Franklin Credit Holding (FCMC) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission file number 0-17771U

FRANKLIN CREDIT MANAGEMENT CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	75-2243266
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

101 Hudson Street

Jersey City, New Jersey 07302

(201) 604-1800

(Address of principal executive offices)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer o Accelerated filer x Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 10, 2006: 7,857,295

FRANKLIN CREDIT MANAGEMENT CORPORATION

FORM 10-Q

INDEX

		UPage
PART I.           FINANCIAL INFORMATION
Item 1.              Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2006 and December 31, 2005		3
	Consolidated Statements of Income for the three and six months ended June 30, 2006 and June 30, 2005	4
	Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2006	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005	6
	Notes to Consolidated Financial Statements	7
Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Application of Critical Accounting Policies and Estimates	18
	Portfolio Characteristics	19
	Results of Operations	28
	Liquidity and Capital Resources	33
	Borrowings	35
Item 3.              Quantitative and Qualitative Disclosures about Market Risk		40
Item 4.              Controls and Procedures		41
PART II.         OTHER INFORMATION
Item 1.              Legal Proceedings		42
Item 1A.          Risk Factors		42
Item 2.              Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.              Defaults Upon Senior Securities		45
Item 4.              Submission of Matters to a Vote of Security Holders		45
Item 5.              Other Information		45
Item 6.              Exhibits and Reports on Form 8-K		46
SIGNATURES		47

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

	June 30, 2006 (Unaudited)			December 31, 2005
ASSETS
Cash and cash equivalents	$	3,881,320		$	3,886,506
Restricted cash		39,426,556			17,008,649
Short-term investments		16,128,854			16,954,019
Notes Receivable:
Principal		984,329,235			934,657,413
Purchase discount		(14,788,839	)		(17,809,940	)
Allowance for loan losses		(60,539,288	)		(67,276,155	)
Net notes receivable		909,001,108			849,571,318
Originated loans held for sale		3,333,233			12,844,882
Originated loans held for investment, net		440,406,576			372,315,935
Accrued interest receivable		14,588,091			13,341,964
Other real estate owned		19,394,263			19,936,274
Deferred financing costs, net		10,635,499			10,008,473
Other receivables		6,127,876			7,309,505
Building, furniture and equipment, net		3,775,763			4,029,481
Other assets		6,283,695			1,033,583
Total assets	$	1,472,982,834		$	1,328,240,589
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable, net of debt discount of $3,311,012 at June 30, 2006 and $3,002,767 at December 31, 2005	$	1,364,468,177		$	1,203,880,994
Financing agreements		35,018,989			57,284,085
Accounts payable and accrued expenses		15,524,956			12,971,954
Success fee liability		6,710,810			5,721,918
Deferred income tax liability		1,926,042			787,470
Total liabilities		1,423,648,974			1,280,646,421
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 3,000,000; issued - none		-			-
Common stock and additional paid-in capital, $.01 par value, 22,000,000 authorized shares; issued and outstanding: 7,857,295 at June 30, 2006 and 7,539,295 at December 31, 2005		22,337,317			21,292,252
Retained earnings		26,996,543			26,599,207
Unearned compensation		-			(297,291	)
Total stockholders’ equity		49,333,860			47,594,168
Total liabilities and stockholders’ equity	$	1,472,982,834		$	1,328,240,589

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
	2006			2005 (Restated)		2006		2005 (Restated)
Revenues:
Interest income	$	35,272,864		$	23,978,328	$	68,715,174	$	46,855,526
Purchase discount earned		2,223,710			2,867,795		4,202,673		5,119,276
Gain on sale of notes receivable		-			665,902		69,049		665,902
Gain on sale of originated loans held for sale		170,924			578,306		336,796		906,233
Gain on sale of other real estate owned		440,741			400,402		1,242,283		656,383
Prepayment penalties and other income		2,335,115			1,655,273		4,540,321		3,044,685
Total revenues		40,443,354			30,146,006		79,106,296		57,248,005
Operating Expenses:
Interest expense		27,898,497			16,313,059		52,390,065		29,493,329
Collection, general and administrative		10,432,793			7,909,409		18,380,672		14,588,160
Provision for loan losses		3,162,146			1,052,714		5,031,275		2,250,932
Amortization of deferred financing costs		1,130,415			1,012,734		2,038,430		1,705,721
Depreciation		251,613			209,353		563,318		414,827
Total expenses		42,875,464			26,497,269		78,403,760		48,452,969
(Loss)/income before provision for income taxes		(2,432,110	)		3,648,737		702,536		8,795,036
Income tax (benefit)/expense		(1,042,698	)		1,678,919		305,200		4,050,089
Net (loss)/income	$	(1,389,412	)	$	1,969,818	$	397,336	$	4,744,947
Net (loss)/income per common share:
Basic	$	(0.18	)	$	0.33	$	0.05	$	0.79
Diluted	$	(0.18	)	$	0.29	$	0.05	$	0.71
Weighted average number of shares outstanding:
Basic		7,634,878			6,004,628		7,574,837		5,995,795
Diluted		7,634,878			6,714,823		8,055,260		6,715,976

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)

	Common Stock and Additional Paid-in Capital
	Shares		Amount			Retained Earnings		Unearned Compensation			Total
BALANCE, JANUARY 1, 2006		7,539,295	$	21,292,252		$	26,599,207	$	(297,291	)	$	47,594,168
Reclassification adjustment on adoption of FASB 123(R)		-		(297,291	)		-		297,291			-
Options exercised		213,000		326,845			-		-			326,845
Stock-based compensation		105,000		484,108			-		-			484,108
Excess tax benefit		-		531,403			-		-			531,403
Net income		-		-			397,336		-			397,336
BALANCE, JUNE 30, 2006		7,857,295	$	22,337,317		$	26,996,543	$	-		$	49,333,860

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

	Six Months Ended June 30,
	2006			2005 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	397,336		$	4,744,947
Adjustments to reconcile income to net cash provided by/(used in) operating activities:
Gain on sale of notes receivable		(69,049	)		(665,902	)
Gain on sale of other real estate owned		(1,242,283	)		(656,384	)
Gain on sale of originated loans held for sale		(336,796	)		(906,234	)
Depreciation		563,318			414,827
Amortization of deferred costs and fees on originated loans		734,090			862,078
Amortization of deferred financing costs		2,038,430			1,705,721
Amortization of debt discount and success fees		680,646			377,669
Excess tax benefit		(531,403	)		-
Non-cash compensation		484,108			293,239
Proceeds from the sale of and principal collections on loans held for sale		20,988,948			30,122,048
Origination of loans held for sale		(11,946,300	)		(30,053,155	)
Deferred tax provision		1,138,572			475,565
Purchase discount earned		(4,202,673	)		(5,119,276	)
Provision for loan losses		5,031,275			2,250,931
Changes in operating assets and liabilities:
Accrued interest receivable		(1,246,127	)		(1,977,487	)
Other receivables		1,181,629			(3,692,461	)
Other assets		(4,718,708	)		192,737
Accounts payable and accrued expenses		2,553,000			1,815,979
Net cash provided by operating activities		11,498,013			184,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash		(22,417,907	)		(19,014,724	)
Purchase of notes receivable		(216,054,218	)		(173,407,681	)
Principal collections on notes receivable		141,008,398			130,905,542
Principal collections on loans held for investment		110,406,287			31,703,390
Origination of loans held for investment		(192,466,907	)		(163,253,882	)
Sales of short-term investments		825,165			-
Proceeds from sale of other real estate owned		17,078,333			16,543,339
Proceeds from sale of loans held for investment		13,519,573			8,264,142
Proceeds from sale of notes receivable		84,553			8,596,823
Purchase of building, furniture and equipment		(309,598	)		(1,384,607	)
Net cash used in investing activities		(148,326,322	)		(161,047,658	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		431,163,623			351,987,874
Principal payments of notes payable		(270,268,195	)		(178,168,120	)
Proceeds from financing agreements		206,386,407			194,041,589
Principal payments of financing agreements		(228,651,503	)		(202,547,534	)
Excess tax benefit		531,403			-
Payment of deferred financing costs		(2,665,458	)		(3,355,486	)
Exercise of options		326,845			36,273
Net cash provided by financing activities		136,823,122			161,994,596
NET CHANGE IN CASH AND CASH EQUIVALENTS		(5,186	)		1,131,780
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,886,506			5,127,732
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,881,320		$	6,259,512
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest	$	47,212,204		$	27,853,662
Cash payments for taxes	$	3,524,080		$	3,128,702
NON-CASH INVESTING AND FINANCING ACTIVITY:
Transfer of loans from held for sale to loans held for investment	$	483,601		$	-
Transfer from notes receivable and loans held for investment to OREO	$	23,354,090		$	12,601,777

See Notes to Consolidated Financial Statements.

6

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.   BUSINESS

As used herein references to the “Company,” “FCMC,” “we,” “our” and “us” refer to Franklin Credit Management Corporation, collectively with its subsidiaries.

We are a specialty consumer finance company primarily engaged in two related lines of business: (1) the acquisition, servicing and resolution of performing, reperforming and nonperforming residential mortgage loans and real estate assets; and (2) the origination of non-prime mortgage loans, both for our portfolio and for sale into the secondary market. We specialize in acquiring and originating loans secured by 1-to-4 family residential real estate that generally fall outside the underwriting standards of Fannie Mae and Freddie Mac and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. We typically purchase loan portfolios at a discount, and originate loans with interest rates and fees, calculated to provide us with a rate of return adjusted to reflect the elevated credit risk inherent in the types of loans we acquire and originate. Unlike many of our competitors, we generally hold for investment the loans we acquire and a significant portion of the loans we originate.

From inception through June 30, 2006, we had purchased and originated in excess of $3.33 billion in mortgage loans. As of June 30, 2006, we had total assets of $1.47 billion and our portfolios of notes receivable and loans held for investment, net, totaled $1.35 billion.

Loan Acquisitions

Since commencing operations in 1990, we have become a nationally recognized buyer of portfolios of residential mortgage loans and real estate assets from a variety of financial institutions in the United States, including mortgage banks, commercial banks and thrifts, other traditional financial institutions and other specialty finance companies. These portfolios generally consist of one or more of the following types of mortgage loans:

·             performing loans - loans to borrowers who are contractually current, but may have been delinquent in the past and which may have deficiencies relating to credit history, loan-to-value ratios, income ratios or documentation;

·             reperforming loans - loans to borrowers who are not contractually current, but have recently made regular payments and where there is a good possibility the loans will be repaid in full; and

·             nonperforming loans - loans to borrowers who are delinquent, not expected to cure, and for which a primary avenue of recovery is through the sale of the property securing the loan.

We sometimes refer collectively to these types of loans as “scratch and dent” or “S&D” loans.

We have developed a specialized expertise at risk-based pricing, credit evaluation and loan servicing that allows us to effectively evaluate and manage the potentially higher risks associated with this segment of the residential mortgage industry, including the rehabilitation or resolution of reperforming and nonperforming loans.

We refer to the S&D loans we acquire as “notes receivable.” In the second quarter of 2006, we purchased notes receivable with an aggregate unpaid principal balance of $133.5 million at an aggregate purchase price equal to 90% of the face amount of the notes. During the six months ended June 30, 2006, we acquired $237.3 million of notes receivable at an aggregate purchase price equal to 91% of the face amount of the notes.

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Loan Originations

We conduct our loan origination business through our wholly-owned subsidiary, Tribeca Lending Corp. (“Tribeca”), which we formed in 1997 in order to capitalize on our experience in evaluating and servicing scratch and dent residential mortgage loans. We originate primarily non-prime residential mortgage loans to individuals whose documentation, credit histories, income and other factors cause them to be classified as non-prime borrowers and to whom, as a result, conventional mortgage lenders often will not make loans. The loans we originate typically carry interest rates that are significantly higher than those of prime loans and we believe have fairly conservative loan-to-value ratios. The principal factor in our underwriting guidelines has historically been our determination of the borrower’s equity in his or her home and the related calculation of the loan-to-value ratio based on the appraised value of the property, and not, or to a lesser extent, on a determination of the borrower’s ability to repay the loan. We have recently begun in an increasing number of cases to gather and analyze additional information that allows us to assess to a reasonable degree the borrower’s ability and intent to repay the loan in connection with our credit decision. We have chosen to focus our marketing efforts on this segment of the 1-to-4 family residential real estate mortgage market in order to capitalize on our extensive experience in acquiring and servicing loans with similar performance characteristics.

