<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, 1998

                       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, 1998. All of the shares of 
common stock were held by Franklin Bank at December 31, 1998; 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.................................................. 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 5

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        SHAREHOLDER MATTERS................................................ 5
ITEM 6. SELECTED FINANCIAL DATA............................................ 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS................................ 7
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK........................................................10
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.......................... i
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................11 

                                    PART III

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

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K...............................................13


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 ("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 collectibilty
of principal and interest on such loan is doubtful.




                                       3

<PAGE>   4

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.

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 Ginnie Mae), or by government-sponsored enterprises such as the Federal
National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan
Mortgage Corporation (FHLMC or Freddie Mac), Ginnie Mae 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 Ginnie Mae, 
Fannie Mae, and Freddie Mac carry additional guarantees, which enhance their 
credit worthiness. These guarantees pertain to the timely payment of principal 
and interest.

Unlike Ginnie Mae's guarantee, neither Fannie Mae's nor Freddie Mac'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, 1998 were 
issued by FNMA and the 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 four 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 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 

                                       4
<PAGE>   5

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, 1998, 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"). 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, 1998 and
accordingly, there is no trading market for the 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.




                                       5
<PAGE>   6



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, 1999, there were 22,077 issued and outstanding shares of Common
Stock held by one shareholder, the Bank. On December 31, 1998, the Company
declared a cash dividend of $43.58 per common share of Common Stock to the
shareholder of record on December 31, 1998. The dividend was paid on January 31,
1999.

PREFERRED STOCK

The Series A Preferred Shares are listed on the NASDAQ National Market under the
trading symbol "FSVBP". As of March 26, 1999, there were 2,070,000 issued and
outstanding Series A Preferred Shares held by approximately 69 holders of
record. The following table reflects the respective high and low sales prices
for the Series A Preferred Shares for the year ended December 31, 1998.
The table also indicates the distributions paid by the Company during this
period.

<TABLE>
<CAPTION>
                     
                                         Price  
                                  -------------------
    Quarter Ended                 High            Low                Distributions

<S>                              <C>              <C>                <C>     
March 31, 1998                   10.785           10.188               $450,225
June 30, 1998                    10.375            9.50                $450,225
September 30, 1998                9.875            8.375               $450,225
December 31, 1998                10.063            8.375               $450,772
</TABLE>


                                       6
<PAGE>   7



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
                                                                   For the period from
                                                 As of or           December 22, 1997
                                            For the Year Ended     (inception) through
                                             December 31, 1998      December 31, 1997
                                             -----------------      -----------------

OPERATING DATA:

FOR THE YEAR
<S>                                              <C>                 <C>        
Interest income                                  $ 3,076,526         $   102,547
  Net income                                       2,763,552             102,547
  Income available to common shareholder             962,105              53,207
  Income per common share                              43.58                2.41

DIVIDENDS DECLARED:

Dividends on common stock                        $   962,105         $    53,207
Dividends on preferred stock                       1,801,447              49,340

BALANCE SHEET DATA:

AT YEAR END
  Net loans                                      $25,033,927         $41,488,700
  Mortgage-backed securities                      15,028,748                  --
  Total assets                                    42,559,875          41,642,825
  Total shareholders' equity                      41,597,770          41,642,278
  Number of preferred shares outstanding           2,070,000            2,070,00
  Number of common shares outstanding                 22,077              22,077
</TABLE>



                       

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

FINANCIAL CONDITION

RESIDENTIAL MORTGAGE LOANS. At December 31, 1998 and 1997, the Company had $13.8
million and $22.8 million, respectively, invested in Residential Mortgage Loans.
The decrease is due to repayments of mortgage loans in 1998. The Company 
reinvested the proceeds recovered from the repayment of Residential Mortgage 
Loans in Mortgage-backed Securities.

At December 31, 1998 and 1997, there were no delinquent or nonaccrual
Residential Mortgage Loans.

