<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2000

                        COMMISSION FILE NUMBER: 330-23469

                          FRANKLIN FINANCE CORPORATION
             (Exact name of registrant as specified in its charter)

                      MICHIGAN                              38-3372606
          (State or other jurisdiction of                (I.R.S. Employer
           Incorporation or organization)               Identification No.)

                  24725 West Twelve Mile Road
                        Southfield, MI                        48034
           (Address of principal executive office)          (Zip code)

                                 (248) 358-4710
              (Registrant's telephone number, including area code)

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

Title of each class                  Name of each exchange on which registered
-----------------------------------  ------------------------------------------
8.70% Noncumulative Exchangeable     Nasdaq National Market
Preferred Stock, Series A

Securities registered pursuant to Section 12(g) of the Act:
               N/A
-------------------------------------------------------------------------------
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X  No
    ---    ---

Indicate by check mark 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]

The number of shares outstanding of the registrant's sole class of common stock
is 22,077 shares, $300 par value, as of December 31, 2000. All of the shares of
common stock were held by Franklin Bank at December 31, 2000; accordingly, no
common stock is held by non-affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
None


<PAGE>   2



                          FRANKLIN FINANCE CORPORATION
                        --------------------------------

                                TABLE OF CONTENTS
                                -----------------
                                     PART I

ITEM 1. BUSINESS..........................................................   3
ITEM 2. PROPERTIES........................................................   5
ITEM 3. LEGAL PROCEEDINGS.................................................   6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............   6

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        SHAREHOLDER MATTERS...............................................   6
ITEM 6. SELECTED FINANCIAL DATA...........................................   8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS...............................   9
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK.......................................................  16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................  17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE............................  28

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............  28
ITEM 11. EXECUTIVE COMPENSATION...........................................  29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
         OWNERS AND MANAGEMENT............................................  29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................  29

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K..............................................  31


Except for the historical information contained herein, the matters discussed
herein may be deemed to be forward-looking statements that involve risk and
uncertainties. Words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Factors which could cause
actual results to differ include, but are not limited to, fluctuations in
interest rates, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, the acceptance of new products, the
impact of competitive products and pricing, and the other risks detailed from
time to time in the Company's SEC reports. These forward-looking statements
represent the Company's judgment as of the date of this report. The Company
disclaims, however, any intent or obligation to update these forward-looking
statements.

                                       2
<PAGE>   3


                                     PART I

ITEM 1. BUSINESS

GENERAL

Franklin Finance Corporation ("Company") is a Michigan corporation incorporated
on September 25, 1997, and created for the purpose of acquiring and holding real
estate mortgage assets. The Company elected to be treated as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
("Code"), and generally will not be subject to Federal income tax to the extent
that it distributes its earnings to its shareholders and maintains its
qualification as a REIT. All of the shares of the Company's common stock, par
value $300.00 per share ("Common Stock"), are owned by Franklin Bank, N.A., a
nationally chartered and federally insured national bank ("Bank"). The Company
was formed by the Bank to provide the Bank with a cost-effective means of
raising capital.

On December 22, 1997, the Company offered to the public and sold 2,070,000
shares of the Company's 8.70% noncumulative exchangeable preferred stock, Series
A, liquidation preference $10.00 per share ("Series A Preferred Shares").
Simultaneous with the consummation of the preferred stock offering, the Bank
purchased Common Stock in the amount of $20.9 million, net of offering cost.

The Company used the net proceeds raised from the initial public offering of the
Series A Preferred Shares and the sale of the Common Stock in the Bank to
purchase from the Bank the Company's initial portfolio of $41.5 million
residential and commercial mortgage loans ("Mortgage Loans") at their estimated
fair value.

The Company's principal executive office is located at 24725 Twelve Mile Road,
Southfield, Michigan 48034. The Company's telephone number at such address is
(248) 358-4710.

The Company's principal business is to acquire, hold and manage mortgage loans
that will generate net income for distribution to shareholders. The Company
currently acquires all of its mortgage loans from the Bank, consisting of whole
loans secured by first mortgages or deeds of trust on single-family
(one-to-four-unit) residential real estate properties ("Residential Mortgage
Loans") or by commercial real estate properties consisting of retail strip
centers, multi-family residential rental properties, warehouse, industrial and
office center properties ("Commercial Mortgage Loans"). The Company also from
time to time acquires investment grade mortgage securities that qualify as real
estate assets under Section 856(c)(6)(B) of the Internal Revenue Code of 1986,
as amended ("Code"). Mortgage loans underlying the mortgage securities are
secured by single-family residential, multifamily, or commercial real estate
properties located in the United States.

The Company's policy is not to acquire any commercial mortgage loan if such
commercial mortgage loan constitutes more than 5% of the total book value of the
Mortgage Loans of the Company at the time of its acquisition. The Company's
policy also prohibits the acquisition of any mortgage loan or any interest in a
Mortgage Loan (other than an interest resulting from the acquisition of Mortgage
securities), which mortgage loan (i) is delinquent in the payment of principal
or interest: (ii) is or was at any time during the preceding 12 months (a)
classified, (b) in nonaccrual status, or (c) renegotiated due to financial
deterioration of the borrower; or (iii) has been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest. Loans that are in nonaccrual status are generally loans that are past
due 90 days or more in principal or interest and classified loans are troubled
loans which are deemed substandard or doubtful and where the full collectibility
of principal and interest on such loan is doubtful.

Substantially all of the real estate properties underlying the Company's
Residential Mortgage Loans and all of the commercial properties underlying the
Company's Commercial Mortgage Loans included in the current portfolio are
located in Michigan. Consequently, these Mortgage Loans may be subject to a
greater risk of default than other comparable mortgage loans in the event of
adverse economic, political or business developments and natural hazards in
Michigan that may affect the ability of property owners in Michigan to make
payments of principal and interest on the underlying mortgages.



                                       3
<PAGE>   4

Mortgage-backed securities represent an ownership interest in mortgage loans by
financial institutions such as savings and loans, commercial banks or mortgage
companies to finance the borrowers purchase of a home or other real estate.

The majority of Mortgage-backed securities are issued and/or guaranteed by an
agency of the U.S Government, the Government National Mortgage Association
("GNMA"), or by government-sponsored enterprises such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). GNMA is a government-owned corporation within the Department of
Housing and Urban Development.

Issuers of mortgage-backed securities are typically very selective in choosing
the mortgages that make up their pools. Beyond the basic security of the
mortgage loans themselves, mortgage-backed securities issued by GNMA, FNMA and
FHLMC carry additional guarantees, which enhance their credit worthiness. These
guarantees pertain to the timely payment of principal and interest.

Unlike GNMA's guarantee, neither FNMA's nor FHLMC's guarantees are backed by the
full faith and credit of the U.S. Government. However, the credit markets
consider the securities of these two entities to be nearly equivalent to those
issued by agencies which have the full faith and credit guarantee. Thus, they
carry an implied AAA rating.

The mortgage-backed securities owned by the Company at December 31, 2000 were
issued by FNMA and FHLMC.

TAX STATUS OF THE COMPANY

The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1997. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 95
percent of its REIT taxable income to its shareholders, and meets certain
organizational, stock ownership and operational requirements. If in any taxable
year the Company fails to qualify as a REIT, the Company would not be allowed a
deduction for distributions to shareholders in computing its taxable income and
would be subject to Federal and state income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.

The Company does not anticipate that it will engage in the business of
originating mortgage loans and does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks,
mortgage bankers, thrift and loan associations, finance companies, or insurance
companies in acquiring its mortgage loans. As described above, the Company
anticipates that it will purchase all mortgage loans from the Bank.




EMPLOYEES

The Company has two officers. All of the officers of the Company are also
officers of the Bank. The Company does not anticipate that it will require any
additional employees because it has retained the Bank to perform certain
functions pursuant to an Advisory Agreement ("Advisory Agreement").

THE ADVISOR

On December 22, 1997, the Company entered into an Advisory Agreement with the
Bank to administer the day-to-day operations of the Company, (i) monitoring the
credit quality of the mortgage loans held by the Company, (ii) advising the
Company with respect to the acquisition, management, financing and disposition
of the Company's mortgage loans and (iii) maintaining custody of the documents
related to the Company's mortgage loans. The Advisory Agreement has an initial
term of five years, and will be renewed automatically



                                       4
<PAGE>   5

for additional five-year periods unless notice of nonrenewal is delivered to the
Bank by the Company. The Bank will be entitled to receive an annual advisory fee
equal to $125,000 with respect to the advisory and management services provided
by it to the Company.