During the second quarter of 2006, we originated $99.6 million in non-prime mortgage loans, 94% of which were adjustable-rate (fixed-rate for the first two years) loans. We originated approximately 33% of these mortgage loans on a retail basis and the remainder through our wholesale network of mortgage brokers. During the six months ended June 30, 2006, we originated $204.4 million in non-prime mortgage loans, 95% of which were adjustable-rate (fixed rate for the first two years) loans. We originated approximately 67% of these mortgage loans on a retail basis and the remainder through our wholesale network of mortgage brokers. We hold the majority of mortgages we originate in our portfolio and sell the remainder for cash in the whole loan market, depending on market conditions and our own portfolio goals.

Loan Servicing

We have a loan servicing capability that is focused on collections, loss mitigation and default management. In general, we seek to ensure that the loans we acquire and originate are repaid in accordance with the original terms or according to amended repayment terms negotiated with the borrowers. Because we expect our loans will experience above average delinquencies, erratic payment patterns and defaults, our servicing operation is focused on maintaining close contact with our borrowers and as a result is more labor-intensive than traditional mortgage servicing operations. Through frequent communication we are able to encourage positive payment performance, quickly identify those borrowers who are likely to move into seriously delinquent status and promptly apply appropriate loss mitigation strategies. Our servicing staff employs a variety of collection strategies that we have developed to successfully manage serious delinquencies, bankruptcy and foreclosure. Additionally, we maintain a real estate department with extensive experience in property management and the sale of residential properties.

2.   RESTATEMENT

In connection with the preparation of the Annual Report on Form 10-K for the year ended December 31, 2005, management identified certain errors in and restated its previously issued financial statements for the years ended December 31, 2004 and 2003, for the first three quarters in 2005 and the quarterly periods in 2004. These restatements and resulting revisions related principally to (i) the accounting treatment of certain fees and costs related to the successful acquisition of pools of residential mortgage loans (“deferred acquisition costs”) and (ii) the accounting treatment of success fees that are both currently and potentially payable to the Company’s primary lending bank following repayment of existing term debt (“success fees”).

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In addition, the Company restated previously reported “Cash and cash equivalents” to classify the restricted portion separately on the balance sheet with related adjustments to the statements of cash flows, and restated the presentation of deferred origination costs for loans sold by reclassifying these costs from “Collection, general and administrative” expenses to “Gain on sale of originated loans held for sale.” Neither restatement had an impact on previously reported net income. The Company’s restated financial statements also include certain other adjustments that were immaterial individually and in the aggregate.

The net after-tax effects of the restatement on the Company’s consolidated net income for the three and six months ended June 30, 2005 were as follows:

	Net Income (As Previously Reported)		Deferred Acquisition Costs (SFAS No. 91)			Success Fees (SFAS No. 133)			Other		Net Income (Restated)
Three months ended June 30, 2005	$	2,108,667	$	(234,167	)	$	(164,832	)	$	260,150	$	1,969,818
Six months ended June 30, 2005	$	5,179,491	$	(349,451	)	$	(283,640	)	$	198,547	$	4,744,947

The significant effects of the restatement on the Company’s consolidated financial statements for the three and six months ended June 30, 2005 follow.

Restated Statement of Income Information for Three and Six Months Ended June 30, 2005 (Unaudited)

	Three Months Ended June 30, 2005				Six Months Ended June 30, 2005
	As Previously Reported		Restated		As Previously Reported		Restated
REVENUES:
Gain on sale of loans held for sale	$	1,026,389	$	578,306	$	1,690,093	$	906,233
Prepayment penalties and other income		2,202,930		1,655,273		4,045,846		3,044,685
Total revenues		31,141,746		30,146,006		59,033,026		57,248,005
OPERATING EXPENSES:
Interest expense		16,281,776		16,313,059		29,300,121		29,493,329
Collection, general and administrative		8,679,188		7,909,409		15,768,732		14,588,160
Total expenses		27,235,765		26,497,269		49,440,333		48,452,969
INCOME BEFORE PROVISION FOR INCOME TAXES		3,905,981		3,648,737		9,592,693		8,795,036
PROVISION FOR INCOME TAXES		1,797,314		1,678,919		4,413,202		4,050,089
NET INCOME		2,108,667		1,969,818		5,179,491		4,744,947
EARNINGS PER SHARE:
Basic	$	0.35	$	0.33	$	0.85	$	0.79
Diluted	$	0.30	$	0.29	$	0.75	$	0.71
Weighted average shares, basic		6,090,628		6,004,628		6,088,212		5,995,795
Weighted average shares, diluted		6,958,628		6,714,823		6,872,015		6,715,976

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Restated Statement of Cash Flows Information for Six Months Ended June 30, 2005 (Unaudited)

	Six Months Ended June 30, 2005
	As Previously Reported			Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,179,491		$	4,744,947
Adjustments to reconcile income to net cash provided by/(used in) operating activities:
Gain on sale of originated loans held for sale		-			(906,234	)
Amortization of deferred costs and fees on originated loans		-			862,078
Amortization of debt discount and success fees		-			377,669
Issuance of restricted stock		430,190			-
Non-cash compensation		-			293,239
Proceeds from the sale of and principal collections on loans held for sale		28,450,972			30,122,049
Changes in operating assets and liabilities:
Deferred income tax		1,914,074			475,565
Other assets		(1,364,189	)		192,737
Accounts payable and accrued expenses		1,740,815			1,815,979
Net cash provided by operating activities		(1,441,831	)		184,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash		(30,494	)		(19,014,724	)
Loan fees		(1,721,767	)		-
Net cash used in investing activities		(143,787,396	)		(161,047,658	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing costs		-			(3,355,486	)
Net cash provided by financing activities		152,736,623			161,994,596
NET CHANGE IN CASH AND CASH EQUIVALENTS		7,507,396			1,131,780
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		19,519,659			5,127,732
CASH AND CASH EQUIVALENTS, END OF PERIOD		27,027,055			6,259,512

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments, consisting of all normal and recurring items, which are necessary for a fair presentation, have been included.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates of the Company are allowance for loan losses, discounts on acquired loans and success fee liability. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility and credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions may occur which could cause actual results to differ materially. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The operating and financial results for interim periods reported are not necessarily indicative of the results that may be expected for the full year.

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Stock-Based Compensation Plans - The Company maintains share-based payment arrangements under which employees are awarded grants of restricted stock, non-qualified stock options, incentive stock options and other forms of stock-based payment arrangements. Prior to January 1, 2006, the Company accounted for these awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, compensation cost for stock options was not recognized as long as the stock options granted had an exercise price equal to the market price of the Company’s common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) using the modified-prospective transition method. Under this transition method, compensation cost recognized beginning January 1, 2006 includes compensation cost for all share-based payment arrangements, requisite services rendered prior to, but not yet vested as of December 31, 2005, based on the grant date fair value and expense attribution methodology determined in accordance with the original provisions of SFAS 123. Compensation cost for all share-based payment arrangements granted subsequent to December 31, 2005, is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). In addition, the effect of forfeitures on restricted stock (if any), is estimated when recognizing compensation cost. Results for prior periods have not been recast for the adoption of SFAS No. 123(R).

The compensation cost recognized in income for the plans described below was $335,350 and $183,188 for the three months ended June 30, 2006 and 2005, respectively. The compensation cost recognized in income for the plans described below was $484,108 and $293,239 for the six months ended June 30, 2006 and 2005, respectively.

Prior to January 1, 2006, the Corporation estimated the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model. The table below presents the assumptions used to estimate the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model for the six months ended June 30, 2006 and 2005. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. The Corporation uses historical data to estimate stock option exercise. The expected term of stock options granted is derived from the output of the model and represents the period of time that stock options granted are expected to be outstanding. The estimates of fair value from these models are theoretical values for stock options and changes in the assumptions used in the models could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Corporation’s common stock when the stock options are exercised.

Stock Option Plan

	Six Months Ended June 30,
	2006			2005
Risk-free interest rate		3.85	%		5.60	%
Weighted average volatility		47.57			108.76
Expected lives (years)		6.0			6.0

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Our stock-based compensation was accounted for under the recognition and measurement principles of APB Opinion 25 and related interpretations. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards during the three and six months ended June 30, 2005.

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income - as reported	$	1,969,818		$	4,744,947
Stock-based compensation expense determined under fair value method, net of related tax effects(1)		(95,601	)		(98,873	)
Net income - pro forma	$	1,874,217		$	4,646,074
Earnings per share:
Basic - as reported	$	0.33		$	0.79
Basic - pro forma	$	0.31		$	0.77
Diluted - as reported	$	0.29		$	0.71
Diluted - pro forma	$	0.28		$	0.69

(1)   The stock-based compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards.

·Stock Options - The Company awards stock options to certain officers and directors under the Franklin Credit Management Corporation 1996 Stock Incentive Plan (“the Plan”) as amended. The Compensation Committee of the Board of Directors (the “Compensation Committee”) determines which eligible employees or directors will receive awards, the types of awards to be received, and the terms and conditions thereof.

Options granted under the Plan may be designated as either incentive stock options or non-qualified stock options. The Compensation Committee determines the terms and conditions of the option, including the time or times at which an option may be exercised, the methods by which such exercise price may be paid, and the form of such payment. Options are generally granted with an exercise price equal to the market value of the Company’s stock at the date of grant. These option awards generally vest over 1 to 3 years and have a contractual term of 10 years.

The estimated fair value of options granted was calculated using the Black-Scholes option pricing valuation model. This model takes into account several factors and assumptions. The risk-free interest rate is based on the yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumption at the time of grant. The expected life (estimated period of time outstanding) is estimated using the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior. Expected volatility prior to July 1, 2005 was calculated based on historical volatility for a period equal to the stock option’s expected life, calculated on a monthly basis.

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A summary of the status of the Company’s stock option awards as of June 30, 2006 and changes during the six month period then ended is presented below:

	Shares		Weighted Average Exercise		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance, January 1, 2006		667,500	$	2.88		5.1 years	$	3,901,085
Granted		15,000		7.73		10 years		600
Exercised		126,000		1.36		1.57 years		807,595
Canceled		-		-		-		-
Forfeited		20,000		10.70		8.76 years		31,050
Balance, June 30, 2006		536,500		3.05		5.76 years	$	3,008,640
Options exercisable at June 30, 2006		505,750	$	2.40		5.58 years

There were 15,000 stock option awards granted that immediately vested during the six months ended June 30, 2006 compared to 106,500 options granted to management and the board of directors during the six months ended June 30, 2005.

As of June 30, 2006, there was $268,215 of unrecognized compensation cost related to the Company’s stock option awards. The weighted average period over which this cost is expected to be recognized is one year. Cash received from the exercise of stock options for the six months ended June 30, 2006 and 2005 was $326,845 and $36,273, respectively.

The Company’s policy is to issue newly issued shares upon the exercise of options.

2006 Stock Incentive Plan

On May 24, 2006, the shareholders approved the 2006 Stock Incentive Plan to be effective June 15, 2006. This approval authorized and reserved 750,000 shares for grant in addition to the remaining amount under the 1996 stock option incentive plan awards can consist off non-qualified stock options, incentive stock options, stock appreciation rights, shares of restricted stock, restricted stock units, shares of unrestricted stock, performance shares and dividend equivalent rights are authorized. Grants of non-qualified stock options, incentive stock options and stock appreciation rights under the 2006 Stock Incentive Plan generally qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code, and, therefore, are not subject to the provisions of Section 162(m), which disallow a federal income tax deduction for certain compensation in excess of $1 million per year paid to the Company’s Chief Executive Officer and each of its four other most highly compensated executive officers.

·Restricted Stock - Restricted shares of the Company’s common stock have been awarded under separate agreements dated in April 2005 and May 2006 to certain executives. The stock awards are subject to restrictions on transferability and other restrictions, and step vest over a three year period.

13

A summary of the status of the Company’s restricted stock awards as of June 30, 2006 and changes during the period then ended is presented below:

	Shares		Weighted Average Grant Date Fair Value
Non-vested balance, January 1, 2006		27,000	$	12.92
Granted		105,000		7.90
Vested	��	29,000		9.46
Forfeited		-		-
Non-vested balance, June 30, 2006		103,000	$	8.78

The total fair value of the Company’s restricted stock that vested during the six months ended June 30, 2006 was $274,250.

As of June 30, 2006, there was $879,918 of unrecognized compensation cost related to the Company’s restricted stock awards.

Discounts on Acquired Loans - Effective January 1, 2005, as a result of the required adoption of SOP 03-3 the Company was required to change its accounting for loans acquired subsequent to December 31, 2004, which have evidence of deterioration of credit quality since origination and for which it is probable, at the time of our acquisition, that the Company will be unable to collect all contractually required payments. For these loans, the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated by us at the time of acquisition is not accreted into income (nonaccretable discount). The amount representing the excess of cash flows estimated by us at acquisition over the purchase price is accreted into purchase discount earned over the life of the loan (accretable discount).

