SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

------------------------------

(X)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2008

OR

(  )

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

EXCHANGE ACT OF 1934

For the transition period from __________to _________

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Commission File Number 2-27985

1^st FRANKLIN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Georgia

58-0521233

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

135 East Tugalo Street

Post Office Box 880

Toccoa, Georgia

30577

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code:  (706) 886-7571

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  __   No   X 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  __   No   X 

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

(Cover page 1 of 2 pages)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    X 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company”” in Rule 12b-2 of the Exchange Act.  (Check one):  

Large Accelerated Filer __     Accelerated Filer __     Non Accelerated Filer  X  

Smaller Reporting Company  __

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter:   Not Applicable.

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

Class

Outstanding at February 28, 2009

Common Stock, $100 Par Value

1,700 Shares

Non-Voting Common Stock, No Par Value

168,300 Shares

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2008 are incorporated by reference into Parts I and II of this Form 10-K.

(Cover page 2 of 2 pages)

PART I

Item 1.

BUSINESS:

The Company, Page 1 and Business, Pages 4-11, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 2008 (the “Annual Report”) are incorporated herein by reference.

Item 1A.

RISK FACTORS:

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

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

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

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

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

Our liquidity depends on, and we fund our operations through, the sale of our debt securities, the collection of our receivables and the continued availability of borrowings under our credit agreement.  Numerous available investment alternatives have resulted in investors evaluating more critically their investment opportunities.  We cannot assure you that our debt securities will offer interest rates and redemption terms which will generate sufficient sales to meet our liquidity requirements.  In addition, our current credit agreement terminates in December 2009.  While we are in the process of negotiating a new credit agreement, no assurances can be provided that we will be able to do so on commercially reasonable terms, in a timely manner, or at all.

As described more fully elsewhere in this Annual Report, our senior demand notes can be redeemed at any time without penalty.  Our variable rate subordinated debentures are subject to redemption by investors at the end of any interest adjustment period prior to their maturity at the option of the debenture holder and may be requested to be redeemed during an interest adjustment period, although we are not obligated to accept requests for redemption of debentures during any interest adjustment period, and any of those requests are subject to one-half the interest earned since the most recent interest adjustment date, if applicable, or the purchase date.  It is possible that a significant number of redemption requests could adversely affect our liquidity.

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

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

In either event, any reduced liquidity due to any of the reasons above could negatively impact our ability to pay the principal and interest on any of our outstanding debt securities when due.

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

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

Current economic conditions are negatively affecting our operations and profitability, and we cannot assure you that our operations and profitability will not continue to be negatively affected.

Rising unemployment and other factors typical of recessionary economic cycles are affecting our investors’, customers’, and potential investors’ and customers’ disposable income, confidence, and spending patterns and preferences, which in turn are negatively impacting our sales of investment securities and our customers’ ability to repay their obligations to us.  As a result, we have increased our provision for credit losses in order to set our allowance for credit losses at a level deemed appropriate by Management.  This increase in our provision for loan losses has had a negative impact on our operations and profitability.  Should the current economic conditions continue or worsen, our operations and profitability could continue to be materially and adversely affected.

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

Net interest margin represents the difference between the amount that we earn on loans and investments and the amount that we pay on debt securities and other borrowings.  The loans we make in the ordinary course of our business are subject to the interest rate and regulatory provisions of each applicable state's lending laws and are sometimes made at fixed rates which are not adjustable during the term of the loan. Since some loans are made at fixed interest rates and are made using the proceeds from the sale of our fixed and variable rate securities, we may experience a decrease in our net interest margin because increased interest costs cannot be passed on to all of our loan customers.  A reduction in our net interest margin could adversely affect our ability to make payments on our outstanding debt securities.

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

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

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

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

•

require that we obtain and maintain certain licenses and qualifications;

•

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

•

require specified disclosures to borrowers;

•

limit or prescribe other terms of our loans;

•

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

•

define our rights to repossess and sell collateral.

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

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

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

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

We are continuing to devote resources to comply with various provisions of the Sarbanes-Oxley Act, and this may reduce the resources we have available to focus on our core business.