The Company also entered into two servicing agreements with the Bank to service
the Residential Mortgage Loans and Commercial Mortgage Loans. Pursuant to each
servicing agreement the Bank receives a fee equal to .375% per annum on the
principal balances of the mortgage loans serviced.

The servicing agreements require the mortgage loans to be serviced in a manner
generally consistent with accepted secondary market practices, with any
servicing guidelines promulgated by the Company and, in the case of Residential
Mortgage Loans, with FNMA and FHLMC guidelines and procedures. The servicing
agreements can be terminated without cause with at least sixty days notice to
the Bank and payment of a termination fee.

The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company may, under
certain circumstances, purchase the Series A Preferred Shares and other shares
of its capital stock in the open market or otherwise, provided, however, that
the Company will not redeem or repurchase any shares of its Common Stock for so
long as any Series A Preferred Shares are outstanding without the approval of a
majority of the Independent Directors (as defined in the Certificate of
Designation relating to the Series A Preferred Shares). The Company has no
present intention of causing the Company to repurchase any shares of its capital
stock, and any such action would be taken only in conformity with applicable
federal and state laws and regulations and the requirement for qualifying as a
REIT.

The Company currently intends to make investments and operate its business at
all times in such a manner as to be consistent with the requirements of the Code
to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of independent directors, to determine that it is in the best interest
of the Company and its shareholders to revoke its REIT status. As of December
31, 2000, management of the Company believes that it was in full compliance with
the REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code.

The Company has no foreign operations.

ITEM 2.  PROPERTIES

None.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not the subject of any material litigation. None of the Company,
the Bank or any affiliate of the Bank is currently involved in nor, to the
Company's knowledge, is currently threatened with any material litigation with
respect to the mortgage loans included in the Company's portfolio which
litigation would have a material effect on the business or operations of the
Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

GENERAL

The Company is authorized to issue up to 60,000 shares of common stock, $300.00
par value per share, and 2,500,000 shares of Preferred Stock, $10.00 liquidation
preference per share. Preferred Stock totaling 2,070,000 shares have been issued
as the Series A Preferred Shares. The Bank owns 100% of the Company's 22,077
shares of Common Stock outstanding at December 31, 2000 and accordingly, there
is no trading market for the



                                       5
<PAGE>   6

Common Stock. In addition, the Bank intends that, as long as any Series A
Preferred Shares are outstanding, it will maintain ownership of the outstanding
Common Stock of the Company. Subject to the rights, if any, of the holders of
the Series A Preferred Shares, all voting rights are vested in the Common Stock.
The holders of the Common Stock are entitled to one vote per share.

Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors of the Company out of funds legally available
therefore, provided that, so long as any shares of Preferred Shares are
outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Stock unless full dividends on
the shares of all series of Preferred Stock have been paid for the prior four
quarters. In order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its annual "REIT Taxable Income" (not including capital
gains) to shareholders.

In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled to
share equally and ratable in any assets remaining after the payment of all debts
and liabilities.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

The Company's Articles of Incorporation contain certain restrictions on the
number of shares of Common Stock and Preferred Stock that individual
shareholders may own. For the Company to qualify as a REIT under the Code, no
more that 50% in number or value of its outstanding shares of capital stock my
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other that the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "one Hundred
Persons Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each shareholder of the Bank counts as a separate beneficial owner for purposes
of the Five or Fewer Test and the capital stock of the Bank is widely held.
Further, the Articles of Incorporation of the Company contain restrictions on
the acquisition of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any transfer
of shares of capital stock of the Company would cause the Company to be
beneficially owned by fewer that 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the stock.

COMMON STOCK

There is no established public trading market in the Company's Common Stock. As
of March 26, 2001, there were 22,077 issued and outstanding shares of Common
Stock held by one shareholder, the Bank. On December 31, 2000, 1999 and 1998,
the Company declared a cash dividend of $47.40, $30.18 and $43.58 per common
share of Common Stock to the shareholders of record on December 31, 2000, 1999
and 1998, respectively. The dividends' were paid on January 31, 2001, 2000 and
1999, respectively.

PREFERRED STOCK

The Series A Preferred Shares are listed on the Nasdaq National Market under the
trading symbol "FSVBP". As of March 26, 2001, there were 2,070,000 issued and
outstanding Series A Preferred Shares held by approximately 73 holders of
record, which excludes preferred shares held in street name. The following table
reflects the respective high and low sales prices for the Series A Preferred
Shares for the year ended December 31, 2000. The table also indicates the
dividends paid by the Company during 2000.





                                       6
<PAGE>   7

<TABLE>
<CAPTION>
                                    PRICE
QUARTER ENDED               HIGH            LOW     DIVIDENDS
---------------------------------------------------------------
<S>                         <C>            <C>     <C>
March 31, 2000              7.250          6.000   $   450,225
June 30, 2000               7.000          5.749   $   450,225
September 30, 2000          7.375          5.375   $   450,225
December 31, 2000           7.500          6.500   $   450,225
</TABLE>




                                       7
<PAGE>   8


ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data of the Company herein has been derived from the
Financial Statements of the Company, which statements have been audited by Grant
Thornton LLP, independent certified public accountants, as indicated by their
report with respect thereto included elsewhere in this form 10-K. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
included in this form 10-K.

<TABLE>
<CAPTION>

                                                                                                         AS OF OR
SELECTED DATA                                                    AS OF OR FOR THE                        FOR THE PERIOD FROM
                                                              YEARS ENDED DECEMBER 31,                   DECEMBER 22, 1997
                                                 -----------------------------------------------------   (INCEPTION) THROUGH
                                                      2000               1999               1998         DECEMBER 31, 1997
                                                 -----------------------------------------------------------------------------
<S>                                                <C>                <C>                <C>                <C>
OPERATING DATA:

FOR THE YEAR
Interest income                                    $ 3,131,300        $ 2,763,374        $ 3,076,526        $   102,547
Net income                                           2,847,455          2,467,247          2,763,552            102,547
Income available to common shareholders'             1,046,555            666,347            962,105             53,207
Income per common share                                  47.40              30.18              43.58               2.41

DIVIDENDS DECLARED:

Dividends on common stock                          $ 1,046,555        $   666,347        $   962,105        $    53,207
Dividends on preferred stock                         1,800,900          1,800,900          1,801,447             49,340

BALANCE SHEET DATA:

AT YEAR END
Net loans                                          $26,822,264        $23,508,412        $25,033,927        $41,488,700
Mortgage-backed securities                          15,459,617         17,108,295         15,028,748
Total assets                                        42,731,538         42,091,167         42,559,875         41,744,825
Total shareholders' equity                          41,669,683         41,404,320         41,597,770         41,642,278
Number of preferred shares outstanding               2,070,000          2,070,000          2,070,000          2,070,000
Number of common shares outstanding                     22,077             22,077             22,077             22,077
</TABLE>






                                       8
<PAGE>   9




ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS



FINANCIAL CONDITION

RESIDENTIAL MORTGAGE LOANS. At December 31, 2000 and 1999, the Company had $11.2
million and $11.6 million, respectively, invested in Residential Mortgage Loans.
The decrease is due to repayments of mortgage loans in 2000. The Company
reinvested a portion of the proceeds recovered from the repayment of Residential
Mortgage Loans and Commercial Mortgage Loans.

At December 31, 2000 and 1999, there were no delinquent or nonaccrual
Residential Mortgage Loans.

COMMERCIAL MORTGAGE LOANS. At December 31, 2000 and 1999, the Company had $15.7
million and $11.9 million, respectively, invested in Commercial Mortgage Loans.
The net increase is due to purchase of $4.9 million during 2000, along with
principal paydowns of $1.1 million during 2000. The Company reinvested the
proceeds recovered from the repayment of Commercial Mortgage Loans into new
mortgage loans.