The nonaccretable discount is not accreted into income. If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting may be used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan.

Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable and collection is probable, the corresponding decrease in the nonaccretable discount is transferred to the accretable discount and is accreted into interest income over the remaining life of the loan on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline is accounted for through the allowance for loan losses.

There is judgment involved in estimating the amount of the loan’s future cash flows. The amount and timing of actual cash flows could differ materially from management’s estimates, which could materially affect our financial condition and results of operations. Depending on the timing of an acquisition, the initial allocation of discount will be made primarily to nonaccretable discount until the Company has boarded all loans onto its servicing system; at that time, any cash flows expected to be collected over the purchase price will be transferred to accretable discount. Generally, the allocation will be finalized no later than ninety days from the date of purchase.

For loans not addressed by SOP 03-3 that are acquired subsequent to December 31, 2004, the discount, which represents the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into purchase discount earned using the interest method over the term of the loans. This is consistent with the method the Company utilizes for its accounting for loans purchased prior to January 1, 2005, except that for these loans an allowance allocation was also made at the time of acquisition.

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The following tables set forth certain information relating to the activity in the accretable and nonaccretable discounts, which are shown as a component of notes receivable principal on the balance sheet, in accordance with SOP 03-3 for the periods indicated:

	Three Months Ended June 30,
	2006			2005
UAccretable DiscountU
Balance, beginning of period	$	14,454,449		$	1,461,379
New Acquisitions		-			5,521,854
Accretion		(1,063,092	)		(206,266	)
Transfers from nonaccretable		815,934			-
Net reductions relating to loans sold		-			(55,747	)
Net reductions relating to loans repurchased		-			-
Other		33,237			-
Balance, end of period	$	14,240,528		$	6,721,220
UNonaccretable DiscountU
Balance, beginning of period	$	27,516,933		$	11,518,409
New Acquisitions		13,314,691			1,879,326
Transfers to accretable		(815,934	)		-
Net reductions relating to loans sold		-			(59,656	)
Net reductions relating to loans repurchased		(197,153	)		-
Other, loans transferred to OREO		(606,075	)		-
Balance, end of period	$	39,212,462		$	13,338,079

	Six Months Ended June 30,
	2006			2005
UAccretable DiscountU
Balance, beginning of period	$	11,360,617		$	-
New Acquisitions		2,545,873			7,033,952
Accretion		(1,926,473	)		(256,985	)
Transfers from nonaccretable		2,187,617			-
Net reductions relating to loans sold		-			(55,747	)
Net reductions relating to loans repurchased		(2,189	)		-
Other		75,083			-
Balance, end of period	$	14,240,528		$	6,721,220
UNonaccretable DiscountU
Balance, beginning of period	$	23,981,013		$	-
New Acquisitions		18,689,222			13,397,735
Transfers to accretable		(2,187,617	)		-
Net reductions relating to loans sold		(7,885	)		(59,656	)
Net reductions relating to loans repurchased		(204,026	)		-
Other, loans transferred to OREO		(1,058,245	)		-
Balance, end of period	$	39,212,462		$	13,338,079

15

The Company purchased $133,462,289 and $237,289,905 of loans subject to SOP 03-3, respectively, during the three and six months ended June 30, 2006. The outstanding balance of notes receivable subject to SOP 03-3 at June 30, 2006 was $599,013,512.

Segments - The Company has two reportable operating segments: (i) portfolio asset acquisition and resolution; and (ii) mortgage banking. The portfolio asset acquisition and resolution segment acquires performing, nonperforming, nonconforming and sub-performing notes receivable and promissory notes from financial institutions, mortgage and finance companies, and services and collects such notes receivable through enforcement of original note terms, modification of original note terms and, if necessary, liquidation of the underlying collateral. The mortgage-banking segment originates or purchases for sale and investment purposes residential mortgage loans to individuals whose credit histories, income and other factors cause them to be classified as subprime borrowers.

The Company’s management evaluates the performance of each segment based on profit or loss from operations before unusual and extraordinary items and income taxes.

	For the Three Months Ended June 30,
	2006			2005
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	27,890,748		$	24,042,147
Mortgage banking		12,552,606			6,103,859
Consolidated revenue	$	40,443,354		$	30,146,006
CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(2,378,743	)	$	1,212,614
Mortgage banking		989,331			757,204
Consolidated net income	$	(1,389,412	)	$	1,969,818
	For the Six Months Ended June 30,
		2006			2005
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	55,834,379		$	46,519,874
Mortgage banking		23,271,917			10,728,131
Consolidated revenue	$	79,106,296		$	57,248,005
CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(1,601,295	)	$	3,175,519
Mortgage banking		1,998,631			1,569,428
Consolidated net income	$	397,336		$	4,744,947
		June 30, 2006			December 31, 2005
CONSOLIDATED ASSETS:
Portfolio asset acquisition and resolution	$	994,638,438		$	924,564,871
Mortgage banking		478,344,396			403,675,718
Consolidated assets	$	1,472,982,834		$	1,328,240,589

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Recent Accounting Pronouncements - On July 13, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Corporation will adopt FIN 48 on January 1, 2007. The cumulative effect, if any, of applying FIN 48 will be recorded as an adjustment to the beginning balance of “Retained earnings.” Management is currently evaluating the effect of FIN 48 on the Corporation.

On February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Instruments (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007, with earlier adoption permitted. Management is currently evaluating the effect of the statement, if any, on the Corporation’s results of operations and financial condition.

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

Restatement

As discussed in Note 2 of the Consolidated Financial Statements, Franklin Credit Management Corporation restated its historical consolidated financial statements for the fiscal years ended December 31, 2004 and 2003, for the first three quarters in 2005 and the quarterly periods in 2004. The accompanying Management’s Discussion and Analysis reflects the effects of the restatement.

General

Safe Harbor Statements. Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in forward-looking statements made by the Company. These factors include, but are not limited to: (i) unanticipated changes in the U.S. economy, including changes in business conditions such as interest rates, and changes in the level of growth in the finance and housing markets; (ii) the status of the Company’s relations with the Company’s sole lender and the lender's willingness to extend additional credit to the Company; (iii) the availability for purchases of additional loans; (iv) the availability of sub-prime borrowers for the origination of additional loans; (vi) changes in the statutes or regulations applicable to the Company’s business or in the interpretation and enforcement thereof by the relevant authorities; (vii) the status of the Company’s regulatory compliance; and (viii) other risks detailed from time to time in the Company’s SEC reports and filings. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company's filings with the Securities and Exchange Commission, including, but not limited to, those factors discussed under the captions “Interest Rate Risk” and “Real Estate Risk” in Item 3 herein, under the caption “Risk Factors” in Item 1A herein, and under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, all of which the Company urges investors to consider. The Company undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events, except as other wise required by securities, and other applicable laws. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the results on any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Application of Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 3 to the December 31, 2005 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. We have identified notes receivable and income recognition, discounts on acquired loans, allowance for loan losses, originated loans held for sale, originated loans held for investment, other real estate owned and success fees as the Company’s most critical accounting policies and estimates. The following discussion and analysis of financial condition and results of operations is based on the amounts reported in our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. In preparing the consolidated financial statements, management is required to make various judgments, estimates and assumptions that affect the financial statements and disclosures. Changes in these estimates and assumptions could have a material effect on our consolidated financial statements. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time.

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Portfolio Characteristics

Overall Portfolio

At June 30, 2006, our portfolio (excluding OREO) consisted of $1.04 billion of notes receivable (inclusive of purchase discount not reflected on the face of the balance sheet), $443.3 million of loans held for investment and $3.4 million of loans held for sale. Our total loan portfolio grew 9% to $1.48 billion as of June 30, 2006, from $1.36 billion at December 31, 2005. Not boarded loans represent loans serviced by the seller on a temporary basis. The following table sets forth information regarding the types of properties securing our loans.

UProperty TypesU	UPrincipal BalanceU		Percentage of Total UPrincipal BalanceU
Residential 1-4 family	$	1,212,053,886		81.65	%
Condos, co-ops, PUD dwellings		142,329,978		9.59	%
Manufactured homes		24,051,986		1.62	%
Multi-family		1,070,590		0.07	%
Secured, property type unknown		48,402,189		3.26	%
Commercial		2,429,141		0.16	%
Unsecured loans		16,576,535		1.12	%
Other		408,813		0.03	%
Not boarded		37,173,894		2.50	%
Total	$	1,484,497,012		100.00	%

Geographic Dispersion. The following table sets forth information regarding the geographic location of properties securing the loans in our portfolio at June 30, 2006:

ULocationU	UPrincipal BalanceU		Percentage of Total UPrincipal BalanceU
New York	$	174,878,964		11.78	%
New Jersey		162,313,592		10.93	%
California		120,841,159		8.14	%
Florida		97,323,499		6.56	%
Pennsylvania		79,232,986		5.34	%
Ohio		77,495,833		5.22	%
Texas		72,580,927		4.89	%
Michigan		51,378,735		3.46	%
Illinois		47,514,697		3.20	%
Georgia		46,354,880		3.12	%
All Others		554,581,740		37.36	%
Total	$	1,484,497,012		100.00	%

Amounts included in the tables above under the heading “Principal Balance” represent the aggregate unpaid principal balance outstanding of notes receivable, loans held for investment and loans held for sale.

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Asset Quality

Delinquency. The following tables provide a breakdown of the delinquency status of our notes receivable, loans held for investment and loans held for sale portfolios as of the dates indicated, by principal balance. Because we specialize in acquiring and servicing loans with erratic payment patterns and an elevated level of credit risk, a substantial portion of the loans we acquire are in various stages of delinquency, foreclosure and bankruptcy when we acquire them. We monitor the payment status of our borrowers based on both contractual delinquency and recency delinquency. By contractual delinquency, we mean the delinquency of payments relative to the contractual obligations of the borrower. By recency delinquency, we mean the recency of the most recent full monthly payment received from the borrower. By way of illustration, on a recency delinquency basis, if the borrower has made the most recent full monthly payment within the past 30 days, the loan is shown as current regardless of the number of contractually delinquent payments. In contrast, on a contractual delinquency basis, if the borrower has made the most recent full monthly payment, but has missed an earlier payment or payments, the loan is shown as contractually delinquent. We classify a loan as in foreclosure when we determine that the best course of action to maximize recovery of unpaid principal balance is to begin the foreclosure process. We classify a loan as in bankruptcy when we receive notice of a bankruptcy filing from the bankruptcy court.

			June 30, 2006
			Contractual Delinquency					Recency Delinquency
	Days Past Due		Amount		%			Amount		%
Current		0 - 30 days	$	870,238,324		59	%	$	977,169,950		66	%
Delinquent		31 - 60 days		84,782,587		5	%		39,278,084		3	%
		61 - 90 days		49,261,922		3	%		28,289,389		2	%
		90+ days		77,101,084		5	%		36,646,494		3	%
UBankruptcyU		0 - 30 days		46,637,332		3	%		119,960,900		8	%
Delinquent		31 - 60 days		10,168,548		1	%		6,808,402		-
		61 - 90 days		9,123,347		1	%		5,174,772		-
		90+ days		100,746,126		7	%		34,731,279		2	%
UForeclosureU		0 - 30 days		2,454,723		-			13,458,219		1	%
Delinquent		31 - 60 days		1,096,896		-			6,465,546		-
		61 - 90 days		4,169,288		-			11,315,391		1	%
		90+ days		191,542,941		13	%		168,024,692		11	%
Not BoardedP(1)P				37,173,894		3	%		37,173,894		3	%
		Total	$	1,484,497,012		100	%	$	1,484,497,012		100	%
Total loans		0 - 30 days	$	919,330,379		62	%	$	1,110,589,069		75	%

(1)   Not boarded represents recently acquired loans serviced by the seller on a temporary basis and recently originated loans that have been funded but have not yet been entered into the servicing system. A portion of not boarded loans has been included in the appropriate delinquency categories based on information provided by the seller-servicer. The remaining portion of not boarded loans, for which information has not been entered into our servicing system, is shown in the not boarded category.

