming proficient and comfortable working on the new system.  Consequently, our business development efforts were not as concerted, resulting in lower loan originations during the first quarter than in past years.  Collection efforts were also affected, causing delinquencies to increase.    During the third quarter of the year, our operations were impacted by Hurricanes Katrina and Rita.  The hurricanes were devastating, leaving areas destroyed and many people homeless.  Business operations in twenty-eight of our branch locations in Louisiana and Mississippi were temporarily interrupted.  Most were back in operation within a few days; however, our Bay St. Louis branch remains closed and currently shares a location with one of our other branches.  We worked with our customers and offered assistance with respect to their obligations to the Company.  In certain instances, we extended payment dates, waived delinquent charges or otherwise modified our loan agreements with certain affected customers.      Our branch office in Booneville, Mississippi experienced a fire during the year which interrupted its business operations for a short time.  The branch personnel worked diligently to get their branch back on-line in a minimum amount of time.    Although we had our challenges, it was a successful year for the Company.  We exceeded $100.0 million in revenues for the first time in the Company’s history and we were able to exceed our projected goal of $7.5 million in pre-tax profits.      The Company expanded it branch operations network during 2005 by opening six new locations and purchasing a seventh location from another finance company.  At December 31, 2005, the Company was operating 219 branches in five states.    Financial Condition:      Overall assets of the Company were $324.9 million at December 31, 2005 as compared to $312.4 million at December 31, 2004, representing a $12.5 million (4%) increase.  Increases in the Company’s loan and marketable debt securities portfolios were the asset categories providing the majority of the growth.     12       As indicated in the Overview section, our business operations were affected by certain events which were not in the normal and ordinary course of our business.  Consequently, we did not experience the 8%-9% growth in loan originations we have seen in the previous three years.  Our loan originations approximated the same level achieved in 2004.  Based on the level of loan activity, net receivables (gross receivables less unearned finance charges) increased $8.2 million (3%) to $260.4 million at December 31, 2005 from $252.2 million at December 31, 2004.    Inherent in the loan portfolio are probable losses due to the inability of some customers to ultimately pay their obligations.  The creditworthiness of our loan portfolio is continually monitored and the Company maintains an allowance for loan losses to cover probable losses.  We determine the amount of the allowance by reviewing our previous loss experience, reviewing specifically identified loans where collection is doubtful and evaluating the inherent risks and changes in the composition of our loan portfolio.  As a result of the increase in our loan portfolio and higher loan losses in 2005, we increased the allowance for loan losses to $16.9 million as of December 31, 2005 compared to $15.3 million at December 31, 2004.      Investing activity by the Company’s insurance subsidiaries also contributed to the overall increase in assets.  During the year, surplus funds generated by our insurance subsidiaries were invested in various marketable debt securities.  As a result, our investment portfolio grew to $71.4 million at December 31, 2005 as compared to $63.6 million at the end of the previous year, representing a $7.8 million (12%) increase.  Management maintains what it believes to be a conservative approach when formulating its investment strategy.  The Company does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.  The investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  Approximately 68% of these investment securities have bee n designated as “available for sale” with any unrealized gain or loss accounted for in the Company’s equity section, net of deferred income taxes for those investments held by the insurance subsidiaries.  The remainder of the investment portfolio represents securities carried at amortized cost and designated “held to maturity”, as Management has both the ability and intent to hold these securities to maturity.     Cash used to fund loan originations during 2005 and the aforementioned investing activity by the Company’s insurance subsidiaries resulted in cash and cash equivalents declining $1.8 million (11%) at the end of 2005 as compared to the end of 2004.      An increase in prepaid expenses was the main reason for the $.8 million (6%) increase in other assets at December 31, 2005 as compared to the prior year-end.  These prepaid expenses include payments on multiple year contracts for equipment maintenance and software licenses.   Also included are prepaid insurance premiums and lease payments on equipment.       Significant growth in the Company’s commercial paper outstanding was a major factor causing the $8.5 million (4%) increase in total liabilities.  The Company’s debt security program continues to fund a majority of our operations each year.    Results of Operations:    The Company generated a record $101.8 million in revenues during 2005, compared to $98.5 million in 2004 and $91.4 million in 2003.    Net income during the same comparable periods was $5.1 million, $5.0 million and $8.7 million, respectively.     Net income was lower during 2005 and 2004 as compared to 2003 mainly due to the impact of the conversion of the Company’s loan and accounting operations to a new computer system and higher loan losses.  In addition, the impact of the aforementioned hurricanes also contributed to higher costs during 2005.        13       On January 1, 2005, the Company successfully converted its entire loan and accounting operations to a new computer system, culminating a project which began in the fall of 2002.  The scope of the project was enormous and a substantial amount of resources was committed during the process. A majority of the preparation and cost of conversion occurred and was realized during 2004.  The implementation of a data communication network for all our branch offices was completed, equipment was procured and development and testing of the new system was done.  Also during 2004, our entire employee base was trained on the new system.      Immediately after conversion, our focus was on fine-tuning the system and having our employees become comfortable and proficient using it.  Business development and collection activity was adversely impacted during the first quarter of 2005 as a result of the transition process.  The project was a major factor in the lower levels of net income during 2005 and 2004 as compared to 2003.     Management believes results of operations during 2006 will be above those achieved during 2005, as the Company refocuses on its strategic plan.      Net Interest Income:     As with any lending institution, the Company’s key performance benchmark is our net interest income.   This benchmark represents the margin between income earned on loans and investments and the interest paid on bank loans, debt securities and capital lease obligations.  Therefore, results of operations each year is primarily dependent on our ability to successfully manage our margin.  Factors affecting the margin include the level of average net receivables and the interest income associated therewith, capitalized loan origination costs and average outstanding debt and the interest rate environment.   Volatility in interest rates has more impact on the income earned on investments and the Company’s borrowing cost than on interest income earned on loans.  Management does not normally change the rates charged on loans originated due to changes in the interest  rate environment.     Net interest margin was $64.4 million, $61.5 million and $56.7 million during each of the three years ended December 31, 2005, 2004 and 2003, respectively.  Higher levels of average net receivables outstanding during 2005 and 2004, and the associated finance charge income earned thereon, led to the higher margins in each of those years.    The negative component of the Company’s net interest income is interest expense.  As debt levels expand and/or average interest rates rise, the increase in financing costs can restrict or lower our margin.  This combination of increases took place in the year just ended.  During 2005, our average debt outstanding grew to $205.8 million as compared to $195.7 million in 2004 and average interest rates were 3.78% compared to 3.49% during the same comparable periods.  The result was an increase in interest expense of $.9 million (12%) during 2005 as compared to 2004.    During 2004, average debt levels increased approximately $10.7 million; however, average interest rates declined to 3.49% as compared to 3.57% during 2003.  Interest expense increased a marginal $.3 million (5%) during 2004 compared to 2003.    Management projects interest costs for the Company will continue to rise as the outstanding amount of its debt securities continues to increase and average interest rates continue to rise.  The increase could impact its net interest margin during 2006.      Net Insurance Income:    Net insurance income during 2005 declined $1.0 million (5%) as compared to 2004.  Lower premium revenue and higher claims during the period were the cause of the decline.  A factor contributing to the lower premium revenue was a term limit of twelve months imposed by the Mississippi Insurance Department on limited physical damage insurance written in Mississippi, effective January 2005.    The decline in net insurance income during 2005 was also due to higher claims incurred, mainly as a result of the aforementioned hurricanes.   Many customers in the affected areas who had opted for credit insurance when they obtained their loans filed property claims for damages incurred by the storms.         14       During 2004, net insurance income increased $1.1 million (5%).  The increase was mainly due to the increase in average net receivables.  As average net receivables increase, the Company typically experiences an increase in the number of customers requesting credit insurance, thereby leading to higher levels of insurance in force.      Provision for Loan Losses:    The Company’s provision for loan losses reflect the level of net charge-offs and adjustments to the allowance for loan losses to cover credit losses inherent in the outstanding loan portfolio at the balance sheet date.   During 2005, 2004 and 2003 the provision for loan losses was $19.5 million, $18.1 million and $15.2 million, respectively.   Higher write-offs on non-performing loans led to the increases in the loss provision during the two year period ended December 31, 2005.  Management also allocated additional reserves to cover probable losses, determined on a historical basis, in the current loan portfolio during the same periods.    New federal bankruptcy laws which became effective October 17, 2005 appear to have curtailed the number of bankruptcy filings the Company was experiencing prior to the laws being enacted.  Prior to October 1, 2005, the Company was averaging approximately $1.0 million a month in new bankruptcy filings by its loan customers.  During October, bankruptcy filings by our loan customers more than doubled in amount as potential filers submitted their request prior to the October 17th deadline.  During the months of November and December, customer bankruptcy filings declined to approximately $.5 million each month.    