##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 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 0-17771
 FRANKLIN CREDIT HOLDING CORPORATION
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    26-3104776
(IRS Employer
Identification No.)101 Hudson Street 
Jersey City, New Jersey
(Address of Principal 
Executive Offices)
    
    07302
(Zip code)
 (201) 604-1800
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)Smaller reporting company þ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No
þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009
    
    
    4Consolidated Statement of Changes in Stockholders (Deficit) for the six months ended June 30, 2010
    
    
    5Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    48Application of Critical Accounting Policies and Estimates
    
    
    49Serviced for Others Portfolio
    
    
    49Results of Operations
    
    
    53Liquidity and Capital Resources
    
    
    68Borrowings
    
    
    69Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    71Item 4T. Controls and Procedures
    
    
    72PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    73Item 1A. Risk Factors
    
    
    73Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    77Item 3. Defaults Upon Senior Securities
    
    
    77Item 4. (Removed and Reserved)
    
    
    77Item 5. Other Information
    
    
    77Item 6. Exhibits
    
    
    78Exhibit 10.3EX-31.1EX-31.2EX-32.1EX-32.2




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 June 30, 2010
    
    
    December 31, 2009ASSETSCash and cash equivalents
    
    $
    17,883,434
    
    
    $
    15,963,115Restricted cash
    
    
    2,542,820
    
    
    
    2,611,640Investment in REIT securities
    
    
    477,316,409
    
    
    
    477,316,409Investment in trust certificates at fair value
    
    
    57,973,017
    
    
    
    69,355,735Mortgage loans and real estate held for sale
    
    
    288,747,674
    
    
    
    345,441,865Notes receivable held for sale, net
    
    
    2,965,481
    
    
    
    3,575,323Accrued interest receivable
    
    
    37,649
    
    
    
    41,337Deferred financing costs, net
    
    
    7,223,844
    
    
    
    7,287,536Other receivables
    
    
    4,422,164
    
    
    
    3,233,676Building, furniture and equipment, net
    
    
    1,261,253
    
    
    
    1,529,418Income tax receivable
    
    
    2,113,054
    
    
    
    5,592,370Other assets
    
    
    1,032,838
    
    
    
    692,730Total assets
    
    $
    863,519,637
    
    
    $
    932,641,154LIABILITIES AND STOCKHOLDERS (DEFICIT)Liabilities:Notes payable, net of debt discount of $189,825 at June 30, 2010
and $191,511 at December 31, 2009
    
    $
    1,372,482,944
    
    
    $
    1,367,199,323Financing agreements
    
    
    1,000,000
    
    
    
    1,000,000Nonrecourse liability
    
    
    288,747,674
    
    
    
    345,441,865Accounts payable and accrued expenses
    
    
    4,385,865
    
    
    
    4,466,779Derivative liabilities, at fair value
    
    
    9,958,645
    
    
    
    13,144,591Terminated derivative liability
    
    
    8,200,000
    
    
    
    8,200,000Total liabilities
    
    
    1,684,775,128
    
    
    
    1,739,452,558Commitments and ContingenciesStockholders (Deficit):Preferred stock, $0.001 par value; authorized 3,000,000;
issued and outstanding: none
    
    
    
    
    
    
    Common stock and additional paid-in capital, $0.01 par value,
22,000,000 authorized shares; issued and outstanding: 8,029,795
at June 30, 2010 and 8,012,795 at December 31, 2009
    
    
    22,091,338
    
    
    
    22,067,763Noncontrolling interest in subsidiary
    
    
    1,771,408
    
    
    
    1,657,275Accumulated other comprehensive (loss)
    
    
    (7,092,924
    )
    
    
    (12,310,764
    )Retained (deficit)
    
    
    (838,025,313
    )
    
    
    (818,225,678
    )Total stockholders (deficit)
    
    
    (821,255,491
    )
    
    
    (806,811,404
    )Total liabilities and stockholders (deficit)
    
    $
    863,519,637
    
    
    $
    932,641,154
   3




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Interest income
    
    $
    10,876,369
    
    
    $
    16,676,815
    
    
    $
    22,351,597
    
    
    $
    33,131,140Dividend income
    
    
    10,629,300
    
    
    
    10,629,299
    
    
    
    21,258,599
    
    
    
    10,629,299Purchase discount earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    392,127Gain on recovery from contractual loan purchase rights
    
    
    
    
    
    
    30,550,000
    
    
    
    
    
    
    
    30,550,000(Loss) on mortgage loans and real estate held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (282,593,653
    )(Loss) on valuation of investments in trust certificates
and notes receivable held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,651,940
    )Fair valuation adjustments
    
    
    (10,900,755
    )
    
    
    (14,393,966
    )
    
    
    (14,671,797
    )
    
    
    (14,393,966
    )Gain on sale of other real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374,344Servicing fees and other income
    
    
    1,530,379
    
    
    
    1,717,609
    
    
    
    2,708,936
    
    
    
    4,227,166Total revenues/(losses)
    
    
    12,135,293
    
    
    
    45,179,757
    
    
    
    31,647,335
    
    
    
    (280,335,483
    )Operating Expenses:Interest expense
    
    
    16,789,474
    
    
    
    17,117,236
    
    
    
    35,808,717
    
    
    
    34,800,392Collection, general and administrative
    
    
    8,132,344
    
    
    
    6,905,713
    
    
    
    15,000,327
    
    
    
    25,598,708Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,479Amortization of deferred financing costs
    
    
    29,055
    
    
    
    288,577
    
    
    
    63,692
    
    
    
    455,345Depreciation
    
    
    142,289
    
    
    
    157,892
    
    
    
    287,801
    
    
    
    314,540Total expenses
    
    
    25,093,162
    
    
    