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			December 31, 2005
			Contractual Delinquency					Recency Delinquency
	Days Past Due		Amount		%			Amount		%
Current		0 - 30 days	$	687,887,057		51	%	$	791,779,227		58	%
Delinquent		31 - 60 days		76,225,331		6	%		36,316,774		3	%
		61 - 90 days		19,629,463		1	%		15,938,651		1	%
		90+ days		139,882,279		10	%		79,589,478		6	%
UBankruptcyU		0 - 30 days		38,018,748		3	%		108,931,183		8	%
Delinquent		31 - 60 days		11,207,345		1	%		7,845,350		1	%
		61 - 90 days		4,725,448		-			4,851,743		-
		90+ days		113,808,976		8	%		46,132,241		3	%
UForeclosureU		0 - 30 days		793,327		-			8,414,493		1	%
Delinquent		31 - 60 days		606,737		-			2,934,832		-
		61 - 90 days		895,794		-			2,444,743		-
		90+ days		131,112,327		10	%		119,614,117		9	%
Not BoardedP(1)P				132,573,874		10	%		132,573,874		10	%
		Total	$	1,357,366,706		100	%	$	1,357,366,706		100	%
Total loans		0 - 30 days	$	726,699,132		54	%	$	909,124,903		67	%

(1)   Not boarded represents recently acquired loans serviced by the seller on a temporary basis and recently originated loans that have been funded but have not yet been entered into the servicing system. A portion of not boarded loans has been included in the appropriate delinquency categories based on information provided by the seller-servicer. The remaining portion of not boarded loans, for which information has not been entered into our servicing system, is shown in the not boarded category.

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Notes Receivable Portfolio

At June 30, 2006, our notes receivable portfolio, which consists of purchased loans, included approximately 26,227 loans with an aggregate unpaid principal balance (“UPB”) of $1.04 billion and a net UPB of $977 million (after allowance for loan losses of $61 million), compared with approximately 23,684 loans with an aggregate UPB of $970 million and a net UPB of $903 million (after allowance for loan losses of $67 million) as of December 31, 2005. Impaired loans comprise and will continue to comprise a significant portion of our portfolio. Many of the loans we acquire are impaired loans at the time of purchase. We generally purchase such loans at significant discounts and have considered the payment status, underlying collateral value and expected cash flows when determining our purchase price. While interest income is not accrued on impaired loans, interest and fees are received on a portion of loans classified as impaired. The following table provides a breakdown of the notes receivable portfolio by year:

	June 30, 2006		December 31, 2005
Performing loans	$	725,340,306	$	536,974,892
Allowance for loan losses		10,606,077		14,266,781
Total performing loans, net of allowance for loan losses		714,734,229		522,708,111
Impaired loans		275,268,024		244,986,933
Allowance for loan losses		49,933,211		43,691,572
Total impaired loans, net of allowance for loan losses		225,334,813		201,295,361
Not yet boarded onto servicing system		37,173,894		188,037,218
Allowance for loan losses		-		9,317,802
Not yet boarded onto servicing system, net of allowance for loan losses		37,173,894		178,719,416
Total notes receivable, net of allowance for loan losses		977,242,936		902,722,888
*Accretable Discount		14,240,528		11,360,617
*Nonaccretable Discount		39,212,462		23,981,013
Total Notes Receivable, net of allowance for loan losses and accretable/nonaccretable discounts	$	923,789,946	$	867,381,258

* Represents purchase discount not reflected on the face of the balance sheet in accordance with SOP 03-3 for loans acquired after December 31, 2004. Accretable Discount is the excess of the loan’s estimated cash flows over the purchase prices, which is accreted into income over the life of the loan. Nonaccretable Discount is the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated to be collected.

22

The following table provides a breakdown of the balance of our portfolio of notes receivable between fixed-rate and adjustable-rate loans, net of allowance for loan losses and excluding loans purchased but not yet boarded onto our servicing operations system as of June 30, 2006 of $37,173,894.

	June 30, 2006		December 31, 2005
Performing Loans:
Fixed-rate Performing Loans	$	594,649,221	$	393,982,311
Adjustable Performing Loans		120,085,008		128,725,800
Total Performing Loans	$	714,734,229	$	522,708,111
Impaired Loans:
Fixed-rate Impaired Loans	$	186,189,095	$	167,093,004
Adjustable Impaired Loans		39,145,718		34,202,357
Total Impaired Loans	$	225,334,813	$	201,295,361
Total Notes	$	940,069,042	$	724,003,472
*Accretable Discount	$	14,240,528	$	11,360,617
*Nonaccretable Discount	$	39,212,462	$	13,953,006
Total Notes Receivable, net of allowance for loan losses and accretable/nonaccretable discounts, excluding loans not boarded onto servicing systems	$	886,616,052	$	698,689,849

Loan Acquisitions

We purchased approximately $133.5 million in assets (principally residential single-family first and second lien loans) during the second quarter of 2006, compared with approximately $81.8 million in assets (principally residential single-family first and second lien loans) during the second quarter of 2005. For the six months ended June 30, 2006, we purchased $237.3 million of loans as compared with $193.6 million for the same period in 2005. The following table sets forth the amounts and purchase prices of our mortgage loan acquisitions during the three and six months ended June 30, 2006 and June 30, 2005:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Number of loans		3,740			1,044			10,408			5,160
Aggregate unpaid principal balance at acquisition	$	133,462,289		$	81,808,510		$	237,289,905		$	193,583,799
Purchase price	$	120,146,984		$	74,884,736		$	216,054,218		$	173,407,681
Purchase price percentage		90	%		92	%		91	%		90	%

During the quarter ended June 30, 2006, we acquired a portfolio of 1,430 loans, the majority of which consisted of second lien mortgage loans, with an unpaid principal balance of $17.1 million at a purchase price percentage of approximately 75%.

23

Notes Receivable Dispositions

In the ordinary course of our loan servicing process and through the periodic review of our portfolio of purchased loans, there are certain loans that, for various reasons, we determine to sell. We typically sell these loans on a whole-loan basis, servicing-released for cash. The following table sets forth our dispositions of purchased loans during the three and six months ended June 30, 2006 and June 30, 2005:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Sale of Performing Loans
Aggregate unpaid principal balance	$	-	$	7,337,363	$	-	$	7,337,363
Gain on sale	$	-	$	618,881	$	-	$	618,881
Sale of Non-Performing Loans
Aggregate unpaid principal balance	$	-	$	23,491,405*	$	161,149	$	23,491,405	*
Gain on sale	$	-	$	47,021	$	69,049	$	47,021
Total gain on sale	$	-	$	665,902	$	69,049	$	665,902

*Sale of credit card portfolio. The carrying value of this portfolio was $1.2 million.

Tribeca’s Loan Originations

The following table sets forth Tribeca’s loan originations, as well as dispositions, during the three and six months ended June 30, 2006 and June 30, 2005.

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Number of loans originated		467			485			944			873
Original principal balance	$	99,638,002		$	105,382,820		$	204,413,207		$	193,307,037
Average loan amount	$	213,358		$	217,284		$	216,539		$	221,428
Originated as fixed	$	6,415,450		$	10,357,605		$	10,479,900		$	17,276,905
Originated as ARM*	$	93,222,552		$	95,025,215		$	193,933,307		$	176,030,132
Number of loans sold		119			114			144			185
Aggregate face value	$	27,041,507		$	23,191,382		$	33,793,948		$	36,602,558
Gain on sale	$	170,924		$	578,306		$	336,796		$	906,233
Gain on sale percentage		0.63	%**		2.49	%		1.00	%**		2.48	%

* Originated ARM loans are principally fixed-rate for the first two years and six-month adjustable-rate for the remaining term.

** In the three months ended June 30, 2006, we sold $7.5 million of originated loans held for sale to investors at a loss of $269,000; these loans did not meet investor requirements.

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Property Types of Originated Loans. At June 30, 2006, Tribeca’s portfolio consisted of $443.3 million of loans originated and held for investment and $3.4 million of loans held for sale. Tribeca’s portfolio of loans held for investment grew 18% to $443.3 million as of June 30, 2006, from $374.5 million at December 31, 2005. The following table sets forth information regarding the types of properties securing Tribeca’s portfolio of loans held for investment.

	Loans Held for Investment at June 30, 2006
UProperty TypesU	UPrincipal BalanceU		Percentage of Total UPrincipal BalanceU
Residential 1-4 family	$	410,290,681		92.55	%
Condos, co-ops, PUD dwellings		31,014,946		7.00	%
Manufactured homes		83,931		0.02	%
Multi-family		132,933		0.03	%
Commercial		1,704,174		0.38	%
Unsecured loans		74,639		0.02	%
Total	$	443,301,304		100.00	%

Geographic Dispersion of Originated Loans. The following table sets forth information regarding the geographic location of properties securing all loans originated by Tribeca during the six months ended June 30, 2006 and the aggregate portfolio of loans originated and held for investment at June 30, 2006:

	Loans Originated for Six Months Ended June 30, 2006					Loans Held for Investment at June 30, 2006
Location	Principal Balance		Percentage of Total Principal Balance			Principal Balance		Percentage of Total Principal Balance
New Jersey	$	72,285,944		35.36	%	$	141,462,753		31.91	%
New York		55,608,732		27.20	%		136,054,760		30.69	%
Pennsylvania		15,103,675		7.39	%		40,642,908		9.17	%
Maryland		11,856,824		5.80	%		18,656,064		4.21	%
Florida		11,720,085		5.73	%		23,345,719		5.27	%
Massachusetts		10,601,825		5.19	%		24,035,046		5.42	%
Virginia		7,171,423		3.51	%		15,899,276		3.59	%
Connecticut		6,766,950		3.31	%		14,088,337		3.18	%
California		3,224,700		1.58	%		9,259,854		2.09	%
North Carolina		2,663,250		1.30	%		3,393,443		0.76	%
All Others		7,409,799		3.63	%		16,463,144		3.71	%
Total	$	204,413,207		100.00	%	$	443,301,304		100.00	%

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Delinquency. The following tables provide a breakdown of the delinquency status of our loans held for investment and loans held for sale portfolios as of the dates indicated, by principal balance. Because we specialize in originating residential mortgage loans for individuals with credit histories, income and/or factors that cause them to be classified as non-prime borrowers, a substantially greater portion of the loans we originate experience varying degrees of delinquency, foreclosure and bankruptcy than those of prime lenders. However, due to the fairly conservative loan-to-value ratios, we typically collect full payment of principal on delinquent loans that are in the process of foreclosure. We monitor the payment status of our borrowers based on both contractual delinquency and recency delinquency. By contractual delinquency, we mean the delinquency of payments relative to the contractual obligations of the borrower. By recency delinquency, we mean the recency of the most recent full monthly payment received from the borrower. By way of illustration, on a recency delinquency basis, if the borrower has made the most recent full monthly payment within the past 30 days, the loan is shown as current regardless of the number of contractually delinquent payments. In contrast, on a contractual delinquency basis, if the borrower has made the most recent full monthly payment, but has missed an earlier payment or payments, the loan is shown as contractually delinquent. We classify a loan as in foreclosure when we determine that the best course of action to maximize recovery of unpaid principal balance is to begin the foreclosure process. We classify a loan as in bankruptcy when we receive notice of a bankruptcy filing from the bankruptcy court.

		June 30, 2006
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Current	0 - 30 days	$	267,047,771		60	%	$	300,640,186		67	%
Delinquent	31 - 60 days		39,078,871		9	%		22,029,662		5	%
	61 - 90 days		23,540,316		5	%		15,306,210		3	%
	90+ days		25,403,759		5	%		17,094,659		4	%
UBankruptcyU	0 - 30 days		-		-			1,261,292		-
Delinquent	31 - 60 days		55,827		-			205,786		-
	61 - 90 days		160,925		-			276,029		-
	90+ days		3,559,326		1	%		2,032,971		-
UForeclosure*	0 - 30 days		724,171		-			4,538,346		1	%
Delinquent	31 - 60 days		263,147		-			3,094,427		1	%
	61 - 90 days		3,442,945		1	%		6,863,270		2	%
	90+ days		83,437,730		19	%		73,371,950		16	%
	Total	$	446,714,788		100	%	$	446,714,788		100	%
Total loans	0 - 30 days	$	267,771,942		60	%	$	306,439,824		69	%

* $87.9 million of loans were in various stages of the foreclosure process; our servicing practice for this portfolio is to move loans into our foreclosure collection process at an early stage of delinquency.