COMMERCIAL MORTGAGE LOANS. At December 31, 1998 and 1997, the Company had $11.2
million and $18.8 million, respectively, invested in Commercial Mortgage Loans.
The decrease is due to repayments of mortgage loans in 1998. The Company 
reinvested the proceeds recovered from the repayment of Commercial Mortgage 
Loans in Mortgage-backed Securities.




                                       7
<PAGE>   8



The following table reflects the composition of Mortgage Loans at December 31,
1998:
<TABLE>
<CAPTION>

                                                           Weighted
                                    Principal               Average        Percent of
                                     Balance             Interest Rate    Total Loans
                                  ---------------------------------------------------
<S>                                <C>                        <C>            <C>   
LOAN TYPE

Residential Mortgage Loans
  Fixed                            $  6,252,783               8.16%          24.98%
  Variable                            7,546,290               7.73%          30.14%
                                   -----------------------------------------------
                                   $ 13,799,073               7.93%          55.12%
                                 

Commercial Mortgage Loans
  Fixed                            $  8,270,071               9.36%          33.04%
  Variable                            2,976,783               8.79%          11.89%
                                   ----------------------------------------------- 
                                   $ 11,246,854               9.19%          44.93%
Allowance for Loans Loss                (12,000)                             (0.05%)

Total Loans, Net                   $ 25,033,927               8.49%         100.00%
                                   ===============================================
</TABLE>




The following table reflects the composition of Mortgage Loans at December 31,
1997:
<TABLE>
<CAPTION>

                                                           Weighted
                                    Principal               Average        Percent of
                                     Balance             Interest Rate    Total Loans
                                  ---------------------------------------------------
<S>                                <C>                        <C>            <C>   
LOAN TYPE

Residential Mortgage Loans
  Fixed                            $ 12,686,696               8.33%          30.58%
  Variable                           10,049,319               8.06%          24.22%
                                   -----------------------------------------------
                                   $ 22,736,015               8.20%          54.80%
                                 

Commercial Mortgage Loans
  Fixed                            $  9,282,579               8.91%          22.37%
  Variable                            9,470,106               9.16%          22.83%
                                   ----------------------------------------------- 
                                   $ 18,752,685               9.04%          45.20%

Allowance for Loans Loss                 -

Total Loans, Net                   $ 41,488,700               8.58%         100.00$
                                   ===============================================
</TABLE>



MORTGAGE-BACKED SECURITIES. At December 31, 1998, the Company had $15.0 million
invested in mortgage-backed securities. At December 31, 1997, the Company had no
investment in mortgage-backed securities. The increase in 1998 is due to the
Company's reinvestment of mortgage loan repayments in mortgage-backed
securities. The weighted average maturity and yield of these investments at 
December 31, 1998 are 1.61 years and 5.88%, respectively.




                                       8
<PAGE>   9

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, 1998 and the period from December 22, 1997
(inception) through December 31,1997, the Company reported net income of
$962,105 and $102,547, respectively. Interest income on Residential Mortgage
Loans totaled $1,464,172 for 1998 and $50,358 for the period from December 22,
1997 (inception) through December 31,1997, which represents an average yield on
such loans of 8.02% and 8.20%, respectively. Interest income on Commercial
Mortgage Loans totaled $1,415,079 for 1998 and $52,189 for the period from
December 22, 1997 (inception) through December 31,1997, which represents an
average yield on such loans of 9.43% and 9.04%, respectively. The average loan
balance of the Residential Mortgage Loan portfolio for the years ended December
31, 1998 and 1997 was $67,976 and $79,644, respectively. The average loan
balance of the Commercial Mortgage Loan portfolio for the years ended December
31, 1998 and 1997 was $965,143 and $776,315,respectively,

Operating expenses totalled $300,974 and $0, respectively, for the years ended
December 31, 1998 and the period from December 22, 1997 (inception) through
December 31,1997.



                                       9
<PAGE>   10

The Company also declared a cash dividend of $43.58 per Common Share, which was
paid on January 31, 1999.

The Company also declared a cash dividend of $.2175 on Preferred Shares to
shareholders of record on December 31, 1998.