At December 31, 2005, the balance on bankrupt accounts was $11.8 million compared to $12.3 million at December 31, 2004 and $13.0 million at December 31, 2003.      The creditworthiness of the loan portfolio will continue to be monitored considering factors such as previous loss experience, delinquency status, bankruptcy trends, the perceived ability of the borrower to repay, value of the underlying collateral and changes in the size of the loan portfolio.  Additions will be made to the allowance for loan losses when we deem it appropriate to protect against probable losses in the current portfolio.  Currently, we believe the allowance for loan losses is adequate to absorb losses.  However, if conditions change, future additions to the allowance may be necessary in order to provide adequate protection against probable losses in the current portfolio.    Other Operating Expenses:    Personnel expense increased $1.6 million (5%) during 2005 as compared to 2004 mainly due to merit salary increases and higher insurance claims incurred by the Company’s employee health insurance plan.  Additional staff hired to assist in conversion and overtime associated with training our employees on the new system, additional employees hired to staff the new offices opened and merit salary increases caused personnel expense during 2004 to increase $2.7 million (9%) as compared to 2003.  Lower medical claims, incentive bonuses and profit sharing contributions during 2004 kept the increase in personnel expense from being higher.     New office openings and an increase in maintenance on equipment caused occupancy expense to increase $.3 million (4%) during 2005 as compared to 2004.  Occupancy expense during 2004 increased $1.1 million (14%) compared to 2003 mainly due to increases in depreciation on capitalized new computer equipment and the maintenance on the equipment.  Rent expense on new branch offices and leases renewed on existing branch offices also contributed to the increase in 2004.       Other miscellaneous operating expenses decreased $1.5 million (9%) during 2005 as compared to 2004 primarily due to a decline in conversion expenses.  The majority of the cost associated with the actual conversion and training of employees occurred in 2004.  A gain on the sale of certain property added to the reduction of other expenses during 2005.  Also contributing to the decline in other expenses during 2005 was lower advertising expenses, lower legal expenses and a reduction in stationary and supply expenditures.       15       Computer expenses, other conversion expenses and lease on new equipment were the primary factors causing other operating expenses to increase $3.0 million or 21% during 2004 as compared to 2003.  Higher legal and audit expenses were other factors contributing to the increase in 2004.    Income Taxes:    In 1997, the Company elected S Corporation status for income tax reporting purposes.  Taxable income or loss of an S Corporation is included in the individual tax returns of the shareholders of the Company.  However, income taxes continue to be reported for the Company’s insurance subsidiaries, as they are not allowed S Corporation status, and for the Company’s state taxes in Louisiana, which does not recognize S Corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The deferred income tax assets and liabilities are due to certain temporary differences between reported income and expenses for financial statement and income tax purposes.      Effective income tax rates for the years ended December 31, 2005, 2004 and 2003 were 33.0%, 33.8% and 22.5%, respectively.  The higher rates during 2005 and 2004 were due to losses of the S Corporation being passed to the shareholders for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.    Other:    During 2005, the Company began the process of preparing to comply with certain requirements of the Sarbanes-Oxley Act of 2002.  The original deadline for compliance with these requirements was prior to the completion of the Company’s fiscal year ending December 31, 2005; however, the deadline for certain companies, including 1st Franklin, has been extended to December 31, 2007.  The Sarbanes-Oxley Act sets out requirements with respect to, among other things, corporate governance and financial accounting disclosures.  A project director position has been created and assigned the task of preparing the Company for compliance with the Sarbanes-Oxley Act.  The Company has engaged a consulting firm to assist the project director on the project.  Additional resources are expected to be added as needed, which may involve substantial additional costs which could materi ally affect the Company’s results of operations.  During 2005, we incurred approximately $.3 million in expenses and we project additional expenses of $.3 million during 2006.    Quantitative and Qualitative Disclosures About Market Risk:    Volatility of market rates of interest can impact the Company’s investment portfolio and the interest rates paid on its debt securities.  These exposures are monitored and managed by the Company as an integral part of its overall cash management program.  It is Management’s goal to minimize any adverse effect that movements in interest rates may have on the financial condition and operations of the Company.  The information in the table below summarizes the Company’s risk associated with marketable debt securities and debt obligations as of December 31, 2005.  Rates associated with the marketable debt securities represent weighted averages based on the yield of each individual security.  No adjustment has been made to yield, even though many of the investments are tax-exempt.  For debt obligations, the table presents principal cash flows and related weighted  average interest rates by contractual maturity dates.  The structure of subordinated debenture debt incorporates various interest adjustment periods, which allows the holder to redeem that security prior to the contractual maturity without penalty.  It is expected that actual maturities on certain debentures will occur prior to the contractual maturity.  Management estimates the carrying value of senior and subordinated debt approximates their fair values when compared to instruments of similar type, terms and maturity.      Loans are excluded from the information below since interest rates charged on loans are based on rates allowable in compliance with federal and state guidelines.  Management does not believe that changes in market interest rates will significantly impact rates charged on loans.  The Company has no exposure to foreign currency risk.       16      Expected Year of Maturity        2011 &  Fair   2006 2007 2008 2009 2010 Beyond Total Value  Assets: (in millions)     Marketable Debt Securities $  7 $  9 $  9 $  9     $  9 $28 $71 $71     Average Interest Rate 3.9% 3.9% 3.9% 4.0% 4.1% 4.4% 4.1%   Liabilities:             Senior Debt:                Senior Notes $64 — — — — — $64 $64        Average Interest Rate 2.9% — — — — — 2.9%         Commercial Paper $108 — — — — — $108 $108        Average Interest Rate 4.9% — — — — — 4.9%         Notes Payable to Banks $ 9 — — — — —  $ 9  $ 9        Average Interest Rate 6.8%  — — — — — 6.8%                 Subordinated Debentures $5 $  8 $12 $14 — — $39 $39     Average Interest Rate 4.2% 4.4% 4.2% 4.4% — — 4.3%      Liquidity:    Liquidity is the ability of the Company to meet short-term financial obligations, either through the collection of receivables or by generating additional funds through liability management.  Continued liquidity of the Company is therefore dependent on the collection of its receivables, the issuance of debt securities that meet the investment requirements of the public and the continued availability of unused bank credit from the Company’s lender.     As of December 31, 2005 and December 31, 2004, the Company had $15.6 million and $17.4 million, respectively, invested in cash and short-term investments readily convertible into cash with original maturities of three months or less.      The Company's investments in marketable securities can be converted into cash, if necessary.  As of December 31, 2005 and 2004, respectively, 97% and 95% of the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries.  State insurance regulations limit the use an insurance company can make of assets.  Dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  At December 31, 2005, Frandisco Property and Casualty Insurance and Frandisco Life Insurance Company had a statutory surplus of $30.0 million and $31.7 million, respectively.  The maximum aggregate amount of dividends these subsidiaries  can pay to the Company in 2006 without prior approval of the Georgia Insurance Commissioner is approximately $7.6 million.    Most of the Company's loan portfolio is financed through public debt securities, which, because of redemption features, have a shorter average maturity than the loan portfolio as a whole.  The difference in maturities may adversely affect liquidity if the Company does not continue to issue debt securities at interest rates and terms that are responsive to the demands of the marketplace or maintain sufficient unused bank borrowings.       17       In addition to the debt securities program, the Company maintains an external source of funds through a credit agreement with Wachovia Bank, N.A., which provides for unsecured borrowings up to $30.0 million.  The commitment termination date of the credit agreement is September 25, 2006.  Any amounts then outstanding under our line of credit are due and payable on such date, and any amounts outstanding under any term loan would be, upon notice, due and payable three years from that date.  As of December 31, 2005, $9.0 million was outstanding under the credit agreement at an interest rate of 6.75% and available borrowings under the agreement were $21.0 million.  We plan to negotiate a renewal of this credit agreement prior to its current scheduled expiration date but cannot provide any assurance that any such renewal will be available on commercially reasonable ter ms, if at all.  The failure to renew this credit agreement, or obtain a new agreement on terms acceptable to the Company, could materially affect the Company’s financial condition.  Please refer to Note 5 in the "Notes to Consolidated Financial Statements" included herein for additional information regarding the aforementioned credit agreement.      18       The Company was subject to the following contractual obligations and commitments at December 31, 2005:                 2011 &    2006 2007 2008 2009 2010 Beyond Total   (in millions)  Contractual Obligations:            Credit Line * $   9.2 $     - $     - $     -  $     - $      - $   9.2     Bank Commitment Fee ** .1      -      -     -       -       - .1     Senior Notes * 66.0      -      -     -       -       - 66.0     Commercial Paper * 109.1 - - - - - 109.1     Subordinated Debt * 6.4 9.4 14.3 17.5 - - 47.6     Operating leases (offices)  3.1  2.5  1.9  1.0      .4    .1  9.0     Operating leases (equipment)  .9 .9 .8 .1 - - 2.7     Capitalized leases (equipment) .2 .3 .3 .2 - - 1.0  Software license fees .1 - - - - - .1  Software service contract ** 2.4 2.4 2.4 2.4 2.4 9.5 21.6  Data communication lines contract **        2.5      2.5      1.7       -         -         -       6.7         Total $200.0   $18.0 $21.4 $21.2 $ 2.8 $ 9.7 $273.1           *  Note:  Includes estimated interest at current rates.       **  Note:  Based on current usage.              The increase in the loan loss allowance also did not directly affect liquidity as the allowance is maintained out of income; however, an increase in the loss rate may have a material adverse effect on the Company’s earnings.  However, the inability to collect loans could eventually impact the Company’s liquidity in the future.      Critical Accounting Policies:    The accounting and reporting policies of 1st Franklin and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry.  