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		December 31, 2005
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Current	0 - 30 days	$	277,508,660		72	%	$	309,162,953		80	%
Delinquent	31 - 60 days		29,203,954		8	%		15,606,343		4	%
	61 - 90 days		8,504,760		2	%		7,192,915		2	%
	90+ days		23,073,068		6	%		6,328,231		2	%
UBankruptcyU	0 - 30 days		859,676		-			1,697,063		-
Delinquent	31 - 60 days		341,989		-			101,250		-
	61 - 90 days		279,669		-			66,490		-
	90+ days		1,842,298		-			1,458,829		-
UForeclosure*U	0 - 30 days		-		-			2,659,754		1	%
Delinquent	31 - 60 days		606,737		-			1,113,952		-
	61 - 90 days		669,889		-			638,318		-
	90+ days		44,476,962		12	%		41,341,564		11	%
	Total	$	387,367,662		100	%	$	387,367,662		100	%
Total loans	0 - 30 days	$	278,368,336		72	%	$	313,519,770		81	%

* $45.6 million of loans were in various stages of the foreclosure process; our servicing practice for this portfolio is to move loans into our foreclosure collection process at an early stage of delinquency.

Other Real Estate Owned

The following table sets forth our real estate owned, or OREO portfolio, and OREO sales during the three and six months ended June 30, 2006 and June 30, 2005:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Other real estate owned	$	19,394,263		$	17,340,979		$	19,394,263		$	17,340,979
OREO as a percentage of total assets		1.32	%		1.66	%		1.32	%		1.66	%
OREO sold	$	8,284,103		$	9,108,242		$	15,830,201		$	15,886,956
Gain on sale	$	440,741		$	400,402		$	1,242,283		$	656,383

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Results of Operations

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Overview. The Company had a net loss of $1.4 million for the second quarter of 2006, compared with net income of $2.0 million for the second quarter of 2005, a decrease of 171%. Revenues increased by 34% to $40.4 million for the three months ended June 30, 2006, from $30.1 million for the three months ended June 30, 2005. The Company had a loss per common share for the three months ended June 30, 2006 of $0.18 both on a diluted and basic basis, compared to earnings per share of $0.29 on a diluted basis and $0.33 on a basic basis for the three months ended June 30, 2005. During the second quarter of 2006, we acquired S&D loans with an aggregate face amount of $133.5 million and we originated $99.6 million of non-prime loans. We increased the size of our total portfolio of net notes receivable, loans held for sale, loans held for investment and OREO at June 30, 2006 to $1.37 billion from $1.25 billion at the end of 2005. Correspondingly, our total debt outstanding grew to $1.40 billion at June 30, 2006 from $1.26 billion at December 31, 2005. As a result of the increase of our total debt, and the impact of the rise in short-term interest rates since mid-2005 on our interest-sensitive borrowings, interest expense (inclusive of amortization of deferred financing costs) increased $11.7 million, or 68%, during the second quarter of 2006 compared with the same period in 2005. Our average cost of funds during the three months ended June 30, 2006 increased to 7.86% from 6.51% during the three months ended June 30, 2005. At June 30, 2006, the weighted average interest rate of borrowed funds was 7.92%. Collection, general and administrative expenses increased $2.5 million, or 32%, to $10.4 million during the three months ended June 30, 2006, from $7.9 million for the same period in 2005. The increase in collection, general and administrative expenses reflected for the most part the growth of the Company during the past twelve months, as total assets increased 40% from June 30, 2005. The provision for loan losses increased $2.1 million to $3.2 million in the three months ended June 30, 2006, principally due to higher than expected default rates in certain pools of loans purchased in mid-2004. Stockholders’ equity increased 4% to $49.3 million at June 30, 2006 from $47.6 million at December 31, 2005.

Revenues. Revenues increased by $10.3 million, or 34%, to $40.4 million during the second quarter of 2006, from $30.1 million during the same period in 2005. Revenues include interest income, purchase discount earned, gains on sales of notes receivable, gains on sales of loans held for sale, gains on sales of OREO and prepayment penalties and other income.

Interest income increased by $11.3 million or 47%, to $35.3 million during the three months ended June 30, 2006 from $24.0 million during the three months ended June 30, 2005. The increase in interest income reflected the significant increase in the portfolio of gross notes receivable and loans held for investment during the three months ended June 30, 2006 compared to the three months ended June 30, 2005.

Purchase discount earned decreased by $644,000, or 22%, to $2.2 million during the second quarter of 2006 from $2.9 million during the second quarter of 2005. This decrease resulted primarily from the increase in the purchase price of portfolios relative to unpaid principal at acquisition of portfolios purchased during 2005, particularly the portfolios purchased in the second half of 2005, which resulted in less purchase discount available for accretion of discount compared with portfolios purchased in prior years. We received $72.3 million of principal payments from notes receivable during the three months ended June 30, 2006 compared with $73.5 million of principal payments during the same period in 2005.

There were no sales of notes receivable during the three months ended June 30, 2006. The Company realized a gain on sale of notes receivable of $666,000 from sales of $7.3 million of performing notes receivable and credit card receivables with a face amount of $23.5 million during the three months ended June 30, 2005.

28

Gain on sale of originated loans held for sale decreased by $407,000, or 70%, to $171,000 during the three months ended June 30, 2006, from $578,000 during the three months ended June 30, 2005. The Company sold $27.0 million of originated loans during the three months ended June 30, 2006, of which $7.5 million were loans that were originated for sale to investors, but, for various reasons, did not meet investor requirements and therefore were sold at a loss, compared with $23.2 million of loans during the three months ended June 30, 2005. The average gain on loans sold decreased from 2.49% during the second quarter of 2005 to 0.63% during the second quarter of 2006, principally due to the sale of $7.5 million of loans at a loss. Excluding the $7.5 million of loans sold referred to above, the average gain on loans sold in the second quarter of 2006 was 1.63%.

Gain on sale of OREO increased by $40,000, or 10%, to $441,000 during the three months ended June 30, 2006, from $400,000 during the three months ended June 30, 2005. We sold 150 OREO properties with an aggregate carrying value of $8.3 million during the second quarter of 2006, as compared to 147 OREO properties in the aggregate amount of $9.1 million during the second quarter of 2005.

Prepayment penalties and other income (principally late charges and other servicing fees) increased by $700,000, or 41%, to $2.3 million during the three months ended June 30, 2006 from $1.7 million during the corresponding period last year. This increase was primarily due to an increase in prepayment penalties as a result of accelerated loan pay offs during the three months ended June 30, 2006, as compared with the corresponding period in 2005. This was primarily attributable to the increased size of both our portfolio of purchased loans and loans held for investment, combined with continued low mortgage interest rates. Increased late charges resulting primarily from the growth in the size of our loan portfolios also contributed to the increase.

Operating Expenses. Operating expenses increased by $16.4 million, or 62%, to $42.9 million during the second quarter of 2006 from $26.5 million during the same period in 2005. Total operating expenses include interest expense, collection, general and administrative expenses, provisions for loan losses, amortization of deferred financing costs and depreciation expense.

Interest expense increased by $11.6 million, or 71%, to $27.9 million during the three months ended June 30, 2006, from $16.3 million during the three months ended June 30, 2005. This increase was the result of the increase in total debt, which was $1.40 billion as of June 30, 2006 as compared with $1.00 billion as of June 30, 2005, reflecting additional borrowings to fund the growth in total assets during this period. In addition, our average cost of funds during the three months ended June 30, 2006 increased to 7.86% from 6.51% during the three months ended June 30, 2005, reflecting the continued rise in short-term interest rates and its effect on our interest-rate sensitive borrowings.

Collection, general and administrative expenses increased by $2.5 million, or 32%, to $10.4 million during the three months ended June 30, 2006, from $7.9 million during the corresponding period in 2005. Collection, general and administrative expenses as a percentage of average assets decreased from 3.11% during the three months ended June 30, 2005 to 2.89% during the three months ended June 30, 2006, reflecting the growth of the Company and the increase in total assets. Salaries and employee benefits expenses increased by $1.6 million, or 52%, reflecting an increase in the number of employees, incentive awards of restricted stock for new senior management (an increase in expense of $865,000) and stock option expenses incurred during the second quarter of 2006. We ended the second quarter of 2006 with 225 employees as compared to 213 at the end of the second quarter of 2005. The cost of outside services, such as appraisals, incurred in servicing delinquent loans increased by $321,000, or 289%, to $432,000 from $111,000 during the three months ended June 30, 2006 compared to the three months ended June 30, 2005 due to increases in foreclosure activity as a result of a larger total portfolio of notes receivable and certain loans purchased in various stages of delinquency and foreclosure. Legal fees, principally relating to increased activity with respect to foreclosures, increased by $271,000, or 23%, to $1.5 million from $1.2 million during the same period last year. Professional fees increased by $228,000, or 34%, to $899,000 from $671,000 due to increased audit, tax and recruitment fees. All other general and administrative expenses, including loan portfolio acquisition costs, increased by $123,000, or 4%, to $3.0 million from $2.9 million during the three months ended June 30, 2005 due to an increase in portfolios purchased and considered for purchase compared to the same period last year.

29

The provision for loan losses increased by $2.1, or 200%, to $3.2 million during the three months ended June 30, 2006, from $1.1 million during the three months ended June 30, 2005. This increase was primarily due to higher than expected default rates experienced in certain pools of loans purchased in mid-2004.

Amortization of deferred financing costs increased by $118,000 or 12%, to $1.1 during the second quarter of 2006 from $1.0 million during the second quarter of 2005. This increase resulted primarily from the growth in debt to fund the expansion of the portfolio of loans acquired and originated, and the increased pace of loan portfolio prepayments during the second quarter of 2006 that caused a corresponding increase in the pay down of senior debt.

Depreciation expenses increased by $42,000, or 20%, to $252,000 in the second quarter of 2006, principally due to leasehold improvements related to the Company’s new office facility in New Jersey and the addition and upgrading of computer hardware and software during 2005 and 2006.

Our pre-tax income decreased by $6.0 million, or 167%, to a loss of $2.4 million during the three months ended June 30, 2006, from income of $3.6 million during the three months ended June 30, 2005 for the reasons set forth above.

During the three months ended June 30, 2006, the Company had a tax benefit of $1.0 million as compared to a tax provision of $1.7 million during the three months ended June 30, 2005. Due to the loss incurred during the second quarter of 2006, there was no tax provision compared with a 46% effective tax rate for the three months ended June 30, 2005.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Overview. Net income totaled $397,000 for the first half of 2006, compared with $4.7 million for the first half of 2005, a decrease of 92%. Revenues increased by 38% to $79.1 million for the six months ended June 30, 2006, from $57.2 million for the six months ended June 30, 2005. Earnings per common share for the six months ended June 30, 2006 was $0.05 both on a diluted and a basic basis, compared to $0.71 and $0.79 for the six months ended June 30, 2005, respectively. During the first half of 2006, we acquired S&D loans with an aggregate face amount of $237.3 million and we originated $204.4 million of non-prime loans. We increased the size of our total portfolio of net notes receivable, loans held for sale, loans held for investment and OREO at June 30, 2006 to $1.37 billion from $1.25 billion at the end of 2005, and from $1.01 billion at June 30, 2005. Correspondingly, our total debt outstanding grew to $1.40 billion at June 30, 2006 from $1.26 billion at December 31, 2005, and from $1.01 billion at June 30, 2005. As a result of the increase of our total debt, and the impact of the rise in short-term interest rates since mid-2005 on our interest-sensitive borrowings, interest expense (inclusive of amortization of deferred financing costs) increased $23.2 million, or 74%, to $52.4 million, during the first half of 2006, compared with the same period in 2005. Our average cost of funds during the six months ended June 30, 2006 increased to 7.69% from 6.20% during the six months ended June 30, 2005. At June 30, 2006, the weighted average interest rate of borrowed funds was 7.92%. Collection, general and administrative expenses increased $4.0 million, or 26%, to $18.4 million, during the six months ended June 30, 2006 from $14.6 million for the same period in 2005. The increase in collection, general and administrative expenses reflected for the most part the growth of the Company during the past twelve months as total assets increased 40% from June 30, 2005. The provision for loan losses increased $2.8 million to $5.0 million in the six months ended June 30, 2006, principally due to higher default rates experienced in certain pools of loans purchased in mid-2004. Stockholders’ equity increased 4% to $49.3 million at June 30, 2006 from $47.6 million at December 31, 2005.

30

Revenues. Revenues increased by $21.9 million, or 38%, to $79.1 million during the first half of 2006, from $57.2 million during the same period in 2005. Revenues include interest income, purchase discount earned, gains on sales of notes receivable, gains on sales of loans held for sale, gains on sales of OREO and prepayment penalties and other income.

Interest income increased by $21.9 million or 47%, to $68.8 million during the six months ended June 30, 2006 from $46.9 million during the six months ended June 30, 2005. The increase in interest income reflected the significant increase in the portfolio of gross notes receivable and loans held for investment during the six months ended June 30, 2006 compared to the six months ended June 30, 2005.