    24,469,418
    
    
    
    51,160,537
    
    
    
    61,338,464(Loss)/income before provision for income taxes
    
    
    (12,957,869
    )
    
    
    20,710,339
    
    
    
    (19,513,202
    )
    
    
    (341,673,947
    )Income tax
    
    
    74,000
    
    
    
    433,165
    
    
    
    172,300
    
    
    
    433,165Net (loss)/income
    
    
    (13,031,869
    )
    
    
    20,277,174
    
    
    
    (19,685,502
    )
    
    
    (342,107,112
    )Net income attributed to noncontrolling interest
    
    
    48,802
    
    
    
    
    
    
    
    114,133
    
    
    
    Net (loss)/income attributed to common stockholders
    
    $
    (13,080,671
    )
    
    $
    20,277,174
    
    
    $
    (19,799,635
    )
    
    $
    (342,107,112
    )Net (loss)/income per common share:Basic and diluted
    
    $
    (1.63
    )
    
    $
    2.53
    
    
    $
    (2.47
    )
    
    $
    (42.78
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    8,021,295
    
    
    
    8,000,295
    
    
    
    8,020,731
    
    
    
    7,997,170
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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 AccumulatedCommon Stock and
    
    
    Noncontrolling
    
    
    Other
    
    
    RetainedAdditional Paid-in Capital
    
    
    Interest
    
    
    Comprehensive
    
    
    (Deficit)/Shares
    
    
    Amount
    
    
    in Subsidiary
    
    
    Loss
    
    
    Earnings
    
    
    TotalBALANCE, JANUARY 1, 2010
    
    
    8,012,795
    
    
    $
    22,067,763
    
    
    $
    1,657,275
    
    
    $
    (12,310,764
    )
    
    $
    (818,225,678
    )
    
    $
    (806,811,404
    )Stock-based compensation
    
    
    17,000
    
    
    
    23,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,575Net income attributed to minority interest
    
    
    
    
    
    
    
    
    
    
    114,133
    
    
    
    
    
    
    
    
    
    
    
    114,133Amortization  unrealized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,217,840
    
    
    
    
    
    
    
    5,217,840Net (loss) attributed to common shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,799,635
    )
    
    
    (19,799,635
    )BALANCE, JUNE 30, 2010
    
    
    8,029,795
    
    
    $
    22,091,338
    
    
    $
    1,771,408
    
    
    $
    (7,092,924
    )
    
    $
    (838,025,313
    )
    
    $
    (821,255,491
    )
     5




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 Six Months Ended June 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) attributed to common shareholders
    
    $
    (19,799,635
    )
    
    $
    (342,107,112
    )Adjustments to reconcile net loss to net cash provided by operating activities:Gain on sale of other real estate owned
    
    
    
    
    
    
    (374,344
    )Depreciation
    
    
    287,801
    
    
    
    314,540Amortization of deferred costs and fees on originated loans, net
    
    
    
    
    
    
    48,215Loss on mortgage loans and real estate held for sale
    
    
    
    
    
    
    282,593,653Loss on value of investment in trust certificates and notes receivable held for sale
    
    
    
    
    
    
    62,651,940Fair valuation adjustments
    
    
    14,671,797
    
    
    
    14,393,966Principal collections on mortgage loans and real estate held for sale, net
    
    
    10,123,940
    
    
    
    28,992,711Paid in kind interest
    
    
    18,925,333
    
    
    
    6,938,945Proceeds from the sale of real estate held for sale
    
    
    7,781,706
    
    
    
    22,251,806Amortization of deferred financing costs
    
    
    63,692
    
    
    
    455,345Amortization of debt discount
    
    
    1,686
    
    
    
    15,065Stock-based compensation
    
    
    23,575
    
    
    
    132,029Purchase discount earned
    
    
    
    
    
    
    (392,127
    )Provision for loan losses
    
    
    
    
    
    
    169,479Net income attributed to noncontrolling interest
    
    
    114,133
    
    
    
    Changes in operating assets and liabilities:Accrued interest receivable
    
    
    3,688
    
    
    
    1,611,839Other receivables
    
    
    (1,188,488
    )
    
    
    (9,589,412
    )Income tax receivable
    
    
    3,479,316
    
    
    
    78,955Other assets
    
    
    (340,106
    )
    
    
    (293,227
    )Transfer to fixed assets
    
    
    
    
    
    
    (127,190
    )Accounts payable and accrued expenses
    
    
    1,950,980
    
    
    
    (12,312,666
    )Terminated derivative liability
    
    
    
    
    
    
    8,200,000Net cash provided by operating activities
    
    
    36,099,418
    
    
    
    63,652,410CASH FLOWS FROM INVESTING ACTIVITIES:(Increase)/decrease in restricted cash
    
    
    68,820
    
    
    
    26,619,011Principal collections on notes receivable
    
    
    408,018
    
    
    
    10,813,027Principal collections on loans held for investment
    
    
    
    
    
    
    5,857,079Proceeds from sale of other real estate owned
    
    
    
    
    
    
    19,227,015Purchase of building, furniture and equipment
    
    
    (19,639
    )
    
    
    (6,201
    )Net cash provided by investing activities
    
    
    457,199
    
    
    
    62,509,931CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments of notes payable
    
    
    (13,643,399
    )
    
    
    (82,109,940
    )Payments on nonrecourse liability
    
    
    (20,992,899
    )
    
    
    (51,244,519
    )Principal payments of financing agreements
    
    
    
    
    
    
    (2,975,063
    )Proceeds from financing agreements
    
    
    
    
    
    
    2,017,052Net cash (used in) financing activities
    
    
    (34,636,298
    )
    
    
    (134,312,470
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    1,920,319
    
    
    
    (8,150,129
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    15,963,115
    
    
    
    21,426,777CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    17,883,434
    
    
    $
    13,276,648SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest
    
    $
    16,511,709
    
    
    $
    23,349,263Cash payments for taxes
    
    $
    368,145
    
    
    $
    268,154NON-CASH INVESTING AND FINANCING ACTIVITY:Transfer from notes receivable and loans held for investment to OREO
    
    $
    
    
    
    $
    20,566,413
   6




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 1.   BUSINESS
  Overview
 Recent Developments
 Sale of Trusts Loans, Loan Sale Servicing Agreement, New Trust Servicing Agreement, Amendment to
Licensing Credit Agreement and Other Agreements with The Huntington National Bank
     7




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Letter Agreement with the Bank.
 
