<PAGE>
                       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, 2001

                       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 March 28, 2002. All of the shares of
common stock were held by Franklin Bank at March 28, 2002; accordingly, no
common stock is held by non-affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


<PAGE>





                          FRANKLIN FINANCE CORPORATION


                                TABLE OF CONTENTS

                                     PART I


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


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.................................................   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.............................................................  17
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................  18
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................  29

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................   29
ITEM 11. EXECUTIVE COMPENSATION.................................................   30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
         OWNERS AND MANAGEMENT..................................................   30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................   30

                                     PART IV

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

</TABLE>


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>

                                     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"). On or
after December 22, 2002, the Series A Preferred shares may be redeemed for cash
at the option of the Company, in whole or in part, at any time and from time to
time at redemption price of $10.00 per share, plus the accrued and unpaid
dividends for the most recent quarter, if any, thereon. Simultaneous with the
consummation of the preferred stock offering, the Bank purchased Common Stock in
the amount of $20.9 million, net of offering costs.

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>


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, 2001 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 90 (95%
in taxable years prior to January 1, 2001) 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 one officer. The officer of the Company is also an officer 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>




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 thirty 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, 2001, 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, 2001 and accordingly, there
is no trading market for the Common Stock.


                                       5


<PAGE>


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, 2002, there were 22,077 issued and outstanding shares of Common
Stock held by one shareholder, the Bank. On December 31, 2001, 2000 and 1999,
the Company declared a cash dividend of $58.49, $47.40 and $30.18 per common
share of Common Stock to the shareholders of record on December 31, 2001, 2000
and 1999, respectively. The dividends' were paid on January 31, 2002, 2001 and
2000, respectively.

PREFERRED STOCK

The Series A Preferred Shares are listed on the Nasdaq Bulletin Board under the
trading symbol "FSVBP". As of March 22, 2002, there were 2,070,000 issued and
outstanding Series A Preferred Shares held by approximately 76 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 years ended December 31, 2001 and 2000. The table also indicates
the dividends paid by the Company during 2001 and 2000.



                                       6
<PAGE>
<TABLE>
<CAPTION>

PRICE AND DIVIDEND DATA FOR 2001

                                        PRICE
        QUARTER ENDED               HIGH      LOW        DIVIDENDS
----------------------------------------------------- ----------------
<S>                                <C>       <C>       <C>


March 31, 2001                     $ 7.70    $ 5.72      $ 450,225
June 30, 2001                      $ 8.47    $ 7.16      $ 450,225
September 30, 2001                 $ 9.04    $ 7.90      $ 450,225
December 31, 2001                  $ 9.62    $ 8.30      $ 450,225


PRICE AND DIVIDEND DATA FOR 2000

                                        PRICE
        QUARTER ENDED               HIGH      LOW         DIVIDENDS
----------------------------------------------------------------------

March 31, 2000                     $ 7.25    $ 6.00      $ 450,225
June 30, 2000                      $ 7.00    $ 5.75      $ 450,225
September 30, 2000                 $ 7.38    $ 5.38      $ 450,225
December 31, 2000                  $ 7.50    $ 6.50      $ 450,225

</TABLE>
                                       7

<PAGE>




                         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
                                              2001               2000              1999             1998         DECEMBER 31, 1997
                                         -------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                 <C>              <C>             <C>

OPERATING DATA:

FOR THE YEAR
Interest income                            $ 3,260,141       $ 3,131,300        $ 2,763,374       $ 3,076,526       $   102,547
Net income                                   3,092,256         2,847,455          2,467,247         2,763,552           102,547
Income available to common shareholders'     1,291,356         1,046,555            666,347           962,105            53,207

DIVIDENDS DECLARED:

Dividends per share on common stock        $     58.49       $     47.40        $     30.18       $     43.58       $      2.41
Dividends per share on preferred stock             .87               .87                .87               .87               .02

BALANCE SHEET DATA:

AT YEAR END
 Net loans                                 $33,075,579       $26,822,264        $23,508,412       $25,033,927       $41,488,700
 Mortgage-backed securities                  9,267,333        15,459,617         17,108,295        15,028,748
 Total assets                               43,023,322        42,745,656         42,091,167        42,559,875        41,744,825
 Total shareholders' equity                 41,720,966        41,683,801         41,281,736        41,575,389        41,642,278
 Number of preferred shares outstanding      2,070,000         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            22,077


</TABLE>


                                       8


<PAGE>


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



FINANCIAL CONDITION

RESIDENTIAL MORTGAGE LOANS. At December 31, 2001 and 2000, the Company had $10.2
million and $11.2 million, respectively, invested in Residential Mortgage Loans.
The decrease is due to repayments of mortgage loans in 2001. The Company
reinvested a portion of the proceeds recovered from the repayment of Residential
Mortgage Loans and Commercial Mortgage Loans into additional fixed rate
Commercial Mortgage Loans.