Purchase discount earned decreased by $900,000, or 18%, to $4.2 million during the first half of 2006 from $5.1 million during the first half of 2005. This decrease resulted primarily from the increase in the purchase price of portfolios relative to unpaid principal at acquisition of portfolios purchased during 2005, particularly portfolios purchased in the second half of 2005, which resulted in less purchase discount available for accretion of discount compared with portfolios purchased in prior years. We received $140.5 million of principal payments from notes receivable during the six months ended June 30, 2006 compared with $130.5 million of principal payments during the same period in 2005.

Gain on sale of notes receivable decreased by $597,000, or 90%, to $69,000 for the six months ended June 30, 2006 from $666,000 for the six months ended June 30, 2005. The Company sold a total of $161,000 in non-performing notes receivable during the six months ended June 30, 2006, as compared to a total of $7.3 million of performing notes receivable and credit card receivables with a face amount of $23.5 million during the six months ended June 30, 2005.

Gain on sale of originated loans held for sale decreased by $569,000, or 63%, to $337,000 during the six months ended June 30, 2006, from $906,000 during the six months ended June 30, 2005. The Company sold $33.8 million of originated loans during the six months ended June 30, 2006, of which $7.5 million were loans that were originated for sale to investors, but, for various reasons, did not meet investor requirements and therefore were sold at a loss, compared with $36.6 million of loans during the six months ended June 30, 2005. The average gain on loans sold decreased from 2.48% during the first half of 2005 to 1.00% during the first half of 2006 due to the sale of $7.5 million of loans at a loss. Excluding the $7.5 million of loans sold referred to above, the average gain on loans sold was 1.79% for the first half of 2006.

Gain on sale of OREO increased by $586,000, or 89%, to $1.2 million during the six months ended June 30, 2006, from $656,000 during the six months ended June 30, 2005. During the first half of 2006, certain properties were sold at prices greater than the estimated values set at the time we acquired the properties. We sold 285 OREO properties with an aggregate carrying value of $15.8 million during the first half of 2006, as compared to 253 OREO properties in the aggregate amount of $15.9 million during the first half of 2005. The increase in the number of properties sold reflected the growth in our OREO inventory due to both an increase in foreclosures as our notes receivable portfolio grew and the purchase of loans during the past two years that were already in the foreclosure process.

Prepayment penalties and other income (principally late charges and other servicing fees) increased by $1.5 million or 49%, to $4.5 million during the six months ended June 30, 2006 from $3.0 million during the corresponding period last year. This increase was primarily due to an increase in prepayment penalties received, as a result of accelerated loan pay offs, during the six months ended June 30, 2006, as compared with the corresponding period in 2005. This was primarily attributable to the increased size of both our portfolio of purchased loans and loans held for investment, combined with continued low mortgage interest rates. Increased late charges resulting primarily from the growth in the size of our loan portfolios also contributed to the increase.

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Operating Expenses. Operating expenses increased by $30.0 million, or 62%, to $78.4 million during the first half of 2006 from $48.5 million during the same period in 2005. Total operating expenses include interest expense, collection, general and administrative expenses, provisions for loan losses, amortization of deferred financing costs and depreciation expense.

Interest expense increased by $22.9 million, or 78%, to $52.4 million during the six months ended June 30, 2006, from $29.5 million during the six months ended June 30, 2005. This increase was the result of the increase in total debt, which was $1.40 billion as of June 30, 2006 as compared with $1.00 billion as of June 30, 2005, reflecting additional borrowings to fund the growth in total assets during this period. In addition, our average cost of funds during the six months ended June 30, 2006 increased to 7.69% from 6.20% during the six months ended June 30, 2005, reflecting the continued rise in short-term interest rates and its effect on our interest-rate sensitive borrowings.

Collection, general and administrative expenses increased by $3.8 million, or 26%, to $18.4 million during the six months ended June 30, 2006, from $14.6 million during the corresponding period in 2005. Collection, general and administrative expenses as a percentage of average assets decreased from 3.03% during the six months ended June 30, 2005 to 2.62% during the six months ended June 30, 2006, reflecting the increase in the Company’s total assets. Salaries and employee benefits expenses increased by $2.1 million, or 34%, reflecting an increase in the number of employees and stock option and restricted stock expenses (an increase in expense of $849,000) recognized in the first half of 2006. We ended the first half of 2006 with 225 employees as compared to 213 at the end of the first half of 2005. Legal fees, principally relating to increased activity with respect to foreclosures, increased by $518,000, or 26%, to $2.5 million from $2.0 during the same period last year. Other general and administrative expenses which include loan portfolio acquisition costs, increased by $589,000, or 12%, to $5.6 million from $5.0 million during the six months ended June 30, 2005 due to the direct costs associated with portfolios purchased and portfolios considered for purchase compared to the same period last year. The cost of outside services, such as appraisals, incurred in servicing delinquent loans increased by $369,000, or 142%, to $629,000 from $260,000 during the six months ended June 30, 2006 compared to the six months ended June 30, 2005 due to increases in foreclosure activity as a result of a larger total portfolio of notes receivable and certain loans purchased in various stages of delinquency and foreclosure. Professional fees increased by $237,000, or 19%, from $1.3 million during the first half of 2006 due to increased audit, tax and recruiting fees.

The provision for loan losses increased by $2.8 million, or 124%, to $5.0 million during the six months ended June 30, 2006, from $2.3 million during the six months ended June 30, 2005. This increase was primarily due to higher than expected default rates experienced in certain pools of loans purchased in mid-2004.

Amortization of deferred financing costs increased by $333,000, or 20%, to $2.0 during the first half of 2006 from $1.7 million during the first half of 2005. This increase resulted primarily from the growth in debt to fund the expansion of the portfolio of loans acquired and originated, and the increased pace of loan portfolio prepayments during the first half of 2006 that caused a corresponding increase in the pay down of senior debt.

Depreciation expenses increased by $148,000, or 36%, to $563,000 in the first half of 2006, principally due to leasehold improvements related to the Company’s new office facility in New Jersey and the addition and upgrading of computer hardware and software during 2005 and the six months ending June 30, 2006.

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Our pre-tax income decreased by $8.1 million, or 92%, to $703,000 during the six months ended June 30, 2006 from $8.8 million during the six months ended June 30, 2005 for the reasons set forth above.

During the six months ended June 30, 2006, the Company had a provision for income taxes of $305,000 as compared to a provision of $4.1 million during the six months ended June 30, 2005. Due to the Company’s relocation of servicing, administrative and other operations from New York City to New Jersey in August 2005, our effective tax rate for the first half of 2006 declined to 43% from 46% for the six months ended June 30, 2005.

Liquidity and Capital Resources

General

During the three months ended June 30, 2006, we purchased 3,740 loans, consisting primarily of first and second mortgages, with an aggregate face value of $133.5 million at an aggregate purchase price of $120.1 million, or 90% of face value. During the six months ended June 30, 2006, we purchased 10,408 loans with an aggregate face value of $237.3 million at an aggregate purchase price of $216.1 million, or 91% of face value. All acquisitions acquired were funded through borrowings under our master credit facility.

During the three and six months ended June 30, 2006, we originated $99.6 million and $204.4 million of loans, respectively, through our origination subsidiary, Tribeca. Originations are initially funded through borrowings under our warehouse facility, and loans originated for portfolio are subsequently funded with term debt after transfer to portfolio. In the first quarter of 2006, Tribeca and certain of its subsidiaries entered into master credit and security agreements with each of our principal lender and BOS (USA) Inc., an affiliate of Bank of Scotland, the proceeds of which were used to refinance and consolidate certain term loans with our principal lender.

We have one principal source of external funding to meet our liquidity requirements, in addition to the cash flow provided from borrower payments of interest and principal on mortgage loans. See “- Borrowings.” In addition, we have the ability to sell loans in the secondary market. We sell pools of acquired mortgage loans from time to time and we sell loans that we originate specifically for sale into the secondary market on a regular basis.

As a result of the growth of the loan portfolios and our strengthened balance sheet, management has begun to explore potential additional sources of funding for financing portfolio acquisitions and loan originations. We have been evaluating the feasibility of securitizing certain acquired and originated loans in order to seek a lower cost funding alternative and possibly to reduce somewhat the short-term interest sensitivity of our borrowings. In addition, we have begun to seek additional term debt funding alternatives with banks and other financial institutions in order to expand our borrowing capabilities.

Short-term Investments. The Company’s short-term investment portfolio includes U.S. treasury bills and investment-grade commercial paper. The Company’s investment policy is structured to provide an adequate level of liquidity in order to meet normal working capital needs and expansion of the loan portfolio. At June 30, 2006, the Company had short-term investments of $16.1 million, consisting of investment-grade commercial paper and U.S. treasury bills.

Cost of Funds. As of June 30, 2006, we had total borrowings of $1.40 billion, of which $1.37 billion was under our term loan facilities and an aggregate of $35.0 million was under our warehouse facility. Substantially all of the debt under our term loan facilities was incurred in connection with the purchase and origination of, and is secured by, our acquired notes, originated loans held for investment and OREO portfolios. At June 30, 2006, approximately $8.1 million of our term debt accrues interest at a rate of prime plus a margin of 0% to 1.75%, $795.1 million accrues interest at the FHLB 30-day LIBOR advance rate plus 2.5%, $563.2 million accrues interest at the FHLB 30-day LIBOR advance rate plus 3.0%, $386,000 accrues interest at the FHLB 30-day LIBOR advance rate plus 3.375% and $878,000 accrues interest at the FHLB 30-day LIBOR advance rate plus 3.875%. Our warehouse facility is utilized to fund Tribeca’s originations of loans pending sale to others or pending funding under our term debt facility for loans to be held for investment. The interest rate on the warehouse debt was 7.75% at June 30, 2006, compared with a rate of 6.75% at December 31, 2005. At June 30, 2006, the weighted average interest rate on senior debt under our master credit facilities was 7.92%. The weighted average interest rate on senior debt at December 31, 2005 and June 30, 2005 was 7.28% and 6.49%, respectively.

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Cash Flow from Operating, Investing and Financing Activities

Liquidity represents our ability to obtain cost effective funding to meet our financial obligations. Our liquidity position is affected by mortgage loan purchase and origination volume, mortgage loan payments, including prepayments, loan maturities and the amortization and maturity structure of borrowings under our term loan facilities.

At June 30, 2006, we had cash and cash equivalents of $3.9 million compared with $3.9 million at December 31, 2005. Restricted cash of $39.4 million and $17.0 million at June 30, 2006 and December 31, 2005, respectively, was restricted under our credit agreements and lockbox facility with our primary lead lending bank, Sky Bank. Restricted cash increased $22.4 million from December 31, 2005 due principally to an increase in cash collected in the latter part of June, which was held in anticipation of a corresponding paydown of debt required on the fifth of the next month.

Substantially all of our assets are invested in our portfolios of notes receivable, loans held for investment, OREO and loans held for sale. Primary sources of our cash flow for operating and investing activities are borrowings under our debt facilities, collections of interest and principal on notes receivable and loans held for investment and proceeds from sales of notes and OREO properties. Primary uses of cash include purchases of notes receivable, origination of loans and for operating expenses. We rely significantly upon our lender and the other banks that participate in the loans made to us by our lender to provide the funds necessary for the purchase of notes receivable portfolios and the origination of loans. While we have historically been able to finance these purchases and originations, we have not had committed loan facilities in significant excess of the amount we currently have outstanding under our credit facilities.

Net cash provided by operating activities was $11.5 million as of June 30, 2006, compared with cash provided of $185,000 during the six months ended June 30, 2005. The increase in cash provided by operating activities during the six months ended June 30, 2006 was due primarily to a decrease in the volume of loans originated for sale in the secondary market. The volume of such loan originations can vary widely from period to period, depending to a large extent on secondary market conditions.

Net cash used in investing activities was $148.3 million in the six months ended June 30, 2006, compared to $161.0 million of cash used in the six months ended June 30, 2005. The decrease in cash used during the six months ended June 30, 2006 was primarily due to increased principal collections of notes receivable and loans held for investment of $88.8 million and an increase in the proceeds from sale of loans held for investment of $5.3 million, which was partially offset by an increase in both the purchase of notes receivable of $42.6 million and the origination of loans held for investment of $29.2 million.

Net cash provided by financing activities decreased to approximately $136.8 million during the six months ended June 30, 2006, from $162.0 million provided by financing activities during the six months ended June 30, 2005. The decrease resulted primarily from increased repayments of outstanding notes payable and financing agreements of $118.2 million (the result of increased prepayments of both notes receivable and loans held for investment), which was partially offset by increases in the proceeds of notes payable and financing agreements of $91.5 million.