    
    FCMC made a $1 million payment to the Bank as reimbursement for certain expenses of
the Bank in connection with the Loan Sale, which the Company expects will result in a
pre-tax $1 million charge to earnings in the third quarter ending September 30, 2010;
    
    FCMC released all claims under the Legacy Servicing Agreement as of the loan sale
date (other than those for unpaid servicing advances for services incurred prior to
June 30, 2010) with respect to the loans sold in the Loan Sale;
    
    FCMC refunded to the Trust an estimated $400,000 for servicing fees paid in advance
to FCMC under the Legacy Servicing Agreement in respect of July 2010 to the extent
attributable to the loans sold in the Loan Sale;
    
    The Legacy Servicing Agreement was terminated as to the loans sold, except with
respect to FCMCs obligations to assist in curing documentary issues or deficiencies
relating to the loans sold; and,
    
    FCMC and the Trust entered into an amended and restated servicing agreement (the
New Trust Servicing Agreement or Servicing Agreement) on July 30, 2010 and
effective August 1, 2010, relating to the servicing of the loans previously serviced
under the Legacy Servicing Agreement, other than those sold in the Loan Sale (see
below).
  Amendment No. 2 to the Licensing Credit Agreement with the Bank.
 
    
    FCMC used $1 million in unpledged cash to repay the amount outstanding under its
revolving line of credit with the Bank; and,
    
    Available credit under the revolving loan facility was reduced from $2 million to $1
million and the cash collateral securing the revolving loan and letter of credit
facilities was reduced from $8.5 million to $7.5 million, with the released collateral
applied as a voluntary payment against the debt outstanding of certain subsidiaries of
the Company under the Legacy Credit Agreement, which the Company expects will result in
a $1 million reduction of stockholders equity in the third quarter ending September
30, 2010.
 Loan Sale Servicing Agreement with Purchaser.
  8




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Potential Restructuring.
 
    
    The Bank would use its reasonable efforts to assist Franklin Holding and FCMC in
connection with such Potential Restructuring in obtaining the approval of the required
lenders for the Potential Restructuring and consenting to any change of control in
connection with the Potential Restructuring to the extent required under the Legacy
Credit Agreement, and FCMC or Franklin Holding would reimburse and hold the Bank and
the required lenders harmless from any reasonable expense incurred by them in
connection with any such Potential Restructuring;
    
    FCMC would make semi-annual payments to the Bank under the Legacy Credit Agreement
(the EBITDA Payment) equal to (i) 50% of FCMCs EBITDA, in accordance with generally
accepted accounting principles (GAAP), for each period for the first 18 months from
the Loan Sale Closing Date, and (ii) 70% of FCMCs GAAP EBITDA for each period
thereafter, up to a maximum aggregate of $3 million;
    
    Thomas J. Axons existing personal guaranty to the Bank would be extended to the
EBITDA Payment pursuant to an amendment to the guarantee, which will also provide that
to the extent that the EBITDA Payment in respect of any period is less than $500,000,
Mr. Axon will pay such shortfall. Mr. Axons obligations pursuant to the guaranty
would be secured and continue to be secured by the collateral he had pledged to the
Bank on March 31, 2009; and,
    
    Any payments by FCMC or Mr. Axon in respect of the EBITDA Payment would go to reduce
the obligation of the other in respect of the obligations to make such payment, or the
guaranty in respect of such payment, as the case may be; and, any payments in respect
of the EBITDA Payments, and application of payments to the Bank in respect of
distributions by FCMC to its stockholders (in accordance with the March 2010 amendment
to the Licensing Credit Agreement and with the requirement under the Legacy Credit
Agreement that all such distributions to stockholders be accompanied by such
application such that such applications are not less than 70% of the total amounts of
such applications and distributions for any semi-annual period), would each serve as a
credit against the other, which could have the effect of reducing the impact of the $3
million maximum amount of the EBITDA Payments otherwise payable as described above.
See Note 7  Notes Payable and Financing Agreements.
  9




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New Trust Servicing Agreement.
    Investment in Huntington REIT Securities
   10




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The Companys Business
 March 2009 Restructuring
   Expiration of Draw Facility under the Licensing Credit Agreement .
   11




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December 2008 Corporate Reorganization and Holding Company Structure
   Going Concern Uncertainty  Franklin Holding
  Operating Losses  Franklin Holding
   12




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Licenses to Service Loans
      13




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14




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Franklins Business  Franklin Credit Management Corporation (FCMC)
  Transfers and Servicing
 Loan Servicing
    15




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Loan Servicing and Collection Operations
  Loan Boarding and Administration .
  Customer Service .
  16




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Client Relations .
 Collections .
 Loss Mitigation .
    17




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Real Estate .
 Deficiency Recovery & Judgment Processing Department (Recovery) .
 Face to Face Home Solutions (Face to Face) .
 Training .
 Quality Control .
 Home Affordable Modification Program
   18