The following table reflects the composition of Mortgage Loans at December 31,

<TABLE>
<CAPTION>
                                                2000                                          1999
                              ---------------------------------------------------------------------------------------
                                               WEIGHTED                                      WEIGHTED
                                 PRINCIPAL     AVERAGE         PERCENT OF    PRINCIPAL       AVERAGE       PERCENT OF
                                 BALANCE     INTEREST RATE     TOTAL LOANS    BALANCE     INTEREST RATE   TOTAL LOANS
                              ---------------------------------------------------------------------------------------
<S>                           <C>            <C>              <C>           <C>           <C>            <C>
LOAN TYPE

Residential Mortgage Loans
  Fixed                       $  6,742,715       7.74%          25.14%      $  6,348,991      7.67%          27.01%
  Variable                       4,439,765       8.40%          16.55%         5,284,603      7.30%          22.48%
                              ------------                     -------------------------                   -------
                              $ 11,182,480       8.00%          41.69%      $ 11,633,594      7.50%          49.49%

Commercial Mortgage Loans
  Fixed                       $ 12,102,955       8.82%          45.12%      $  8,282,878      8.83%          35.23%
  Variable                       3,548,829       8.84%          13.23%         3,603,940      8.32%          15.33%
                              ------------                     -------------------------                   -------
                              $ 15,651,784       8.82%          58.35%      $ 11,886,818      8.68%          50.56%

Allowance for Loan Loss            (12,000)                     (0.04%)          (12,000)                    (0.05%)
                              ------------                     -------------------------                   -------
Total Loans, Net              $ 26,822,264       8.48%         100.00%      $ 23,508,412      8.06%         100.00%
                              ============                     =========================                   =======
</TABLE>



                                       9
<PAGE>   10


Of the Residential Mortgage Loans included in the Residential Portfolio;
approximately 60.23% and 54.57% bear interest at fixed rates as of December 31,
2000 and 1999, respectively. The interest rates of the fixed rate Residential
Mortgages Loans included in the Residential Portfolio range from 6.00% per annum
to 10.49% per annum as of December 31, 2000 and 1000. The weighted average
interest rate of the fixed rate Residential Mortgage Loans included in the
Residential Portfolio was approximately 7.74% and 7.67% as of December 31, 2000
and 1999, respectively. The following table contains certain additional data as
of December 31, 200 and 1999, with respect to the interest rates of the fixed
rate Residential Mortgage Loans included in the Residential Portfolio.

     INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                AS OF DECEMBER 31, 2000                      AS OF DECEMBER 31, 1999
                      ---------------------------------------------------------------------------------------------
                                                   PERCENTAGE OF                                   PERCENTAGE OF
                                                    RESIDENTIAL                                     RESIDENTIAL
                      NUMBER OF      AGGREGATE     PORTFOLIO BY        NUMBER OF   AGGREGATE       PORTFOLIO BY
                      MORTGAGE       PRINCIPAL      AGGREGATE           MORTGAGE   PRINCIPAL        AGGREGATE
INTEREST RATE          LOANS          BALANCE    PRINCIPAL BALANCE       LOANS      BALANCE      PRINCIPAL BALANCE
---------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>             <C>                 <C>        <C>            <C>
6.00%-6.49%              36         $  862,038           7.71%             42       $1,136,131           9.77%
6.50%-6.99%                                                                 1        1,055,619           9.07%
7.00%-7.49%               4          1,875,019          16.77%              2        1,005,486           8.64%
7.50%-7.99%               4          1,379,943          12.34%              4          571,744           4.91%
8.00%-8.49%               2            508,852           4.55%              2          516,137           4.44%
8.50%-8.99%              11          1,561,642          13.97%             11          835,637           7.18%
9.00%-9.49%               1            140,408           1.26%              2          330,115           2.84%
9.50%-9.99%               6            302,691           2.71%              9          782,752           6.73%
10.00%-10.49%             4            112,122           1.00%              4          115,370           0.99%
                    -------------------------------------------------------------------------------------------------

Total                    68         $6,742,715          60.30%             77       $6,348,991          54.57%
                    =================================================================================================
</TABLE>

Of the Residential Mortgage Loans included in the Residential Portfolio,
approximately 39.77% and 45.51% bear interest at adjustable rates as of December
31, 2000 and 1999, respectively. The interest rates on the "adjustable rate
mortgages" or "ARMs" contained in the Residential Portfolio are all ties to the
one-year Treasury Index (defined below) ("One-Year ARM"), and adjust
periodically. ARMs are typically subject to limitations on lifetime interest
rates as well as periodic interest rate adjustments. The current interest rates
of the Residential Mortgage Loans included in the Residential Portfolio that are
ARMs ranged from 5.00% per annum to 9.99% per annum as of December 31, 2000 and
1999. As of December 31, 2000 and 1999, the weighted average current interest
rate of the Residential Mortgage Loans included in the Residential Portfolio
that are ARMs was approximately 8.40% per annum and 7.30% per annum,
respectively. The following table contains certain additional data as of
December 31, 2000 and 1999 with respect to the interest rates of the Residential
Mortgage Loans included in the Residential Portfolio that are ARMs:



                                       10
<PAGE>   11

INTEREST RATE OF VARIABLE RATE RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                 AT DECEMBER 31, 2000                             AT DECEMBER 31, 1999
                     -----------------------------------------------------------------------------------------------------
                                                     PERCENTAGE OF                                     PERCENTAGE OF
                      NUMBER OF       AGGREGATE       RESIDENTIAL        NUMBER OF     AGGREGATE         RESIDENTIAL
                      MORTGAGE        PRINCIPAL  PORTFOLIO BY AGGREGATE   MORTGAGE     PRINCIPAL   PORTFOLIO BY AGGREGATE
INTEREST RATE          LOANS           BALANCE     PRINCIPAL BALANCE       LOANS        BALANCE      PRINCIPAL BALANCE
--------------------------------------------------------------------------------------------------------------------------
<S>                  <C>          <C>            <C>                    <C>          <C>           <C>
5.50%-5.99%                                                                   2        $  147,804             1.27%
6.00%-6.49%                                                                   4           165,313             1.42
6.50%-6.99%              2         $   46,072             0.41%              18           717,498             6.18
7.00%-7.49%              3            203,809             1.83               27         2,066,617            17.80
7.50%-7.99%             11            702,895             6.30               21         1,477,975            12.73
8.00%-8.49%             20          1,165,808            10.44                7           709,397             6.11
8.50%-8.99%             17          1,430,095            12.81
9.00%-9.49%             13            805,785             7.22
9.50%-9.99%              1             85,302             0.76
                     -----------------------------------------------------------------------------------------------------
Total                   67         $4,439,765            39.77%              79        $5,284,603            45.51%
                     =====================================================================================================
</TABLE>

The following tables set forth certain information with respect to each type of
Residential Mortgage Loan included in the Residential Portfolio:

TYPE OF RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                                                               AS OF DECEMBER 31, 2000
                                                      -------------------------------------------------------------------------
                                                                                          PERCENTAGE OF
                                                                                           RESIDENTIAL
                                                                          AGGREGATE        PORTFOLIO BY       WEIGHTED AVERAGE
                                                       NUMBER OF          PRINCIPAL         AGGREGATE          MONTHS REMAINING
TYPE                                                  MORTGAGE LOANS       BALANCE       PRINCIPAL BALANCE       TO MATURITY
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>              <C>                  <C>
Fixed Rate                                              68              $ 6,742,715             60.30%              115.34
One-Year ARM                                            67                4,439,765             39.70%              174.89
                                                      ----------------------------------------------------
Total                                                  135              $11,182,480            100.00%
                                                      ====================================================

<CAPTION>
                                                                              AS OF DECEMBER 31, 1999
                                                      -------------------------------------------------------------------------
                                                                                          PERCENTAGE OF
                                                                                           RESIDENTIAL
                                                                           AGGREGATE      PORTFOLIO BY         WEIGHTED AVERAGE
                                                       NUMBER OF           PRINCIPAL        AGGREGATE          MONTHS REMAINING
TYPE                                                 MORTGAGE LOANS         BALANCE      PRINCIPAL BALANCE       TO MATURITY
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>            <C>                   <C>
Fixed Rate                                                77              $ 6,348,991           54.57%              185.09
One-Year ARM                                              79                5,284,603           45.43%              330.11
                                                      ----------------------------------------------------
Total                                                    156              $11,633,594          100.00%
                                                      ====================================================
</TABLE>


                                       11
<PAGE>   12

Of the Commercial Mortgage Loans included in the Commercial Portfolio,
approximately 77.23% and 69.28% bear interest at fixed rates as of December 31,
2000 and 1999, respectively. The interest rates of the fixed rate Commercial
Mortgage Loans included in the Commercial Portfolio range from 7.50% per annum
to 9.99% per annum as of December 31, 2000 and 1999. The following tables
contain certain additional data with respect to the interest rates of the fixed
rate Commercial Mortgage Loans included in the Commercial Portfolio (including
those variable rate Commercial Mortgage Loans that have been converted, pursuant
to their terms, to fixed rates):

INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                   AT DECEMBER 31, 2000                                      AT DECEMBER 31, 1999
                   ----------------------------------------------------     ------------------------------------------------------
                                                       PERCENTAGE OF                                              PERCENTAGE OF
                   NUMBER OF                       COMMERCIAL PORTFOLIO     NUMBER OF                         COMMERCIAL PORTFOLIO
                   MORTGAGE   AGGREGATE PRINCIPAL      BY AGGREGATE          MORTGAGE   AGGREGATE PRINCIPAL       BY AGGREGATE
INTEREST RATE        LOANS          BALANCE          PRINCIPAL BALANCE        LOANS           BALANCE           PRINCIPAL BALANCE
----------------------------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>                  <C>                      <C>         <C>                   <C>
7.00%-7.49%            1          $ 1,974,601             12.60%
7.50%-7.99%            1            2,013,028             12.85                 1            $2,038,839              17.05%
8.00%-8.49%            1              905,185              5.78                 2             1,687,553              14.12
8.50%-8.99%            1              748,269              4.77                 1               958,065               8.01
9.00%-9.49%            1            2,037,761             13.00                 3             3,598,121              30.10
9.50%-9.99%            3            3,486,295             22.25
12.00%-12.49%          1              937,817              5.98
                   ---------------------------------------------------------------------------------------------------------------
Total                  7          $12,102,955             77.23%                7            $8,282,578              69.28%
                   ===============================================================================================================
</TABLE>

Of the Commercial Mortgage Loans included in the Commercial Portfolio, as of
December 31, 2000 and 1999, 22.77% and 30.52%, respectively, bear interest at
variable rates which are typically tied to an index (such as The Bank's Prime
Rate or the U.S. Treasury Index adjusted for a constant maturity of either one
year or three years) and are adjustable periodically. The current interest rates
borne by the variable rate Commercial Mortgage Loans included in the Commercial
Portfolio ranged from 7.50% per annum to 11.49% per annum as of December 31,
2000 and 1999. The following table contains certain additional data as of
December 31, 2000 and 1999 with respect to the interest rates of the variable
rate Commercial Mortgage Loans included in the commercial Portfolio:

COMMERCIAL MORTGAGE LOANS

<TABLE>
<CAPTION>
                                   AT DECEMBER 31, 2000                                      AT DECEMBER 31, 1999
                   ----------------------------------------------------     ------------------------------------------------------
                                                       PERCENTAGE OF                                              PERCENTAGE OF
                   NUMBER OF                       COMMERCIAL PORTFOLIO     NUMBER OF                         COMMERCIAL PORTFOLIO
                   MORTGAGE   AGGREGATE PRINCIPAL      BY AGGREGATE          MORTGAGE   AGGREGATE PRINCIPAL       BY AGGREGATE
INTEREST RATE        LOANS          BALANCE          PRINCIPAL BALANCE        LOANS           BALANCE           PRINCIPAL BALANCE
----------------------------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>                  <C>                      <C>         <C>                   <C>
7.50%-8.49%            1          $ 2,060,231             13.22%                1            $2,086,648              17.67%
8.50%-8.99%                                                                     1            $  394,721               3.34
9.00%-9.49%                                                                     1               992,838               8.41
10.00%-10.49%                                                                   1               129,734               1.10
9.50%-9.99%            1              383,721              2.46
10.50%-10.99%          1              980,408              6.29
11.00%-11.49%          1              124,468              0.80
                   ---------------------------------------------------------------------------------------------------------------
Total                  4          $ 3,548,829             22.77%                4            $3,603,941              30.52%
                   ===============================================================================================================
</TABLE>


                                       12
<PAGE>   13

The following tables set forth certain information with respect to each type of
commercial property underlying each Commercial Mortgage Loan included in the
Commercial Portfolio as of December 31, 2000 and 1999:

TYPE OF COMMERCIAL MORTGAGE LOAN

<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31, 2000
                               -------------------------------------------------------------------------------------------
                                                                PERCENTAGE OF
                                                                 COMMERCIAL       WEIGHTED      WEIGHTED        WEIGHTED
                                                                PORTFOLIO BY       AVERAGE       AVERAGE         AVERAGE
                                                   AGGREGATE      AGGREGATE       ORIGINAL       CURRENT         MONTHS
                                  NUMBER OF        PRINCIPAL      PRINCIPAL        LOAN-TO       LOAN-TO        REMAINING
TYPE OF MORTGAGED PROPERTY     MORTGAGED LOANS      BALANCE        BALANCE          VALUE         VALUE        TO MATURITY
--------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                <C>           <C>               <C>           <C>            <C>
5-36 unit apartments                  3           $ 3,103,486       19.83%          54.3%         51.9%            80.20
Industrial                            2             2,730,134       17.44%          70.9          69.1            128.10
Office                                1               981,767        6.27%          80.0          75.4             18.87
Retail strip center                   3             3,631,133       23.20%          69.5          66.1             40.54
Other                                 4             5,205,264       33.26%          73.2          63.8             28.90
                               -------------------------------------------
Total                                13           $15,651,784      100.00%          69.6%         65.3%            49.32
                               ===========================================
</TABLE>

<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31, 1999
                               -------------------------------------------------------------------------------------------
                                                                PERCENTAGE OF
                                                                 COMMERCIAL       WEIGHTED      WEIGHTED        WEIGHTED
                                                                PORTFOLIO BY       AVERAGE       AVERAGE         AVERAGE
                                                   AGGREGATE      AGGREGATE       ORIGINAL       CURRENT         MONTHS
                                  NUMBER OF        PRINCIPAL      PRINCIPAL        LOAN-TO       LOAN-TO        REMAINING
TYPE OF MORTGAGED PROPERTY     MORTGAGED LOANS      BALANCE        BALANCE          VALUE         VALUE        TO MATURITY
--------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                <C>           <C>               <C>           <C>            <C>
5-36 unit apartments                  2           $ 2,216,381       18.65%          41.8%         39.6%           76.60
Industrial                            1               759,412        6.39%          67.7          66.0            35.40
Office                                1               992,838        8.35%          80.0          76.4            30.10
Retail strip center                   4             4,683,667       39.40%          74.6          71.7            62.90
Other                                 3             3,234,520       27.21%          77.9          68.3            34.60
                               -------------------------------------------
Total                                11           $11,886,818      100.00%          68.4%         64.4%           47.92
                               ===========================================
</TABLE>



MORTGAGE-BACKED SECURITIES. At December 31, 2000 and 1999, the Company had $15.5
million and $17.1 million, respectively, invested in mortgage-backed securities.
The decrease in 2000 and 1999 is due to the Company's reinvestment of
mortgage-backed securities


                                       13

<PAGE>   14

repayments into new mortgage loans. The weighted average maturity of these
investments at December 31, 2000 and 1999 are 2.69 years and 3.19 years with a
yield of 6.83% and 6.10%, respectively.

INTEREST RATE RISK. The Company's income consists primarily of interest payments
on mortgage loans. Currently, the Company does not use any derivative products
or manage its interest rate risk. If there is a decline in interest rates (as
measured by the indices upon which the interest rates of the adjustable rate
mortgage loans are based), then the Company will experience a decrease in income
available to be distributed to its shareholders. There can be no assurance that
an interest rate environment in which there is a significant decline in interest
rates, over an extended period of time, would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.

SIGNIFICANT CONCENTRATION OF CREDIT RISK. Concentration of credit risk arises
when a number of customers engage in similar business activities, or activities
in the same geographical region, or have similar economic features that would
cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. Concentration of credit risk indicates the
relative sensitivity of the Company's performance to both positive and negative
developments affecting a particular industry.

Geographically, the Company's Mortgage Loans are generally located in the
Michigan. Geographic concentration of loans may present risks in addition to
those present with respect to Mortgage Loans generally. Mortgage Loans secured
by properties located in Michigan may be subject to a greater risk of default
than other comparable mortgage loans in the event of adverse economic, political
or business developments or natural hazards that may affect Michigan and the
ability of property owners in Michigan to make payments of principal and
interest on the underlying mortgages.

LIQUIDITY AND CAPITAL RESOURCES. The objective of liquidity management is to
ensure the availability of sufficient cash flows to meet all of the Company's
financial commitments. In managing liquidity, the Company takes into account
various legal limitations and requirements placed on a REIT.

The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional mortgage loans as Mortgage Loans
currently in the portfolio mature or prepay and to pay dividends on the Series A
Preferred Shares. The acquisition of additional mortgage loans is intended to be
funded with the proceeds obtained from repayment of principal balances by the
individual mortgagees. The Company does not have and does not anticipate having
any material capital expenditures.

