<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                      FOR THE QUARTER ENDED MARCH 31, 2001

                         COMMISSION FILE NUMBER: 0-23469

                          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, MICHIGAN 48034
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)

                                 (248) 358-4710
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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 ___

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S SOLE CLASS OF COMMON STOCK
IS 22,077 SHARES, $300 PAR VALUE, AS OF MARCH 31, 2001.



<PAGE>   2



                          FRANKLIN FINANCE CORPORATION

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
    ITEM 1.  FINANCIAL STATEMENTS:                                                                        PAGE
<S>                                                                                                       <C>

         STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 2001 (UNAUDITED)
              AND DECEMBER 31, 2000 ...................................................................... 1

         STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
              AND 2000 (UNAUDITED) ....................................................................... 2

         STATEMENTS OF COMPREHENSIVE INCOME FOR THREE MONTHS ENDED MARCH 31, 2001
              AND 2000 (UNAUDITED) ....................................................................... 2

         STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001
              (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999 ................................. 3

         STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001
              AND 2000 (UNAUDITED) ....................................................................... 4

         NOTES TO FINANCIAL STATEMENTS ................................................................... 5

   ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
         2000............................................................................................. 6

   ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
         RISK............................................................................................. 9

                         PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS ............................................................................... 9

ITEM 2.  CHANGES IN SECURITIES ...........................................................................10

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES .................................................................10

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................................10

ITEM 5.  OTHER INFORMATION ...............................................................................10

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K ................................................................10

SIGNATURES ...............................................................................................11
</TABLE>




                                       ii
<PAGE>   3

                          FRANKLIN FINANCE CORPORATION
                        STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                                      AT
                                                                      -------------------------------------
                                                                        MARCH 31, 2001    DECEMBER 31, 2000
                                                                      -----------------   -----------------
                                                                          (UNAUDITED)
ASSETS

<S>                                                                <C>                     <C>
Cash in checking                                                     $      2,147            $        766
Cash in savings                                                           162,542                  11,900
-----------------------------------------------------------------------------------------------------------
Total cash in bank                                                        164,689                  12,666
Loans
   Residential mortgage loans                                          10,566,344              11,182,480
   Commercial mortgage loans                                           15,579,023              15,651,784
   Allowance for loan losses                                              (12,000)                (12,000)
-----------------------------------------------------------------------------------------------------------
Net loans                                                              26,133,367              26,822,264

Mortgage-backed securities, available for sale                         15,218,818              15,459,617
Accrued interest - mortgage-backed securities                              88,831                  91,030
Accrued interest - residential mortgage loans                              97,870                  77,035
Accrued interest - commercial mortgage loans                               67,368                  68,475
Due from parent company                                                   297,850                 179,899
Prepaid expenses and other assets                                          29,001                  20,552
-----------------------------------------------------------------------------------------------------------
Total assets                                                         $ 42,097,794            $ 42,731,538
===========================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Dividend payable - Common                                            $          0            $  1,046,555
Accrued expenses                                                           62,149                  15,300
Total current liabilities                                                  62,149               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                                    104,531                  27,405
Retained earnings                                                         288,836
-----------------------------------------------------------------------------------------------------------
Total shareholders' equity                                             42,035,645              41,669,683
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                           $ 42,097,794            $ 42,731,538
-----------------------------------------------------------------------------------------------------------
</TABLE>


The Notes to Financial Statements are an integral part of these statements.




                                       1
<PAGE>   4



                          FRANKLIN FINANCE CORPORATION
                      STATEMENTS OF OPERATIONS (UNAUDITED)


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                 ---------------------------------
                                                             MARCH 31,
                                                       2001             2000
                                                 ---------------------------------
<S>                                              <C>                 <C>
Interest income

Interest on residential mortgage loans               $220,859        $229,311

Interest on commercial mortgage loans                 331,835         259,033

Interest on mortgage-backed securities                254,772         261,248

Interest on savings                                     3,516           9,764
                                                 ---------------------------------
Total interest income                                 810,982         759,356
                                                 ---------------------------------
Operating expenses