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Bosco Servicing Agreement
   Due Diligence Services
  2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   19




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Recent Accounting Pronouncements
 Transfers and Servicing
(Topic 860)  Accounting for Transfers of Financial Assets
 Disclosures About the Credit Quality of
Financing Receivables and the Allowance for Credit Losses Receivables
  Effect of a Loan
Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset  A Consensus
of the FASB Emerging Task Force
  20




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Income Taxes, (Topic 740) Accounting for Certain
Tax Effects of the Health Care Reform Acts
 Derivatives and Hedging
 Consolidation (Topic 810) .
 Subsequent Events (Topic 855)  Amendments to
Certain Recognition and Disclosure Requirement
 Technical Corrections to Various Topics
  21




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Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements
 Equity (Topic 505): Accounting for Distributions
to Shareholders with Components of Stock and Cash
 Consolidations (Topic 810)  Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
  22




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3.    INVESTMENT IN TRUST CERTIFICATES AT FAIR VALUE, MORTGAGE LOANS AND REAL ESTATE HELD FOR
SALE, AND NOTES RECEIVABLE HELD FOR SALE
  Six Months EndedJune 30, 2010Balance, January 1
    
    $
    69,355,735Trust distributions
    
    
    (6,120,529
    )Transfers (out)
    
    
    (1,566,985
    )Fair value adjustments, net
    
    
    (3,695,204
    )Balance, June 30
    
    $
    57,973,017
   Six Months EndedJune 30, 2010Balance, January 1
    
    $
    345,441,865REO sales
    
    
    (7,781,706
    )Principal payments
    
    
    (14,773,555
    )Loans written off
    
    
    (23,016
    )Fair value adjustments, net
    
    
    (34,115,914
    )Balance, June 30
    
    $
    288,747,674
   23




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Six Months EndedJune 30, 2010Balance, January 1
    
    $
    3,575,323Principal payments
    
    
    (408,018
    )Loans written off
    
    
    (13,395
    )Fair value adjustments, net
    
    
    (188,429
    )Balance, June 30
    
    $
    2,965,481
  4.   FAIR VALUATION ADJUSTMENTS
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Valuation gain/(loss) on OREO sold
    
    $
    2,576,120
    
    
    $
    (11,564,907
    )
    
    $
    4,349,020
    
    
    $
    (11,564,907
    )Valuation (loss) on mortgage loans and OREO
    
    
    (36,091,212
    )
    
    
    (17,046,415
    )
    
    
    (34,115,914
    )
    
    
    (17,046,415
    )Valuation (loss) on nonrecourse liability
    
    
    36,091,212
    
    
    
    17,046,415
    
    
    
    34,115,914
    
    
    
    17,046,415Valuation gain/(loss) on trust certificates
    
    
    (5,701,040
    )
    
    
    733,601
    
    
    
    (3,695,204
    )
    
    
    733,601Valuation (loss) on notes receivable
    
    
    (204,613
    )
    
    
    
    
    
    
    (188,429
    )
    
    
    Other adjustments
    
    
    (7,571,222
    )
    
    
    (3,562,660
    )
    
    
    (15,137,184
    )
    
    
    (3,562,660
    )(Loss) on valuation
    
    $
    (10,900,755
    )
    
    $
    (14,393,966
    )
    
    $
    (14,671,797
    )
    
    $
    (14,393,966
    )
   5.   DERIVATIVES
 Derivatives and Hedging
  24




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25




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Notional Amount
    
    
    Term
    
    Maturity Date
    
    
    Fixed Rate
    
    
    Estimated Fair Value$
    275,000,000
    
    
    3 years
    
    March 5, 2011
    
    
    3.47
    %
    
    $
    (6,751,931
    )70,000,000
    
    
    3 years
    
    March 5, 2011
    
    
    3.11
    %
    
    
    (1,244,467
    )45,000,000
    
    
    4 years
    
    March 5, 2012
    
    
    3.43
    %
    
    
    (1,962,247
    )$
    390,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (9,958,645
    )
   Six Months EndedJune 30, 2010Balance, January 1
    
    $
    (13,144,591
    )Cash settlements
    
    
    6,227,116Fair value adjustments
    
    
    (3,041,170
    )Balance, June 30
    
    $
    (9,958,645
    )
 6.   FAIR VALUE MEASUREMENTS
 Fair Value Measurements and Disclosures,
 
    
    Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
    
    Level 2 Inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets and inputs that are observable for the asset
of liability, either directly or indirectly, for substantially the full term of the
financial instrument. Fair values for these instruments are estimated using pricing
models, quoted prices of securities with similar characteristics, or discounted cash
flows.
    
    Level 3 Inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Fair values are initially valued based upon transaction
price and are adjusted to reflect exit values as evidenced by financing and sale
transactions with third parties.
   26




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Level 3Interest-rate swaps
    
    $
    
    
    
    $
    (9,958,645
    )
    
    $
    
    
    
    $
    Investment in trust certificates
    
    
    
    
    
    
    
    
    
    
    57,973,017
    
    
    
    Nonrecourse liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (288,747,674
    )Total
    
    $
    
    
    
    $
    (9,958,645
    )
    
    $
    57,973,017
    
    
    $
    (288,747,674
    )
  Investments
    
    
    LiabilitiesBalance, January 1, 2010
    
    $
    69,355,735
    
    
    $
    (345,441,865
    )Total unrealized gains/(losses)
    
    
    (3,695,204
    )
    
    
    24,738,007Transfers in/(out)
    
    
    (1,566,985
    )
    
    
    23,015Distributions/payments
    
    
    (6,120,529
    )
    
