<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 SEPTEMBER 30, 1998

                         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 SEPTEMBER 30, 1998.



<PAGE>   2

                          FRANKLIN FINANCE CORPORATION

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS:                                             PAGE

     STATEMENTS OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998
          AND DECEMBER 31, 1997............................................. 1

     STATEMENT OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS
          ENDED SEPTEMBER 30, 1998.......................................... 2

     STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS
          ENDED SEPTEMBER 30, 1998.......................................... 3

     STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED
          SEPTEMBER 30, 1998................................................ 4

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

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS FOR THE NINE AND
        THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998........................ 6

        RESULT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
        AND THREE MONTHS ENDED SEPTEMBER 30, 1998........................... 8

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

                     PART II - OTHER INFORMATION

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

ITEM 2.  CHANGES IN SECURITIES.............................................. 9

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.................................... 9

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  .............. 9

ITEM 5.  OTHER INFORMATION.................................................. 9

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K .................................. 9

SIGNATURES..................................................................11


                                       ii
<PAGE>   3

                          FRANKLIN FINANCE CORPORATION
                       STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
Assets                                                 September 30, 1998 December 31, 1997
                                                       ------------------------------------
                                                           (unaudited)
<S>                                                      <C>                   <C>        
Cash in bank                                             $  2,070,991          $       268
Loans
  Residential Homes Loans                                  16,554,383           22,736,015
  Commercial Loans                                         14,526,309           18,752,685
Allowance for loan losses                                     (12,000)
                                                         ---------------------------------
Net Loans                                                  31,068,692           41,488,700


Other investments                                           7,859,097
Accrued interest on investments                                89,499
Accrued Interest - Residential                                 94,625              112,244
Accrued Interest - Commercial                                  98,249              115,989
Due from parent company                                     1,117,763               27,624
Prepaid expenses and other assets                               7,053
                                                         ---------------------------------
Total Assets                                             $ 42,405,968          $41,744,825
                                                         =================================

Liabilities and Shareholders' Equity
                              

Dividend Payable - Preferred                                                   $    49,340
Dividend Payable - Common                                                           53,207
Misc  Accounts Payable                                   $      2,000
                                                         ---------------------------------
Total Current Liabilities                                       2,000              102,547


Shareholders' Equity
Common Stock par value $300.00; 60,000 shares
   authorized, 22,077 shares  issued and outstanding        6,623,100            6,623,100
Preferred Stock, par value $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
Unrealized gain                                                 3,466
Retained Earnings                                             758,225
                                                         ---------------------------------
Total Shareholders' Equity                                 42,403,969           41,642,278


Total Liabilities/Shareholders' Equity                   $ 42,405,969          $41,744,825
                                                         =================================
</TABLE>

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


                                       1
<PAGE>   4

                          FRANKLIN FINANCE CORPORATION
                            STATEMENT OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 Nine Months Ended          Three Months Ended
                                                                 September 30, 1998         September 30, 1998
                                                                 ---------------------------------------------
<S>                                                              <C>                        <C>               
Interest Income


Interest on residential loans                                    $        1,166,243         $          349,727
Interest on commercial loans                                              1,096,584                    345,101
Interest on mortgage backed securities                                       89,734                     89,734
                                                                 ---------------------------------------------
Total interest                                                            2,352,561                    784,562
Provision for loan losses                                                    12,000
                                                                 ---------------------------------------------                   
Total interest income after provision for loan losses                     2,340,561                    784,562
                                                                 ---------------------------------------------
Expenses

Director's fees                                                               3,000                      2,000
Outside services                                                              5,949                      1,146
Advisory fee                                                                 93,816                     31,272
Insurance                                                                    23,083                      7,692
Loan service  fee                                                            99,266                     34,342
Single business tax                                                           6,000                      6,000
                                                                 ---------------------------------------------
Total expenses                                                              231,114                     82,452
                                                                 ---------------------------------------------
Net income                                                       $        2,109,447          $         702,110
                                                                 =============================================
Preferred stock dividend                                                  1,351,222                    450,225
                                                                 ---------------------------------------------
Net income available to common shareholders                      $          758,225          $         251,885
                                                                 =============================================
 Earnings per common share - basic                                           $34.34                     $11.41