Advisory fee - paid to parent                          31,247          31,247
Loan service fee - paid to parent                      22,274          23,204
Other general and administrative                       18,400          19,864
                                                 ---------------------------------
Total expenses                                         71,921          74,315
                                                 ---------------------------------
Net income                                            739,061         685,041
                                                 ---------------------------------
Preferred stock dividend                              450,225         450,225
                                                 ---------------------------------
Net income available to common shareholders          $288,836        $234,816
                                                 =================================
   Income per common share                           $  13.08        $  10.64

</TABLE>


                          FRANKLIN FINANCE CORPORATION
                 STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                              MARCH 31,
                                                          2001       2000
                                                      ----------------------
<S>                                                   <C>         <C>
Net income                                            $ 739,061   $ 685,041

Other comprehensive income (loss)
   Unrealized holding gains (losses) on securities,
      available for sale                                 77,126     (31,410)
----------------------------------------------------------------------------
Comprehensive income                                  $ 816,187   $ 653,631
============================================================================
</TABLE>




The Notes to Financial Statements are an integral part of these statements.







                                       2

<PAGE>   5




                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                      Accumulated Other
                                              Preferred       Common         Paid in    Comprehensive    Retained
                                              Stock           Stock          Surplus    Income (Loss)    Earnings     Totals
----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>          <C>           <C>           <C>
BALANCE AT JANUARY 1, 1999                   $ 20,700,000  $  6,623,100  $ 14,319,178   $ (44,508)  $             $  41,598,317
Net Income                                                                                             2,467,247      2,467,247
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                          (1,801,447)    (1,801,447)
Dividend on Common Stock ($43.58 per share)                                                             (666,347)      (666,347)
Change in accumulated other
   comprehensive loss                                                                    (193,450)                     (193,450)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                   20,700,000     6,623,100    14,319,178    (237,958)                   41,404,320
Net Income                                                                                             2,847,455      2,847,455
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                          (1,800,900)    (1,800,900)
Dividend on Common Stock ($47.40 per share)                                                           (1,046,555)    (1,046,555)
Change in accumulated other
   comprehensive income (loss)                                                            265,363                       265,363
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                   20,700,000     6,623,100    14,319,178      27,405                    41,669,683
Net Income                                                                                               739,061        739,061
Dividends on 8.70% Noncumulative
   Series A Preferred Shares                                                                            (450,225)      (450,225)
Change in accumulated other
   comprehensive income                                                                    65,125                        77,126
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001 (UNAUDITED)        $ 20,700,000  $  6,623,100  $ 14,319,178   $  92,530   $    288,836  $  42,035,645
==================================================================================================================================
</TABLE>


The Notes to Financial Statements are an integral part of these statements.


                                       3
<PAGE>   6




                          FRANKLIN FINANCE CORPORATION
                      STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                                    --------------------------------
                                                                                               MARCH 31,
                                                                                         2001               2000
                                                                                    --------------------------------
<S>                                                                                 <C>                 <C>
OPERATING ACTIVITIES:
Net Income                                                                          $   739,061         $   685,041
Adjustments to reconcile net income to cash provided by
operating activities:
   Amortization on securities                                                            16,124              40,524
   Increase in accrued interest receivable                                              (17,529)            (11,512)
   (Increase) decrease in due from parent, prepaid expenses and other assets           (166,134)             52,649
   Increase (decrease) in other liabilities                                              46,849             (14,925)
--------------------------------------------------------------------------------------------------------------------
Total adjustments                                                                      (120,690)             66,736
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                               618,371             751,777

INVESTING ACTIVITIES:

Proceeds from maturities and paydowns of mortgage-backed securities                     341,533             544,595
Purchase of residential loans                                                           (90,172)           (815,455)
Net decrease in loans                                                                   779,071             363,821
--------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                             1,030,432              92,961

FINANCING ACTIVITIES:
Dividends paid on common stock                                                       (1,046,555)           (666,347)
Dividends paid on preferred stock                                                      (450,225)           (450,225)
--------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                                (1,496,780)         (1,116,572)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                    152,023            (271,834)
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                         12,666             891,711
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                          $   164,689         $   619,877
--------------------------------------------------------------------------------------------------------------------
</TABLE>


The Notes to Financial Statements are an integral part of these statements.