In order to ensure compliance with the various provisions of the Sarbanes-Oxley Act, we are required to, among other things, evaluate our internal controls to allow management to report on, and, with respect to future fiscal years, to allow our independent registered public accounting firm to attest to, our internal controls over financial reporting.  While we have completed this evaluation for 2008, we are continuing to evaluate our internal controls and business processes which are required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act in the future. During the course of our future testing, we may identify deficiencies which we may not be able to remediate in time to meet any future deadline for compliance with Section 404.  The processes involved in testing and maintaining internal controls also involve significant costs and can divert our management's attention from other matters that are important to our business.  Among other things, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404, and our independent auditors may not be able or willing to issue a favorable opinion on our internal controls.  Either of these, or any other failures to comply with the various requirements of the Sarbanes-Oxley Act, may require significant management time and expenses, and divert attention or resources away from our core business.

Item 1B.

UNRESOLVED STAFF COMMENTS:

Not Applicable.

Item 2.

PROPERTIES:

Paragraph 1 of The Company, Page 1; paragraph 1 (and the accompanying table) of Footnote 8 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements, Page 35; and map of branch offices, page 44 of the Annual Report, are incorporated herein by reference.

Item 3.

LEGAL PROCEEDINGS:

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

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

No matters were submitted to a vote of security holders during the quarter ended December 31, 2008.

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES:

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

Item 6.

SELECTED FINANCIAL DATA:

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

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS:

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Pages 12-20 of the Annual Report is incorporated herein by reference.

Item 7A.

QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk sub-heading, Page 16 of the Annual Report is incorporated herein by reference.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

Report of Independent Registered Public Accounting Firm and the Company’s Consolidated Financial Statements and Notes thereto, Pages 21-41 of the Annual Report are incorporated herein by reference.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE:

Not applicable.

Item 9A.

CONTROLS AND PROCEDURES:

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.    Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures under Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934 were effective at December 31, 2008.

There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  Based on this evaluation, Management believes that internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), was effective as of December 31, 2008.

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

Item 9B.

OTHER INFORMATION:

None.

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Forward Looking Statements:

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

PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS

Position(s)

Name of Director

Age

Director Since  

with Company

Ben F. Cheek, III  (3)(5)

72

1967

Chairman of Board /

Chief Executive Officer

Ben F. Cheek, IV (3)(4)(5)

47

2001

Vice Chairman

A. Roger Guimond (3)(5)

54

2004

Executive Vice President / Chief Financial Officer

John G. Sample, Jr. (1)(2)(5)

52

2004

None

C. Dean Scarborough (1)(2)(5)

54

2004

None

Robert E. Thompson (1)(2)(5)

76

1970

None

Keith D. Watson (1)(2)(5)

51

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.   For more than five years prior to 2006, Mr. Scarborough was co-owner of Scarborough’s Men’s Store.  He sold his interest in this business in 2006 and now is involved in real estate sales.  Dr. Thompson is a retired physician.  Mr. Watson is Vice President and Corporate Secretary of Bowen & Watson, Inc., a general contracting company, Mr. Watson has been in his position of employment, and Dr. Thompson has been retired, for more than five years.

(3)

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

(4)

Son of Ben F. Cheek, III.

(5)

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

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

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

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

The Company is a family owned business in which Ben F. Cheek, III is the majority shareholder.  Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining the responsibilities thereof.  The Company’s Executive Management Team (the “EMT”) consisting of executive officers 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 Culpepper, and Ms. Herring and Ms. Lovern.   Additional information concerning the processes and procedures for the consideration and determination of executive officer and director compensation is contained under the heading “Compensation Discussion and Analysis” below.

EXECUTIVE OFFICERS

Name, Age, Position(s)

and Family Relationship

Business Experience

Ben F. Cheek, III, 72

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,  47

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, 45

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.

Name, Age, Position(s)

and Family Relationship

Business Experience

A.

Roger Guimond, 54

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.

J. Michael Culpepper, 54

Executive Vice President, Chief Operating

    Officer

No Family Relationship

Joined the Company in 1979, became Supervisor in 1984, Area Vice President in 1996, Vice President in 2001 and Executive Vice President and Chief Operating Officer in 2006.  

C. Michael Haynie, 54

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, 50

Executive Vice President –

     Strategic and Organization Development

No Family Relationship

Joined the Company in 2000 as Director of Training and Development.  Became Executive Vice President – Strategic and Organization Development on January 1, 2006.

Charles E. Vercelli, Jr., 48

Executive Vice President –

     General Counsel

No Family Relationship

Joined the Company in 2008 as Executive Vice President – General Counsel.