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Borrowings

As of June 30, 2006, the Company owed an aggregate of $1.40 billion under several credit facilities with our lender. These borrowings are shown in the Company’s financial statements as “Notes payable” (referred to as “term loans” herein) and “Financing agreements” (referred to as the “warehouse facility” herein).

Senior Debt Facility

General.On October 13, 2004, the Company, and its finance subsidiaries, entered into a Master Credit and Security Agreement with Sky Bank, an Ohio banking corporation, which we refer to as our lender. Under this master credit facility, we request loans to finance the purchase of residential mortgage loans or refinance existing outstanding loans. The facility does not include a commitment to additional lendings, which are therefore subject to our lender’s discretion as well as any regulatory limitations to which our lender is subject. The facility expires on October 13, 2006. Based on our historical experience with Sky Bank, we expect that this facility will be extended prior to this date.

Interest Rates and Fees. Interest on the loans is payable monthly at a floating rate equal to the highest Federal Home Loan Bank of Cincinnati 30-day advance rate as published daily by Bloomberg under the symbol FHL5LBRI, or “the 30-day advance rate,” plus the applicable margin as follows:

	For Loans Funded
	Prior to July 1, 2005	On or After July 1, 2005
If the 30-day advance rate is	the applicable margin is	the applicable margin is
Less than 2.26%	350 basis points	300 basis points
2.26 to 4.50%	325 basis points	275 basis points
Greater than 4.50%	300 basis points	250 basis points

Upon each closing of a subsidiary loan after June 23, 2006, we are required to pay an origination fee equal to 0.50% of the amount of the subsidiary loan unless otherwise agreed to by our lender and our finance subsidiary. For loans funded between July 1, 2005 and June 23, 2006, the origination fee paid was 0.75% of the amount of the subsidiary loan, and for loans funded prior to July 1, 2005, the origination fee paid was 1% of the amount of the subsidiary loan unless otherwise agreed to by our lender and the subsidiary. Upon repayment of subsidiary loans, our lender is generally entitled to receive a fee (referred to as a success fee) equal to the lesser of (i) 0.50% or with respect to certain subsidiaries whose loans were originated before 1996, 1% of the original principal balance of the subsidiary loan or (ii) 50% of the remaining cash flows of the pledged mortgage loans related to such subsidiary loan as and when received by the relevant subsidiary after the repayment of the subsidiary loan. In connection with certain subsidiary loans, we and our lender have agreed to specified minimum fees and fee waivers. Effective June 26, 2006, the success fee has been eliminated for all new subsidiary loans.

Principal; Prepayments; Termination of Commitments. The unpaid principal balance of each loan is amortized over a period of twenty years, but matures three years after the date the loan was made. Historically, our lender has agreed to extend the maturities of such loans for additional three-year terms upon their maturity. We are required to make monthly payments of the principal on each of our outstanding loans.

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In the event there is a material and adverse breach of the representations and warranties with respect to a pledged mortgage loan that is not cured within 30 days after notice by our lender, we will be required to repay the loan with respect to such pledged mortgage loan in an amount equal to the price at which such mortgage loan could readily be sold (as determined by our lender).

Covenants; Events of Default. The master credit facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, a covenant that we and our subsidiaries together maintain a minimum net worth of at least $10 million. The facility contains events of default customary for facilities of this type (with customary grace and cure periods, as applicable). We believe that we are in compliance with such covenants as of June 30, 2006.

Security.Our obligations under the master credit facility are secured by a first priority lien on loans acquired by us that are financed by proceeds of loans made to us under the facility. In addition, pursuant to a lockbox arrangement, our lender is entitled to receive all sums payable to us in respect of any of the collateral.

Warehouse Facility

On October 18, 2005, our Tribeca subsidiary entered into a warehousing credit and security agreement with our lender, which replaced the facility as amended on April 7, 2004. The agreement provides for an increased commitment to $60 million effective October 18, 2005. In April 2006, our lender extended the maturity date of the warehousing credit and security agreement to April 30, 2007.

Interest on advances is payable monthly at a rate per annum equal to the greater of (i) a floating rate equal to the Wall Street Journal Prime Rate minus 50 basis points or (ii) 5%.

The warehouse facility is secured by a lien on all of the mortgage loans delivered to our lender or in respect of which an advance has been made as well as by all mortgage insurance and commitments issued by insurers to insure or guarantee pledged mortgage loans. Tribeca also assigns all of its rights under third-party purchase commitments covering pledged mortgages and the proceeds of such commitments and its rights with respect to investors in the pledged mortgages to the extent such rights are related to pledged mortgages. In addition, we have provided a guaranty of Tribeca’s obligations under the warehouse facility, which is secured by a lien on substantially all of our personal property. As of June 30, 2006, Tribeca had approximately $25.0 million available under this facility.

Tribeca Term Loans

As of June 30, 2006, Tribeca, through its subsidiaries, had borrowed an aggregate of $414.6 million in term loans refinancing outstanding advances under the warehouse facility. Each of the term loans is made pursuant and subject to the term loan and security between Tribeca and our lender and a term note. Interest on the loans is payable monthly at a floating rate equal to the highest Federal Home Loan Bank of Cincinnati 30-day advance rate published by Bloomberg under the symbol FHL5LBRI. The interest rate on Tribeca’s term loans is based on the same rate and margin matrix as loans made under the Master Credit Facility. In addition, upon the closing of each term loan, the applicable subsidiary-borrower pays an origination fee of approximately 0.50% of the amount of the loan, and pays certain other fees (referred to as success fees) at the termination of the applicable term loan. Effective June 26, 2006, the success fee has been eliminated on all future fundings. The origination fee was 1% of the amount of the loan for loans funded prior to July 1, 2005. The unpaid balance of each term loan is amortized over a period of 20 years, but matures three years after the loan was made. Each term loan is subject to mandatory payment under certain circumstances. Each subsidiary-borrower is required to make monthly payments of the principal of its outstanding loan. Each term loan is secured by a lien on certain promissory notes and hypothecation agreements, as well as all monies, securities and other property held by, received by or in transit to our lender. The term loan agreements contain affirmative and negative covenants and events of default customary for financings of this type. We believe that we are in compliance with such covenants as of June 30, 2006.

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On February 28, 2006, Tribeca and certain of its subsidiaries entered into a Master Credit and Security Agreement (the “Sky Loan”) with its lender Sky Bank, pursuant to which certain Tribeca subsidiaries may borrow funds to finance their acquisition of loans Tribeca previously financed under its warehouse line of credit with Sky and consolidate and refinance prior term loans made by Sky to such subsidiaries. The facility does not include a commitment for a specified number of lendings, which are therefore subject to Sky’s discretion, as well as any regulatory limitations to which Sky is subject. The facility terminates on February 28, 2008. Interest on the loans under the facility is payable monthly at a floating rate equal to the Federal Home Loan Bank of Cincinnati 30-day advance rate (“FHLBC Rate”) plus an applicable margin as follows:

	For Loans Funded
	Prior to July 1, 2005	On or After July 1, 2005
If the 30-day advance rate is	the applicable margin is	the applicable margin is
Less than 2.26%	350 basis points	300 basis points
2.26 to 4.50%	325 basis points	275 basis points
Greater than 4.50%	300 basis points	250 basis points

In addition, upon each closing of a subsidiary loan, Sky is entitled to receive an origination fee equal to 0.50% of the amount of such loan. Upon repayment of subsidiary loans, Sky is generally entitled to receive a fee (referred to as a success fee) equal to the lesser of (a) 50% of the remaining payments which are subsequently paid under the remaining pledged mortgage loans related to a satisfied subsidiary loan or (b) 0.50% of the original principal amount of the relevant subsidiary loan. As of June 26, 2006, this success fee has been eliminated on all future fundings.

The unpaid principal balance of each loan will be amortized over a period of 20 years, but matures three years after the date the loan was made. Tribeca’s subsidiaries are required to make monthly amortization payments and payments of interest on each of their outstanding loans.

The facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, covenants that require Tribeca and its subsidiaries, together, to maintain a minimum net worth of at least $3,500,000 and rolling four-quarter pre-tax net income of $750,000. The facility contains events of default customary for facilities of this type. We believe that we are in compliance with such covenants as of June 30, 2006.

Tribeca’s and the subsidiary borrowers’ obligations under the facility are secured by a first priority lien on loans acquired by Tribeca or such subsidiary that are financed or refinanced by proceeds of loans made to Tribeca or subsidiary borrowers under the facility. The collateral securing each loan cross-collateralizes all other loans made under the facility. In addition, pursuant to a lockbox arrangement, Sky is entitled to receive substantially all sums payable to Tribeca and any subsidiary borrower in respect of any of the collateral.

On February 28, 2006, upon execution and delivery of the Sky Loan, various outstanding term loan and security agreements between certain of Tribeca’s subsidiaries and Sky with respect to approximately $379,000,000 in indebtedness terminated and the loans outstanding thereunder are now under the Sky Loan.

On March 24, 2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary Borrower”) entered into a $100,000,000 Master Credit and Security Agreement (the “BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. On March 26, 2006, $98.2 million of proceeds of the BOS Loan were used to consolidate and refinance prior term loans made to certain Tribeca subsidiaries. The outstanding balance of the BOS Loan was $91.9 million at June 30, 2006. Interest on the BOS Loan is payable monthly at a floating rate equal to the FHLBC Rate plus an applicable margin as follows:

If the 30-day advance rate is	the applicable margin is
Less than 2.26%	300 basis points
2.26 to 4.50%	275 basis points
Greater than 4.50%	250 basis points

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Upon repayment of the BOS Loan, BOS is entitled to receive a fee equal to the lesser of (a) 50% of the remaining payments which are subsequently paid under the remaining pledged mortgage loans related to the BOS Loan or (b) 0.50% of the original principal amount of the BOS Loan.

The unpaid principal balance of the BOS Loan will be amortized over a period of 20 years, but matures on March 24, 2009. The Tribeca Subsidiary Borrower is required to make monthly amortization payments and payments of interest on the BOS Loan.

The facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, covenants that require Tribeca and its subsidiaries, together, to maintain a minimum net worth of at least $3,500,000 and rolling four-quarter pre-tax net income of $750,000. The facility contains events of default customary for facilities of this type.

Tribeca’s and the Tribeca Subsidiary Borrower’s obligations under the facility are secured by (i) a first priority lien on loans acquired by the Tribeca Subsidiary Borrower that are refinanced by the proceeds of the BOS Loan and (ii) a second priority lien on collateral securing loans made to Tribeca or its subsidiaries under the Sky Loan described above. In addition, pursuant to a lockbox arrangement, BOS is entitled to receive substantially all sums payable to Tribeca and the Tribeca Subsidiary Borrower in respect of any of the primary collateral under the facility. Tribeca’s BOS Loan and the Sky Loan are cross-collateralized.

June 27, 2006 Modifications to Sky Bank Financing Arrangements

On June 27, 2006, we received from our lead lending bank a letter (the “June Modification Letter”) modifying the Master Credit and Security Agreements for both Franklin Credit Management Corporation and Tribeca Lending Corporation, together referred to as the “Master Credit Facilities.” Pursuant to the June Modification Letter, the origination fee payable upon the closing of term loans under the Franklin Master Credit Facility made on or after June 26, 2006 is reduced from 75 basis points to 50 basis points. In addition, Franklin and Tribeca will no longer be required to pay Sky Bank a success fee upon the successful payoff of term loans made on or after June 26, 2006 under the Master Credit Facilities.

August 2, 2006 Modifications to Sky Bank Financing Arrangements

On August 2, 2006, the Company received a letter from its lead lending bank (the “August Modification Letter”) modifying the Master Credit Facilities. Pursuant to the August Modification Letter, the interest rate to be charged by Sky Bank for all debt originated under the Master Credit Facilities before July 1, 2005, excluding the portion of such debt that is shared by two additional financial institutions who participate in the Master Credit Facilities and subject to various participation agreements thereto, shall be lowered initially by at least 25 basis points no later than October 1, 2006 and then by an additional 25 basis points no later than January 1, 2007. These rate reductions will occur according to the following schedule based on actions taken by the Federal Reserve, but will not in any event exceed a total of 50 basis points.

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Federal Reserve Action	Change to Interest Rate Margin Charged by Sky Bank
If the Federal Reserve raises the federal funds rate by 25 basis points at its meeting on or about August 8, 2006	Rate reduction of 25 basis points effective September 1, 2006
If the Federal Reserve raises the federal funds rate by 50 basis points at its meeting on or about August 8, 2006	Rate reduction of 50 basis points effective September 1, 2006
If the Federal Reserve keeps the federal funds rate at its current standard or decreases such rate at its meeting on or about August 8, 2006	Rate reduction of 25 basis points effective October 1, 2006
If the Federal Reserve raises the federal funds rate by 25 basis points or more at its meeting on or about September 20, 2006	Rate reduction of 25 basis points effective October 1, 2006
If the Federal Reserve keeps the federal funds rate at its current standard or decreases such rate at its meeting on or about September 20, 2006	Rate reduction of 25 basis points effective January 1, 2007

The amount of debt subject to the August Modification Letter was approximately $475 million at June 30, 2006.