</TABLE>

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

                                       2






<PAGE>   5




                        FRANKLIN FINANCE CORPORATION
                      STATEMENT OF SHAREHOLDERS' EQUITY
                                 (UNAUDITED)

                 For the Nine months Ended September 30, 1998

<TABLE>
<CAPTION>
                                                                                        Unrealized
                                        Preferred       Common          Paid in         Gain/(Loss)     Retained
                                          Stock          Stock          Surplus         on Securities   Earnings        Totals  
                                        -----------------------------------------------------------------------------------------
<S>                                   <C>              <C>             <C>              <C>           <C>           <C> 
Balance, December 31, 1997            $  20,700,000    $ 6,623,100     $ 14,319,178                                 $  41,642,278
Net Income                                                                                            $  2,109,447      2,109,447
Capital Contribution from
 Common Shareholder                                                          67,552                                        67,552
Additional Expenses for Preferred                                                                                           
 Stock Offering                                                             (67,552)                                      (67,552)
Dividends on 8.70% Noncumulative
 Series A Preferred Shares                                                                              (1,351,222)    (1,351,222)
Change in unrealized gain (loss) on
 securities available for sale net of tax                                                   3,466                           3,466
Balance, September 30, 1998           -------------------------------------------------------------------------------------------
                                      $  20,700,000    $ 6,623,100     $ 14,319,178        $3,466     $    758,225  $  42,403,969
                                      -------------------------------------------------------------------------------------------

</TABLE>

The Notes to Financial Statements are an integral part of this statement.


                                       3

<PAGE>   6

                          FRANKLIN FINANCE CORPORATION
                             STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                  --------------------------------------------
<TABLE>
<CAPTION>
<S>                                                                             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                                      $ 2,109,447
Adjustments to reconcile net income to cash provided by operating activities:
   Provision for loan losses                                                         12,000
   Amortization on securities                                                       (84,484)
   Increase in accrued interest receivable                                          (54,140)
   Increase in prepaid expenses and other assets                                 (1,098,977)
   Decrease in other liabilities                                                   (100,547)
                                                                                -----------
Total adjustments                                                                (1,326,148)
                                                                                -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                           783,299
                                                                                -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of commercial loans                                                       (981,840)
Purchase of securities available for sale                                        (8,674,529)
Repayment                                                                           905,167
Net decrease in loans                                                            11,389,848
                                                                                -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                         2,638,646
                                                                                -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend on preferred stock                                                      (1,351,222)
                                                                                -----------
NET CASH USED IN FINANCING ACTIVITIES                                            (1,351,222)
                                                                                -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                         2,070,723
                                                                                -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                        268
                                                                                -----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, 1998                                 $ 2,070,991
                                                                                ===========
</TABLE>



The Notes to Financial Statements are an integral part of this statement.


                                       4
<PAGE>   7
                          FRANKLIN FINANCE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 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 COMMERICAL MORTGAGE LOANS:

Of the residential mortgage loans included in the portfolio, 47.4% bear interest
at fixed rates. At September 30, 1998, the interest rates of the fixed rate
residential mortgage loans included in the portfolio range from 6.00% per annum
to 10.25% per annum. The weighted average interest rate of the fixed rate
residential mortgage loans included in the portfolio at September 30, 1998 was
approximately 8.17% per annum.

Of the residential mortgage loans included in the portfolio, approximately 52.6%
bear interest at adjustable rates. 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 6.875% per annum to 8.55% per annum as of September 30, 1998. As of
September 30, 1998, the weighted average current interest rate of the
residential mortgage loans included in the portfolio that are ARMs was
approximately 7.86% per annum.

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 $112,459 to $1.9 million as of September 30, 1998.

Of the commercial mortgage loans included in the portfolio at September 30,
1998, 56.3% bear interest at fixed rates. The interest rates of the fixed rate
commercial mortgage loans included in the portfolio ranged from 7.75% per annum
to 12.00% per annum at September 30, 1998. As of September 30, 1998, the
weighted average current interest rate of the commercial mortgage loans included
in the portfolio that are fixed rate loans was 9.65% per annum.

Of the commercial mortgage loans included in the portfolio at September 30,
1998, 43.7% 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 8.00% per annum to 10.0% per annum
as of September 30, 1998, weighted average yield equals 8.66% per annum.