To the extent that the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity offerings,
debt financing or retention of cash flows (after consideration of provisions of
the Code requiring the distribution by a REIT of at least 95% of its "REIT
taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods, subject to certain
approvals as described in the Company's organizational documents.





RESULTS OF OPERATIONS

For the years ended December 31, 2000, 1999 and 1998, the Company reported net
income available to common shareholders of $1.0 million, $666,347 and $962,105,
respectively. Interest income on Residential Mortgage Loans totaled $887,819,
$923,300, and $1.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively, which represents an average yield on such loans of 7.89%, 7.26%,
and 8.02% respectively. Interest income on Commercial Mortgage Loans totaled
$1,162,563, $969,145, and $1.4 million for the years ended December 31, 2000,
1999, and 1998, respectively, which represents an average yield on such loans of
8.62%, 8.38%, and 9.43%, respectively. Interest income on mortgage-backed
securities totaled $1.0 million, $850,352 and $197,275 for the years ended
December


                                       14

<PAGE>   15

31, 2000, 1999 and 1998, respectively. The yield on mortgage-backed securities
for the year-end December 31, 2000, 1999 and 1998 were 6.43%, 6.10% and 5.88%,
respectively. The average loan balance of the Residential Mortgage Loan
portfolio for the years ended December 31, 2000 and 1999 was $82,691 and
$74,574, respectively. The average loan balance of the Commercial Mortgage Loan
portfolio for the years ended December 31, 2000 and 1999 was $1.2 million and
$1.1 million, respectively.

Operating expenses totaled $ 283,845, 296,127 and $300,974, respectively, for
the years ended December 31, 2000, 1999 and 1998.

QUARTERLY SUMMARY OF SELECTED FINANCIAL DATA

The following tables set forth a quarterly summary of selected financial data:



            QUARTERLY SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                     2000
                                                                            --------------------------------------------------------
                                                                             FIRST           SECOND          THIRD           FOURTH
                                                                            QUARTER         QUARTER         QUARTER         QUARTER
                                                                            --------------------------------------------------------
<S>                                                                         <C>             <C>             <C>             <C>
Interest income                                                             $759,356        $778,526        $771,818        $821,600
                                                                            --------------------------------------------------------
  Net interest income                                                        759,356         778,526         771,818         821,600
Provision for loan losses                                                       --              --              --              --
                                                                            --------------------------------------------------------
  Net interest income after provision for loan losses                        759,356         778,526         771,818         821,600

Other non interest expenses                                                   74,315          65,433          70,608          73,489
                                                                            --------------------------------------------------------
Net income before preferred stock dividends                                  685,041         713,093         701,210         748,111
Preferred stock dividends of subsidiary                                      450,225         450,225         450,225         450,225
                                                                            --------------------------------------------------------
  Net income(loss)                                                          $234,816        $262,868        $250,985        $297,886
                                                                            ========================================================

Income(loss) per common share:

  Net income(loss) per common share:                                        $  10.64        $  11.91        $  11.37        $  13.49

  Average common shares outstanding:                                          22,077          22,077          22,077          22,077

</TABLE>




                                       15
<PAGE>   16

QUARTERLY SUMMARY OF SELECTED FINANCIAL DATA (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                     1999
                                                                            --------------------------------------------------------
                                                                             FIRST           SECOND          THIRD           FOURTH
                                                                            QUARTER         QUARTER         QUARTER         QUARTER
                                                                            --------------------------------------------------------
<S>                                                                         <C>             <C>             <C>             <C>
Interest income                                                             $690,368        $625,531        $703,063        $744,412
                                                                            --------------------------------------------------------
  Net interest income                                                        690,368         625,531         703,063         744,412
Provision for loan losses                                                       --              --              --              --
                                                                            --------------------------------------------------------
  Net interest income after provision for loan losses                        690,368         625,531         703,063         744,412

Other non interest expenses                                                   75,757          59,780          92,749          67,841
                                                                            --------------------------------------------------------
  Net income before preferred stock dividends                                614,611         565,751         610,314         676,571
Preferred stock dividends of subsidiary                                      450,225         450,225         450,225         450,225
                                                                            --------------------------------------------------------
  Net income                                                                $164,386        $115,526        $160,089        $226,346
                                                                            ========================================================

Income(loss) per common share:

  Net income(loss) per common share:                                        $   7.45        $   5.23        $   7.25        $  10.25

  Average common shares outstanding:                                          22,077          22,077          22,077          22,077
</TABLE>


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company considers that its primary business objective is to ensure the
availability of sufficient cash flows to meet the obligations mandated by the
Series A Preferred Shares. In managing its investments, the Company accepts a
certain credit risk posture and assumes some interest rate risk.

Interest rate risk generally refers to the potential volatility in net interest
income resulting from changes in interest rates. The Company's risk occurs when
it must replace amortized loans with current production mortgages. These
replacement loans are chosen in a manner to maintain an interest rate risk
posture similar to the Initial Portfolio. The Company must monitor the ratio of
fixed costs (the Series A Preferred Shares' dividends, advisory fees, and
servicing fees) to the interest income potential of the Mortgage Loans. When, in
management's opinion, the coverage ratio is at risk of being depleted, the
Company must look to its parent company, the Bank, for support or utilize the
investment powers of the Company.

The Company will record higher levels of interest income in a rising interest
rate environment and will experience declining interest income during periods of
falling interest rates. This happens because the Company's assets reprice while
the Series A Preferred Shares have a fixed cost of 8.70%.

At December 31, 2000 the Company had a coverage ratio (Projected interest income
divided by REIT dividends plus Advisory fees plus Servicing fees) of 1.58
compared to 1.37 and 1.53 at December 31, 1999 and 1998, respectively.



                                       16
<PAGE>   17

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
         CONTENTS                                                                      Page

<S>                                                                                    <C>
(a)      Report of Independent Certified Public Accountants                               18

(b)      Statements of Financial Condition at December 31, 2000 and 1999                  19

(c)      Statements of Income for the years ended December 31, 2000, 1999 and 1998        20

(d)      Statements of Comprehensive Income for the years ended December 31, 2000,
         1999 and 1998                                                                    20

(e)      Statements of Shareholders' Equity for the years ended December 31, 2000,
         1999 and 1998                                                                    21

(f)      Statements of Cash Flows for the years ended December 31, 2000, 1999
         and 1998                                                                         22

(g)      Notes to Financial Statements                                                    23
</TABLE>


                                       17
<PAGE>   18



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Shareholders of Franklin Finance Corporation:

We have audited the accompanying statements of financial condition of Franklin
Finance Corporation as of December 31, 2000 and 1999, and the related statements
of income, comprehensive income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Finance Corporation as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Grant Thornton LLP
--------------------------
Grant Thornton LLP
Southfield, Michigan
January 23, 2001






                                       18
<PAGE>   19
                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31,
ASSETS                                                                 2000                1999
                                                                   ---------------------------------
<S>                                                                <C>                 <C>
Cash in checking                                                   $        766        $    137,391
Cash in savings                                                          11,900             754,320
                                                                   ---------------------------------
Total cash in bank                                                       12,666             891,711
Loans
  Residential mortgage loans                                         11,182,480          11,633,594
  Commercial mortgage loans                                          15,651,784          11,886,818
  Allowance for loan losses                                             (12,000)            (12,000)
                                                                   ---------------------------------
Net loans                                                            26,822,264          23,508,412


Mortgage-backed securities, available for sale                       15,459,617          17,108,295
Accrued interest - mortgage-backed securities                            91,030             104,223
Accrued interest - residential loans                                     77,035              51,437
Accrued interest - commercial loans                                      68,475              46,296
Due from parent company                                                 179,899             200,872
Prepaid expenses and other assets                                        20,552             179,921

Total assets                                                       $ 42,731,538        $ 42,091,167


LIABILITIES AND SHAREHOLDERS' EQUITY


Dividend payable - Common                                          $  1,046,555        $    666,347
Accrued expenses                                                         15,300        $     20,500
Total current liabilities                                             1,061,855             686,847


Shareholders' equity
Common Stock, par value $300.00; 60,000 shares
  authorized, 22,077 shares issued and outstanding                    6,623,100           6,623,100
Preferred Stock, liquidation preference $10.00; 2,500,000 shares
  authorized, 2,070,000 shares issued and outstanding                20,700,000          20,700,000
Paid in surplus                                                      14,319,178          14,319,178
Accumulated other comprehensive income (loss)                            27,405            (237,958)
Retained earnings
Total shareholders' equity                                           41,669,683          41,404,320
Total liabilities and shareholders' equity                         $ 42,731,538        $ 42,091,167
</TABLE>

The accompanying notes are an integral part of these statements.