Lynn E. Cox, 51

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 officer, principal financial officer, principal accounting officer and controller, or any persons performing similar functions, as well as to its Directors and other employees.  A copy of this code of ethics is publicly available on the Company’s website at:   http//www.1ffc.com.  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.

Item 11.  EXECUTIVE COMPENSATION:

Compensation Discussion and Analysis

Overall Philosophy:

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

Role of Executive Officers in Compensation Decisions:

The Company is a family-owned business in which Ben F. Cheek, III, the Chairman and Chief Executive Officer, is the majority stockholder.  Because of the closely-held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions).  The Executive Management Team (the “EMT”), consisting of executive officers of the Company, establishes the bases for all executive officer compensation, which compensation is approved by Mr. Cheek, III.  The EMT consists of Messrs. Cheek, III, Cheek IV, Guimond, Haynie, Culpepper and Vercelli, and Ms. Herring and Ms. Lovern.

Components of Compensation:

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

Base Salary:

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

Bonus Awards:

Bonus amounts paid to the executive officers include discretionary bonuses and may include certain cash bonuses from time to time for special recognition, each determined at the discretion of the EMT and approved by the Chief Executive Officer.  The EMT may consider, among other factors, the Company’s inability to grant equity-based award to its officers and employees, as described below, when determining whether and to what extent to make awards.  In November, 2008 and 2007, the executive officers were paid a holiday bonus of 4% of their respective base salaries.   In addition to the 4% bonus, Mr. Cheek, III  retains the discretion to award certain additional amounts.  In 2008, Mr. Guimond was awarded an additional discretionary bonus in recognition of his continued contributions and service to the Company and its subsidiaries (for which he received no separate compensation during such period).

Non-Equity Incentive Compensation:

The Company’s stock is not traded or quoted on any national securities exchange or association, but rather is closely held by the Mr. Cheek, III, and his family.  As a result, the Company does not grant stock or other equity based awards.  In consideration of this and other factors, and in order to provide certain known targets, the achievement of which would trigger the payment of additional compensation, the EMT has, historically, adopted annual incentive compensation plans.  For Example, in January 2008 the EMT approved the Company’s 2008 Bonus Plan (the “2008 Bonus Plan”).  

The 2008 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 2008 Bonus Plan, a minimum pre-tax income threshold of $12.0 million was established as a baseline goal to be achieved in order for any payouts to be made under such Plan.  The EMT determined that pre-tax income was an appropriate measure upon which to evaluate our annual performance due to the Company’s status as an S Corporation which generally does not pay corporate income taxes.  

If that threshold is met, payouts under the 2008 Bonus Plan were based on the number of other strategic goals met by the Company.  For 2008, the EMT identified five strategic goals in addition to the minimum pre-tax income threshold goal.  Each goal was chosen as a critical metric for the continued growth and financial soundness of the Company based on the impact the achievement of such goals has on the Company’s results of operations and financial condition.  The goals are:

(i)

Minimum 7.50% corporate net receivables growth;

(ii)

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

past due, not to exceed 11.50% of outstanding receivables;

(iii)     $18.0 million minimum pre-tax income goal (separate from minimum threshold goal);

(iii)     Maximum corporate expense / revenue ratio of 90.0% or less; and

(iv)     Minimum 4.00% return on assets.

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

No. of Strategic Goals Met

Bonus Payout (% of Salary)

1

5% - 25%

2

5% - 35%

3

5% - 45%

4

5% - 55%

5

5% - 65%

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

Deferred Compensation:

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

As a result of certain federal limitations on the ability of management or highly compensated employees (within the respective meanings of Section 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974) to participate in such plans, Management determined to establish the Company’s Executive Nonqualified Deferred Compensation Plan) (the “Deferred Compensation Plan”).  Pursuant to the plan, the Company annually credits the account of each participant who received more than the Section 401(a)(17) salary limit (as described in the Internal Revenue Code of 1986) with a discretionary amount that is usually, but not always, equal to the amount the participant would have received as a 401(k) Company matching contribution on the amount of their salary above the 401(a)(17) limit had they been allowed to defer 6% of that amount into the qualified plan.  Management determined that it was appropriate to offer the Deferred Compensation Plan, and the matching contribution consistent with the level provided by employees generally, to such persons as if they were eligible to participate in Company sponsored plans open to other employees.