                                     4




<PAGE>   7



                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

The accompanying financial statements of Franklin Finance Corporation (the
"Company") have been prepared in accordance with the instructions for Form 10-Q.
Accordingly, they do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. The statements do,
however, include all adjustments (consisting of normal recurring accruals) which
management considers necessary for a fair presentation of the interim periods.

This Form 10-Q is written with the presumption that the users of the interim
financial statements have read or have access to the Company's Annual Report on
Form 10-K, which contains the latest audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 2000 and for the year
then ended. Therefore, only material changes in financial condition and results
of operations are discussed in the remainder of Part I.

The results of operations for the three month period ended March 31, 2001 are
not necessarily indicative of the results to be expected for the year ended
December 31, 2001.

The Statement of Financial Condition as of December 31, 2000 has been derived
from the audited Statement of Financial Condition as of that date.

Franklin Finance Corporation 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 of $20.9 million made by the Bank on December 22, 1997, raised net
capital of approximately $41.6 million.

The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares, the sale of Common Stock to the Bank and the
additional capital contribution to the Company by the Bank to pay the expenses
related to the offering and the formation of the Company and to purchase from
the Bank the Company's initial portfolio of residential and commercial mortgage
loans at their estimated fair value of approximately $41.5 million. Such loans
were recorded in the accompanying balance sheet at their estimated fair values.


NOTE 2 - RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS

Of the residential mortgage loans included in the portfolio, 45.3% and 58.2%
bear interest at fixed rates at March 31, 2001 and 2000, respectively. At March
31, 2001, the interest rates of the fixed rate residential mortgage loans
included in the portfolio ranged from 6.00% to 9.50% per annum. At March 31,
2000 these rates ranged from 6.00% to 10.00%. The weighted average interest rate
of the fixed rate residential mortgage loans included in the portfolio at March
31, 2001 and 2000, respectively, was approximately 7.61% and 7.71% per annum.

Of the residential mortgage loans included in the portfolio, 54.7% and 41.8%
bear interest at adjustable rates at March 31, 2001 and 2000, respectively. The
interest rates on the "adjustable rate mortgages" or "ARMs" contained in the
portfolio are all tied to the one-year Treasury Index ("One-Year ARM") and
adjust periodically. The interest rates of the residential mortgage loans
included in the portfolio that are ARMs ranged from 6.75% to 9.38% per annum as
of March 31, 2001. At March 31, 2000 these rates ranged from 6.00% to 8.50%. As
of March 31, 2001 and 2000, respectively, the weighted average current interest
rate of the residential mortgage loans included in the portfolio that are ARMs
was approximately 8.41% and 7.57% per annum.




                                       5
<PAGE>   8



The commercial mortgage loans included in the portfolio generally consist of
retail strip centers, multi-family residential rental properties, warehouse,
industrial and office center properties located in Michigan. The outstanding
principal balances of the commercial mortgage loans included in the portfolio
ranged from $122,938 to $2.1 million as of March 31, 2001, and $128,266 to $2.1
million as of March 31, 2000.

Of the commercial mortgage loans included in the portfolio at March 31, 2001 and
2000, respectively, 69.3% and 69.7% bear interest at fixed rates. The interest
rates of the fixed rate commercial mortgage loans included in the portfolio
ranged from 8.25% to 9.75% per annum at March 31, 2001 and 7.75% to 9.75% per
annum at March 31, 2000. The weighted average current interest rate of the
commercial mortgage loans included in the portfolio that are fixed rate loans
was 9.16% and 8.83% per annum, as of March 31, 2001 and March 31, 2000,
respectively.

Of the commercial mortgage loans included in the portfolio at March 31, 2001 and
2000, respectively, 30.7% and 30.3% 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 interest rates borne by the variable rate
commercial mortgage loans included in the portfolio ranged from 7.25% per annum
to 8.33% per annum as of March 31, 2001 and 7.75% to 10.50% per annum as of
March 31, 2000. The weighted average yield equaled 7.68% and 8.63% per annum, at
March 31, 2001 and 2000, respectively.