Subsequent Events

On June 27, 2006, the Company received from Sky Bank, a letter (the “June Modification Letter”) modifying the Master Credit and Security Agreement, dated as of October 13, 2004, as amended (the “Franklin Master Credit Facility”), between the Company and all of its subsidiaries other than Tribeca Lending Corp. (“Tribeca”) and the Master Credit and Security Agreement, dated as of February 28, 2006, among Tribeca, Sky Bank and certain subsidiaries of Tribeca (the “Tribeca Master Credit Facility” and, together with the Franklin Master Credit Facility, the “Master Credit Facilities”).

Pursuant to the June Modification Letter, the origination fee payable upon the closing of term loans under the Franklin Master Credit Facility made on or after June 26, 2006 is reduced from 75 basis points to 50 basis points. In addition, Franklin and Tribeca will no longer be required to pay Sky Bank a success fee upon the successful payoff of term loans made on or after June 26, 2006 under the Master Credit Facilities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and changes in corporate tax rates. A material change in these rates could adversely affect our operating results and cash flows.

Interest Rate Risk

Interest rate fluctuations can adversely affect our operating results and present a variety of risks, including the risk of a mismatch between the repricing of interest-earning assets and borrowings, variances in the yield curve and changing prepayment rates on notes receivable, loans held for investment and loans held for sale.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse effect on our business, financial condition and results of operations.

The Company’s operating results will depend in large part on differences between the interest earned on its assets and the interest paid on its borrowings. Most of the Company’s assets, consisting primarily of mortgage notes receivable, generate fixed returns and have remaining contractual maturities in excess of five years, while the majority of originated loans held for investment generate fixed returns for the first two years and six-month adjustable returns thereafter. We fund the origination and acquisition of these assets with borrowings, which have interest rates that are based on the monthly Federal Home Loan Bank of Cincinnati (“FHLB”) 30-day advance rate. In most cases, the interest income from our assets will respond more slowly to interest rate fluctuations than the cost of our borrowings, creating a mismatch between interest earned on our interest-yielding assets and the interest paid on our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, will significantly impact our net interest income and, therefore, net income. Our borrowings bear interest at rates that fluctuate with the FHLB Bank of Cincinnati 30-day advance rate or, to a lesser extent, the prime rate. Based on approximately $1.40 billion of borrowings under term loan and warehouse facilities outstanding at June 30, 2006, a 1% instantaneous and sustained increase in both FHLB and prime rates could increase quarterly interest expense by as much as approximately $3.5 million, pre-tax, which would negatively impact our quarterly after-tax net income. Due to our liability-sensitive balance sheet, increases in these rates will decrease both net income and the market value of our net assets.

The value of our assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty. When we originate and purchase mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lockout periods or prepayment penalties. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

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Real Estate Risk

Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions, which may be adversely affected by industry slowdowns and other factors; local real estate conditions (such as the supply of housing or the rapid increase in home values). Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could cause us to suffer losses on the ultimate disposition of foreclosed properties.

We purchase and originate principally fixed and adjustable rate residential mortgage loans, which are secured primarily by the underlying single-family properties. Because the vast majority of our loans are to non-prime borrowers, delinquencies and foreclosures are substantially higher than those of prime mortgage loans, and if not serviced actively and effectively could result in an increase in losses on dispositions of properties acquired through foreclosure. In addition, a decline in real estate values would reduce the value of the residential properties securing our loans, which could lead to an increase in borrower defaults, reductions in interest income and increased losses on the disposition of foreclosed properties.

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and changes in corporate tax rates. A material change in these rates could adversely affect our operating results and cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation and as a result of the material weaknesses identified in the Company’s Annual Report on Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2006, the Company’s disclosure controls and procedures are not effective for gathering, analyzing and disclosing the information that the Company is required to disclose in reports filed under the Securities Act of 1934.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to have a material effect on internal control over financial reporting.

The Company identified material weaknesses as defined by the Public Company Accounting Oversight Board (United States) with respect to the accounting and reporting matters discussed in Note 2 of the Consolidated Financial Statements included in the 2005 Annual Report filed on Form 10-K. Under the direction of the Company’s Chief Financial Officer, the Company is continuing to review its related systems of internal controls over financial reporting and is remediating its material weaknesses that have been previously disclosed in Item 9A of the 2005 Annual Report filed on Form 10-K. Management continues to assess its controls over accounting policy and financial reporting matters, and has made considerable progress in implementing appropriate improvements.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in routine litigation matters incidental to our business related to the enforcement of our rights under mortgage loans we hold, none of which is individually material. In addition, because we originate and service mortgage loans throughout the country, we must comply with various state and federal lending laws and we are routinely subject to investigation and inquiry by regulatory agencies, some of which arise from complaints filed by borrowers, none of which is individually material.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005. The risk factors discussed in detail in the Company’s Form 10-K include the following:

Risks Related to Our Business

·   If we are not able to identify and acquire portfolios of “scratch and dent” residential mortgage loans on terms acceptable to us, our revenues and profitability could be materially reduced.

·   We may not be able to successfully market our residential mortgage loan origination products to non-prime borrowers.

·   Our business is dependent on external financing, and we currently receive the substantial majority of our financing from a single lender. If our principal lender ceases to provide financing to us or increases the cost to us of such financing and we are unable to access alternative external sources of financing on favorable terms or at all, we would not be able to fund and grow our operations and our business will be materially harmed.

·   Our ability to fund increased operating expenses depends on the agreement of our principal lender to increases in our operating allowance.

·   If our principal lender ceases to renew our maturing loans for additional terms or provide us with refinancing opportunities, or we are unable to secure refinancing opportunities with other lenders, our indebtedness will become due and payable upon the contractual maturity of each borrowing.

·   Our credit facilities require us to observe certain covenants, and our failure to satisfy such covenants could render us insolvent or preclude our seeking additional financing from this or other sources.

·   Our business is sensitive to, and can be materially affected by, changes in interest rates.

·   A prolonged economic slowdown or a lengthy or severe recession could harm our operations, particularly if it results in a decline in the real estate market.

·   The residential mortgage origination business is a cyclical industry, has recently been at its highest levels ever and may decline, which could reduce the number of mortgage loans we originate and could adversely impact our business.

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·   Our reliance on cash-out refinancings as a significant source of our origination activities increases the risk that our earnings will be harmed if the demand for this type of refinancing declines.

·   When we acquire S&D loans, the price we pay is based on a number of assumptions. A material difference between the assumptions we use in determining the value of S&D loans we acquire and our actual experience could harm our financial position.

·   We may experience higher loan losses than we have reserved for in our financial statements.

·   We use estimates for recognizing revenue on a majority of our portfolio investments and our earnings would be reduced if actual results are less than our estimates.

·   If we do not manage our growth effectively, our financial performance could be harmed.

·   The inability to attract and retain qualified employees could significantly harm our business.

·   We may have to outsource a portion of the servicing of the loans we hold due to capacity constraints or lack of sufficient personnel.

·   We face intense competition that could adversely impact our market share and our revenues.

·   A significant amount of our mortgage loan originations are secured by property in New York and New Jersey, and our operations could be harmed by economic downturns or other adverse events in these states.

·   Competition with other lenders for the business of independent mortgage brokers could negatively affect the volume and pricing of our originated loans.

·   We may not be adequately protected against the risks inherent in non-prime residential mortgage loans.

·   We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, vendors and our employees.

·   An interruption in or breach of our information systems may result in lost business and increased expenses.

·   The success and growth of our business will depend on our ability to adapt to and implement technological changes to remain competitive, and any failure to do so could result in a material adverse effect on our business.

·   We are exposed to the risk of environmental liabilities with respect to properties to which we take title.

·   If we were to lose our Chairman, our operations could be adversely affected.

·   If we do not obtain and maintain the appropriate state licenses we will not be allowed to originate, purchase and service mortgage loans in some states, which would adversely affect our operations.

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Risks Related to the Restatement of Our Financial Statements

·   We may become subject to liability and incur increased expenditures as a result of our restatement of our financial statements.

·   Failures in our internal controls and disclosure controls and procedures could lead to material errors in our financial statements and cause us to fail to meet our reporting obligations.

Risks Related to the Regulation of Our Industry

·   New legislation and regulations directed at curbing predatory lending practices could restrict our ability to originate, purchase, price, sell, or finance non-prime residential mortgage loans, which could adversely impact our earnings.

·   The broad scope of our operations exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels.

·   If financial institutions face exposure stemming from legal violations committed by the companies to which they provide financing or underwriting services, this could increase our borrowing costs and negatively affect the market for whole-loans and mortgage-backed securities.

·   We may be subject to fines or other penalties based upon the conduct of our independent brokers.

·   We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use and security of customer information.

·   If many of our borrowers become subject to the Servicemembers Civil Relief Act of 2003, our cash flows and interest income may be adversely affected.

Risks Related to Our Securities

·   Thomas J. Axon effectively controls our company, substantially reducing the influence of our other stockholders.

·   Our organizational documents, Delaware law and our credit facility may make it harder for us to be acquired without the consent and cooperation of our board of directors, management and lender.

·   Our quarterly operating results may fluctuate and cause our stock price to decline.

·   Various factors unrelated to our performance may cause the market price of our common stock to become volatile, which could harm our ability to access the capital markets in the future.

·   Future sales of our common stock may depress our stock price.

·   Compliance with the rules of the market in which our common stock trades and proposed and recently enacted changes in securities laws and regulations are likely to increase our costs.

Additional information on these risk factors is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On May 24, 2006, at the Company’s annual meeting, the stockholders voted to elect eight Directors to the Board of Directors, to approve the Company’s 2006 Stock Incentive Plan and to ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accountants for the fiscal year ending December 31, 2006.

Election of Directors

Director	For		Withhold		Not Voted		Total
Thomas J. Axon		4,777,591		117,729		1,490		4,896,810
Alexander Gordon Jardin		4,777,591		117,729		1,490		4,896,810
William F. Sullivan		4,777,591		117,729		1,490		4,896,810
Michael Bertash		4,777,591		117,729		1,490		4,896,810
Robert M. Chiste		4,777,591		117,729		1,490		4,896,810
Frank B. Evans		4,777,591		117,729		1,490		4,896,810
Steven W. Lefkowitz		4,777,591		117,729		1,490		4,896,810
Allan R. Lyons		4,777,591		117,729		1,490		4,896,810

2006 Stock Incentive Plan

For	Against	Abstain	Not Voted	Total
4,365,298	431,233	98,334	1,945	4,896,810

Independent Registered Public Accountants

For	Against	Abstain	Not Voted	Total
4,753,916	103,649	600	38,645	4,896,810

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number
3.1	Fifth Amended and Restated Certificate of Incorporation. Incorporated by reference to Appendix A to the Registrant’s Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission (the “Commission”) on January 20, 2005.
3.2	Amended and Restated By-laws. Incorporated by reference to Appendix B to the Registrant’s Definitive Information Statement on Schedule 14C, filed with the Commission on January 20, 2005.
10.26*	Employment Agreement, dated as of March 1, 2006, between the Registrant and Alexander Gordon Jardin.
10.27	Franklin Credit Management Corporation 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 of the Registrant’s Revised Definitive Proxy Statement on Schedule 14A, filed with the Commission on May 3, 2006.
10.28*	Restricted Stock Grant Agreement, dated as of June 15, 2006, between the Registrant and Alexander Gordon Jardin.
10.29	Modification Letter dated as of June 27, 2006, from Sky Bank to the Registrant. Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K, filed with the Commission on August 8, 2006.
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

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SIGNATURES

Pursuant to the requirements 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.

UAugust 14, 2006
	FRANKLIN CREDIT MANAGEMENT CORPORATION
	By:	/s/ ALEXANDER GORDON JARDINU
		Alexander Gordon Jardin
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

Signature	Title	Date
U/s/ ALEXANDER GORDON JARDIN	Chief Executive Officer and Director	UAugust 14, 2006U
Alexander Gordon Jardin
(Principal Executive Officer)
U/s/ PAUL D. COLASONOU	Executive Vice President U	August 14, 2006
Paul D. Colasono	and Chief Financial Officer	U
(Principal Financial Officer)

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