Perquisites and Other Compensation:

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

The Company’s executive officers are provided the use of Company-owned automobiles and granted a travel allowance to cover certain costs of business-related travel when an overnight stay is not required and the Company’s travel expense policy is not otherwise involved.  These amounts are included in the taxable income of the executive officers.  In addition, the Company generally provides certain insurance benefits to its employees and executive officers.  This includes long-term disability and travel accident insurance (which pays a benefit upon the occurrence of certain specific events), as well as basic life and accidental death insurance coverage, which coverage is provided on a graduated scale based on seniority.  In addition, in recognition of those individuals with twenty or more years of experience with the Company, the Company provides them certain excess medical benefits not covered by the Company’s traditional medical plans.  In 2008 Messrs. Cheek, III, Cheek, IV, Guimond and Culpepper received this benefit.  In addition, during 2008, Messrs. Cheek, III and Cheek, IV, and Ms. Herring, based on positions as shareholders and executive officers, were determined eligible to participate in the Company’s medical expenses reimbursement program (“MERP”), which provides reimbursement for amounts not otherwise covered under policies for which these officers are eligible to participate in.

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

Employment Agreements and Change in Control Arrangements:

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

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

Compensation Committee Report:

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

The Board of Directors:

Ben F. Cheek, III

C. Dean Scarborough

Ben F. Cheek, IV

Robert E. Thompson

A. Roger Guimond

Keith D. Watson

John G. Sample, Jr.

Summary Compensation Table

Name and

Principal

Position

Year

Salary

Bonus (1)

Non-Equity

Incentive

Plan

Compensation (2)

Change in

Pension Value

And Non-Qualified Deferred

Compensation

Earnings

All

Other

Compensation

(3)

Total

Ben F. Cheek, III

  Chairman and

  CEO

2008

2007

2006

$

240,000

$

240,000

$

240,000

$

9,600

$

9,600

$

9,600

$

-

$

-

$

-

$

-

$

-

$

-

$

121,749

$

117,393

$

119,731

$

371,349

$

366,993

$

369,331

Ben F. Cheek, IV

  Vice Chairman

2008

2007

2006

$

197,917

$

173,424

$

154,000

$

7,917

$

6,937

$

6,160

$

39,583

$

104,054

$

84,700

$

-

$

-

$

-

$

45,687

$

37,817

$

34,970

$

291,104

$

322,232

$

279,830

Virginia C. Herring

  President

2008

2007

2006

$

197,917

$

173,424

$

154,000

$

7,917

$

6,937

$

6,160

$

39,583

$

104,054

$

84,700

$

$

-

$

-

$

35,948

$

32,349

$

22,561

$

281,365

$

316,764

$

267,421

A. Roger Guimond

  Executive Vice President

  And Chief Financial

  Officer

2008

2007

2006

$

289,230

$

277,800

$

263,550

$

23,751

$

25,469

$

49,254

$

101,231

$

180,570

$

171,308

$

$

-

$

-

$

52,532

$

35,358

$

27,352

$

466,744

$

519,197

$

511,464

J. Michael Culpepper

  Executive Vice President

  And Chief Operating

  Officer

2008

2007

2006

$

217,860

$

203,000

$

179,650

$

8,714

$

8,120

$

7,186

$

76,251

$

131,950

$

116,773

$

$

-

$

-

$

15,425

$

7,972

$

35,619

$

318,250

$

351,042

$

339,228

(1)

Consists of a bonus paid at the discretion of the EMT and approved by the Chief Executive Officer.  The bonus was equal to 4% of salary.  Mr. Guimond was also paid an additional discretionary bonus each year.

(2)

Consists of payouts under the Company’s 2008, 2007 and 2006 Bonus Plans.  Amounts under the 2008 Bonus Plan were paid in 2009 but deemed earned in 2008 based on the Company’s 2008 performance.   Amounts under the 2007 Bonus Plan were paid in 2008 but deemed earned in 2007 based on the Company’s 2006 performance.  Amounts under the 2006 Bonus Plan were paid in 2007 but deemed earned in 2006 based on the Company’s 2006 performance.