The more critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves.    The allowance for loan losses is based on the Company's previous loss experience, a review of specifically identified loans where collection is doubtful and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral.    Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual precomputed account to calculate income for on-going precomputed accounts; however, state regulations often allow interest refunds to be made according to the “Rule of 78's” method for payoffs and renewals.  Since the majority of the Company's precomputed accounts are paid off or renewed prior to maturity, the result is that most of the precomputed accounts effectively yield on a Rule of 78's basis.       19       Precomputed finance charges are included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which are not precomputed, have income recognized on a simple interest accrual basis.  Income is not accrued on a loan that is more than 60 days past due.    Loan fees and origination costs are deferred and recognized as an adjustment to the loan yield over the contractual life of the related loan.      The property and casualty credit insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.    The credit life and accident and health policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.    Included in unearned insurance premiums and commissions on the consolidated statements of financial position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries.  These reserves are established based on acceptable actuarial methods.  In the event that the Company’s actual reported losses for any given period are materially in excess of the previous estimated amounts, such losses could have a material adverse affect on the Company’s results of operations.    Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations.      20     MANAGEMENT'S REPORT    The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States by management of the Company, who assume responsibility for their integrity and reliability.    The Company maintains a system of internal accounting controls, which is supported by a program of internal audits with appropriate management follow-up action.  The integrity of the financial accounting system is based on careful selection and training of qualified personnel, on organizational arrangements which provide for appropriate division of responsibilities and on the communication of established written policies and procedures.    The financial statements of the Company included in this Annual Report have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. Their report expresses an opinion as to the fair presentation of the financial statements and is based upon their independent audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board (United States).    The Company’s Audit Committee, comprised solely of outside directors, meets periodically with Deloitte & Touche LLP, the internal auditors and representatives of management to discuss auditing and financial reporting matters. Deloitte & Touche LLP has free access to meet with the Audit Committee without management representatives present to discuss the scope and results of its audit and its opinions on the quality of financial reporting.     21      REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM        To:  The Board of Directors  1st Franklin Financial Corporation    We have audited the accompanying consolidated statements of financial position of 1st Franklin Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate for the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting p rinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.    In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of 1st Franklin Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.        /s/ DELOITTE & TOUCHE LLP    Atlanta, Georgia  March 22, 2006       22      1st FRANKLIN FINANCIAL CORPORATION    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION    DECEMBER 31, 2005 AND 2004    ASSETS        2005      2004          CASH AND CASH EQUIVALENTS (Note 4):       Cash and Due From Banks  $ 2,202,925 $ 2,704,106     Short-term Investments  11,785,166 13,152,253   13,988,091 15,856,359      RESTRICTED CASH (Note 1)  1,591,967 1,556,930      LOANS (Note 2):       Direct Cash Loans  241,313,264 229,043,613     Real Estate Loans  23,382,248 26,989,611     Sales Finance Contracts  30,345,466 30,510,881     295,040,978   286,544,105         Less: Unearned Finance Charges  34,661,179 34,343,193   Unearned Insurance Premiums  18,834,971 18,022,788   Allowance for Loan Losses  16,885,085 15,285,085            224,659,743 218,893,039      MARKETABLE DEBT SECURITIES (Note 3):       Available for Sale, at fair market value  48,431,606 37,309,738     Held to Maturity, at amortized cost  23,041,123 26,334,592   71,472,729 63,644,330      OTHER ASSETS:       Land, Buildings, Equipment and Leasehold Improvements,          less accumulated depreciation and amortization             of $12,770,424 and $13,185,739 in 2005          and 2004, respectively   7,217,783  7,185,341     Deferred Acquisition Costs  1,024,096 1,001,001     Due from Non-affiliated Insurance Company  1,299,766 1,436,664     Miscellaneous  3,655,586 2,792,410   13,197,231 12,415,416                      TOTAL ASSETS  $ 324,909,761 $ 312,366,074                  See Notes to Consolidated Financial Statements      23      1st FRANKLIN FINANCIAL CORPORATION           CONSOLIDATED STATEMENTS OF FINANCIAL POSITION    DECEMBER 31, 2005 AND 2004    LIABILITIES AND STOCKHOLDERS' EQUITY      2005  2004     SENIOR DEBT (Note 5):       Notes Payable to Banks  $ 9,018,370 $  10,387,000      Senior Demand Notes, including accrued interest   64,120,201   66,331,059      Commercial Paper  107,574,284 91,949,693   180,712,855 168,667,752               ACCOUNTS PAYABLE AND ACCRUED EXPENSES  14,110,767  15,286,107           SUBORDINATED DEBT (Note 6)  38,901,635  41,310,529                   Total Liabilities  233,725,257  225,264,388           COMMITMENTS AND CONTINGENCIES (Note 7)             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  170,000  170,000       Non-Voting Shares; no par value;              198,000 shares authorized; 168,300 shares              outstanding as of December 31, 2005 and 2004  --  --      Accumulated Other Comprehensive Income  268,012  826,392      Retained Earnings  90,746,492  86,105,294                  Total Stockholders' Equity  91,184,504  87,101,686                           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $ 324,909,761   $ 312,366,074                    See Notes to Consolidated Financial Statements      24     1st FRANKLIN FINANCIAL CORPORATION    CONSOLIDATED STATEMENTS OF INCOME    FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003          2005 2004 2003  INTEREST INCOME: Finance Charges  Investment Income   $ 69,228,623  3,174,145  72,402,768   $ 66,068,779  2,609,639  68,678,418   $ 60,773,100  2,737,744  63,510,844   INTEREST EXPENSE: Senior Debt  Subordinated Debt    6,309,551  1,706,478  8,016,029   5,073,818  2,063,150  7,136,968   4,564,880  2,247,738  6,812,618        NET INTEREST INCOME  64,386,739  61,541,450  56,698,226        PROVISION FOR  LOAN LOSSES (Note 2)   19,483,632   18,096,969   15,244,755        NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   44,903,107   43,444,481   41,453,471        NET INSURANCE INCOME: Premiums  Insurance Claims and Expense   28,438,711  (6,732,679) 21,706,032   28,864,383  (6,133,770) 22,730,613   26,976,656  (5,318,222) 21,658,434        OTHER REVENUE  985,194  915,745  879,996        OPERATING EXPENSES: Personnel Expense  Occupancy Expense  Other Expense   35,926,511  8,622,917  15,424,125  59,973,553   34,312,589  8,287,737  16,963,690  59,564,016   31,588,132  7,239,664  14,004,631  52,832,427        INCOME BEFORE INCOME TAXES  7,620,780  7,526,823  11,159,474        PROVISION FOR INCOME TAXES (Note 10)   2,512,081  2,545,601  2,505,875        NET INCOME  $ 5,108,699  $ 4,981,222  $ 8,653,599        BASIC EARNINGS PER SHARE: 170,000 Shares outstanding for all periods ( 1,700 voting, 168,300 non-voting)    $30.05     $29.30     $50.90             See Notes to Consolidated Financial Statements      25      1st FRANKLIN FINANCIAL CORPORATION    CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY    FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003         Accumulated       Other    Common Stock  Retained Comprehensive    Shares Amount Earnings Income Total     Balance at December 31, 2002  170,000  $170,000 $78,657,682     $ 1,394,029    $80,221,711              Comprehensive Income:              Net Income for 2003  —  —  8,653,599   —            Net Change in Unrealized Gain            On Available-For-Sale Securities  —   —     —     (342,951)       Total Comprehensive Income  —  —  —    —   8,310,648       Cash Distributions Paid            —              —      (4,688,327)                —       (4,688,327)         Balance at December 31, 2003  170,000 170,000 82,622,954   1,051,078   83,844,032              Comprehensive Income:              Net Income for 2004  —  —  4,981,222   —           Net Change in Unrealized Gain            On Available-For-Sale Securities   —   —   —    (224,686)       Total Comprehensive Income  —  —  —   —   4,756,536       Cash Distributions Paid            —              —     (1,498,882)                —      (1,498,882)         Balance at  December 31, 2004  170,000 170,000 86,105,294   826,392   87,101,686               Comprehensive Income:              Net Income for 2005  —  —  5,108,699   —            Net Change in Unrealized Gain            On Available-For-Sale Securities  —   —   —    (558,380)         Total Comprehensive Income  —  —  —   —   4,550,319         Cash Distributions Paid            —              —       (467,501)               —        (467,501)         Balance at December 31, 2005  170,000 $170,000 $90,746,492   $   268,012   $91,184,504                  Disclosure of reclassification amount:  2005 2004 2003         Unrealized holding gains arising during period,  net of applicable income taxes       $    (565,267)   $    (203,796)   $    (285,172)          Less: Reclassification adjustment for net gains included in       income, net of applicable income taxes            (6,887)          20,890           57,779          Net unrealized gains on securities,  net of applicable income taxes   $    (558,380)  $    (224,686)  $    (342,951)     See Notes to Consolidated Financial Statements       26      1st FRANKLIN FINANCIAL CORPORATION    CONSOLIDATED STATEMENTS OF CASH FLOWS    FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003      2005        2004        2003          CASH FLOWS FROM OPERATING ACTIVITIES:     Net Income  $ 5,108,699   $ 4,981,222   $ 8,653,599       Adjustments to reconcile net income to net            cash provided by operating activities:         Provision for Loan Losses  19,483,632   18,096,969   15,244,755        Depreciation and Amortization  1,827,138   1,754,700   1,396,117        Provision for Deferred Taxes  46,005   79,896   142,667        Loss on sale of marketable securities and            equipment and premium amortization on securities  (247,414) 116,407  13,910       (Increase) decrease in Miscellaneous Assets and other (778,605)  413,522   (505,930)      Increase (decrease) in Other Liabilities  (964,319)  (1,404,963)  894,880              Net Cash Provided  24,475,138   24,037,753   25,839,998         CASH FLOWS FROM INVESTING ACTIVITIES:        Loans originated or purchased  (196,159,931) (196,761,835) (180,569,120)     Loan payments  170,909,595   166,233,836   146,945,113       Increase in restricted cash  (35,037) (1,206,930) --      Purchases of securities, available for sale  (16,172,200) (9,658,757) (11,153,662)     Purchases of securities, held to maturity  --  (7,429,492) (5,049,365)     Sales of securities, available for sale  --   --   2,893,910       Redemptions of securities, available for sale  4,195,250   7,816,250   8,232,750       Redemptions of securities, held to maturity  3,255,000   3,105,000   6,203,000       Principal payments on securities, available for sale  --   248,854   174,149       Capital expenditures  (2,086,599) (3,499,585) (2,575,128)     Proceeds from sale of equipment  581,808   210,732   120,610              Net Cash Used  (35,512,114) (40,941,927) (34,777,743)       CASH FLOWS FROM FINANCING ACTIVITIES:        Net increase (decrease) in Notes Payable to            Banks and Senior Demand Notes  (3,579,488) 8,812,994  813,460      Commercial Paper issued  44,700,469   28,626,116   29,199,674       Commercial Paper redeemed  (29,075,878) (16,975,372) (17,238,336)     Subordinated Debt issued  6,669,812   5,754,767   6,053,896       Subordinated Debt redeemed  (9,078,706) (8,520,172) (8,755,799)     Dividends / Distributions paid  (467,501) (1,498,882) (4,688,327)            Net Cash Provided  9,168,708   16,199,451   5,384,568         NET DECREASE IN           CASH AND CASH EQUIVALENTS  (1,868,268)   (704,723)   (3,553,177)        CASH AND CASH EQUIVALENTS, beginning  15,856,359   16,561,082   20,114,259         CASH AND CASH EQUIVALENTS, ending  $ 13,988,091   $ 15,856,359   $ 16,561,082       Cash paid during the year for: Interest  $ 7,964,734  $ 7,101,750  $ 6,823,904    Income Taxes  2,571,625   2,517,856   2,313,110          See Notes to Consolidated Financial Statements     27     1ST FRANKLIN FINANCIAL CORPORATION    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003      1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    Business:    1st Franklin Financial Corporation (the "Company") is a consumer finance company which acquires and services direct cash loans, real estate loans and sales finance contracts through 219 branch offices located throughout the southeastern United States.  (See inside front cover of this Annual Report for branch office locations.)  In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance.  Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the life, the accident and health and the property insurance so written.    Basis of Consolidation:    The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.    Fair Values of Financial Instruments:    The following methods and assumptions are used by the Company in estimating fair values for financial instruments:    Cash and Cash Equivalents.  Cash includes cash on hand and with banks.  Cash equivalents are short-term highly liquid investments with original maturities of three months or less.  The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization.    Loans.  The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying value since the estimated life, assuming prepayments, is short-term in nature.  The fair value of the Company's real estate loans approximate the carrying value since the rate charged by the Company approximates market.    Marketable Debt Securities.  The fair values for marketable debt securities are based on quoted market prices.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  See Note 3 for the fair value of marketable debt securities.    Senior Debt.  The carrying value of the Company's senior debt approximates fair value due to the relatively short period of time between the origination of the instruments and their expected payment.    Subordinated Debt.  The carrying value of the Company's subordinated debt approximates fair value due to the repricing frequency of the debt.    Use of Estimates:    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could vary from these estimates, however, in the opinion of Management, such variances would not be material.       28     Income Recognition:    Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual precomputed account to calculate income for on-going precomputed accounts, however, state regulations often allow interest refunds to be made according to the “Rule of 78's” method for payoffs and renewals.  Since the majority of the Company's precomputed accounts are paid off or renewed prior to maturity, the result is that most of the precomputed accounts effectively yield on a Rule of 78's basis.    Precomputed finance charges are included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which are not precomputed, have income recognized on a simple interest accrual basis.  Income is not accrued on a loan that is more than 60 days past due.    Loan fees and origination costs are deferred and recognized as an adjustment to the loan yield over the contractual life of the related loan.      The property and casualty credit insurance policies written by the Company are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.    The credit life and accident and health policies written by the Company are reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.    Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported (IBNR) claims.  Reserves for claims totaled $984,775 and $792,859 at December 31, 2005 and 2004, respectively, and are included in unearned insurance premiums on the balance sheet.    Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.    Depreciation and Amortization:    Office machines, equipment (including equipment and capital leases) and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years.  Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the lease.    Restricted Cash:    At December 31, 2005, 2004 and 2003, the Company has cash of $1,591,967, $1,556,930 and $350,000, respectively, that is held in restricted accounts at its insurance subsidiaries in order to meet the deposit requirements of the State of Georgia and to meet the reserve requirements of its reinsurance agreements.  These amounts were included in cash and cash equivalents as short-term investments in the 2004 consolidated statement of financial position.  During 2005, the Company determined that these amounts should have been classified as restricted cash.  Accordingly, the 2004 and 2003 amounts have been reclassified to restricted cash in the accompanying consolidated financial statements to conform to the 2005 presentation.  This reclassification resulted in a decrease in cash and cash equivalents from amounts previously reported in the consolidated statement of financial position and  the consolidated statement of cash flows as of December 31, 204 of $1,556,930, a decrease in cash and cash equivalents as of December 31, 2003 of $350,000 and an increase in cash used in investing activities from amounts previously reported in the consolidated statement of cash flows for the year ended December 31, 2004 of $1,206,930.       29     Impairment of Long-Lived Assets:    The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable.  When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition.  In Management's opinion, there has been no impairment of carrying value of the long-lived assets, including property and equipment and other intangible assets, at December 31, 2005.     Income Taxes:    No provision for income taxes has been made by the Company since it elected S Corporation status in 1997.  The Company’s insurance subsidiaries remain taxable and income taxes are provided where applicable (Note 10).    Collateral Held for Resale:    When the Company takes possession of the collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance.  Any losses incurred at that time are charged against the Allowance for Loan Losses.     Bulk Purchases:    A bulk purchase is a group of loans purchased by the Company from another lender.  Bulk purchases are recorded at the outstanding loan balance and an allowance for losses is established in accordance with Management's evaluation of the specific loans purchased and their comparability to similar type loans in the Company's existing portfolio.    For loans with precomputed charges, unearned finance charges are also recorded using the effective interest method.  Any difference between the purchase price of the loans and their net balance (outstanding balance less allowance for losses and unearned finance charges) is amortized or accreted to income over the estimated average life of the loans purchased using the APR (FASB 91) method.    Marketable Debt Securities:      Management has designated a significant portion of the marketable debt securities held in the Company's investment portfolio at December 31, 2005 and 2004 as being available-for-sale.  This portion of the investment portfolio is reported at fair market value with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income which is a separate component of stockholders' equity.  Gains and losses on sales of securities available-for-sale are determined based on the specific identification method.  The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity.    Earnings per Share Information:    The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same.      2. LOANS    The Company's consumer loans are made to individuals in relatively small amounts for relatively short periods of time.  First and second mortgage loans on real estate are made in larger amounts and for longer periods of time.  The Company also purchases sales finance contracts from various dealers.       30     Contractual Maturities of Loans:    An estimate of contractual maturities stated as a percentage of the loan balances based upon an analysis of the Company's portfolio as of December 31, 2005 is as follows:       Direct Real Sales   Due In       Cash Estate Finance   Calendar Year        Loans       Loans     Contracts   2006  67.16% 21.29% 65.37%   2007  28.29 18.59 26.24   2008  3.84 15.32 6.93   2009  .52 12.63 1.35   2010  .09 10.07 .09    2011 & beyond        .10   22.10          .02    100.00% 100.00% 100.00%     Historically, a majority of the Company's loans have renewed many months prior to their final contractual maturity dates, and the Company expects this trend to continue in the future.  Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections.    Cash Collections on Principal:    During the years ended December 31, 2005 and 2004, cash collections applied to the principal of loans totaled $170,909,595 and $166,233,836, respectively, and the ratios of these cash collections to average net receivables were 69.54% and 66.42%, respectively.    Allowance for Loan Losses:    The Allowance for Loan Losses is based on the Company's previous loss experience, a review of specifically identified loans where collection is doubtful and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Such allowance is, in the opinion of Management, sufficiently adequate for probable losses in the current loan portfolio.  Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral.  As the estimates used in determining the loan loss reserve are influenced by outside factors, such as consumer payment patterns and general economic conditions, there is uncertainty inherent in these estimates, making  it reasonably possible that they could change.    When a loan becomes five installments past due, it is charged off unless Management directs that it be retained as an active loan. In making this charge off evaluation, Management considers factors such as pending insurance, bankruptcy status and other measures of collectibility.  In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid.  The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums.    The Company held $29,229,634 and $23,764,078 of loans in a non-accrual status at December 31, 2005 and 2004, respectively.      