At December 31, 2001 and 2000, there were no delinquent or nonaccrual
Residential Mortgage Loans.

COMMERCIAL MORTGAGE LOANS. At December 31, 2001 and 2000, the Company had $22.9
million and $15.7 million, respectively, invested in Commercial Mortgage Loans.
The net increase is due to the purchase of $9.9 million during 2001, along with
principal paydowns of $2.7 million during 2001. The Company reinvested the
proceeds recovered from the repayment of Commercial Mortgage Loans into new
Commercial Mortgage Loans.

The following table reflects the composition of Mortgage Loans at December 31,
2001 and 2000;

<TABLE>
<CAPTION>


                                                        2001                                                  2000
                              ------------------------------------------------------------------------------------------------------
                                                 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                       $  4,789,943        7.70%            14.48%           $  6,742,715        7.74%              25.14%
   Variable                       5,399,120        7.37%            16.33%              4,439,765        8.40%              16.55%
                              --------------                 --------------      -----------------                    -------------
                               $ 10,189,063        7.53%            30.81%           $ 11,182,480        8.00%              41.69%

Commercial Mortgage Loans
   Fixed                       $ 18,047,841        8.34%            54.56%           $ 12,102,955        8.82%              45.12%
   Variable                       4,850,675        7.00%            14.67%              3,548,829        8.84%              13.23%
                              --------------                 --------------      -----------------                    -------------
                               $ 22,898,516        8.05%            69.23%           $ 15,651,784        8.82%              58.35%

Allowance for Loan Loss             (12,000)                        (0.04%)               (12,000)                          (0.04%)
                              --------------                 --------------      -----------------                    -------------

Total Loans, Net               $ 33,075,579        7.89%           100.00%           $ 26,822,264        8.48%             100.00%
                              ==============                 ==============      =================                    =============


</TABLE>



                                       9


<PAGE>




Of the Residential Mortgage Loans included in the Residential Portfolio;
approximately 47.01% and 60.30% bear interest at fixed rates as of December 31,
2001 and 2000, respectively. The interest rates of the fixed rate Residential
Mortgages Loans included in the Residential Portfolio range from 6.50% per annum
to 10.49% per annum as of December 31, 2001 and 6.00% per annum to 10.49% per
annum as of December 31, 2000. The weighted average interest rate of the fixed
rate Residential Mortgage Loans included in the Residential Portfolio was
approximately 7.94% and 7.74% as of December 31, 2001 and 2000, respectively.
The following table contains certain additional data as of December 31, 2001 and
2000, 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, 2001                        AS OF DECEMBER 31, 2000
                       -----------------------------------------------------------------------------------------------
                                                      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%
6.50%-6.99%                    7      1,161,140              11.40%
7.00%-7.49%                    3      1,955,542              19.19%            4     1,875,019              16.77%
7.50%-7.99%                    1        155,400               1.52%            4     1,379,943              12.34%
8.00%-8.49%                    1        495,005               4.86%            2       508,852               4.55%
8.50%-8.99%                    2        322,022               3.16%           11     1,561,642              13.96%
9.00%-9.49%                    1        137,928               1.35%            1       140,408               1.26%
9.50%-9.99%                    1        168,854               1.66%            6       302,691               2.71%
10.00%-10.49%                  1        394,052               3.87%            4       112,122               1.00%
                       -----------------------------------------------------------------------------------------------

Total                         17     $4,789,943              47.01%           68    $6,742,715              60.30%
                       ===============================================================================================