(3)

All other compensation for executive officers is detailed as follows:

Name

Year

Personal

Use of

Company

Auto

Travel

Allowance

Insurance

Premiums

Director

Fees (1)

Relocation

Reimburse-

ment  (2)

Company

Contribution

To Deferred

Comp Plan

Other (3)

Total

Ben F. Cheek, III

2008

2007

2006

$

7,346

$

8,825

$

11,105

$

2,400

$

2,400

$

2,400

$

7,720

$

3,415

$

3,518

$

-

$

-

$

-

$

-

$

-

$

-

$

3,461

$

1,931

$

1,886

$

100,822

$

100,822

$

100,822

$

121,749

$

117,393

$

119,731

Ben F. Cheek, IV

2008

2007

2006

$

385

$

389

$

204

$

2,400

$

2,400

$

2,400

$

4,094

$

1,618

$

1,956

$

15,000

$

15,000

$

12,000

$

-

$

-

$

-

$

5,398

$

-

$

-

$

18,410

$

18,410

$

18,410

$

45,687

$

37,817

$

34,970

Virginia C. Herring

2008

2007

2006

$

5,750

$

8,955

$

553

$

2,400

$

2,400

$

2,400

$

3,990

$

2,584

$

1,198

$

-

$

-

$

-

$

-

$

-

$

-

$

5,398

$

-

$

-

$

18,410

$

18,410

$

18,410

$

35,948

$

32,349

$

22,561

A. Roger Guimond

2008

2007

2006

$

-

$

-

$

-

$

2,400

$

2,400

$

2,400

$

2,287

$

2,077

$

2,036

$

15.000

$

15,000

$

12,000

$

-

$

-

$

-

$

32,845

$

15,881

$

10,916

$

-

$

-

$

-

$

52,532

$

35,358

$

27,352

J. Michael Culpepper

2008

2007

2006

$

617

$

589

$

324

$

2,400

$

2,400

$

2,400

$

1,994

$

1,770

$

1,649

$

-

$

-

$

-

$

-

$

-

$

30,744

$

10,414

$

3,213

$

502

$

$

-

$

-

$

15,425

$

7,972

$

35,619

(1)

Messrs. Cheek IV and Guimond, both Directors of the Company elected to receive their 2008 director fees as deferred compensation.  See “Executive Non Qualified Deferred Compensation Plan” and “Director Fees” below.

(2)

Mr. Culpepper was promoted to Executive Vice President and Chief Operating Officer in 2006.  In connection with the relocation of his primary residence at the Company’s request, he was provided with a relocation stipend.

(2)

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.  Shareholders of Franklin Enterprises, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own 66.67% and 11.11% of the shares of Franklin Enterprises, respectively. Ms. Herring, an Executive Officer, owns 11.11% of Franklin Enterprises, Inc.  The amounts included in “Other” compensation are the pro rata amounts, based on such ownership, paid by the Company to Franklin Enterprises, Inc.  

The Company leases its Clarkesville, Georgia branch office for a total of $400 per month from Cheek Investments, Inc. under a lease which expires on June 30, 2010.  Shareholders of Cheek Investments, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own .50% and 33.17% of the shares in Cheek Investments, respectively. Ms. Herring, an Executive Officer, owns 33.17% Cheek Investments, Inc.  The amounts included in “Other” compensation of each such person include the pro rata amounts, based on such ownership, paid by the Company to Cheek Investments, Inc.

Compensation Committee Interlocks and Insider Participation

The Company is a family owned business in which Ben F. Cheek, III is the majority shareholder.  Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining there responsibilities thereof.  The EMT establishes the bases for all executive compensation, which compensation is approved by Mr. Cheek, III.

During 2008, none of the Company’s executive officers served as a member of the board of directors or compensation committee of any entity for which a member of our Board served as an executive officer.

Executive Nonqualified Deferred Compensation Plan

Any management or highly compensated employee who has been designated by the Administrative Committee for the Company’s Deferred Compensation Plan as an eligible employee may participate in the Company’s Executive Nonqualified Deferred Compensation Plan (the “Plan”).   Outside directors are also eligible to defer their respective director fees into the Deferred Compensation Plan.

The Plan does not require any contribution to be made by a participant therein.

Interest is credited on the participant’s account on the last day of each quarter at an interest rate equal to the average of the interest rate during such quarter paid on the Company’s Variable Rate Subordinated Debentures with a one-year interest adjustment period.