    
    31,933,169Balance, June 30, 2010
    
    $
    57,973,017
    
    
    $
    (288,747,674
    )
   Level 1
    
    
    Level 2
    
    
    Level 3Mortgage loans and real estate held for sale
    
    $
    
    
    
    $
    
    
    
    $
    288,747,674
 7.   NOTES PAYABLE AND FINANCING AGREEMENTS
    27




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Restructuring Agreements with Lead Lending Bank
  July 20, 2010 Amendment to Restructuring Agreements
  March 2009 Restructuring
      28




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Background to the Restructuring.
  Summary of the Restructuring.
 (1)
    
    in exchange for the transfer of that part of the Portfolio underlying the Bank
Trust Certificates (as defined below), the Company received common membership interests
and Class C preferred membership interests in the REIT having in the aggregate a value
intended to approximate the fair market value of that portion of the Portfolio
transferred to the Bank, which as of March 31, 2009 was approximately $477.3 million
(the REIT Securities). The preferred membership interests have a liquidation value
of $100,000 per unit and an annual cumulative dividend rate of 9% of such liquidation
value. Any dividends on the preferred shares shall be payable only out of funds
legally available for the payment thereof;(2)
    
    principal and interest payments in respect of the Legacy Credit Agreement are
only due and payable to the extent of cash flow of the Company, which cash flow would
include dividends declared and paid in respect of the REIT Securities or any other
assets of the Company, other than the retained interest in FCMC (as discussed below);
and,
  29




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(3)
    
    the Banks recourse in respect of the Legacy Credit Agreement is limited to the
assets and stock of Franklin Holdings subsidiaries, excluding the assets of FCMC
(except for a first lien of the Bank on an office condominium unit and a second
priority lien of the Bank on cash collateral held as security under the Licensing
Credit Agreement) and a portion of FCMCs stock, representing not less than twenty-five
percent (since Level 1 referenced below was not achieved) and not more than seventy
percent of FCMCs common equity, based on the amounts received by the Bank from the
cash collections from FCMCs servicing of the Portfolio as discussed in more detail
below. Under the terms and conditions of the Restructuring Agreements, FCMC may pay
dividends or other distributions in respect of its capital stock if FCMC delivers to
the Bank a payment to be applied to outstanding obligations under the Legacy Credit
Agreement equal to seventy percent of any such distribution or dividend that FCMC
elects to make or declare, which percentage share may be reduced to twenty-five percent
(since Level 1 referenced below was not achieved) based upon the Banks receipt of the
agreed amounts of net remittances from the Portfolio summarized below.
  (1)
    
    release of thirty percent of the equity in FCMC, ten percent of which has been
transferred to the Companys principal stockholder, Thomas J. Axon, from the Companys
pledges to the Bank in respect of its Legacy Credit Agreement, with the possibility of
release of up to an additional fifty percent (which is now forty-five percent due to
the failure to achieve Level 1 referenced below and of which a maximum of ten percent
would go to Thomas J. Axon), based upon the Banks receipt of the agreed amounts of net
remittances from the Portfolio, summarized below (the Net Remittances), from March
31, 2009, the effective date of the Legacy Credit Agreement (the Legacy Effective
Date), through the term of the Legacy Credit Agreement; the Bank shall reduce its
interest in the equity in FCMC, as collateral, in accordance with the following
collection levels;
 Minimum Amountof Net RemittancesLevel
    
    (Minimum Level Amount)
    
    Time Period
    
    Release of Equity InterestsLevel 1
    
    $225 million*
    
    1 year from the Legacy Effective Date*
    
    10% (70% reduces to 60%)*Level 2
    
    $475 million
    
    3 years from the Legacy Effective Date
    
    10% (60% reduces to 50%)Level 3
    
    $575 million
    
    No time period specified
    
    10% (50% reduces to 40%)Level 4
    
    $650 million
    
    No time period specified
    
    10% (40% reduces to 30%)Level 5
    
    $750 million
    
    No time period specified
    
    10% (30% reduces to 20%)
 
 *
    
    Provided, however, (i) if Net Remittances do not reach the minimum Level 1 amount prior to
the first anniversary of the Legacy Effective Date (which is what occurred), but reach the
minimum Level 2 amount prior to the third anniversary of the Legacy Effective Date, the Bank
shall retain, as collateral, 55% of the FCMC equity instead of 50%, as currently scheduled,
and any subsequent reductions in the amount of FCMC equity pledged to the Bank shall be 10%;
and provided further that (ii) if Net Remittances do not reach the minimum Level 1 amount
prior to the first anniversary of the Legacy Effective Date and do not reach the minimum Level
2 amount prior to the third anniversary of the Legacy Effective Date, then the schedule for
release of the equity interests in FCMC currently pledged to the Bank shall be as follows: (x)
upon attaining the minimum Level 3 amount, the pledged equity interests in FCMC shall reduce
25% (from 70% to 45%); (y) upon attaining the minimum Level 4 amount, the pledged equity
interests in FCMC shall reduce an additional 10% (from 45% to 35%), and (z) upon attaining the
minimum Level 5 amount, the pledged equity interests in FCMC shall reduce an additional 10%
(from 35% to 25%).  30