                                       5
<PAGE>   8



NOTE 3 - FEDERAL HOME LOAN MORTGAGE CORPORATION, ("FHLMC") MORTGAGE BACKED
SECURITIES

On the last day of the second quarter of 1998 the Company purchased from the
Bank a Federal Home Loan Mortgage Corporation & FNMA Mortgage Backed Security
for $4.6 million. This security has a weighted average life of 1.44 years and is
yielding a weighted average yield to maturity of 6.30%. During the third quarter
of 1998 the company purchased a FNMA agency debt for $3.5 million at a yield of
5.22% maturing July 1999.

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 the nine months ended September 30, 1998, the Company's Board of
Directors declared $1,400,562 of preferred stock dividends. Dividends of
$450,225 were paid on September 30, 1998, June 30, 1998 and March 31, 1998,
respectively. The remaining dividend of $49,887, representing dividends due for
the period December 22 through December 31, 1997, were paid on April 13, 1998.

                                     PART I

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

FINANCIAL CONDITION

Organization

Franklin Finance Corporation (the "Company") is a newly formed 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.

On December 22, 1997, the Company commenced its operations upon the closing of
the initial public offering (the "Offering") of 2,070,000 shares of the
Company's 8.70% Noncumulative Exchangeable Preferred Stock, Series A, par value
$10.00 per share (the "Series A Preferred Shares"). The net proceeds to the
Company from the sale of the Series A Preferred Shares were $19.8 million.
Simultaneous with the consummation of the Offering, the Bank made capital
contributions to the Company with respect to its Common Stock in the amount of
$20.7 million, plus an additional $1.1 million representing the underwriting
discount and the expenses of the Offering.

The Company used the net proceeds of $42.9 million raised from the Offering and
the capital contributions by the Bank to purchase from the Bank the Company's
initial portfolio of Mortgage Assets, comprised of residential and commercial
mortgage loans ("Mortgage Loans"), at their estimated fair value of
approximately $41.5 million. Such loans were recorded in the accompanying
financial statements at the Bank's historical cost basis of $41.2 million and
the premium paid with the purchase of the loans of $0.3 million.

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 

                                       6
<PAGE>   9

and the Bank. These assets represent residential loans, commercial mortgage
loans, Federal Home Loan mortgage backed securities, and FNMA agency debt
securities.

At September 30, 1998, the Company had $16.6 million invested in loans secured
by first mortgages or deeds of trust on single-family residential real estate
properties ("Residential Mortgage Loans"). The $6.2 million decrease from the
balance at December 31, 1997, 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 September 30, 1998, the Company had $14.5 million invested in mortgage loans
secured by income-producing properties ("Commerical Mortgage Loans") that
consist of retail strip centers, multi-family residential rental properties,
warehouse, industrial and office center properties located in Michigan. The $4.2
million decrease from the balance at December 31, 1997, resulted from Commercial
Mortgage Loan principal collections and individual loan payoffs of $5.2 million
and the purchase of loans for the portfolio of $1.0 million. Management intends
to continue to reinvest proceeds received from repayments of loans in additional
Commerical Mortgage Loans, or mortgage backed securities to be purchased from
either the Bank or its affiliates. It is anticipated that more purchases of
mortgage backed securities will be completed during the fourth quarter of 1998.
See "Results of Operations."

At September 30, 1998 the Bank had outstanding principal balances of $7.9
million invested in a "FHLMC" mortgage backed note and a "FNMA" agency security.
These loans are for single family residential loans. The weighted average yield
to maturity of these investments is 5.8%.

At September 30, 1998, 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 charged to income and reduced by net
charge-offs. The activity in the allowance for loan losses for the nine months
ended September 30, 1998 is as follows:

                                                        Nine Months Ended
                                                       September 30, 1998
                                                       ------------------
Balance at beginning of period                         $           12,000
Provision for loan losses
Charge-offs                                                             0
Recoveries                                                              0
                                                       ------------------
Balance at end of period                               $           12,000
                                                       ------------------
                                                      

Interest Rate Risk

The Company's income consists primarily of interest payments on mortgage loans.
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. 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



                                       7
<PAGE>   10

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 will be 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.