                                       19
<PAGE>   20


                          FRANKLIN FINANCE CORPORATION
                              STATEMENTS OF INCOME



<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED
                                                                                  DECEMBER 31,
                                                                --------------------------------------------------
                                                                   2000                1999                1998
                                                                --------------------------------------------------
<S>                                                             <C>                 <C>                 <C>
Interest income

Interest on residential mortgage loans                          $  887,819          $  923,300          $1,464,172
Interest on commercial mortgage loans                            1,162,563             969,145           1,415,079
Interest on mortgage-backed securities                           1,039,442             850,352             197,275
Interest on savings                                                 41,476              20,577
                                                                --------------------------------------------------
Total interest income                                            3,131,300           2,763,374           3,076,526
Provision for loan losses                                                                                   12,000
                                                                --------------------------------------------------
Net interest income after provision for loan losses              3,131,300           2,763,374           3,064,526
                                                                --------------------------------------------------



Operating expense


Advisory fee - paid to parent                                      125,000             125,000             125,000
Loan service fee - paid to parent                                   89,809              81,549             125,053
Other general and administrative                                    69,036              89,578              50,921
                                                                --------------------------------------------------
Total operating expense                                            283,845             296,127             300,974
                                                                --------------------------------------------------
Net income                                                       2,847,455           2,467,247           2,763,552
Preferred stock dividend                                         1,800,900           1,800,900           1,801,447
                                                                --------------------------------------------------
Net income available to common shareholder                      $1,046,555          $  666,347          $  962,105
                                                                ==================================================

Income per common share                                         $    47.40          $    30.18          $    43.58
</TABLE>

The accompanying notes are an integral part of these statements.


                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED
                                                                                  DECEMBER 31,
                                                              -----------------------------------------------------
                                                                 2000                 1999                  1998
                                                              -----------------------------------------------------
<S>                                                           <C>                 <C>                   <C>
Net income                                                    $2,847,455          $ 2,467,247           $ 2,763,552


Other comprehensive income (loss), net of tax:
  Unrealized holding gains(losses) on securities
    arising during the period                                    265,363             (193,450)              (44,508)
                                                              -----------------------------------------------------
Comprehensive income                                          $3,112,818          $ 2,273,797           $ 2,719,044
                                                              =====================================================
</TABLE>

The accompanying notes are an integral part of these statements.


                                       20
<PAGE>   21

                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                COMMON     PREFERRED       PAID IN    OTHER COMPREHENSIVE   RETAINED
                                                STOCK        STOCK         SURPLUS       INCOME (LOSS)      EARNINGS      TOTALS
                                             --------------------------------------------------------------------------------------
<S>                                          <C>          <C>            <C>          <C>                 <C>           <C>
BALANCE AT JANUARY 1, 1998                   $ 6,623,100  $ 20,700,000   $14,319,178                                    $41,642,278
Net Income                                                                                                $ 2,763,552     2,763,552
Capital Contribution from
  Common Shareholder                                                          67,552                                         67,552
Additional Expenses for Preferred
  Stock Offering                                                             (67,552)                                       (67,552)
Dividends on 8.70% Noncumulative
  Series A Preferred Shares                                                                                (1,800,900)   (1,800,900)
Dividends on Common Stock ($43.58 per share)                                                                 (962,105)     (962,105)
Change in accumulated other
  comprehensive loss                                                                          (44,508)                      (44,508)
                                             --------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                   6,623,100    20,700,000    14,319,178          (44,508)                   41,598,317
Net Income                                                                                                  2,467,247     2,467,247
Dividends on 8.70% Noncumulative
  Series A Preferred Shares                                                                                (1,801,447)   (1,801,447)
Dividends on Common Stock ($30.18 per share)                                                                 (666,347)     (666,347)
Change in accumulated other
  comprehensive loss                                                                         (193,450)                     (193,450)
                                             --------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                   6,623,100    20,700,000    14,319,178         (237,958)                   41,404,320
Net Income                                                                                                  2,847,455     2,847,455
Dividends on 8.70% Noncumulative
  Series A Preferred Shares                                                                                (1,800,900)   (1,800,900)
Dividends on Common Stock ($47.40 per share)                                                               (1,046,555)   (1,046,555)
Change in accumulated other
  comprehensive income (loss)                                                                 265,363                       265,363
                                             --------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                 $ 6,623,100  $ 20,700,000   $14,319,178     $     27,405     $        (0)  $41,669,683
                                             ======================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.


                                       21
<PAGE>   22

                          FRANKLIN FINANCE CORPORATION
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         FOR THE YEARS ENDED
                                                                                             DECEMBER 31,
                                                                              -------------------------------------------
                                                                                 2000            1999             1998
                                                                              -------------------------------------------
<S>                                                                           <C>            <C>             <C>
OPERATING ACTIVITIES
Net Income                                                                    $ 2,847,455    $  2,467,247    $  2,763,552
Adjustments to reconcile net income to cash provided by
operating activities:
  Provision for loan losses                                                                                        12,000
  Amortization (Accretion) on securities                                          134,469          86,644        (440,690)
  Decrease (Increase) in accrued interest receivable                              (34,584)        126,100         (99,823)
  Decrease (Increase) in due from parent, prepaid expenses and other assets        43,640       1,781,461         (22,930)
  (Decrease) Increase in other liabilities                                         (5,200)         20,500
                                                                              -------------------------------------------
Total adjustments                                                                 138,325       2,014,705        (551,443)
                                                                              -------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                       2,985,780       4,481,952       2,212,109

INVESTING ACTIVITIES
Purchase of commercial mortgage loans                                          (4,934,059)     (9,326,304)
Purchase of residential mortgage loans                                         (2,921,913)     (2,060,697)
Net decrease in loans                                                           4,542,120      12,912,516      14,453,659
Purchase of mortgage-backed securities                                                         (9,934,840)    (16,451,294)
Proceeds from maturities and paydowns on securities                             1,916,274       7,475,543       1,795,798
                                                                              -------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                          (1,397,578)       (933,782)       (201,837)

FINANCING ACTIVITIES
Dividends paid on common stock                                                   (666,347)       (962,105)        (53,207)
Dividends paid on preferred stock                                              (1,800,900)     (1,800,900)     (1,850,787)
                                                                              -------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES                                          (2,467,247)     (2,763,005)     (1,903,994)
                                                                              -------------------------------------------
NET (DECREASE) INCREASE IN CASH                                                  (879,045)        785,165         106,278
CASH AT BEGINNING OF YEAR                                                         891,711         106,546             268
                                                                              -------------------------------------------
CASH AT END OF YEAR                                                           $    12,666         891,711    $    106,546
                                                                              ===========================================
</TABLE>


The accompanying notes are an integral part of these statements.



                                       22
<PAGE>   23

                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2000, 1999 and 1998

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:

Franklin Finance Corporation (the "Company") is a Michigan corporation which was
incorporated on September 25, 1997 and created for the purpose of acquiring and
holding real estate mortgage assets. The Company is a wholly-owned subsidiary of
Franklin Bank, N.A. (the "Bank"), a nationally chartered commercial bank.

On September 25, 1997, the Company was initially capitalized with the issuance
to the Bank of 1,000 shares of the Company's common stock (the "Common Stock"),
$1.00 par value. On December 22, 1997, the Company commenced its operations upon
consummation of an initial public offering of 2,070,000 shares of the Company's
8.70% Noncumulative Preferred Stock, Series A (the "Series A Preferred Shares"),
$10.00 liquidation preference. These offerings, together with a separate capital
contribution made by the Bank on December 22, 1997, raised net capital of $42.0
million.

The Company used the proceeds from the initial public offering of the Series A
Preferred Shares, the sale of Common Stock to the Bank and the additional
capital contribution to the Company by the Bank to pay the expenses related to
the offering and the formation of the Company and to purchase from the Bank the
Company's initial portfolio of residential and commercial mortgage loans.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The following summarizes the significant accounting policies of the Company.

RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS:

Mortgage loans are carried at the principal amount outstanding. Interest income
is accrued and recognized using the interest method or on a basis approximating
a level rate of return over the term of the loan.

Loans are reviewed on a monthly basis and are placed on non-accrual status when,
in the opinion of management, the full collection of principal or interest has
become unlikely. Uncollectible accrued interest receivable on non-accrual loans
is charged against current period income. The Company had no non-accrual loans
at December 31, 2000 and 1999.