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##### Table of Contents



(2)
    
    entry into a servicing agreement enabling the Company to receive fee income in
respect of its continued servicing of the transferred Portfolio; and,(3)
    
    entry into amended credit facilities in the aggregate principal amount of $13.5
million, (which, effective June 20, 2010, is $7.5 million) including a $5 million
facility for working capital (which expired unrenewed on May 31, 2010) and to support
various servicer licenses, a $2 million revolving facility (which was reduced to $1
million on July 20, 2010) and a $6.5 million letter of credit facility to support
various servicer licenses.
  (1)
    
    the possible transfer of ownership of a portion of FCMC, including a minimum of
twenty-five percent (since Level 1 was not achieved) and a maximum of seventy percent,
to the Bank at maturity of the Companys Legacy Credit Agreement with the Bank, unless
further extended if the Company is not otherwise able to satisfy or refinance the
Legacy Credit Agreement prior to maturity;(2)
    
    the transfer of ten percent of ownership of FCMC to Franklin Holdings
principal stockholder, Thomas J. Axon, as the cost of obtaining certain guarantees and
pledges required by the Bank as a condition of the restructuring, subject to increase
to an additional ten percent should the pledge of common shares of FCMC by Franklin
Holding to the Bank be reduced upon the attainment by FCMC of certain net collection
targets set by the Bank with respect to the Portfolio;(3)
    
    entry into a service agreement with respect to FCMCs continued servicing of
the Portfolio that allows the Bank to terminate such servicing and, concomitantly,
FCMCs fee income from servicing the Portfolio; and,(4)
    
    the Company may incur significant income tax liabilities as a result in part of
a tax basis transfer, at termination of the Legacy Credit Agreement, liquidation of the
Company or any of its direct or indirect subsidiary companies, or certain other Company
events such as a de facto liquidation. The amount of any tax liability that the
Company may incur is not certain since any such calculations need to be performed on a
company by company basis and are influenced by a number of factors including, but not
limited to, the ability to use prior year losses and future results of operations.
 Restructuring Agreements.
 Transferred substantially the entire Portfolio in exchange for the REIT Securities
  (a)
    
    an undivided 100% interest of the Banks portion of consumer mortgage loans
(the Bank Consumer Loan Certificate);
  31




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##### Table of Contents



(b)
    
    an undivided 100% interest in the Banks portion of consumer REO assets (the
Bank Consumer REO Certificate, and together with the Bank Consumer Loan Certificate,
the Bank Trust Certificates);(c)
    
    an undivided 100% interest in the portion of consumer mortgage loan assets
allocated to the M&I Marshall & Ilsley Bank (M&I) and BOS (USA) Inc. (BOS) (M&I and
BOS collectively, the Participants) represented by two certificates (the
Participants Consumer Loan Certificates); and,(d)
    
    an undivided 100% interest in Participants portion of the consumer REO assets
represented by two certificates (the Participants Consumer REO Certificates, and
together with the Participants Consumer Loan Certificate, the Participants Trust
Certificates).
     32




---



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Amended and restated substantially all of its outstanding debt
    33




---



##### Table of Contents



Terms of the Restructured Indebtedness Under the Legacy Credit Agreement.
 Outstanding
    
    
    OutstandingPrincipal Amount
    
    
    Principal Amount
    
    
    Applicable Interest
    
    
    Required Monthlyat March 31, 2009 
    
    
    at June 30, 2010 
    
    
    Margin Over LIBOR
    
    
    PrincipalFranklin Asset/Tribeca
    
    
    Franklin Asset/Tribeca
    
    
    (basis points)
    
    
    AmortizationTranche A
    
    $
    838,000,000
    
    
    $
    759,000,000
    
    
    
    225
    
    
    NoneTranche B
    
    $
    407,000,000
    
    
    
    424,000,000
    
    
    
    275
    
    
    NoneTranche C
    
    $
    125,000,000
    
    
    
    151,000,000
    
    
    
    N/A
    (1)
    
    NoneUnrestructured Debt
    
    $
    41,000,000
    
    
    $
    39,000,000
    
    
    
    
    (2)
    
    None
 
 (1)
    
    The applicable interest rate is fixed at 15% per annum. Interest will be paid in kind
during the term of the Restructuring.(2)
    
    Interest margin over FHLB 30-day LIBOR advance rate plus 2.60%-2.75%.     34




---



##### Table of Contents



3.
    
    Entered into an amended and restated credit agreement to fund FCMCs licensing obligations
and working capital.
   35




---



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36




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##### Table of Contents



4.
    
    Entered into a servicing agreement with the Trust.
    Forbearance Agreements with Lead Lending Bank
   37




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8.   NONCONTROLLING INTEREST
   38




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##### Table of Contents



Six Months EndedJune 30, 2010Balance, January 1, 2010
    
    $
    1,657,275Net income attributed to noncontrolling interest
    
    
    114,133Balance, June 30, 2010
    
    $
    1,771,408
  9.   CERTAIN CONCENTRATIONS
 Third Party Servicing Agreements
  Financing
 10.   RELATED PARTY TRANSACTIONS
 Restructuring
  39




---



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Bosco Servicing Agreement
      40




---



##### Table of Contents



Other Significant Related Party Transactions with the Companys Chairman
  41




---



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11.   SUBSEQUENT EVENTS
 Sale of Trusts Loans, Loan Sale Servicing Agreement, New Trust Servicing Agreement, Amendment to
Licensing Credit Agreement and Other Agreements with The Huntington National Bank
    42




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##### Table of Contents



Letter Agreement with the Bank.
 
    
    FCMC on the Loan Sale Closing Date made a $1 million payment to the Bank as
reimbursement for certain expenses of the Bank in connection with the Loan Sale, which
the Company expects will result in a pre-tax $1 million charge to earnings in the third
quarter ending September 30, 2010;
    
    FCMC released all claims under the Legacy Servicing Agreement (other than those for
unpaid servicing advances for services incurred prior to June 30, 2010) with respect to
the loans sold in the Loan Sale;
    
    FCMC refunded to the Trust on the Loan Sale Closing Date an estimated $400,000 of
the servicing fees paid in advance to FCMC under the Legacy Servicing Agreement in
respect of July 2010 to the extent attributable to the loans sold in the Loan Sale;
    
    On the Loan Sale Closing Date, the Legacy Servicing Agreement was terminated as to
the loans sold, except with respect to FCMCs obligations to assist in curing
documentary issues or deficiencies relating to the loans sold; and,
    
    FCMC and the Trust entered into an amended and restated servicing agreement (the New
Trust Servicing Agreement or Servicing Agreement) on July 30, 2010 and effective
August 1, 2010, relating to the servicing of the loans previously serviced under the
Legacy Servicing Agreement, other than those sold in the Loan Sale (see below).
  Amendment No. 2 to the Licensing Credit Agreement.
 