</TABLE>


Of the Residential Mortgage Loans included in the Residential Portfolio,
approximately 52.99% and 39.70% bear interest at adjustable rates as of December
31, 2001 and 2000, respectively. The interest rates on the "adjustable rate
mortgages" or "ARMs" contained in the Residential Portfolio are all tied 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 4.13% per annum to 9.50% per annum as of December 31, 2001 and
4.00% per annum to 9.99% per annum as of December 31, 2000. As of December 31,
2001 and 2000, the weighted average current interest rate of the Residential
Mortgage Loans included in the Residential Portfolio that are ARMs was
approximately 6.60% per annum and 8.40% per annum, respectively. The following
table contains certain additional data as of December 31, 2001 and 2000 with
respect to the interest rates of the Residential Mortgage Loans included in the
Residential Portfolio that are ARMs:

                                       10

<PAGE>

INTEREST RATE OF VARIABLE RATE  RESIDENTIAL MORTGAGE LOANS

<TABLE>
<CAPTION>

                                   AT DECEMBER 31, 2001                                 AT DECEMBER 31, 2000
                       ----------------------------------------------------------------------------------------------------------
                                                        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>


4.00%-4.49%                       3    $   190,944                   1.87%                $
4.50%-4.99%
5.00%-5.49%                       2        101,541                   1.00
5.50%-5.99%                       2        164,091                   1.61
6.00%-6.49%                      41        960,450                   9.43
6.50%-6.99%                      13      1,115,941                  10.95            2         46,072                    0.41%
7.00%-7.49%                      13        813,219                   7.98            3        203,809                    1.83
7.50%-7.99%                      12        729,095                   7.16           11        702,895                    6.28
8.00%-8.49%                       2        150,197                   1.47           20      1,165,808                   10.42
8.50%-8.99%                       5        942,339                   9.25           17      1,430,094                   12.79
9.00%-9.49%                       2        136,209                   1.34           13        805,785                    7.21
9.50%-9.99%                       1         95,094                   0.93            1         85,302                    0.76
                       --------------------------------------------------------------------------------------------------------
Total                            96    $ 5,399,120                  52.99%          67    $ 4,439,765                   39.70%
                       ========================================================================================================
</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, 2001
                                                     ------------------------------------------------------------------------------
                                                                                            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                                                   17              $ 4,789,943               47.01%                81.54
One-Year ARM                                                 96                5,399,120               52.99%               181.68
                                                     ---------------------------------------------------------
Total                                                       113             $ 10,189,063              100.00%
                                                     =========================================================

<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%
                                                     =========================================================

</TABLE>




                                       11
<PAGE>
Of the Commercial Mortgage Loans included in the Commercial Portfolio,
approximately 78.82% and 77.33% bear interest at fixed rates as of December 31,
2001 and 2000, respectively. The interest rates of the fixed rate Commercial
Mortgage Loans included in the Commercial Portfolio range from 7.25% per annum
to 12.75% per annum as of December 31, 2001 and 7.00% per annum to 12.99% per
annum as of December 31, 2000. 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, 2001                                     AT DECEMBER 31, 2000
                 -------------------------------------------------------------------------------------------------------------------
                                                        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        $  1,724,310                  7.53%           1          $  1,974,601                  12.62%
7.50%-7.99%                 3           4,716,321                 20.60            1             2,013,028                  12.86
8.00%-8.49%                 2           1,428,458                  6.24            1               905,185                   5.79
8.50%-8.99%                 4           6,268,333                 27.37            1               748,269                   4.78
9.00%-9.49%                 1           1,988,037                  8.68            1             2,037,761                  13.02
9.50%-9.99%                 1           1,258,634                  5.50            3             3,486,294                  22.27
12.50%-12.99%               1             663,748                  2.90            1               937,817                   5.99
                 -------------------------------------------------------------------------------------------------------------------
Total                      13        $ 18,047,841                 78.82%           9          $ 12,102,955                  77.33%
                 ===================================================================================================================
</TABLE>






                                       12


<PAGE>
Of the Commercial Mortgage Loans included in the Commercial Portfolio, as of
December 31, 2001 and 2000, 21.18% and 22.67%, 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 5.00% per annum to 8.00% per annum as of December 31, 2001
and 5.00% per annum to 11.49% per annum as of December 31, 2000. The following
table contains certain additional data as of December 31, 2001 and 2000 with
respect to the interest rates of the variable rate Commercial Mortgage Loans
included in the Commercial Portfolio:






INTEREST RATE OF VARIABLE RATE COMMERCIAL MORTGAGE LOANS


<TABLE>
<CAPTION>

                                   AT DECEMBER 31, 2001                                   AT DECEMBER 31, 2000
                    -----------------------------------------------------------------------------------------------------------
                                                       PERCENTAGE OF                                        PERCENTAGE OF
                     NUMBER OF      AGGREGATE      COMMERCIAL PORTFOLIO    NUMBER OF      AGGREGATE      COMMERCIAL PORTFOLIO
                     MORTGAGE       PRINCIPAL          BY AGGREGATE        MORTGAGE       PRINCIPAL          BY AGGREGATE
   INTEREST RATE       LOANS         BALANCE         PRINCIPAL BALANCE      LOANS          BALANCE        PRINCIPAL BALANCE
-------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>             <C>            <C>                   <C>              <C>            <C>

5.00%-5.49%              1             $   370,721                 1.62%      1             $ 2,060,231                 13.16%
5.50%-5.99%              1                 931,842                 4.07
6.00%-6.49%              1                 114,525                 0.50
7.00%-7.49%              1               1,941,739                 8.48
8.00%-8.49%              1               1,491,848                 6.51
9.50%-9.99%                                                                   1                 383,721                  2.45
10.50%-10.99%                                                                 1                 980,408                  6.26
11.00%-11.49%                                                                 1                 124,468                  0.80
                    -----------------------------------------------------------------------------------------------------------
Total                    5             $ 4,850,675                21.18%      4             $ 3,548,829                 22.67%
                    ===========================================================================================================
</TABLE>







                                       13

<PAGE>


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, 2001 and 2000:


TYPE OF COMMERCIAL MORTGAGE LOAN

<TABLE>
<CAPTION>

                                                                              AT DECEMBER 31, 2001
                                  -------------------------------------------------------------------------------------------
                                                                        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                            5     $  6,518,003           28.47%       26.0%        23.3%         86.48
Industrial                                      3        4,505,036           19.67%       57.9         87.0          69.68
Office                                          4        3,893,583           17.00%      100.2         75.6          33.65
Retail strip center                             5        5,993,858           26.18%       86.1         70.0          64.52
Mobile home park                                1        1,988,036            8.68%       21.6         55.2          32.00
                                  -------------------------------------------------------------------------------------------
Total                                          18     $ 22,898,516          100.00%       59.8%        54.5%         63.58
                                  ===========================================================================================


<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>






                                       14


<PAGE>

MORTGAGE-BACKED SECURITIES. At December 31, 2001 and 2000, the Company had $9.3
million and $15.5 million, respectively, invested in mortgage-backed securities.
The decrease in 2001 and 2000 is due to the Company's reinvestment of
mortgage-backed securities repayments into new mortgage loans. The weighted
average maturity of these investments at December 31, 2001 and 2000 are 1.87
years and 2.69 years with a yield of 6.30% and 6.83%, 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 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 90 (95% in taxable
years prior to January 1, 2001) 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.







                                       15
<PAGE>


RESULTS OF OPERATIONS


For the years ended December 31, 2001, 2000 and 1999, the Company reported net
income available to common shareholders of $1.3 million, $1 million and
$666,347, respectively. Interest income on Residential Mortgage Loans totaled
$837,622, $887,819, and $923,300 for the years ended December 31, 2001, 2000 and
1999, respectively, which represents an average yield on such loans of 7.84%,
7.89%, and 7.26% respectively. Interest income on Commercial Mortgage Loans
totaled $1.5 million, $1.2 million and $969,145 for the years ended December 31,
2001, 2000, and 1999, respectively, which represents an average yield on such
loans of 7.65%, 8.62%, and 8.38%, respectively. Interest income on
mortgage-backed securities totaled $932,186, $1.0 million and $850,352 for the
years ended December 31, 2001, 2000 and 1999, respectively. The yield on
mortgage-backed securities for the year-end December 31, 2001, 2000 and 1999
were 6.30%, 6.43% and 6.10%, respectively. The average loan balance of the
Residential Mortgage Loan portfolio for the years ended December 31, 2001 and
2000 was $310,024 and $82,691, respectively. The average loan balance of the
Commercial Mortgage Loan portfolio for the years ended December 31, 2001 and
2000 was $1.5 million and $1.2 million, respectively.

Operating expenses totaled $325,128, 283,845 and $296,127, respectively, for
the years ended December 31, 2001, 2000 and 1999.