ALLOWANCE FOR LOAN LOSSES:

Management periodically reviews the mortgage loan portfolio to establish an
allowance for loan losses if deemed necessary. An allowance is provided after
considering such factors as the economy in lending areas, delinquency
statistics, past loss experience and estimated future losses. The allowance for
loan losses is based on estimates, and ultimate losses may vary from current
estimates. As adjustments to the allowance become necessary, provisions for loan
losses are reported in operations in the periods they are determined to be
necessary.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities purchased by the Company are classified as available
for sale and carried at market value. Unrealized gains and losses on available
for sale securities are excluded from income and recorded as an amount in a
separate component of other comprehensive income or loss until realized.


                                       23
<PAGE>   24



CONCENTRATIONS OF CREDIT:

Substantially all of the real estate properties underlying the Company's
Mortgage Loans are located in Michigan. Consequently, these Mortgage Loans may
be subject to a greater risk of default than other comparable Mortgage Loans in
the event of adverse economic, political or business developments and natural
hazards in Michigan that may affect the ability of residential property owners
in Michigan to make payments of principal and interest on the underlying
mortgages.

DUE FROM PARENT COMPANY:

Due from parent company represents principal and interest payments received from
borrowers by the Bank as servicer of the mortgage loans which are being held by
the servicer in a custodial account pending remittance to the Company.

DIVIDENDS:

Preferred Stock. Dividends on the Series A Preferred Shares are payable at a
rate of 8.70% per annum of the liquidation preference (an amount equal to $0.87
per annum per share), if, when and as declared by the Board of Directors of the
Company. Dividends are not cumulative and, if declared, are payable quarterly in
arrears on March 31, June 30, September 30 and December 31.

Common Stock. The shareholder is entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available after all
preferred dividends have been paid.

INCOME PER COMMON SHARE:

Income per common share is computed by dividing net income after preferred
dividends by the weighted average number of common shares outstanding. There are
no dilutive securities which would require a diluted earnings per share
computation. The Company had 22,077 weighted average common shares outstanding
during 2000, 1999 and 1998.

INCOME TAXES:

The Company has elected for Federal income tax purposes to be treated as a Real
Estate Investment Trust ("REIT") and intends to comply with the provisions of
the Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, the
Company will not be subject to Federal corporate income taxes to the extent it
distributes 95% of its REIT taxable income to shareholders and as long as
certain asset, income and stock ownership tests are met in accordance with the
IRC. During the periods ended December 31, 2000, 1999 and 1998, the Company
distributed 100% of its taxable income. Because the Company believes it
qualifies as a REIT for Federal income tax purposes, no provision for income
taxes is included.

USE OF ESTIMATES:

The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the date of the statement of financial condition and income
and expenses for the reporting period. Actual results could differ from those
estimates.



                                       24
<PAGE>   25



ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS:

In June 1998, the Financial Accounting Standards Board (FASB) has issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended. The statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective in 2001 for the
Company; however, management does not expect this pronouncement to have a
significant impact on the Company's financial position.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
140"). SFAS No. 140 replaces SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), issued in June 1996. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Disclosures about
securitizations and collateral accepted need not be reported for periods ending
on or before December 15, 2000, for which financial statements are presented for
comparative purposes. SFAS No 140 is to be applied prospectively with certain
exceptions. The Bank's management does not expect this pronouncement to have a
material effect on the Bank's financial position or results of operations.


NOTE 3 - RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS:

The following reflects the composition of the Company's Mortgage Loans:

<TABLE>
<CAPTION>
                                                       AT DECEMBER 31,
                                               --------------------------------
                                                   2000                1999
                                               --------------------------------
<S>                                            <C>                 <C>
LOAN TYPE

Residential Mortgage Loans
  Fixed                                        $  6,742,715        $  6,348,991
  Variable                                        4,439,765           5,284,603
                                               --------------------------------
                                                 11,182,480          11,633,594

Commercial Mortgage Loans
  Fixed                                          12,102,955           8,282,878
  Variable                                        3,548,829           3,603,940
                                               --------------------------------
                                                 15,651,784          11,886,818
Allowance for Loan Losses                           (12,000)            (12,000)
                                               --------------------------------

Net Loans                                      $ 26,822,264        $ 23,508,412
                                               ================================
</TABLE>



The properties collateralizing the Company's Commercial Mortgage Loans consist
of retail strip centers, multi-family residential rental properties, warehouse,
industrial and office center properties located in Michigan.






                                       25
<PAGE>   26
NOTE 4 - MORTGAGE-BACKED SECURITIES

The amortized cost and estimated fair value of the mortgage-backed securities
available for sale at December 31, 2000 and 1999 are shown below.


<TABLE>
<CAPTION>
                                                                     GROSS          GROSS
                                                    AMORTIZED      UNREALIZED     UNREALIZED
                                                      COST            GAINS         LOSSES         FAIR VALUE
                                                   ----------------------------------------------------------
<S>                                                <C>             <C>            <C>             <C>
DECEMBER 31, 2000:
  Mortgage-backed securities                       $15,418,095       $52,321       $ 10,799       $15,459,617

DECEMBER 31, 1999:
  Mortgage-backed securities                       $17,468,838       $13,630       $374,173       $17,108,295
</TABLE>


There were no realized gains, losses and proceeds on sales of securities
available for sale for the years ended December 31, 2000, 1999 and 1998.

The scheduled maturities of available for sale securities at December 31, 2000
were as follows:


There were no pledged securities carried at December 31, 2000 and 1999.


NOTE 5 - RELATED PARTY TRANSACTIONS:

The Company has entered into an advisory agreement (the "Advisory Agreement")
with the Bank. The Bank provides advice to the Board of Directors and manages
the operations of

<TABLE>
<CAPTION>
                                                                           AMORTIZED
                                                                              COST          FAIR VALUE
                                                                          -----------------------------
<S>                                                                       <C>              <C>
Mortgage-backed securities due within one year                            $   550,020      $    548,368
Mortgage-backed securities due after one through five years                14,868,075        14,911,249
                                                                          -----------------------------
Total                                                                     $15,418,095      $ 15,459,617
                                                                          =============================
</TABLE>


the Company as defined in the Advisory Agreement. The Advisory Agreement has an
initial term of five years which began on December 22, 1997 and will
automatically renew for additional five-year periods unless the Company delivers
a notice of nonrenewal to the Bank. The Advisory Agreement may be terminated by
the Company at any time upon ninety days' prior written notice. The advisory fee
is $125,000 per annum payable in equal quarterly installments.

The Company also entered into servicing agreements with the Bank for the
servicing of its residential mortgage loans and its commercial mortgage loans
(the "Servicing Agreements"). Pursuant to the Servicing Agreements, the Bank
performs the servicing of the residential and commercial mortgage loans owned by
the Company, in accordance with normal industry practice. The Servicing
Agreements can be terminated without cause with at least thirty days notice to
the Bank and payment of a termination fee. The servicing fee rate is .375% of
the outstanding principal balance of the residential and commercial mortgage
loans.

The Company has cash balances of $12,666 and $891,711 as of December 31, 2000
and 1999, respectively, held in deposit accounts with the Bank.

From time to time the Company may pledge loans and mortgage-backed securities to
the extent they exceed $20.7 million as collateral for short term borrowings of
the Bank.

NOTE 6 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:

The majority of the Company's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant



                                       26
<PAGE>   27

estimates, assumptions and present value calculations were therefore used for
the purposes of deriving the Company's fair values, resulting in a great degree
of subjectivity inherent in the indicated fair value amounts. Since the fair
value is estimated as of the balance sheet date, the amount, which will actually
be realized or paid upon settlement or maturity could be significantly
different. Comparability among REITs may be difficult due to the wide range of
permitted valuation techniques and the numerous estimates and assumptions which
must be made.

The following methods and assumptions were used to estimate the fair value
amounts at December 31, 2000 and 1999.

CASH AND DUE FROM BANK:  Carrying amount approximates fair value.

RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS: Fair value of the residential and
commercial mortgage loans is estimated using discounted cash flow analyses based
on contractual repayment schedules. The discount rates used in these analyses
are based on either the interest rates paid on U.S. Treasury securities of
comparable maturities adjusted for credit risk and non-interest operating costs,
or the interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount reflected on the
balance sheet at December 31, 2000 and 1999 are at cost. The approximate fair
value of the total loans at December 31, 2000 and 1999 were $26.6 million and
$23.0 million, respectively.