YEAR 2000 COMPLIANCE

As with many other companies, the Company is dependant on others for its
computer technology. The Bank provides computer programming and administrative
services through the Advisory Agreement and the Servicing Agreement.

Although the Bank has conducted internal development and testing of their
computer systems to insure millennium compliance, they cannot give the Company
assurance that their internal systems will be completely free of errors.
Furthermore, they cannot give any assurance that all of their vendors will
deliver Year 2000 compliant certificates or that the vendors will in fact be
Year 2000 compliant despite their certification of compliance. If either their
computer systems or those of their vendors fail to function properly because of
the Year 2000 problem, the results of our operations may materially suffer.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.



                                       10
<PAGE>   11



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

           CONTENTS                                                                  Page

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

(b)    Balance Sheets at December 31, 1998, and 1997                                 iii

(c)    Statements of Income for the year ended December 31, 1998 and for the
       period from December 22, 1997 (inception) through December 31, 1997            iv 

(d)    Statements of Comprehensive Income for the year ended December 31, 1998
       and for the period from December 22, 1997 (inception) through
       December 31, 1997                                                               v

(e)    Statements of Shareholders' Equity for the year ended December 31, 1998,
       and for the period from December 22, 1997 (inception) through December
       31, 1997                                                                       vi

(f)    Statements of Cash Flows for the year ended December 31, 1998, and 
       for the period from December 22, 1997 (inception) through December 31,
       1997                                                                          vii

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


                                       i
<PAGE>   12



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Shareholders of Franklin Finance Corporation:

We have audited the accompanying balance sheets of Franklin Finance Corporation
(the "Company") as of December 31, 1998 and 1997 and the related statements of
income, comprehensive income, shareholders' equity and cash flows for the year
ended December 31, 1998 and for the period from December 22, 1997 (inception) to
December 31, 1997. 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 generally accepted auditing
standards. 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 statement. 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, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998 and for the period from December 22,
1997 (inception) to December 31, 1997 in conformity with generally accepted
accounting principles.

/s/ Grant Thornton LLP
-------------------------
Grant Thornton LLP
Southfield, Michigan
January 28, 1999


                                       ii
<PAGE>   13


                          FRANKLIN FINANCE CORPORATION
                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                     At December 31,
                                                                            ---------------------------------
ASSETS                                                                           1998                1997
                                                                            ---------------------------------

<S>                                                                        <C>                   <C>         
Cash                                                                       $    106,546          $        268
Loans

Residential mortgage loans                                                   13,799,073            22,736,015
   Commercial mortgage loans                                                 11,246,854            18,752,685
   Allowance for loan losses                                                    (12,000)
-------------------------------------------------------------------------------------------------------------

Net loans                                                                    25,033,927            41,488,000

Mortgage-backed securities, available for sale                               15,028,748
Accrued interest - mortgage-backed securities                                   181,089
Accrued interest - residential loans                                             67,278               112,244
Accrued interest - commercial loans                                              79,689               115,989
Due from parent company                                                       2,039,668                27,624
Prepaid expenses and other assets                                                22,930
-------------------------------------------------------------------------------------------------------------
Total assets                                                               $ 42,559,875          $ 41,744,825
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY

  Dividend payable - Preferred                                                                   $     49,340
  Dividend payable - Common                                                $    962,105                53,207
-------------------------------------------------------------------------------------------------------------
  Total current liabilities                                                     962,105               102,547

  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 loss                                          (44,508)
  Retained earnings
-------------------------------------------------------------------------------------------------------------
  Total shareholders' equity                                                 41,597,770            41,642,278
-------------------------------------------------------------------------------------------------------------
  Total liabilities and shareholders' equity                               $ 42,559,875          $ 41,744,825
=============================================================================================================
</TABLE>


The accompanying notes are an integral part of these statements.