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>
                                                                                                    2001
                                                                  -------------------------------------------------------------
                                                                          FIRST          SECOND         THIRD        FOURTH
                                                                         QUARTER        QUARTER        QUARTER       QUARTER
                                                                 -------------------------------------------------------------
<S>                                                              <C>                   <C>           <C>            <C>

Interest income                                                            $ 810,982     $ 782,693     $ 804,709     $ 861,757
                                                                  -------------------------------------------------------------
     Net interest income                                                     810,982       782,693       804,709       861,757
Provision for loan losses                                                          -             -             -             -
                                                                  -------------------------------------------------------------
     Net interest income after provision for loan losses                     810,982       782,693       804,709       861,757

Non interest income                                                                                      126,609        30,634
Other non interest expenses                                                   71,921        81,694        89,183        82,330
                                                                  -------------------------------------------------------------
Net income before preferred stock dividends                                  739,061       700,999       842,135       810,061
Preferred stock dividends of subsidiary                                      450,225       450,225       450,225       450,225
                                                                  -------------------------------------------------------------
     Net income(loss)                                                      $ 288,836     $ 250,774     $ 391,910     $ 359,836
                                                                  =============================================================

Income(loss) per common share:

     Net income(loss) per common share:                                    $   13.08     $   11.36     $   17.75     $   16.30

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

</TABLE>



                                       16








<PAGE>




QUARTERLY SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) (CONTINUED)


<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                                                            $ 234,816     $ 262,868     $ 250,985     $ 297,886
                                                                  =============================================================

Income per common share:

     Net income per common share:                                          $   10.64     $   11.91     $   11.37     $   13.49

     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 generally record higher levels of interest income in a rising
interest rate environment and will experience declining interest income during
periods of falling interest rates.

At December 31, 2001 the Company had a coverage ratio (Net income divided by
REIT Preferred stock dividends) of 1.72 compared to 1.58 and 1.37 at December
31, 2000 and 1999, respectively.

                                       17

<PAGE>





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>

           CONTENTS                                                                      Page
<S>     <C>                                                                              <C>

(a)      Report of Independent Certified Public Accountants                               19

(b)      Statements of Financial Condition at December 31, 2001 and 2000                  20

(c)      Statements of Income for the years ended December 31, 2001, 2000 and 1999        21

(c)      Statements of Comprehensive Income for the years ended December 31, 2001,
         2000 and 1999                                                                    21

(e)      Statements of Shareholders' Equity for the years ended December 31, 2001,
         2000 and 1999                                                                    22

(f)      Statements of Cash Flows for the years ended December 31, 2001, 2000
         and 1999                                                                         23

(g)      Notes to Financial Statements                                                    24


</TABLE>

















                                       18
<PAGE>





                    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, 2001 and 2000, 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, 2001. 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
statements are 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, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ Grant Thornton LLP
-------------------------
Grant Thornton LLP
Southfield, Michigan
January 24, 2002







                                       19







<PAGE>
                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

                                                                                       AT DECEMBER 31,
                                                                       ---------------------------------------------
                                                                                   2001                   2000
                                                                       ---------------------------------------------
<S>                                                                    <C>                             <C>

ASSETS

Cash in checking                                                                $     78,468           $        766
Cash in savings                                                                      250,099                 11,900
                                                                       ---------------------------------------------
Total cash in bank                                                                   328,567                 12,666
Loans
   Residential mortgage loans                                                     10,189,063             11,182,480
   Commercial mortgage loans                                                      22,898,516             15,651,784
Allowance for loan losses                                                            (12,000)               (12,000)
                                                                       ---------------------------------------------

Net loans                                                                         33,075,579             26,822,264

Mortgage-backed securities, available for sale                                     9,267,333             15,459,617
Accrued interest - residential loans                                                  48,540                 77,035
Accrued interest - commercial loans                                                  109,426                 68,475
Accrued interest - mortgage-backed securities                                         55,082                 91,030
Due from parent company                                                              138,795                179,899
Prepaid expenses and other assets                                                                            34,670
                                                                       ---------------------------------------------
Total assets                                                                    $ 43,023,322           $ 42,745,656
                                                                       =============================================


LIABILITIES AND SHAREHOLDERS' EQUITY

Dividend payable - Common                                                       $  1,279,356           $  1,046,555
Accrued and other expenses                                                            23,000                 15,300
                                                                       ---------------------------------------------
Total liabilities                                                                  1,302,356              1,061,855

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                                                78,688                 41,523
Retained earnings
                                                                       ---------------------------------------------
Total shareholders' equity                                                        41,720,966             41,683,801
                                                                       ---------------------------------------------
Total liabilities and shareholders' equity                                      $ 43,023,322           $ 42,745,656
                                                                       =============================================

</TABLE>

The accompanying notes are an integral part of these financial statements.