NOTE 3 - FEDERAL HOME LOAN MORTGAGE CORPORATION ("FHLMC") MORTGAGE-BACKED
SECURITIES AND FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") MORTGAGE-BACKED
SECURITIES

At March 31, 2001 and 2000, the mortgage-backed securities held by the Company
totaled $15.2 million and $16.5 million, respectively. At March 31, 2001, these
securities had a weighted average yield of 6.76% and a weighted average term to
maturity of 2.62 years. At March 31, 2000, these securities had a weighted
average yield of 6.09% and a weighted average term to maturity of 3.02 years.


NOTE 4 - PREFERRED STOCK

On December 22, 1997, the Company sold $20.7 million of Series A Preferred
Shares, $10.00 par value and received net cash proceeds of $19.8 million. Cash
dividends on the Series A Preferred Shares are payable quarterly in arrears at
an annual rate of 8.70%. The liquidation value of each Series A Preferred Share
is $10.00 plus accrued and unpaid dividends for the most recent quarter thereon,
if any, to the date of liquidation. The Series A Preferred Shares are not
redeemable until December 22, 2002, and are redeemable thereafter at the option
of the Company. Except under certain circumstances, the holders of the Series A
Preferred Shares have no voting rights. The Series A Preferred Shares are
automatically exchangeable for a new series of preferred stock of the Bank upon
the occurrence of certain events.


NOTE 5 - DIVIDENDS

During both of the three months ended March 31, 2001 and 2000, the Company's
Board of Directors declared $450,225 of preferred stock dividends. To comply
with current IRS regulations, it is expected that common dividends will be
declared in the fourth quarter of 2001.


                                     PART I


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for the historical information contained herein, the matters discussed in
this Report 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 Bank'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 Bank's judgement as of the date of this report. The Bank
disclaims, however, any intent or obligation to update these forward-looking
statements.


                                       7
<PAGE>   9

FINANCIAL CONDITION


ORGANIZATION

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

The Bank administers the day-to-day activities of the Company in its role as
advisor under an Advisory Agreement. The Bank also services the Company's
Mortgage Assets pursuant to servicing agreements between the Company and the
Bank. These assets represent residential loans, commercial mortgage loans, FHLMC
mortgage-backed securities and FNMA mortgage-backed securities.


LOANS

At March 31, 2001 and December 31, 2000, respectively, the Company had $10.6
million and $11.2 million invested in loans secured by first mortgages or deeds
of trust on single-family residential real estate properties ("Residential
Mortgage Loans"). The $616,136 net decrease from the balance at December 31,
2000, resulted from Residential Mortgage Loan principal collections and
individual loan payoffs. Management intends to continue to reinvest proceeds
received from repayments of loans into additional Residential Mortgage Loans or
residential mortgage-backed securities to be purchased from either the Bank or
its affiliates. See "Results of Operations."

At March 31, 2001 and December 31, 2000, respectively, the Company had $15.5
million and $15.7 million invested in mortgage loans secured by income-producing
properties ("Commercial Mortgage Loans") that consist of retail strip centers,
multi-family residential rental properties, warehouse, industrial and office
center properties located in Michigan. The $72,761 net decrease from the balance
at December 31, 2000, resulted from Commercial Mortgage Loan principal
collections and individual loan payoffs. Management intends to continue to
reinvest proceeds received from repayments of loans in additional Commercial
Mortgage Loans, or mortgage-backed securities to be purchased from either the
Bank or its affiliates. See "Results of Operations."

At March 31, 2001 and December 31, 2000, respectively, the Company had no
non-accrual loans (loans contractually past due 90 days or more or with respect
to which other factors indicate that full payment of principal and interest is
unlikely).


ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio and other factors. The allowance is
increased by provisions for loan losses which is charged to income and reduced
by net charge-offs. No provisions were deemed necessary during the three months
ended March 31, 2001 or March 31, 2000.



                                       7
<PAGE>   10

MORTGAGE-BACKED SECURITIES

At March 31, 2001 and December 31, 2000, the Company had outstanding principal
balances of $15.2 million and $15.5 million, respectively, invested in "FHLMC"
mortgage-backed securities and "FNMA" mortgage-backed securities. The $240,799
net decrease from the balance at December 31, 2000, resulted from principal
collections. These loans are for single family residential loans. Management
intends to invest proceeds received from repayments and maturities of
securities into residential mortgage loans and commercial mortgage loans.