An analysis of the allowance for the years ended December 31, 2005, 2004 and 2003 is shown in the following table:      2005 2004 2003  Beginning Balance  $ 15,285,085  $ 13,515,085  $ 12,195,000   Provision for Loan Losses  19,483,632  18,096,969  15,244,755   Charge-Offs  (22,315,779) (20,669,102) (18,172,035)  Recoveries  4,432,147  4,342,133  4,247,365   Ending Balance  $16,885,085  $ 15,285,085  $ 13,515,085       31     3. MARKETABLE DEBT SECURITIES    Debt securities available for sale are carried at estimated fair market value.  The amortized cost and estimated fair market values of these debt securities are as follows:       Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Market Value  December 31, 2005:      U.S. Treasury securities and      obligations of U.S. government      corporations and agencies  $ 11,086,541 $ 9,083 $ (210,238) $ 10,885,386  Obligations of states and       political subdivisions  36,768,810 247,430 (366,806) 36,649,434  Corporate securities  381,110 515,677 --  896,786   $ 48,236,461 $ 772,190 $ (577,044) $ 48,431,606       Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Market Value  December 31, 2004:      U.S. Treasury securities and      obligations of U.S. government      corporations and agencies  $ 8,917,740 $ 82,553 $ (40,839) $ 8,959,454  Obligations of states and       political subdivisions  27,026,816 623,900 (69,211) 27,581,505  Corporate securities  383,861 384,918 --  768,779   $ 36,328,417 $ 1,091,371 $ (110,050) $ 37,309,738        Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity.  The amortized cost and estimated fair market values of these debt securities are as follows:       Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Market Value  December 31, 2005      U.S. Treasury securities and      obligations of U.S. government      corporations and agencies  $ 5,469,203 $ 9,612 $ (137,190) $ 5,341,625  Obligations of states and       political subdivisions  17,071,209 191,357       (85,344) 17,177,222  Corporate securities  500,711 1,444 --  502,155   $ 23,041,123 $ 202,413 $ (222,534) $ 23,021,002        December 31, 2004      U.S. Treasury securities and      obligations of U.S. government      corporations and agencies  $ 5,470,846 $ 42,708 $      (41,049) $ 5,472,505  Obligations of states and      political subdivisions  19,861,496 532,811       (36,093) 20,358,214  Corporate securities  1,002,250 16,604 --  1,018,854   $ 26,334,592 $ 592,123 $ (77,142) $ 26,849,573           32         The amortized cost and estimated fair market values of marketable debt securities at December 31, 2005, by contractual maturity, are shown below:      Available for Sale Held to Maturity    Estimated  Estimated   Amortized Fair Market Amortized Fair Market   Cost Value Cost Value        Due in one year or less  $ 5,429,490 $ 5,943,884 $ 1,846,072 $ 1,849,042  Due after one year through five years  23,153,007 23,025,106 13,528,841 13,469,611  Due after five years through ten years  18,633,746 18,457,920 6,916,210 6,966,514  Due after ten years  1,020,218 1,004,696 750,000 735,835   $ 48,236,461 $ 48,431,606 $ 23,041,123 $ 23,021,002     The following table is an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2005.       Less than 12 Months 12 Months or Longer Total    Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses   Available for Sale:         U.S. Treasury securities and obligations of U.S. government  corporations and  agencies      $ 4,953,450     $ 80,304     $ 4,939,700     $ 129,933     $ 9,893,150     $ 210,238   Obligations of states and political subdivisions   15,569,706  181,732  7,135,244  185,074  22,704,950  366,806   Total 20,523,156 262,036 12,074,944 315,007 32,598,100 577,044            Held to Maturity         U.S. Treasury securities and obligations of U.S. government  corporations and  agencies      1,875,094     37,036     2,745,531     100,153     4,620,625     137,190   Obligations of states and political subdivisions   2,397,091  20,622  2,134,919  64,723  4,532,010  85,344   Total 4,272,185 57,658 4,880,450 164,876 9,152,635 222,534            Overall Total  $ 24,795,341 $ 319,694 $ 16,955,394 $ 479,883 $ 41,750,735 $ 799,578    The unrealized losses on the Company’s investments listed in the above table were the result of interest rate increases.  Based on the ratings of these investments, the Company’s ability and intent to hold these investments until a recovery of fair value and after considering the severity and duration of the impairments, the Company does not consider the impairment of these investments to be other-than-temporary at December 31, 2005.     There were no sales of investments in debt securities available-for-sale during 2005.  Proceeds from redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 2005 were $7,450,250.  Gross gains of $8,810 and gross losses of $18,218 were realized on these redemptions.    There were also no sales of investments in debt securities available-for-sale during 2004.  Proceeds from redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 2004 were $11,170,104.  Gross gains of $29,223 and gross losses of $1,673 were realized on these redemptions.    Sales of investments in debt securities available-for-sale during 2003 generated proceeds of $2,893,910.  Gross gains of $37,660 were realized on these sales.  Proceeds from redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 2003 were $14,609,899.  Gross gains of $27,219 were realized on these redemptions.       33       4. INSURANCE SUBSIDIARY RESTRICTIONS    As of December 31, 2005 and 2004, respectively, 97% and 95% of the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries.  State insurance regulations limit the types of investments an insurance company may hold in its portfolio.  These limitations specify types of eligible investments, quality of investments and the percentage a particular investments that may constitute an insurance company’s portfolio.  Dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  At December 31, 2005, Frandisco Property and Casualty Insurance and Frandisco Life Insurance Company had a statutory surplus of $30.0 million and $31.7 million, respectively.  The Company did not receive any dividends from its insurance subsidiaries for any period presented.  The maximum aggregate amount of dividends these subsidiaries can pay to the Company in 2006 without prior approval of the Georgia Insurance Commissioner is approximately $7.6 million.     5. SENIOR DEBT    Effective September 25, 2001, the Company entered into a line of credit agreement with a bank to provide up to $21.0 million in unsecured borrowings.  All borrowings bear interest at .5% below the prime rate of interest or 0.225% above the 1-month LIBOR, at the option of the Company, and an annual commitment fee is paid quarterly based on .5% of the available line less the average borrowings during the quarter.  In addition, a facility fee of $10,000 was paid to the bank for one year when the credit agreement was executed.  The credit agreement was renewed for a one-year term on September 23, 2005. At December 31, 2005 and 2004, the Company had balances of $9.0 million and $10.4 million, respectively, in borrowings against the credit line facility.    The current credit agreement has a commitment termination date of September 25 in any year in which written notice of termination is given by the bank.  Any then outstanding balance under the line of credit would be due and payable upon notice on such date.  If written notice is given in accordance with the agreement, the outstanding balance of any term loan under the agreement must be paid in full on the date three years after the commitment termination date.  The bank also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the agreement or in September of any calendar year if the financial condition of the Company becomes unsatisfactory to the bank, according to standards set forth in the credit agreement.  Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a  minimum debt to equity ratio among others.     The Senior Demand Notes are unsecured obligations which are payable on demand. The interest rate payable on any Senior Demand Note is a variable rate, compounded daily, established from time to time by the Company.    Commercial Paper is issued by the Company in amounts in excess of $50,000, with maturities of less than 270 days and at negotiable interest rates.    Additional data related to the Company's senior debt is as follows:       Weighted      Average Maximum Average Weighted   Interest Amount Amount Average  Year Ended Rate at end Outstanding Outstanding Interest Rate  December 31 of Year During Year During Year During Year    (In thousands, except % data)  2005:      Bank  6.75% $ 10,387 $ 1,953 5.54%  Senior Demand Notes  2.91    67,523 64,419 2.45     Commercial Paper  4.93    108,544 101,725 4.44     All Categories  4.30    180,713 168,097 3.69              34      Weighted      Average Maximum Average Weighted   Interest Amount Amount Average  Year Ended Rate at end Outstanding Outstanding Interest Rate  December 31 of Year During Year During Year During Year   (In thousands, except % data)  2004:      Bank  5.00% $ 10,387 $ 1,789 4.46%  Senior Demand Notes  2.28    67,905 65,046 2.28     Commercial Paper  4.11    93,076 85,859 3.97     All Categories  3.44    168,667 152,694 3.25           2003:      Bank  --% $ -- $ -- --%  Senior Demand Notes  2.28    70,469 66,540 2.36     Commercial Paper  3.94    80,299 73,815 3.98     All Categories  3.18    148,204 140,354 3.21        6. SUBORDINATED DEBT    The payment of the principal and interest on the subordinated debt is subordinate and junior in right of payment to all unsubordinated indebtedness of the Company.    Subordinated debt consists of Variable Rate Subordinated Debentures which mature four years after their date of issue.  The maturity date is automatically extended for an additional four years unless the holder or the Company redeems the debenture on its original maturity date or within any applicable grace period thereafter.  The debentures have various minimum purchase amounts with varying interest rates and interest adjustment periods for each respective minimum purchase amount, each as established. Interest rates on the debentures are adjusted at the end of each adjustment period.  The debentures may be redeemed by the holder at the applicable interest adjustment date or within any applicable grace period thereafter without penalty.  Redemptions at any other time are at the discretion of the Company and are subject to an interest penalty. The Company may redeem the debentures for  a price equal to 100% of the principal plus accrued but unpaid interest upon 30 days’ notice to the holder.    Interest rate information on the Subordinated Debt at December 31 is as follows:     Weighted Average Rate at  Weighted Average Rate  End of Year  During Year          2005   2004   2003    2005 2004 2003          4.36% 3.96% 4.28%  4.01% 4.19% 4.48%        Maturity information on the Company’s Subordinated Debt at December 31, 2005 is as follows:      Amount Maturing   Based on Maturing Based on Interest   Date Adjustment Period      2006  $ 5,332,736 $ 29,832,730  2007  7,840,983 7,106,735  2008  11,527,489 970,694  2009  14,200,427 991,476   $ 38,901,635 $ 38,901,635          35     7. COMMITMENTS AND CONTINGENCIES    The Company's operations are carried on in locations which are occupied under operating lease agreements.  These lease agreements usually provide for a lease term of five years with a renewal option for an additional five years.  There are also operating and capitalized leases for computer equipment the Company uses in its operations.  Operating leases for equipment have terms of three years and the capitalized leases have terms of five years.  Total operating lease expense was $4,267,824, $4,117,558 and $3,139,312 for the years ended December 31, 2005, 2004 and 2003, respectively.  The Company’s minimum aggregate lease commitments at December 31, 2005 are shown in the table below.          