                                       20


<PAGE>
                          FRANKLIN FINANCE CORPORATION
                              STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                          FOR THE YEARS ENDED
                                                                              December 31,
                                                   -------------------------------------------------------------
                                                              2001                2000                 1999
                                                   -------------------------------------------------------------
<S>                                                <C>                       <C>                    <C>


Interest income

Interest on residential mortgage loans                     $   837,622         $   887,819          $   923,300
Interest on commercial mortgage loans                        1,474,250           1,162,563              969,145
Interest on mortgage-backed securities                         932,186           1,039,442              850,352
Interest on savings                                             16,083              41,476               20,577
                                                   -------------------------------------------------------------
Total interest income                                        3,260,141           3,131,300            2,763,374
Provision for loan losses
                                                   -------------------------------------------------------------
Net interest income after provision for
loan losses                                                  3,260,141           3,131,300            2,763,374
                                                   -------------------------------------------------------------

Non interest income

Gain on sale of securities                                     157,243

Non interest expense

Advisory fee - paid to parent                                  125,000             125,000              125,000
Loan service fee - paid to parent                              115,886              89,809               81,549
Other general and administrative                                84,242              69,036               89,578
                                                   -------------------------------------------------------------
Total non interest expense                                     325,128             283,845              296,127
                                                   -------------------------------------------------------------
Net income                                                   3,092,256           2,847,455            2,467,247
Preferred stock dividend                                     1,800,900           1,800,900            1,800,900
                                                   -------------------------------------------------------------
Net income available to common shareholders                $ 1,291,356         $ 1,046,555          $   666,347
                                                   =============================================================
Income per common share                                    $     58.49         $     47.40          $     30.18
</TABLE>




                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>


                                                                      FOR THE YEARS ENDED
                                                                          DECEMBER 31,
                                                    ------------------------------------------------------------
                                                               2001                2000                 1999
                                                    ------------------------------------------------------------
<S>                                                 <C>                       <C>                   <C>


Net income                                                 $ 3,092,256         $ 2,847,455           $2,467,247

Other comprehensive income (loss):
   Unrealized holding gains(losses) on securities
          arising during the period                            194,408             402,065             (293,106)
  Less: Reclassification adjustment for gains
          included in net income                               157,243
                                                    ------------------------------------------------------------
Other Comprehensive income                                      37,165             402,065             (293,106)
                                                    ------------------------------------------------------------
Comprehensive income                                       $ 3,129,421         $ 3,249,520           $2,174,141
                                                    ============================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       21


<PAGE>

                          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, 1999            $6,623,100    $20,700,000  $14,319,178      $(67,436)        $                 $41,575,389
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                                                             (293,106)                             (293,106)
                                      ----------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1999           6,623,100     20,700,000   14,319,178      (360,542)                           41,281,736
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)                                                     402,065                               402,065
                                      ----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000           6,623,100     20,700,000   14,319,178        41,523                            41,683,801
Net Income                                                                                           3,092,256         3,092,256
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                        (1,800,900)       (1,800,900)
Dividends on Common Stock
  ($58.49 per share)                                                                                (1,291,356)       (1,291,356)
Change in accumulated other
   comprehensive income                                                             37,165                                37,165
                                      ----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001          $6,623,100    $20,700,000  $14,319,178   $    78,688         $         -      $ 41,720,966
                                      ==============================================================================================
</TABLE>











The accompanying notes are an integral part of these financial statements.