                                      iii

<PAGE>   14



                          FRANKLIN FINANCE CORPORATION
                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>


                                                                              For the period from
                                                                              December 22, 1997
                                                        For the year ended   (inception) through     
                                                        December 31, 1997     December 31, 1997
                                                        ---------------------------------------

Interest income

<S>                                                         <C>                <C>       
Interest on residential mortgage loans                      $1,464,172         $   50,358
Interest on commercial mortgage loans                        1,415,079             52,189
Interest on mortgage-backed securities                         197,275
-----------------------------------------------------------------------------------------
Total interest income                                        3,076,526            102,547
Provision for loan losses                                       12,000
-----------------------------------------------------------------------------------------
Net interest income after provision for loan losses          3,064,526            102,547
-----------------------------------------------------------------------------------------

Operating expense
Advisory fee - paid to parent                                  125,000
Loan service fee - paid to parent                              125,053
Other general and administrative                                50,921
-----------------------------------------------------------------------------------------
Total operating expense                                        300,974
-----------------------------------------------------------------------------------------
Net income                                                   2,763,552            102,547
Preferred stock dividend                                     1,801,447             49,340
-----------------------------------------------------------------------------------------
Net income available to common shareholder                  $  962,105         $   53,207
=========================================================================================
   Income per common share                                  $    43.58         $     2.41
</TABLE>


The accompanying notes are an integral part of these statements.



                          FRANKLIN FINANCE CORPORATION

                       STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>



                                                        For the period from
                                                        December 22, 1997
                                  For the year ended   (inception) through     
                                  December 31, 1997     December 31, 1997
                                  ---------------------------------------


<S>                                     <C>                  <C>        
Net income                              $ 2,763,552          $   102,547
Other comprehensive loss
      Unrealized holding losses             (44,508)
------------------------------------------------------------------------
Comprehensive income                    $ 2,719,044          $   102,547
========================================================================
</TABLE>


The accompanying notes are an integral part of these statements.

                                       iv


                             
<PAGE>   15


                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                           Accumulated         
                                                Common         Preferred      Paid in   Other Comprehensive Pertained
                                                 Stock         Stock          Surplus      Income (Loss)     Earnings    Totals
                                             ----------------------------------------------------------------------------------

<S>                                          <C>            <C>             <C>               <C>       <C>            <C>          

Issuance of Common Stock                     $  6,623,100                   $ 14,319,178                               $ 20,942,278

Initial public offering of 8.70%
    Noncumulative Preferred Stock, Series A
    on December 22, 1997                                    $ 20,700,000                                                 20,700,000

Net Income                                                                                              $    102,547        102,547
Dividends on 8.70% Noncumulative
    Series A Preferred Shares                                                                                (49,340)       (49,340)
Dividends on Common Stock ($2.41 per share)                                                                  (53,207)       (53,207)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                    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                                                                             (1,801,447)    (1,801,447)

Dividend 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)   $  -        $ 41,597,770
====================================================================================================================================
</TABLE>


The accompanying notes are an integral part of these statements.

                                       v




  
<PAGE>   16



                          FRANKLIN FINANCE CORPORATION
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                            For the period from
                                                                                                              December 22, 1997
                                                                                    For the year ended        (inception) through
                                                                                     December 31, 1998        December 31, 1997
                                                                                     ------------------------------------------

<S>                                                                               <C>                            <C>        
OPERATING ACTIVITIES                       
Net Income                                                                       $       2,763,552                  102,547
Adjustments to reconcile net income to cash provided by (used in) operating
   activities:
     Provision for loan losses                                                              12,000
     Amortization on securities                                                          (440,690)
     Increase in accrued interest receivable                                              (99,823)                 (228,233)
     Increase in prepaid expenses and other assets                                        (22,930)                  (27,624)
---------------------------------------------------------------------------------------------------------------------------
Total adjustments                                                                        (551,443)                 (153,310)
---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES                                      2,212,109                  (50,763)
INVESTING ACTIVITIES
Purchase of commercial loans                                                                                    (18,754,898)
Purchase of residential loans                                                                                   (22,736,015)
Purchase of mortgage-backed securities                                                (16,451,294)
Repayment of mortgage-backed securities                                                  1,795,798
Net (increase)/decrease in loans                                                        14,453,659                    2,213
---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                                    (201,837)              (41,488,700)