Year Capitalized Equipment Leases Operating Equipment Leases Operating Occupancy Leases Total Operating Leases            2006  $ 245,894 $ 854,076 $ 3,155,448 $ 4,009,524    2007  245,894 854,076 2,551,336 3,405,412    2008  215,234 846,086 1,892,134 2,738,220    2009  9,282 102,483 962,779 1,065,262    2010  -- -- 365,185 365,185    2011 and beyond  -- -- 90,000 90,000       Total  716,304 $ 2,656,721 $ 9,016,882 $ 11,673,603    Less: Amount representing interest 58,027       Capital lease obligation  $ 658,277          As of December 31, 2005 and 2004, the Company had capital lease obligations of $658,277 and $868,298, respectively, recorded in accounts payable and accrued expenses.     The Company is involved in four legal proceedings in the state of Mississippi.  In two of those proceedings, the Company is a named defendant in cases alleging fraud and deceit in the Company's sale of credit insurance, refinancing practices and use of arbitration agreements. The plaintiffs in those two cases seek statutory, compensatory and punitive damages.   Management believes that it is too early to assess the Company's potential liability in connection with any of these proceedings. The Company is diligently contesting and defending the claims in these two proceedings.     In the other two proceedings referred to above, the Company originally filed suit to bar the assertion of certain of the potential claims discussed above and to enforce certain arbitration clauses in its agreements.    The Company is involved in various other claims and lawsuits incidental to its business from time to time.  In the opinion of Management, the ultimate resolution of all claims and lawsuits will not have a material effect on the Company's financial position, liquidity or results of operations.      8. EMPLOYEE BENEFIT PLANS    The Company maintains a profit sharing and 401(k) plan, which is qualified under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), as amended, to cover employees of the Company.     Any employee who has attained the age of 18, worked 1,000 hours and twelve consecutive months for the Company is eligible to participate in the profit sharing portion of the plan; automatic enrollment takes place on the January 1st or July 1st after meeting the requirements.   The profit sharing contribution is determined at the discretion of the executive officers of the Company and approved by the Board of Directors, based on the profits of 1st Franklin Financial Corporation.   An employee becomes 100% vested in his/her profit sharing account after he/she has completed at least five years of service, with 1,000 hours completed in each year.  Total contributions by the Company were $620,000, $620,000, and $905,000 for the years 2005, 2004, and 2003, respectively.        36       Upon hire, any employee who has attained the age of 18 is eligible to participate in the 401(k) portion of the plan; voluntary enrollment may take place any time during the first month of each quarter.  These funds are deferred on a pre-tax basis.  An employee is immediately 100% vested in these funds and currently there is no match of Company funds.    The Company also maintains a non-qualified deferred compensation plan for employees who receive compensation in excess of the amount provided in Section 401(a)(17) of the Code, as said amount may be adjusted from time to time in accordance with Code section 415(d).      9. RELATED PARTY TRANSACTIONS    The Company leases a portion of its properties (see Note 7) for an aggregate of $159,000 per year from certain officers or stockholders. In Management's opinion, these leases are at rates which approximate those obtainable from independent third parties.    Prior to July 20, 2005, beneficial owners of the Company were also beneficial owners of Liberty Bank & Trust (“Liberty”).  Effective July 20, 2005, Liberty merged with Habersham Bank and the Company’s beneficial owners no longer maintain an ownership interest in Liberty or Habersham Bank.  Prior to the merger, the Company and Liberty had certain management and data processing agreements whereby the Company provided certain administrative and data processing services to Liberty for a fee.  Annual income recorded by the Company in 2005, 2004 and 2003 was $7,467, $12,800 and $68,625, respectively.    Liberty also leased its office space and equipment from the Company prior to the merger.  Lease income to the Company during 2005 was $35,100 and $60,100 annually for 2004 and 2003.    During 1999, a loan was extended to a real estate development partnership of which one of the Company’s beneficial owners (David Cheek) is a partner.  David Cheek (son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock.  The balance on this commercial loan (including principal and accrued interest) was $2,053,819 at December 31, 2005 and this amount was the maximum amount outstanding during the year.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. The interest rate adjusts whenever the prime rate changes.      10. INCOME TAXES    Effective January 1, 1997, the Company elected S corporation status for income tax reporting purposes for the parent company (the “Parent”).  The taxable income or loss of an S corporation is included in the individual tax returns of the shareholders of the company.  Accordingly, deferred income tax assets and liabilities were eliminated and no provisions for current and deferred income taxes were made by the Parent other than amounts related to prior years when the Parent was a taxable entity and for amounts attributable to state income taxes for the state of Louisiana, which does not recognize S corporation status for income tax reporting purposes.  Deferred income tax assets and liabilities will continue to be recognized and provisions for current and deferred income taxes will be made by the Company’s subsidiaries.     The Provision for Income Taxes for the years ended December 31, 2005, 2004 and 2003 is made up of the following components:      2005       2004       2003             Current – Federal  $ 2,453,491  $ 2,426,277  $ 2,289,099   Current – State  12,585  39,428  74,109   Total Current  2,466,076  2,465,705  2,363,208        Deferred – Federal  46,005  79,896  142,667        Total Provision  $ 2,512,081  $ 2,545,601  $ 2,505,875       37       Temporary differences create deferred federal tax assets and liabilities, which are detailed below for December 31, 2005 and 2004.  These amounts are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position.           Deferred Tax Assets (Liabilities)       2005        2004         Insurance Commission  $ (3,226,700) $ (3,208,370)  Unearned Premium Reserves  1,195,433  1,202,261   Unrealized Loss (Gain) on     Marketable Debt Securities  72,866  (154,930)  Other  (204,483) (183,637)   $ (2,162,884) $ (2,344,676)      The Company's effective tax rate for the years ended December 31, 2005, 2004 and 2003 is analyzed as follows.  Rates were higher during the year ended December 31, 2005 due to losses in the S corporation being passed to the shareholders for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.  Shareholders were able to use S corporation losses to offset other income they may have had to the extent of their basis in their S corporation stock.      2005  2004   2003    Statutory Federal income tax rate  34.0% 34.0% 34.0%  State income tax, net of Federal     tax effect  .1    .3    .4     Net tax effect of IRS regulations     on life insurance subsidiary  (6.8)   (7.1)   (4.8)    Tax effect of S corporation status  11.3    12.0    (3.9)    Other Items   (5.6)    (5.4)   (3.2)    Effective Tax Rate  33.0% 33.8% 22.5%        11.  SEGMENT FINANCIAL INFORMATION:    The Company discloses segment information in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which the Company adopted in 1998.  SFAS No. 131 requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance.      The Company has five reportable segments: Division I through Division V.  Each segment is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location.  Division I is comprised of offices located in South Carolina.  Offices in North Georgia comprise Division II, and Division III is comprised of Central and South Georgia.  Division IV represents our Alabama offices, and our offices in Louisiana and Mississippi encompass Division V.        Accounting policies of the segments are the same as those described in the summary of significant accounting policies.  Performance is measured based on objectives set at the beginning of each year and include various factors such as segment profit, growth in earning assets and delinquency and loan loss management.  All segment revenues result from transactions with third parties.  The Company does not allocate income taxes or corporate headquarter expenses to the segments.      38     Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2005 followed by a reconciliation to consolidated Company data.        Year 2005  Division I Division II Division III Division IV Division V Total Segments  Revenues:  ( In Millions)  Finance Charges Earned  $  11.1 $  18.0 $  17.7 $ 12.4 $   9.9 $   69.1  Insurance Income      2.1      7.8      7.9      3.4     3.1    24.3  Other         .1        .3        .1        .1        .1         .7       13.3    26.1    25.7    15.9    13.1     94.1  Expenses:          Interest Cost  1.1 2.1 2.2 1.4 1.1  7.9  Provision for Loan Losses  3.3 4.0 4.9 2.8 2.8 17.8  Depreciation       .2       .4       .2      .2       .3       1.3  Other       6.9    11.2      9.5      5.8      7.1     40.5     11.5    17.7    16.8    10.2    11.3     67.5            Segment Profit  $   1.8 $   8.4 $   8.9 $  5.7 $   1.8 $  26.6            Segment Assets:         Net Receivables  $ 34.6 $ 66.2 $ 66.6 $ 46.6 $ 34.0 $248.0  Cash   .4 .8 .9 .5 .5 3.1  Net Fixed Assets  .9 1.2 .7 .6 .7 4.1  Other Assets         .0         .2         .0        .1         .1        .4  Total Segment Assets  $ 35.9 $ 68.4 $ 68.2 $ 47.8 $ 35.3 $255.6          RECONCILIATION:      2005  Revenues:      (In Millions)  Total revenues from  reportable segments  $  94.1  Corporate finance charges earned not allocated to segments  .1  Reclass of investment income net against interest cost  (.1)  Reclass of insurance expense against insurance income  6.8  Timing difference of insurance income allocation to segments  .6  Other revenues not allocated to segments          .3  Consolidated Revenues  $101.8          Net Income:        Total profit or loss for reportable segments  $  26.6  Corporate earnings not allocated  1.0  Corporate expenses not allocated  (20.0)  Income taxes not allocated      (2.5)  Consolidated Net Income  $    5.1          Assets:        Total assets for reportable segments  $255.6  Loans held at corporate home office level  2.3  Unearned insurance at corporate level  (8.8)  Allowance for loan losses at corporate level  (16.9)  Cash and cash equivalents held at  corporate level  12.5  Investment securities at corporate level  71.5  Fixed assets at corporate level  3.1  Other assets at corporate level        5.6  Consolidated Assets  $324.9     39     Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2004 followed by a reconciliation to consolidated Company data.        