                                       22

<PAGE>


                          FRANKLIN FINANCE CORPORATION
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                                            FOR THE YEARS ENDED
                                                                                                DECEMBER 31,
                                                                           ---------------------------------------------------
                                                                                    2001             2000             1999
                                                                           ---------------------------------------------------
<S>                                                                        <C>                  <C>              <C>

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                                      $ 3,092,256      $ 2,847,455      $ 2,467,247
Adjustments to reconcile net income to cash provided by
 operating activities:
   Amortization on securities                                                       121,357          134,469           86,644
   Gain on available for sale securities, net                                      (157,243)
   Decrease (increase) in accrued interest receivable                                23,492          (34,584)         126,100
   Decrease in due from parent, prepaid expenses and other assets                    75,774           43,640        1,781,461
   (Decrease) increase in other liabilities                                          (4,300)          (5,200)          20,500
                                                                           ---------------------------------------------------
Total adjustments                                                                    59,080          138,325        2,014,705
                                                                           ---------------------------------------------------
Net cash provided by operating activities                                         3,151,336        2,985,780        4,481,952

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of commercial mortgage loans                                            (9,937,064)      (4,934,059)      (9,326,304)
Purchase of residential mortgage loans                                           (6,464,319)      (2,921,913)      (2,060,697)
Net decrease in loans                                                            10,148,068        4,542,120       12,912,516
Purchase of mortgage-backed securities                                                                             (9,934,840)
Proceeds from sale of mortgage backed securities, available for sale              1,759,310
Proceeds from maturities and paydowns of mortgage backed securities,
   available for sale                                                             4,506,025        1,916,274        7,475,543
                                                                           ---------------------------------------------------
Net cash provided by (used in) investing activities                                  12,020       (1,397,578)        (933,782)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on common stock                                                   (1,046,555)        (666,347)        (962,105)
Dividends paid on preferred stock                                                (1,800,900)      (1,800,900)      (1,800,900)
                                                                           ---------------------------------------------------

Net cash used in financing activities                                            (2,847,455)      (2,467,247)      (2,763,005)
                                                                           ---------------------------------------------------
Net increase (decrease) in cash                                                     315,901         (879,045)         785,165
Cash at beginning of year                                                            12,666          891,711          106,546
                                                                           ---------------------------------------------------
Cash at end of year                                                             $   328,567      $    12,666      $   891,711
                                                                           ===================================================
</TABLE>








The accompanying notes are an integral part of these financial statements.

                                       23


<PAGE>




                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 and 1999


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, 2001 and 2000.

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 fair 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.



                                       24


<PAGE>

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 2001, 2000 and 1999.

RECLASSIFICATIONS:

Certain reclassifications have been made to the 2000 and 1999 accounts to
conform to the 2001 presentation.

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 90% 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, 2001, 2000 and 1999, 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.


                                       25



<PAGE>





ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS:

In June of 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations."
Statement 141 requires that the purchase method of accounting be used for
business combinations initiated after June 30, 2001. In June of 2001, the FASB
also issued Statement No. 142, "Goodwill and Other Intangible Assets" which is
effective generally beginning January 1, 2002. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized but, instead, tested for impairment at least annually in accordance
with the provisions of Statement 142. The Company has no goodwill at December
31, 2001 or 2000; therefore, the adoption of these statements is not expected to
impact the Company's results of operations or financial position.

In June of 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
the cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the remaining useful life of the related
asset. Upon settlement of the liability, the entity either settles the
obligation for the amount recorded or incurs a gain or loss. Statement 143 is
effective for fiscal years beginning after June 15, 2002. Adoption of this
statement is not expected to impact the Company's results of operations or
financial position.

In August of 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement 144 supersedes certain
previously issued accounting pronouncements. The statement was issued to
establish a single accounting model for long-lived assets to be disposed of by
sale. It broadens the presentation of discontinued operations in the income
statement to include a component of an entity (rather than a segment of a
business). A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. Statement 144 also requires that discontinued
operations be measured at the lower of the carrying amount or fair value less
cost to sell. The statement is effective prospectively for fiscal years
beginning after December 15, 2001 and will only impact the Company if future
transactions occur that involve disposal of long-lived assets.









                                       26

<PAGE>


NOTE 3 - RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS:

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


<TABLE>
<CAPTION>



                                                          AT DECEMBER 31,
                                         ------------------------------------------
                                                  2001                    2000
                                         ------------------------------------------
<S>                                      <C>                         <C>

LOAN TYPE

Residential Mortgage Loans
   Fixed                                       $ 4,789,943             $ 6,742,715
   Variable                                      5,399,120               4,439,765
                                         ------------------------------------------
                                                10,189,063              11,182,480

Commercial Mortgage Loans
   Fixed                                        18,047,841              12,102,955
   Variable                                      4,850,675               3,548,829
                                         ------------------------------------------
                                                22,898,516              15,651,784
Allowance for Loan Losses                          (12,000)                (12,000)
                                         ------------------------------------------

Net Loans                                     $ 33,075,579            $ 26,822,264
                                         ==========================================
</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 fair value of the mortgage-backed securities
available for sale at December 31, 2001 and 2000 are shown below.