OTHER FINANCIAL ASSETS: The carrying amounts of due from parent company and
accrued interest receivable approximate fair value.

FINANCIAL LIABILITIES: The carrying amounts of dividends payable - common and
dividends payable - preferred approximate fair value.





                                       27
<PAGE>   28

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The persons who are directors and executive officers of the Company are as
follows:

<TABLE>
<CAPTION>
         Name                     Age             Position and Offices Held
<S>                               <C>             <C>
         Robert M. Walker         57              Director
         Lloyd A. Schwartz        72              Director
         David L. Shelp           54              Director and President and CEO
         David F. Simon           54              Director and Secretary
</TABLE>

The following is a summary of the experience of the executive officers and
directors of the Company:

        Robert M. Walker, age 57, is a certified public accountant and certified
fraud examiner. He has over 28 years of experience in public accounting,
financial and management consulting, and the financial services industry. Mr.
Walker is a member of the Company's Audit Committee.

        Lloyd A. Schwartz, age 72, is a certified public accountant and has
served as the Deputy Receiver/Rehabilator of two Michigan-based insurance
companies since 1993. Mr. Schwartz has also served as a Technical Reviewer for
the Michigan Association of Certified Public Accountants peer review program
since 1990. Prior to 1990, Mr. Schwartz was a partner with the accounting firm
of Coopers & Lybrand, LLP. Mr. Schwartz is a member of the Company's Audit
Committee.

        David L. Shelp, age 54, President and CEO of the Bank since November
2000, had been the Treasurer of the Bank since its inception in 1983. Mr. Shelp
was an Assistant Treasurer of another financial institution in Lansing, Michigan
from 1975 to 1981 and its Controller from 1981 to 1983. Mr. Shelp is a member of
the Company's Credit Committee.

        David F. Simon, age 54, is Chairman of the Board of the Bank and has
held this position since its inception in 1983. Mr. Simon is a member of the
Company's Credit Committee. He formerly was an attorney in private practice
specializing in securities and financial institutions law from 1971 to 1991.

INDEPENDENT DIRECTORS

The Company's Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the Independent
Directors of the Company. Messrs. Walker and Schwartz are the Company's only
Independent Directors. For so long as there are only two Independent Directors,
any action that requires the approval of a majority of the Independent Directors
must be approved by both Independent Directors.

If at any time the Company fails to pay or declare and set aside for payment a
quarterly cash dividend payment on the Series A Preferred shares, the number of
directors constituting the Board of Directors of the Company will be increased
by two at the Company's next annual meeting and the holders of Series A
Preferred Shares, voting together with the holder of any other outstanding
series of Preferred Stock as a single class, will be entitled to elect two
additional directors to serve on the Company's Board of Directors. Any member of
the Board of Directors elected by holders of the Company's Preferred Stock will
be deemed to be an Independent Director for purposes of the actions requiring
the approval of a majority of the Independent Directors. Each director elected
by the holders of shares of the Preferred Stock shall continue to serve as such
director until the later of (i) the full term for which he or she shall have
been elected or (ii)




                                       28
<PAGE>   29

the payment of four quarterly dividends on the Preferred Stock, including the
Series A Preferred Shares.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers, directors and persons who own more than
ten percent of either the Common Stock or the Series A Preferred Shares to file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
SEC. Such officers, directors and ten percent shareholders are also required by
SEC rules to furnish the Company with copies of all Section 16(a) forms that
they file.

Based solely on its review of copies of such reports received or representations
from certain reporting persons, the Company believes that, during the fiscal
year ended December 31, 1999, all of its officers, directors and ten percent
shareholders complied with all Section 16(a) filing requirements applicable to
them with respect to transactions during fiscal 1999.

ITEM 11.  EXECUTIVE COMPENSATION

Since the Company's inception on December 22,1997, no compensation has been
awarded to, earned by or paid to any of the Company's directors. The Company
does not intend to pay any compensation to any of its directors (other than its
Independent Directors), officers or employees. The Company pays the Independent
Directors a fee of $500 for attendance (in person or by telephone) at each
meeting of the Board of Directors.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Bank owns 100% of the Common Stock of the Company. All voting rights are
vested in the Common Stock.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Set forth below are certain transactions between the Company and its directors
and affiliates. Management believes that the transactions with related parties
described herein have been conducted on substantially the same terms as similar
transactions with unrelated parties. See Note 5 to the financial statements.

The Bank administers the day-to-day operations of the Company and is entitled to
receive fees in connection with the Advisory Agreement. Advisory fees paid to
the Bank for the period ended December 31, 2000, 1999 and 1998 totaled $125,000
for each year.

The Bank services the residential and commercial mortgage loans included in the
Company's loan portfolio, and is entitled to receive fees in connection with the
respective Servicing Agreements. The Company paid the Bank $89,809, $81,549 and
$125,053, respectively in servicing fees for the period ended December 31, 2000,
1999 and 1998.

The Company had cash balances of $12,666 and $891,711 as of December 31, 2000
and 1999 held in deposit accounts with the Bank.



                                       29
<PAGE>   30


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a)(1)  The following financial statements of the Company are included in Item
          8 of this report:

          Report of Independent Certified Public Accountants

          Statements of Financial Condition at December 31, 2000 and 1999

          Statements of Income for the years ended December 31, 2000, 1999 and
          1998

          Statements of Comprehensive Income for the years ended December 31,
          2000, 1999 and 1998

          Statements of Shareholders' Equity for the years ended December 31,
          2000, 1999 and 1998

          Statements of Cash Flows for the years ended December 31, 2000, 1999
          and 1998

          Notes to Financial Statements

  (a)(2)  All other schedules for which provision is made in the applicable
          accounting regulations of the Securities and Exchange Commission are
          not required under the related instruction or are inapplicable and
          therefore have been omitted.

  (a)(3)  Exhibits:
          See Exhibit Index.


                                                          Sequential page number
Exhibit                                                  where attached exhibits
  No.    Document                                        are located in the 10-K

  3.1    Articles of Incorporation of the Company, as amended (incorporated
         herein by reference to Exhibit 3(a) of Form S-11 (file number
         333-10495) filed by the company).

  3.2    Bylaws of the Company (incorporated herein by reference to Exhibit 3(b)
         of Form S-11 (file number 333-10495)filed by the company).

  4.1    Certificate of Designation of 8.70% Noncumulative Exchangeable
         Preferred Stock, Series A (incorporated herein by reference to Exhibit
         3(a)(1) of Form S-11 (file number 333-10495)filed by the company).

 10.1    Residential Mortgage Loan Purchase Agreement and Commercial Mortgage
         Loan Purchase Agreement (incorporated herein by reference to Exhibits
         10.1 and 10.2 of Form S-11 (file number 333-10495)filed by the
         company).

 10.2    Residential Mortgage Loan Servicing Agreement and Commercial Mortgage
         Loan Servicing Agreement (incorporated herein by reference to Exhibit
         10.3 and 10.4 of Form S-11(file number 333-10495)filed by the company).

 10.3    Advisory Agreement between the Company and the Bank (incorporated
         herein by reference to Exhibit 10.5 of Form S-11(file number
         333-10495)filed by the company).

 11      Computation of net income per share.

 12      Computation of ratio of income to fixed charges and Preferred Stock
         dividend Requirements.



                                       30
<PAGE>   31

(b)      No reports on Form 8-K were issued during the year ended
         December 31, 2000


                                       31
<PAGE>   32



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, in Southfield, Michigan on
March 20, 2001.

                               FRANKLIN FINANCE CORPORATION
                                        (Registrant)

                    By:  /s/ David L. Shelp
                         -----------------------------------------
                                      President and CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following officers and directors of the Registrant
and in the capacities and on the dates indicated.


March 20, 2001      By:  /s/ Lloyd A. Schwartz
                         -----------------------------------------
                         Lloyd A. Schwartz
                         Director

March 20, 2001      By:  /s/ David L. Shelp
                         -----------------------------------------
                         David L. Shelp
                         Director, President and CEO

March 20, 2001      By:  /s/ David F. Simon
                         -----------------------------------------
                         David F. Simon
                         Director and Secretary

March 20, 2001      By:  /s/ Robert M. Walker
                         -----------------------------------------
                         Robert M. Walker
                         Director



                                       32
<PAGE>   33


                                 EXHIBITS INDEX


Exhibit                                                                 Page No.

11       Computation of net income per share.                                 35

12       Computation of ratio of income to fixed charges and Preferred
         Stock dividend Requirements.                                         36




                                       33