FINANCING ACTIVITIES
Proceeds from the sale of common stock                                                                           20,941,278         
Proceeds from the sale of preferred stock                                                                        20,700,000
Dividends paid on common stock                                                            (53,207)
Dividends paid on preferred stock                                                       1,850,787
---------------------------------------------------------------------------------------------------------------------------
NET CASH/(USED IN) PROVIDED BY FINANCING ACTIVITIES                                    (1,903,994)               41,641,278
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH                                                            106,278                     (732)   
CASH AT BEGINNING OF PERIOD                                                                    268                    1,000
---------------------------------------------------------------------------------------------------------------------------
CASH AT DECEMBER 31, 1998                                                         $        106,546               $      268
===========================================================================================================================
</TABLE>


The accompanying notes are an integral part of these statements.

                                       vi


<PAGE>   17



                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

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 at
their estimated fair value of approximately $41.5 million. Such loans were
recorded in the accompanying balance sheets at their estimated fair values. See
Note 7.

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, 1998 and 1997.

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 comprehensive income until realized.




                                      vii
<PAGE>   18



CONCENTRATIONS OF CREDIT:

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.

EARNINGS PER COMMON SHARE:

Earnings 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 1998 and 1997.

COMPREHENSIVE INCOME:

The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Comprehensive Income." The Statement requires that entities present items of
other comprehensive income in a financial statement with the same prominence as
other financial statements. The Company adopted SFAS No. 130 in 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, 1998 and 1997, 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.

                                      viii
<PAGE>   19



ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS:

The Financial Accounting Standards Board (FASB) has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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 January 1, 2000 for the Company;
however, management does not expect this pronoucement to have a significant
impact on the Company's financial position.

The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise." The statement requires that an entity engaged in mortgage
banking activities classify resulting mortgage-backed securities and other
retained interests based on its ability and intent to sell or hold those
investments. This statement is effective in 1999 for the Company; however,
management does not expect this pronouncement to have an impact on the Company's
financial position.

NOTE 3 - RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS:

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

<TABLE>
<CAPTION>

                                                    At December
                                        --------------------------------
                                             1998                1997
                                        --------------------------------
<S>                                     <C>                 <C>          
LOAN TYPE

Residential Mortgage Loans              
  Fixed                                 $  6,252,783        $  12,686,696
  Variable                                 7,546,290           10,049,319
                                        ---------------------------------
                                        $ 13,799,073        $  22,736,015
                                        ---------------------------------

Commerical Mortgage Loans
  Fixed                                 $  8,270,071            9,282,579
  Variable                                 2,976,783            9,470,106
                                        ---------------------------------
                                        $ 11,246,854        $  18,752,685     
                                        ---------------------------------
Allowance for Loan Loss                 $     12,000
                                        ---------------------------------

Total Loans, Net                        $ 25,033,927        $  41,488,700
                                        =================================
</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.

NOTE 4 - MORTGAGE-BACKED SECURITIES

The amortized cost and estimated market value of the mortgage-backed securities
available for sale at December 31, 1998 are shown below.




                                       ix

<PAGE>   20
<TABLE>
<CAPTION>

                   
                                                                                              Estimated         
                                                           Gross            Gross               Market            
                                         Amortized        Unrealized      Unrealized           Value at          
                                           Cost             Gains           Losses          December 31, 1998 
                                      -----------------------------------------------------------------------

<S>                                    <C>                 <C>            <C>                 <C>               
Mortgage-backed securities             $ 15,096,186        $ 6,021        $ 73,459            $ 15,028,748      
                                       ===================================================================
</TABLE>

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 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 a servicing agreement with the Bank for the
servicing of its residential mortgage loans (the "Servicing Agreement").
Pursuant to the Servicing Agreement, the Bank performs the servicing of the
residential mortgage loans owned by the Company, in accordance with normal
industry practice. The Servicing Agreement 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 mortgage loans.