Nonqualified Deferred Compensation Table

Name

Executive

Contributions

In Last

Fiscal Year (1)

Registrant

Contributions

In Last

Fiscal Year (2)

Aggregate

Earnings

In Last

Fiscal Year

Aggregate

Withdrawals /

Distributions

Aggregate

Balance

At Last

Fiscal Year

End

Ben F. Cheek, III

$

-

$

3,461

$

33,851

$

-

$

651,476

Ben F. Cheek, IV

$

15,000

$

5,398

$

136

$

-

$

20,534

Virginia C. Herring

$

-

$

5,398

$

100

$

-

$

5,498

A. Roger Guimond

$

15,000

$

32,845

$

7,721

$

-

$

179,500

J. Michael Culpepper

$

-

$

10,414

$

493

$

-

$

15,231

(1)

Consists of compensation for service as a member of the Company’s Board of Directors voluntarily deferred by such person.  See “Directors Compensation Table” below.

(2)

Company contributions are included in the “All Other Compensation” portion of the Summary Compensation Table above.

Director Compensation

Name

Fees

Earned

Or

Paid In

Cash

All

Other

Compensation

Total

Ben F. Cheek, III

$       --

$       --

$       --

Ben F. Cheek, IV

$15,000

$       --

$15,000

A. Roger Guimond

$15,000

$       --

$15,000

John G. Sample, Jr.

$15,000

$   750

$15,750

C. Dean Scarborough

$15,000

$       --

$15,000

Jack D. Stovall (1)

$15,000

$       --

$15,000

Robert E. Thompson

$15,000

$       --

$15,000

Keith D. Watson

$15,000

$       --

$15,000

The Board of Directors has determined that the members thereof, whether or not such members are executive officers of the Company, are entitled to receive $15,000 per year for service as a member of the Board of Directors, including service on any committee thereof.  In addition, Mr. Sample also received $750 in travel-related expenses to attend meetings.  Messrs. Cheek IV, Guimond, Sample and Watson elected to receive their 2008 director fees as deferred compensation.  Mr. Cheek, III elected to waive any fees otherwise due to him for his service as a director in 2008.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS:

(a)

Security Ownership of Certain Beneficial Owners:

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 as of December 31, 2008.  Each such person has sole “beneficial” ownership of such shares (as described in applicable SEC rules relating to share ownership).

Name and Address of

Amount and Nature of

Percent of

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%

837 Beaver Dam Rd.

Toccoa, Georgia  30577

Virginia C. Herring

Voting Common Stock

180 Shares - Direct

10.59%

1135 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:

Ownership listed below represents ownership in each class of equity securities of the Company as of December 31, 2008, 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.  Except as described below, each person has sole voting and dispositive power over such shares.

Amount and Nature of

Percent of

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       

   .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 (1)

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

75,794 Shares – Indirect (1)

45.04%

A. Roger Guimond

Voting Common Stock

None

None

Non-Voting Common Stock

None

None

J. Michael Culpepper

Voting Common Stock

None

None

Non-Voting Common Stock

None

None

John G. Sample, Jr.

Voting Common Stock

None

None

Non-Voting Common Stock

None

None

C. Dean Scarborough

Voting Common Stock

None

None

Non-Voting Common Stock

None

None

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

  .34%

(12 persons)

Non-Voting Common Stock

151,589 - Indirect (1)

90.07%

(1)

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

(c)

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

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE:

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

The Company leases its home office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2010.  Shareholders of Franklin Enterprises, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own 66.67% and 11.11% of the shares of Franklin Enterprises, Inc., respectively. Ms. Herring, an Executive Officer, owns 11.11% of Franklin Enterprises, Inc.  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 $400 per month from Cheek Investments, Inc. under a lease which expires June 30, 2010. Shareholders of Cheek Investments, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own .50%% and 33.17% of the shares of Cheek Investments, Inc., respectively. Ms. Herring, an Executive Officer, owns 33.17% of Cheek Investments, Inc..  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 (the adult son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock.  The loan was renewed on January 14, 2008.  The balance on this commercial loan (including principal and accrued interest) was $932,385 at December 31, 2008.  The maximum amount outstanding during the year was $1,677,762.  A total of $861,133 in principal and interest payments were applied against this loan during 2008.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. Interest is currently computed at an annual rate of 4.25%.  The interest rate adjusts whenever the prime rate changes.