INTEREST RATE RISK

The Company's income consists primarily of interest payments on mortgage loans
and mortgage-backed securities. 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. Conversely, an increase in
interest rates would cause the Company to experience an increase in interest
income. 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. Currently, the Company does not use any derivative
products to manage its interest rate risk.


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 generally are concentrated in the
State of Michigan. Geographic concentration of loans may present risks in
addition to those present with respect to mortgage loans generally. All of the
properties underlying the Company's Residential and Commercial Mortgage Loans
included in the current portfolio are located in Michigan. 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 borrowers in Michigan to make payments of principal and
interest on such loans. The investments held in the FHLMC and FNMA agency
securities help to offset some of the geographic concentration risk in that the
residential mortgage loans collateralizing the securities are representative of
many geographic areas.


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
placed on a REIT as discussed below in "Tax Status of the Company."

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 proceeds obtained from repayment of principal balances by the
individual mortgagees. The Company does not have and does not anticipate having
any material capital expenditures.

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



                                       8
<PAGE>   11

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, 1998. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 95
percent of its REIT taxable income to its stockholders, 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 stockholders 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.
As of March 31, 2001, the Company believed that it was in compliance with the
REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code.


RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31,
2000

During the three-month periods ended March 31, 2001 and March 31, 2000 (the
"three-month period"), the Company reported net income of $739,061 and $685,041,
respectively. Interest income on Residential Mortgage Loans totaled $220,859 and
$229,311 for the three-month periods, respectively, which represents an average
yield on such loans of 8.21% and 7.67%, respectively. Interest income on
Commercial Mortgage Loans totaled $331,835 and $259,033 for the three-month
periods, respectively, which represents an average yield on such loans of 8.62%
and 8.64%, respectively. The average loan balance of the Residential Mortgage
Loan portfolio for the three-month periods was $10.9 million and $12.0 million,
respectively. The average balance of the Commercial Mortgage Loan portfolio for
the three-month periods were $15.6 million and $12.0 million, respectively.

Interest income earned on the mortgage-backed investment securities for
three-month periods ended March 31, 2001 and March 31, 2000 totaled $254,772 and
$261,248, respectively. The three-month average yield for March 31, 2001 and
March 31, 2000 was 6.75% and 6.17% on an average balance of $15.3 million and
$16.9 million, respectively.

Operating expenses totaling $71,921 and $74,315 for the three-month periods
ended March 31, 2001 and March 31, 2000 were comprised of loan servicing fees
and advisory fees paid to the Bank, directors fees and general and
administrative expenses. Loan servicing fees paid to the Bank of $22,274 and
$23,204 for the three-month periods, respectively, were based on a servicing fee
rate of 0.375% of the outstanding principal balances of the Residential and
Commercial Mortgage Loans, pursuant to the servicing agreements between the
Company and the Bank. General and administrative expenses consist primarily of
insurance and outside audit costs

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not the subject of any material litigation. Neither 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 Residential Mortgage Loans or Commercial Mortgage Loans included
in the Company's portfolio, which litigation would have a material adverse
effect on the business or operations of the Company.


ITEM 2. CHANGES IN SECURITIES

None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




                                       9

<PAGE>   12

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

None.


ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits required by item 601 of Regulation S-K are set forth below:

NO.      EXHIBIT
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 three months ended March 31,
2001.



                                       10
<PAGE>   13



                                   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
May 14, 2001.

                          FRANKLIN FINANCE CORPORATION
                                  (Registrant)


              By:  /s/ David L. Shelp


                   --------------------------------------
                   David L. Shelp
                   Director, President, CEO and Chief Financial Officer
                   (Principal financial and accounting officer)





                                       11
<PAGE>   14
                                 Exhibit Index
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.          Description
-----------          -----------
<S>                  <C>
    11               Computation of Net Income Per Common Share
    12               Computation of ratio of income to fixed charges and
                       Preferred Stock dividend requirements
</TABLE>