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

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

Tax Status of the Company

The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1997. As a REIT,
the Company generally will not be subject to Federal income tax on its net
income (excluding capital gains) provided that it distributes annually 95
percent of its REIT taxable income to its 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 September 30, 1998, 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

During the nine-month period ended September 30, 1998 (the "nine-month period")
and three months ended September 30, 1998 (the "three-month period"), the
Company reported net income of $2.1 million and $702,110 respectively. Interest
income on Residential Mortgage Loans totaled $1,116,243 and $349,727 for the
nine-month and three-month periods, respectively, which represents an average
yield on such loans of 7.92% and 7.92%, respectively. Interest income on
Commercial Mortgage Loans totaled $1,096,584 and $345,101 for the nine-month and
three-month periods, respectively, which represents an average yield on such
loans of 8.79% and 9.33%, respectively. The average loan balance of the
Residential Mortgage Loan portfolio for the nine-month and three-month periods
was $19.6 million and $17.6 million, respectively. The average balance of the
Commercial Mortgage Loan portfolio for the nine-month and three-month periods
was $16.3 million and $15.2 million, respectively. The Company does not
anticipate any material change in the amount of interest income to be earned on
these investments for the remainder of fiscal year 1998.



                                       8
<PAGE>   11

Interest income earned on investment securities totaled $89,734 for the period
ended September 30, 1998. Due to the purchase of a FHLMC note on June 30, 1998,
the amount of interest income earned for the 3 months ended September 30, 1998
equals what was earned for the year to date period.

Provision for loan losses of $12,000 was recorded on the Company's loan
portfolio during the nine-month period ending September 30, 1998. No additional
provision for loan losses is expected to be made during the last quarter of
fiscal 1998.

Operating expenses totaling $231,114 and $82,452 for the nine-month and
three-month periods, respectively, 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 $99,266 and $34,342 for the
nine-month and three-month periods, respectively, were based on a servicing fee
rate of .375% of the outstanding principal balances of the Residential and
Commerical Mortgage Loans, pursuant to the servicing agreements between the
Company and the Bank. Advisory fees paid to the Bank for the nine-month and
three-month periods totaled $93,816 and $31,272, respectively. Directors fees
totaled $3,000 for the nine-month period, and represents compensation to the 2
independent members of the Board of Directors. General and administrative
expenses consist primarily of insurance and outside service costs. It is
anticipated that no material increase in these expenditures will occur during
the last quarter of fiscal year 1998.

On September 11, 1998, the Company declared, out of the retained earnings of the
Company, a cash dividend of $.2175 per share on the outstanding shares of Series
A Preferred Stock. Dividends of $450,225 were subsequently paid on September 30,
1998 for the period July 1, 1998 through September 30, 1998.

Franklin Finance Corporation is linked with Franklin Bank's year 2000 compliance
efforts because Franklin Finance Corporation is a wholly owned subsidiary of
Franklin Bank. Please refer to Franklin Bank's September 30, 1998, Form 10-Q for
a description of Year 2000 compliance status.

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.

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.


                                       9
<PAGE>   12

NO.    EXHIBIT
11      Computation of Net Income Per Common Share
12     Computation of ratio of income to fixed charges and Preferred Stock
       dividend requirements.
27     Financial Data Schedule

(b) No reports on Form 8-K were issued during the Nine months ended September
    30, 1998





























                                       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
November 10, 1998.

                          FRANKLIN FINANCE CORPORATION
                                  (Registrant)

                    By:  /s/ Read P. Dunn
                         -----------------------------------------------
                         Read P. Dunn
                         President and Chief Executive Officer
                         (Duly authorized representative)

                    By:  /s/ David L. Shelp
                         -----------------------------------------------
                         David L. Shelp
                         Director, Treasurer and Chief Financial Officer
                         (Principal financial and accounting officer)

















                                       11
<PAGE>   14


                                 Exhibit Index
                                 -------------



<TABLE>
<CAPTION>

Exhibit No.                   Description
-----------                   -----------


<S>     <C>
NO.     EXHIBIT
  11     Computation of Net Income Per Common Share
  12     Computation of ratio of income to fixed charges and Preferred Stock
         dividend requirements.
  27     Financial Data Schedule

</TABLE>