Effective September 23, 1995, the Company and Deborah A. Guimond, Trustee of the Guimond Trust (an irrevocable life insurance trust, the “Trust”) entered into a Split-Dollar Life Insurance Agreement.  The life insurance policy insures A. Roger Guimond, Executive Vice President and Chief Financial Officer of the Company.  As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust.  The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate.  A payment of $6,888 for interest accrued during 2008 was applied to the loan on December 23, 2008.   No principal payments on this loan were made in 2008.  The balance on this loan at December 31, 2008 was $231,318.  This was the maximum loan amount outstanding during the year.

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

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES:

The Company was billed for professional services provided during fiscal years 2008 and 2007 by Deloitte & Touche LLP in the amounts set out in the following table, all of which were pre-approved by the Audit Committee.  Other than as set out below, the Company was not billed for any services provided by Deloitte & Touche LLP.

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

Fee

Fee

Amount

Amount

2008

2007

Services Provided:

Audit Fees (1)

$

277,700

$

254,600

Tax Fees (2)

63,710

79,545

Total

$

341,410

$

334,145

(1)

Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2008 and December 31, 2007, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2008 and 2007 fiscal years.  Included in these amounts are fees of $10,500 and $4,000 for 2008 and 2007, respectively, related to review of registration statements.

(2)

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

All audit and non-audit services to be performed by the Company’s independent registered public accounting firm must be approved in advance by the Audit Committee. Pursuant to the Audit Committee Pre-Approval Policy (the “Policy”), and as permitted by 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 joint statement as to whether, in their view, the request is consistent with Securities and Exchange Commission rules on auditor independence.

 PART IV

Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:

(a)

(1)

Financial Statements:

Report of Independent Registered Public Accounting Firm.

Consolidated Statements of Financial Position at December 31, 2008 and 2008.

Consolidated Statements of Income for the three years ended December 31, 2008.

Consolidated Statements of Stockholders’ Equity for the three years ended

December 31, 2008.

Consolidated Statements of Cash Flows for the three years ended December 31, 2008.

Notes to Consolidated Financial Statements.

(2)

Financial Statement Schedule:

Report of Independent Registered Public Accounting Firm.

Condensed Statements of Financial Position at December 31, 2008 and 2007.

Condensed Statements of Income for the three years ended December 31, 2008.

Condensed Statements of Cash Flows for the three years ended December 31, 2008.

(3)

Exhibits:

3.

(a)

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

(b)

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

4.

(a)

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

(b)

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

(c)

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

(d)

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

(e)

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

(f)

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

(g)

Form of Senior Demand Note (incorporated by reference to Exhibit 4(b) to the Company’s Registration Statement on Form S-1, File No. 333-148331).

9.

Not applicable

10.

(a)

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

(b)

Form of the Company’s 2008 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 30, 2008).

(c)

Director Compensation Summary Term Sheet (incorporated by reference to Exhibit 10(c) to Form 10-K dated March 20, 2008).

(d)

Form of the Company’s 2009 Executive Bonus Plan. *

11.

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

12.

Ratio of Earnings to Fixed Charges.

13.

Annual Report.

15.

Financial Statement Schedules.

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.

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   27,  2009

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 27, 2009

(Ben F. Cheek, III)

Chairman of Board;

Chief Executive Officer

/s/ Ben F. Cheek, IV

(Ben F. Cheek, IV)

Vice Chairman

March 27, 2009

/s/ Virginia C. Herring

(Virginia C. Herring)

President

March 27, 2009

/s/ A. Roger Guimond

(A. Roger Guimond)

Executive Vice President;

March 27, 2009

Principal Financial Officer

Principal Accounting Officer;

Director

/s/ John G. Sample, Jr.

(John G. Sample, Jr.)

Director

March 27, 2009

/s/ C. Dean Scarborough

(C. Dean Scarborough)

Director

March 27, 2009

/s/ Robert E. Thompson

(Robert E. Thompson)

Director

March 27, 2009

/S/ Keith D. Watson

(Keith D. Watson)

Director

March 27, 2009

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, 2008, which is filed as Exhibit 13 hereto.  Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements.

1^st FRANKLIN FINANCIAL CORPORATION

INDEX TO EXHIBITS

Exhibit

No.

Description

Page

No.

10(d)

Form of the Company’s 2009 Executive Bonus Plan

27

12

Ratio of Earnings to Fixed Charges

30

13

Annual Report

31

15

Financial Statement Schedule

78

21

Subsidiaries of Registrant

83

23

Consent of Independent Registered Public Accounting Firm

84

  31.1

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

85

  31.2

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

86

  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   

87

  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   

88