    
    FCMC used $1 million in unpledged cash to repay the amount outstanding under its
revolving line of credit with the Bank; and,
    
    Available credit under the revolving loan facility was reduced from $2 million to $1
million and the cash collateral securing the revolving loan and letter of credit
facilities was reduced from $8.5 million to $7.5 million, with the collateral so
released applied as a voluntary
payment against the debt outstanding of certain subsidiaries of the Company under the
Legacy Credit Agreement, which the Company expects will result in a $1 million reduction
of stockholders equity in the third quarter ending September 30, 2010.
  43




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Loan Sale Servicing Agreement with Purchaser.
    Potential Restructuring.
 
    
    The Bank would use its reasonable efforts to assist Franklin Holding and FCMC in
connection with such Potential Restructuring in obtaining the approval of the required
lenders for the Potential Restructuring and consenting to any change of control in
connection with the Potential Restructuring to the extent required under the Legacy
Credit Agreement, and FCMC or Franklin Holding would reimburse and hold the Bank and
the required lenders harmless from any reasonable expense incurred by them in
connection with any such Potential Restructuring;
    
    FCMC would make semi-annual payments to the Bank under the Legacy Credit Agreement
(the EBITDA Payment) equal to (i) 50% of FCMCs EBITDA, in accordance with generally
accepted accounting principles (GAAP), for each period for the first 18 months
from the Loan Sale Closing Date, and (ii) 70% of FCMCs GAAP EBITDA for each period
thereafter, up to a maximum aggregate of $3 million;
  44




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##### Table of Contents




    
    Thomas J. Axons existing personal guaranty to the Bank would be extended to the
EBITDA Payment pursuant to an amendment to the guarantee, which will also provide that
to the extent that the EBITDA Payment in respect of any period is less than $500,000,
Mr. Axon will pay such shortfall. Mr. Axons obligations pursuant to the guaranty
would be secured and continue to be secured by the collateral he had pledged to the
Bank on March 31, 2009; and,
    
    Any payments by FCMC or Mr. Axon in respect of the EBITDA Payment would go to reduce
the obligation of the other in respect of the obligations to make such payment, or the
guaranty in respect of such payment, as the case may be; and, any payments in respect
of the EBITDA Payments, and application of payments to the Bank in respect of
distributions by FCMC to its stockholders (in accordance with the March 2010 amendment
to the Licensing Credit Agreement and with the requirement under the Legacy Credit
Agreement that all such distributions to stockholders be accompanied by such
application such that such applications are not less than 70% of the total amounts of
such applications and distributions for any semi-annual period), would each serve as a
credit against the other, which could have the effect of reducing the $3 million
maximum amount of the EBITDA Payments otherwise payable as described above. See Note 7
  Notes Payable and Financing Agreements.
  New Trust Servicing Agreement.
   
    
    the servicing fees for second lien mortgage loans, which comprise substantially all
of the Assets serviced under the New Trust Servicing Agreement will be based
predominately on the percentage of principal and interest collected, with a contingency
rate dependent on the delinquency of the loan and a per unit monthly service fee for
only those loans less than 30 days delinquent or in a bankruptcy status during the 90
day period following a bankruptcy filing, rather than a per unit monthly service fee
for second lien mortgages loans up to 119 days delinquent and a contingency rate on the
earlier of foreclosure or liquidation of the REO or when such a loan is 120 days or
more delinquent;
  45




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##### Table of Contents




    
    the servicing fees for the first lien mortgages and REO properties will be based on
a fee schedule from the Loan Sale Servicing Agreement FCMC had entered into with the
third
party (the Purchaser) that had purchased substantially all of the first lien mortgage
loans from the Trust on July 20, 2010 and effective July 1, 2010, (with the exception of
a new incentive that would result in increased fees for REO properties should FCMC sell
50% of more of the REO properties of the Trust (calculated based on the number of
properties) within 180 days of the entry into the New Trust Servicing Agreement;
    
    FCMCs services may be terminated with respect to some or all of the Assets without
cause and without penalty on 30 days prior written notice in connection with a sale of
some or all of the Assets by the Trust (otherwise, the 90 day prior written notice
period that was in effect for the Prior Agreement was retained); and,
    
    under the New Trust Servicing Agreement, (i) the consent process for hiring vendors
was replaced with a general restriction that vendors may not be engaged to perform a
substantial portion of the primary day-to-day servicing obligations of FCMC; (ii)
minimum gross collection targets that could trigger a termination of the agreement
under certain circumstances were removed; and, (iii) the restrictions on entering into
new servicing agreements that could reasonably likely impair the ability of the FCMC to
perform its obligations were eliminated, but a customary servicing standard and
detailed servicer obligations are contained within the agreement.
  Franklin Accounting for the Sale of Loans by the Trust.
   46




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Investment in Huntington REIT Securities
    47




---



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ITEM
2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
 Safe Harbor Statements.
  48




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Application of Critical Accounting Policies and Estimates
 Transfers and Servicing
 
 Serviced for Others Portfolio
      49




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June 30, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalProperty Types
    
    of Loans
    
    
    Principal Balance
    
    
    Principal BalanceResidential 1-4 family
    
    
    20,104
    
    
    $
    1,291,875,045
    
    
    