The Company has cash balances of $106,546 and $268 as of December 31, 1998 and
1997, respectively, held in deposit accounts with 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 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, 1998 and 1997.

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, 1998 and 1997, approximates fair value.

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.

                                       x
<PAGE>   21



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:

    Name                    Age      Position and Offices Held

    Robert M. Walker         55        Director
    Lloyd A. Schwartz        70        Director
    Read P. Dunn             52        Chief Executive Officer                 
    Edward J. Shehab         39        Director and Senior Vice President
    David L. Shelp           52        Director, Treasurer and Chief Financial
                                       Officer
    David F. Simon           52        Director and Secretary

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

        Robert M. Walker, age 55, has served since 1992 as Senior associate at
James V. McTevia & Associates, a Detroit area firm specializing in financial and
management consulting services. Mr. Walker 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 70, 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.

         Read P. Dunn, age 52, is Chief Executive Officer of the Bank and has
held these positions since its inception in 1983. He is a certified public
accountant and was the former President and senior officer at another financial
institution for over 14 years.

         David L. Shelp, age 52, has 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.

         Edward J. Shehab, age 39, joined the Bank in 1985 as a financial
analyst. Prior to that time, Mr. Shehab was an assistant secondary trader at
another financial institution. Since 1991, Mr. Shehab has been Vice President of
Finance at the Bank. Mr. Shehab is a member of the Company's Credit Committee.

         David F. Simon, age 52, 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.

                                       11
<PAGE>   22

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) 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, 1998, 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 1998.

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, 1998 totalled $125,000.

The Bank services the Residential and Commercial Mortgage Loans included in the
Company's portfolio and is entitled to receive fees in connection with the
Servicing Agreement. The Company paid the Bank $125,053 in servicing fees for
the year ended December 31, 1998.

The Company had cash balances of $106,546 and $268 as of December 31, 1998 and
1997 held in deposit accounts with the Bank.

                                       12
<PAGE>   23


                                     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

          Balance Sheets at December 31, 1998 and 1997

          Statements of Income for the year ended December 31, 1998, and for the
          period from December 22, 1997 (inception) through December 31, 1997

          Statements of Comprehensive Income for the year ended December 31,
          1998 and for the period from December 22, 1997 (inception) through
          December 31, 1997

          Statements of Shareholders' Equity for the year ended December 31,
          1998, and for the period from December 22, 1997 (inception) through
          December 31, 1997

          Statements of Cash Flows for the year ended December 31, 1998, and for
          the period from December 22, 1997 (inception) through December 31,
          1997

          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).

                                       13
<PAGE>   24


 11      Computation of net income per share.

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

 27      Financial Data Schedule

(b)      No reports on Form 8-K were issued during the year ended
         December 31, 1998



                                       14
<PAGE>   25

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 31, 1999.

                           FRANKLIN FINANCE CORPORATION
                                  (Registrant)

                    By:  /s/ Read P. Dunn
                         -----------------------------------------
                         Read P. Dunn
                         Chief Executive Officer

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 31, 1999      By:   /s/ Lloyd A. Schwartz
                         -----------------------------------------
                         Lloyd A. Schwartz
                         Director

March 31, 1999      By:  /s/ Edward J. Shehab
                         -----------------------------------------
                         Edward J. Shehab
                         Director and Senior Vice President

March 31, 1999      By:  /s/ David L. Shelp
                         -----------------------------------------
                         David L. Shelp
                         Director, Treasurer and Chief Financial Officer

March 31, 1999      By:  /s/ David F. Simon
                         ----------------------------------------
                         David F. Simon
                         Director and Secretary

March 31, 1999      By:  /s/ Robert M. Walker
                         ----------------------------------------
                         Robert M. Walker
                         Director

                                       15
<PAGE>   26


                                 EXHIBITS INDEX


Exhibit                                                                 Page No.

 11       Computation of net income per share.                                17

 12       Computation of ratio of income to fixed charges and Preferred
          Stock dividend Requirements.                                        17

 27       Financial Data Schedule                                             18



                                       16