Year 2004  Division I Division II Division III Division IV Division V Total Segments  Revenues:  ( In Millions)  Finance Charges Earned  $   10.7 $  19.8 $  19.1 $  12.3 $   9.2 $   71.1  Insurance Income      2.0      8.2      8.3      3.4     2.7    24.6  Other          .1         .2         .2        .1        .0         .6        12.8    28.2    27.6     15.8      11.9     96.3  Expenses:          Interest Cost   .9 2.1 2.0 1.2 .8  7.0  Provision for Loan Losses  2.8 3.9 4.9 2.6 2.1 16.3  Depreciation       .2       .3       .2      .2       .3        1.2  Other       7.3    12.7    11.3      6.6      7.8     45.6     11.2    19.0    18.4    10.6    11.0     70.2            Segment Profit  $   1.5 $   9.2 $   9.2 $   5.2 $     .9 $  26.1            Segment Assets:         Net Receivables  $ 33.1 $ 67.5 $ 67.1 $ 41.9 $ 30.9 $240.5  Cash   .0 .1 .1 .0 .0 .2  Net Fixed Assets  .7 1.1 .7 .6 .7 3.8  Other Assets         .0         .1         .1        .0         .1         .3  Total Segment Assets  $ 33.8 $ 68.8 $ 68.0 $ 42.5 $ 31.7 $244.8          RECONCILIATION:      2004  Revenues:      (In Millions)  Total revenues from  reportable segments  $  96.3  Corporate finance charges earned not allocated to segments  (5.0)  Reclass of investment income net against interest cost  (.0)  Reclass of insurance expense against insurance income  6.2  Timing difference of insurance income allocation to segments  .7  Other revenues not allocated to segments          .3  Consolidated Revenues  $  98.5          Net Income:        Total profit or loss for reportable segments  $  26.1  Corporate earnings not allocated  (3.9)  Corporate expenses not allocated  (14.6)  Income taxes not allocated      (2.6)  Consolidated Net Income  $    5.0          Assets:        Total assets for reportable segments  $244.8  Loans held at corporate home office level  2.2  Unearned insurance at corporate level  (8.4)  Allowance for loan losses at corporate level  (15.3)  Cash and cash equivalents held at  corporate level  17.2  Investment securities at corporate level  63.6  Fixed assets at corporate level  3.4  Other assets at corporate level        4.9  Consolidated Assets  $312.4     40     Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2003 followed by a reconciliation to consolidated Company data.        Year 2003  Division I Division II Division III Division IV Division V Total Segments  Revenues:  ( In Millions)  Finance Charges Earned  $   9.4 $  19.5 $  18.5 $  10.7 $   7.2 $   65.3  Insurance Income      1.8      8.0      8.1      3.0     2.2    23.1  Other          .1         .1         .1        .1        .1         .5         11.3    27.6    26.7      13.8      9.5     88.9  Expenses:          Interest Cost  .8 2.1 2.0 1.0 .6 6.5  Provision for Loan Losses  2.7 3.6 4.0 2.1 1.6 14.0  Depreciation       .2       .2       .2      .1       .2        .9  Other       6.2    11.3    10.2      5.6      5.6     38.9       9.9    17.2    16.4      8.8      8.0     60.3            Segment Profit (Loss)  $     1.4 $   10.4 $  10.3 $  5.0 $    1.5 $  28.6            Segment Assets:         Net Receivables  $ 28.4 $ 67.0 $ 66.1 $ 37.6 $ 23.9 $222.9  Cash   .0 .1 .1 .0 .0 .2  Net Fixed Assets  .6 .8 .5 .5 .5 2.9  Other Assets         .2         .5         .5        .6         .0       1.8  Total Segment Assets  $ 29.1 $ 68.4 $ 67.2 $ 38.7 $ 24.4 $227.8          RECONCILIATION:      2003  Revenues:      (In Millions)  Total revenues from  reportable segments  $  88.9  Corporate finance charges earned not allocated to segments  (4.5)  Reclass of investment income net against interest cost  (.2)  Reclass of insurance expense against insurance income  5.5  Timing difference of insurance income allocation to segments  1.3  Other revenues not allocated to segments          .4  Consolidated Revenues  $  91.4          Net Income:        Total profit or loss for reportable segments  $  28.6  Corporate earnings not allocated  (2.8)  Corporate expenses not allocated  (14.6)  Income taxes not allocated      (2.5)  Consolidated Net Income  $    8.7          Assets:        Total assets for reportable segments  $227.8  Reclass accrued interest receivable on loans  1.5  Loans held at corporate home office level  3.7  Unearned insurance at corporate level  (8.2)  Allowance for loan losses at corporate level  (13.5)  Cash and cash equivalents held at  corporate level  16.7  Investment securities at corporate level  58.2  Fixed assets at corporate level  2.8  Other assets at corporate level        3.9  Consolidated Assets  $292.9      41     DIRECTORS AND EXECUTIVE OFFICERS      Directors  Principal Occupation,  Has Served as a         Name Title and Company Director Since     Ben F. Cheek, III Chairman of Board and Chief Executive Officer, 1967  1st Franklin Financial Corporation    Ben F. Cheek, IV Vice Chairman of Board, 2001  1st Franklin Financial Corporation    A. Roger Guimond Executive Vice President and 2004  Chief Financial Officer,  1st Franklin Financial Corporation    John G. Sample, Jr. Senior Vice President and Chief Financial Officer, 2004  Atlantic American Corporation    C. Dean Scarborough Co-owner, 2004  Scarborough Men & Boys Clothes Store      Jack D. Stovall President, 1983  Stovall Building Supplies, Inc.    Robert E. Thompson Retired 1970    Keith D. Watson Vice President and Corporate Secretary, 2004  Bowen & Watson, Inc.    Executive Officers  Served in this       Name Position with Company Position Since    Ben F. Cheek, III Chairman of Board and CEO 1989    Ben F. Cheek, IV Vice Chairman of Board 2001    Virginia C. Herring President 2001    A. Roger Guimond Executive Vice President and     Chief Financial Officer 1991    A. Jarrell Coffee Executive Vice President and 2001     Chief Operating Officer    Phoebe P. Martin (Retired 12/31/05) Former Executive Vice President - 2001     Human Resources    C. Michael Haynie Executive Vice President - Effective 1/1/06     Human Resources    Kay S. Lovern Executive Vice President - Effective 1/1/06     Strategic and Organization Development    Lynn E. Cox Vice President / Secretary & Treasurer 1989    CORPORATE INFORMATION    Corporate Offices    Legal Counsel    Independent Registered Public  P.O. Box 880 Jones Day Accounting Firm  213 East Tugalo Street Atlanta, Georgia Deloitte & Touche LLP  Toccoa, Georgia 30577 Atlanta, Georgia  (706) 886-7571    Information  Informational inquiries, including requests for a Prospectus describing the Company's current securities offering or the Form 10-K annual report filed with the Securities and Exchange Commission should be addressed to the Company's Secretary.      42      BRANCH OPERATIONS         Jack C. Coker ---------- Senior Vice President    J. Michael Culpepper ---------- Vice President         Division I - South Carolina         Virginia K. Palmer ---------- Vice President    Regional Operations Directors    Patricia Dunaway  Judy E. Mayben    Michael D. Lyles  Brian L. McSwain    Bonnie E. Letempt  Roy M. Metzger         Division II - Northeast Georgia         Ronald F. Morrow ---------- Vice President    Regional Operations Directors    K. Donald Floyd  Harriet H. Moss    Shelia H. Garrett  Melvin L. Osley    Bruce A. Hooper           Division III – Northwest / Central Georgia         Ronald E. Byerly ---------- Vice President    Regional Operations Directors    Jack L. Hobgood  Michelle M. Rentz    James A. Mahaffey  Diana L. Vaughn    R. Gaines Snow           Division IV - South Georgia         Dianne H. Moore ---------- Vice President    Regional Operations Directors    Bertrand P. Brown  Jeffrey C. Lee    William J. Daniel  Thomas C. Lennon    Judy A. Landon  Marcus C. Thomas         Division V - Alabama         Michael J. Whitaker ---------- Vice President    Regional Operations Directors    Jerry H. Hughes  Hilda L. Phillips    Janice B. Hyde  Henrietta R. Reathford    Johnny M. Olive           Division VI - Louisiana and Mississippi         James P. Smith, III ---------- Vice President    Regional Operations Directors    Sonya L. Acosta  John B. Gray    Bryan W. Cook  Marty B. Miskelly    Charles R. Childress  James P. Smith, III    Jeremy R. Cranfield           ADMINISTRATION        Lynn E. Cox Vice President –    Investment Center  Pamela S. Rickman Vice President  -  Compliance / Audit  Cindy Mullin Vice President –    Information Technology   R. Darryl Parker Vice President -    Employee Development    43                 _________,________    ___________________    2005 BEN F. CHEEK, JR. "OFFICE OF THE YEAR"      *********************  ** PICTURE OF EMPLOYEES **  *********************      This award is presented annually in recognition of the office that represents the highest overall performance within the Company.  Congratulations to the entire Dothan, Alabama staff for this significant achievement.  The Friendly Franklin Folks salute you!        44                                        INSIDE BACK COVER PAGE OF ANNUAL REPORT    (Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi and South Carolina which is regional operating territory of Company and listing of branch offices)     1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES     ALABAMA  Albertville Center Point Fayette Moulton Prattville Sylacauga  Alexander City Clanton Florence Muscle Shoals Russellville (2) Troy  Andalusia Cullman Gadsden Opelika Scottsboro Tuscaloosa  Arab Decatur Hamilton Opp Selma Wetumpka  Athens Dothan Huntsville (2) Ozark    Bessemer Enterprise Jasper Pelham       GEORGIA  Adel Canton Dahlonega Glennville Manchester Stockbridge  Albany Carrollton Dallas Greensboro McDonough Swainsboro  Alma Cartersville Dalton Griffin (2) Milledgeville Sylvania  Americus Cedartown Dawson Hartwell Monroe Sylvester  Athens (2) Chatsworth Douglas (2) Hawkinsville Montezuma Thomaston  Bainbridge Clarkesville Douglasville  Hazlehurst Monticello Thomson  Barnesville Claxton East Ellijay Helena Moultrie Tifton  Baxley Clayton Eastman Hinesville (2) Nashville Toccoa  Blairsville Cleveland Eatonton Hogansville Newnan Valdosta (2)  Blakely Cochran Elberton Jackson Perry Vidalia  Blue Ridge Colquitt Fitzgerald ** Jasper Pooler  Villa Rica  Bremen Commerce Flowery Branch Jefferson Richmond Hill Warner Robins  Brunswick Conyers Forsyth Jesup Rome Washington  Buford Cordele Fort Valley LaGrange Royston Waycross  Butler Cornelia Gainesville Lavonia Sandersville Waynesboro  Cairo Covington Garden City Lawrenceville Savannah Winder  Calhoun Cumming Georgetown Madison Statesboro      LOUISIANA  Alexandria DeRidder Jena Marksville New Iberia Pineville  Crowley Franklin Lafayette Morgan City Opelousas Prairieville  Denham Springs Houma Leesville Natchitoches     DeRidder  MISSISSIPPI  Batesville Corinth Hazlehurst Kosciusko Newton Senatobia  Bay St. Louis Forest Hernando Magee Oxford Starkville  Booneville Grenada Houston McComb Pearl Tupelo  Carthage Gulfport Iuka Meridian Picayune Winona  Columbia Hattiesburg Jackson New Albany Ripley    Columbia  SOUTH CAROLINA  Aiken Chester Florence Laurens North Charleston Spartanburg  Anderson Clemson Gaffney Lexington North Greenville Summerville   Barnwell Columbia Greenville Lugoff Orangeburg Sumter   Boling Springs Conway Greenwood Marion Rock Hill Union  Cayce Dillon Greer Newberry Seneca York  Charleston Easley Lancaster North Augusta Simpsonville           **  Opened February, 2006          45          1st FRANKLIN FINANCIAL CORPORATION        MISSION STATEMENT:     "1st Franklin Financial Corporation will be a major provider of credit to individuals and families in the Southeastern United States.”          CORE VALUES:    Ø Integrity Without Compromise    Ø Open Honest Communication    Ø Doing Right by All Our Customers and Employees    Ø Teamwork and Collaboration    Ø Personal Accountability    Ø Run It Like You Own It      46        EX-15 6 exhibit15financialschedulese.htm SEC FORM 10-K / EXHIBIT 13     Form 10K  1993        Exhibit 15  Page 1 of 5      REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      To: The Board of Directors of 1st Franklin Financial Corporation    We have audited the consolidated financial statements of 1st Franklin Financial Corporation and subsidiaries (the “Company’) as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and have issued our report thereon dated March 22, 2006; such financial statements and report are included in your 2005 Annual Report to security holders 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 financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.  /s/  DELOITTE & TOUCHE LLP  Atlanta, Georgia March 22, 2006             SCHEDULE I  Page 2 of 5    CONDENSED FINANCIAL INFORMATION OF REGISTRANT  1st FRANKLIN FINANCIAL CORPORATION  (Parent Company Only)    DECEMBER 31, 2005 AND 2004    ASSETS     2005       2004          CASH AND CASH EQUIVALENTS:       Cash and Due From Banks $ 2,156,052 $ 2,649,818     Short-term Investments 242,392 734,903   2,398,444 3,384,721      LOANS:       Direct Cash Loans 241,313,264 229,043,613     Real Estate Loans 23,382,248 26,989,611     Sales Finance Contracts 30,345,466 30,510,881     295,040,978   286,544,105         Less: Unearned Finance Charges 34,661,179 34,343,193   Unearned Insurance Commissions 9,752,241 9,194,384   Allowance for Loan Losses 16,885,085 15,285,085    233,742,473 227,721,443      INVESTMENTS IN SUBSIDIARIES 76,157,561 68,529,016      MARKETABLE DEBT SECURITIES:       Available for Sale, at fair market value 645,271 506,999     Held to Maturity, at amortized cost -- --   645,271 506,999      OTHER ASSETS:       Land, Buildings, Equipment and Leasehold Improvements,          less accumulated depreciation and amortization             of $12,770,424 and $13,185,739 in 2005          and 2004, respectively  7,217,783  7,185,341     Miscellaneous 2,832,288 2,217,973   10,050,071 9,403,314                      TOTAL ASSETS $ 322,993,820 $ 309,545,493           SCHEDULE I  Page 3 of 5    CONDENSED FINANCIAL INFORMATION OF REGISTRANT  1st FRANKLIN FINANCIAL CORPORATION  (Parent Company Only)    DECEMBER 31, 2005 AND 2004    LIABILITIES AND STOCKHOLDERS' EQUITY       2005  2004     SENIOR DEBT:       Notes Payable to Banks $  9,018,370  $  10,387,000      Senior Demand Notes, including accrued interest  64,120,201   66,331,059      Commercial Paper 107,574,284 91,949,693   180,712,855 168,667,752               ACCOUNTS PAYABLE AND ACCRUED EXPENSES 11,947,883  12,915,235           SUBORDINATED DEBT 38,901,635  41,310,529                   Total Liabilities 231,562,373  222,893,516               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 170,000  170,000       Non-Voting Shares; no par value;              198,000 shares authorized; 168,300 shares issued and              outstanding as of December 31, 2005 and 2004 --  --      Accumulated Other Comprehensive Income 514,955  376,683      Retained Earnings 90,746,492  86,105,294                  Total Stockholders' Equity 91,431,447  86,651,977                           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 322,993,820   $ 309,545,493            SCHEDULE I  Page 4 of 5    CONDENSED FINANCIAL INFORMATION OF REGISTRANT  1st FRANKLIN FINANCIAL CORPORATION  (Parent Company Only)    STATEMENTS OF INCOME  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003        2005 2004 2003  INTEREST INCOME:     Finance Charges $ 69,228,623  $ 66,068,779  $ 60,773,100   Investment Income 103,791  35,621  186,703    69,332,414  66,104,400  60,959,803        INTEREST EXPENSE:     Senior Debt  6,309,551  5,073,818  4,564,880   Subordinated Debt 1,706,478  2,063,150  2,247,738    8,016,029  7,136,968  6,812,618        NET INTEREST INCOME 61,316,385  58,967,432  54,147,185        PROVISION FOR LOAN LOSSES 19,483,632  18,096,969  15,244,755        NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  41,832,632   40,870,463   38,902,430        NET INSURANCE INCOME 13,516,256  14,169,770  13,515,517        OTHER REVENUE 985,194  903,917  868,184        OPERATING EXPENSES:     Personnel Expense 35,926,511  34,312,589  31,588,132   Occupancy Expense 8,622,917  8,287,737  7,239,664   Other Expense 14,295,115  15,998,782  13,190,031    58,844,543  58,599,108  52,017,827        INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS  OF SUBSIDIARIES   (2,510,340)   (2,654,958)   1,268,304        PROVISION FOR INCOME TAXES 12,647  39,428  74,109        EQUITY IN EARNINGS OF  SUBSIDIARIES, Net of Tax  7,631,686   7,675,608   7,459,404        NET INCOME 5,108,699  4,981,222  8,653,599        RETAINED EARNINGS, Beginning of Period 86,105,294  82,622,954  78,657,682   Distributions on Common Stock 467,501  1,498,882  4,688,327   RETAINED EARNINGS, End of Period $ 90,746,492  $ 86,105,294  $ 82,622,954                SCHEDULE I  Page 5 of 5    1st FRANKLIN FINANCIAL CORPORATION  (Parent Company Only)    STATEMENTS OF CASH FLOWS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003        2005      2004      2003        CASH FLOWS FROM OPERATING ACTIVITIES:     Net Income $ 5,108,699   $ 4,981,222   $ 8,653,599       Adjustments to reconcile net income to net            cash provided by operating activities:         Provision for Loan Losses 19,483,632   18,096,969   15,244,755        Depreciation and Amortization 1,827,138   1,754,700   1,396,117        Equity in undistributed earnings of subsidiaries (7,628,545) (7,661,108) (7,445,404)      Loss on sale of marketable securities and            equipment and premium amortization on securities (354,789) 43,347    (34,396)      (Increase) Decrease in Miscellaneous Assets (614,315)  410,047  (491,249)      Increase (Decrease) in Other Liabilities (967,352)  (1,308,689)  1,024,789             Net Cash Provided 16,854,468   16,316,488   18,348,211         CASH FLOWS FROM INVESTING ACTIVITIES:        Loans originated or purchased (196,159,931) (196,761,835) (180,569,120)     Loan payments 170,655,269   165,955,472   146,558,514       Purchases of securities, available for sale --   --   --      Sales of securities, available for sale --    --    2,893,910      Redemptions of securities, available for sale --    --    2,165,000       Principal payments on securities, available for sale --    248,854   174,149       Capital expenditures (2,086,599) (3,499,585) (2,575,128)     Proceeds from sale of equipment 581,808   210,732   120,610              Net Cash Used (27,009,453) (33,846,362) (31,232,065)       CASH FLOWS FROM FINANCING ACTIVITIES:        Net increase in Notes Payable to            Banks and Senior Demand Notes (3,579,488) 8,812,994  813,460      Commercial Paper issued 44,700,469   28,626,116   29,199,674       Commercial Paper redeemed (29,075,878) (16,975,372) (17,238,336)     Subordinated Debt issued 6,669,812   5,754,767   6,053,896       Subordinated Debt redeemed (9,078,706) (8,520,172) (8,755,799)     Dividends / Distributions Paid (467,501) (1,498,882) (4,688,327)            Net Cash Provided 9,168,708   16,199,451   5,384,568         NET DECREASE IN           CASH AND CASH EQUIVALENTS (986,277)   (1,330,423)  (7,499,286)        CASH AND CASH EQUIVALENTS, beginning 3,384,721   4,715,144   12,214,430         CASH AND CASH EQUIVALENTS, ending $ 2,398,444   $ 3,384,721   $ 4,715,144       Cash paid during the year for: Interest $ 7,964,734  $ 7,101,750  $ 6,823,904     Income Taxes 50,125   39,856   93,940             EX-21 7 exhibit21subisidiariesedgar.htm SEC FORM 10-K / EXHIBIT 21     Converted by EDGARwiz          Exhibit 21        SUBSIDIARIES OF REGISTRANT    Franklin Securities, Inc., a Georgia corporation, was incorporated on May 4, 1982, as a wholly owned subsidiary to handle securities transactions.  This Company does not currently engage in any securities transactions.  Frandisco Property and Casualty Insurance Company, a Georgia corporation, was incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure the property and casualty insurance policies written by the Company in connection with its credit transactions.  Frandisco Life Insurance Company of Georgia, a Georgia corporation, was incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure the life and the accident and health insurance policies written by the Company in connection with its credit transactions.  Effective December 27, 1990, Frandisco Life Insurance Company of Georgia was merged with Frandisco Life Insurance Company of Arizona (incorporated on August 16, 1978 as a wholly owned subsidiary), with Frandisco Life Insurance Company of Georgia becoming the surviving Company.   T & T Corporation, a Georgia corporation, is a 50% owned subsidiary of the Company.  This corporation owns a building adjacent to the Company’s headquarters which the Company leases.              EX-23 8 exhibit23auditorsconsentedga.htm SEC FORM 10-K / EXHIBIT 23     Converted by EDGARwiz       Exhibit 23        Consent of Independent Registered Public Accounting Firm      We consent to the incorporation by reference in Registration Statement No. 333-126589 on Form S-2 of our reports dated March 22, 2006, relating to the consolidated financial statements and financial statement schedule of 1st Franklin Financial Corporation, appearing in and incorporated by reference in this Annual Report on Form 10-K of 1st Franklin Financial Corporation for the year ended December 31, 2005.     /s/ Deloitte & Touche LLP  Atlanta, Georgia March 22, 2006           EX-31 9 exhibit311certificationedgar.htm SEC FORM 10-K / EXHIBIT 31.1     Exhibit 31         Exhibit 31.1      RULE 13a-14(a)/15d-14(a)  CERTIFICATIONS    I,  Ben F. Cheek, III, certify that:  1. I have reviewed this annual report on Form 10-K of 1st Franklin Financial Corporation;  2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;  4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.    Date: March  22, 2006 /s/ Ben F. Cheek, III Ben F. Cheek, III Chairman and Chief Executive Officer             EX-31 10 exhibit312certificationedgar.htm SEC FORM 10-K / EXHIBIT 31.2     Exhibit 31         Exhibit 31.2      RULE 13a-14(a)/15d-14(a)  CERTIFICATIONS    I,  A. Roger Guimond, certify that:  1. I have reviewed this annual report on Form 10-K of 1st Franklin Financial Corporation;  2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;  4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.    Date: March  22, 2006 /s/ A. Roger Guimond A. Roger Guimond Executive Vice President and Chief Financial Officer             EX-32 11 exhibit321certificationedgar.htm SEC FORM 10-K / EXHIBIT 32.1     1st FRANKLIN FINANCIAL CORPORATION         Exhibit 32.1      1st FRANKLIN FINANCIAL CORPORATION  213 EAST TUGALO STREET  P.O. BOX 880  TOCCOA, GEORGIA  30577  TELEPHONE:  (706) 886-7571      March  22, 2006      Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002    Ladies and Gentlemen:    Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1st Franklin Financial Corporation (the "Company") for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:     (1) The Report fully complies with the requirements of Section 13(a) or 15(d)  of the Securities Exchange Act of 1934; and     (2) The information contained in the Report fairly presents, in all material  respects, the financial condition and results of operations of the Company  as of the dates and for the periods expressed in the Report.          /s/ Ben F. Cheek, III  Name:  Ben F. Cheek, III  Title:  Chairman and Chief Executive Officer                       EX-32 12 exhibit322certificationedgar.htm SEC FORM 10-K / EXHIBIT 32.2     Exhibit 32         Exhibit 32.2      1st FRANKLIN FINANCIAL CORPORATION  213 EAST TUGALO STREET  P.O. BOX 880  TOCCOA, GEORGIA  30577  TELEPHONE:  (706) 886-7571      March 22, 2006      Re: Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002    Ladies and Gentlemen:    Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1st Franklin Financial Corporation (the "Company") for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:     (1) The Report fully complies with the requirements of Section 13(a) or 15(d)  of the Securities Exchange Act of 1934; and     (2) The information contained in the Report fairly presents, in all material  respects, the financial condition and results of operations of the Company  as of the dates and for the periods expressed in the Report.          /s/ A. Roger Guimond  Name:  A. Roger Guimond  Title:  Executive Vice President and              Chief Financial Officer                   -----END PRIVACY-ENHANCED MESSAGE-----