<TABLE>
<CAPTION>



                                                                          GROSS           GROSS
                                                        AMORTIZED       UNREALIZED      UNREALIZED
                                                           COST           GAINS           LOSSES         FAIR VALUE
                                                     ------------------------------------------------------------------
<S>                                                 <C>                 <C>             <C>             <C>

DECEMBER 31, 2001:
   Mortgage-backed securities                         $ 9,188,645       $ 78,688         $      -      $ 9,267,333

DECEMBER 31, 2000:
   Mortgage-backed securities                         $15,418,094       $ 52,321         $ 10,798      $15,459,617

</TABLE>








                                       27





<PAGE>




The scheduled maturities of available for sale securities at December 31, 2001
were as follows:

<TABLE>
<CAPTION>

                                                                                       AMORTIZED
                                                                                         COST            FAIR VALUE
                                                                                    ---------------------------------
<S>                                                                                 <C>                 <C>

Mortgage-backed securities due within one year                                          $ 2,158,243      $ 2,170,578
Mortgage-backed securities due after one through five years                               7,030,402        7,096,755
                                                                                    ---------------------------------
Total                                                                                   $ 9,188,645      $ 9,267,333
                                                                                    =================================
</TABLE>



There were approximately $4.2 million and $0 pledged securities carried at
December 31, 2001 and 2000, respectively.



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 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 $328,566 and $12,666 as of December 31, 2001
and 2000, 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 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, 2001 and 2000.

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, 2001 and 2000 are at cost. The approximate fair
value of the total loans at December 31, 2001 and 2000 were $34.4 million and
$26.6 million, respectively.

                                       28
<PAGE>



MORTGAGE-BACKED SECURITIES: For securities available for sale, fair values
are based on quoted market prices or dealer quotes.

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.



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            58             Director
      Lloyd A. Schwartz           73             Director
      David L. Shelp              55             Director and President and CEO
      David F. Simon              55             Director and Secretary

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

         Robert M. Walker, age 58, is a certified public accountant and
certified fraud examiner. He has over 29 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 73, 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 55, President and CEO of the Bank since November
2001, 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 55, 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

                                       29

<PAGE>

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, 2001, 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 2001.

ITEM 11.  EXECUTIVE COMPENSATION

The Company pays only the Independent outside 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, 2001, 2000 and 1999 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 $115,886, $89,809 and
$81,549, respectively, in servicing fees, for the period ended December 31,
2001, 2000 and 1999.

The Company had cash balances of $328,567 and $12,666 as of December 31, 2001
and 2000 held in deposit accounts with the Bank.



                                       30
<PAGE>




                                     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, 2001 and 2000

          Statements of Income for the years ended December 31, 2001, 2000 and
          1999

          Statements of Comprehensive Income for the years ended December 31,
          2001, 2000 and 1999

          Statements of Shareholders' Equity for the years ended December 31,
          2001, 2000 and 1999

          Statements of Cash Flows for the years ended December 31, 2001, 2000
          and 1999

          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 common share.

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

(b)      No reports on Form 8-K were issued during the year ended
         December 31, 2001


                                       31

<PAGE>

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 28, 2002.

                          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 28, 2002      By:  /s/ Lloyd A. Schwartz
                         -----------------------------------------
                         Lloyd A. Schwartz
                         Director

March 28, 2002      By:  /s/ David L. Shelp
                         -----------------------------------------
                         David L. Shelp
                         Director, President and CEO

March 28, 2002      By:  /s/ David F. Simon
                         -----------------------------------------
                         David F. Simon
                         Director and Secretary

March 28, 2002      By:  /s/ Robert M. Walker
                         -----------------------------------------
                         Robert M. Walker
                         Director



                                       32
<PAGE>




                                 EXHIBITS INDEX

<TABLE>
<CAPTION>

Exhibit                                                                          Page No.
-------------------------------------------------------------------------------------------
<S>     <C>                                                                     <C>

11       Computation of net income per common share.                               35

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

</TABLE>