    70.55
    %Condos, co-ops, PUD dwellings
    
    
    3,282
    
    
    
    199,415,039
    
    
    
    10.89
    %Manufactured and mobile homes
    
    
    490
    
    
    
    13,819,178
    
    
    
    0.75
    %Secured, property type unknown(1)
    
    
    1,397
    
    
    
    22,630,616
    
    
    
    1.24
    %Commercial
    
    
    40
    
    
    
    3,283,250
    
    
    
    0.18
    %Unsecured loans(2)
    
    
    8,822
    
    
    
    300,045,421
    
    
    
    16.39
    %Total
    
    
    34,135
    
    
    $
    1,831,068,549
    
    
    
    100.00
    %
 
 (1)
    
    The loans included in this category are principally small balance (less than $10,000)
second-lien loans acquired, and are collateralized by residential real estate.(2)
    
    The loans included in this category are principally second-lien loans where the Company
is aware that residential real estate collateral has been foreclosed by the first-lien
holder.  50




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June 30, 2010Contractual DelinquencyDays Past Due
    
    
    Amount
    
    
    %Performing  Current
    
    0 - 30 days
    
    $
    229,534,744
    
    
    
    12.54
    %Delinquent
    
    31 - 60 days
    
    
    14,192,970
    
    
    
    0.78
    %61 - 90 days
    
    
    10,363,660
    
    
    
    0.57
    %90+ days
    
    
    766,545,921
    
    
    
    41.86
    %Modified Loans
    
    0 - 30 days
    
    
    207,056,261
    
    
    
    11.31
    %Delinquent
    
    31 - 60 days
    
    
    30,495,622
    
    
    
    1.67
    %61 - 90 days
    
    
    14,000,249
    
    
    
    0.76
    %90+ days
    
    
    51,354,897
    
    
    
    2.80
    %Bankruptcy
    
    0 - 30 days
    
    
    29,325,285
    
    
    
    1.60
    %Delinquent
    
    31 - 60 days
    
    
    4,971,486
    
    
    
    0.27
    %61 - 90 days
    
    
    3,115,488
    
    
    
    0.17
    %90+ days
    
    
    164,871,537
    
    
    
    9.00
    %Foreclosure
    
    0 - 30 days
    
    
    951,631
    
    
    
    0.05
    %Delinquent
    
    31 - 60 days
    
    
    786,717
    
    
    
    0.04
    %61 - 90 days
    
    
    2,718,056
    
    
    
    0.15
    %90+ days
    
    
    300,784,025
    
    
    
    16.43
    %Total
    
    $
    1,831,068,549
    
    
    
    100.00
    %All current loans
    
    0 - 30 days
    
    $
    466,867,921
    
    
    
    25.50
    %
   51




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##### Table of Contents



June 30, 2010Contractual DelinquencyDays Past Due
    
    
    Number of Loans
    
    
    %Performing  Current
    
    0 - 30 days
    
    
    5,643
    
    
    
    16.53
    %Delinquent
    
    31 - 60 days
    
    
    333
    
    
    
    0.98
    %61 - 90 days
    
    
    262
    
    
    
    0.77
    %90+ days
    
    
    18,610
    
    
    
    54.52
    %Modified Loans
    
    0 - 30 days
    
    
    2,479
    
    
    
    7.26
    %Delinquent
    
    31 - 60 days
    
    
    314
    
    
    
    0.92
    %61 - 90 days
    
    
    166
    
    
    
    0.49
    %90+ days
    
    
    753
    
    
    
    2.21
    %Bankruptcy
    
    0 - 30 days
    
    
    723
    
    
    
    2.12
    %Delinquent
    
    31 - 60 days
    
    
    105
    
    
    
    0.31
    %61 - 90 days
    
    
    81
    
    
    
    0.24
    %90+ days
    
    
    3,180
    
    
    
    9.32
    %Foreclosure
    
    0 - 30 days
    
    
    5
    
    
    
    0.01
    %Delinquent
    
    31 - 60 days
    
    
    7
    
    
    
    0.02
    %61 - 90 days
    
    
    19
    
    
    
    0.06
    %90+ days
    
    
    1,455
    
    
    
    4.24
    %Total
    
    
    34,135
    
    
    
    100.00
    %All current loans
    
    0 - 30 days
    
    
    8,850
    
    
    
    25.93
    %
   June 30, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalLien Position
    
    of Loans
    
    
    Principal Balance
    
    
    Principal Balance1st Liens
    
    
    6,390
    
    
    $
    691,213,102
    
    
    
    37.75
    %2nd Liens
    
    
    27,745
    
    
    
    1,139,855,447
    
    
    
    62.25
    %Total
    
    
    34,135
    
    
    $
    1,831,068,549
    
    
    
    100.00
    %
  52




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June 30, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalLocation
    
    of Loans
    
    
    Principal Balance
    
    
    Principal BalanceCalifornia
    
    
    5,533
    
    
    $
    468,287,841
    
    
    
    25.57
    %New York
    
    
    1,455
    
    
    
    165,324,760
    
    
    
    9.03
    %Florida
    
    
    2,747
    
    
    
    145,780,252
    
    
    
    7.96
    %New Jersey
    
    
    918
    
    
    
    127,799,076
    
    
    
    6.98
    %Texas
    
    
    3,325
    
    
    
    90,268,767
    
    
    
    4.93
    %Pennsylvania
    
    
    1,121
    
    
    
    62,977,264
    
    
    
    3.44
    %Ohio
    
    
    1,770
    
    
    
    56,357,953
    
    
    
    3.08
    %Illinois
    
    
    1,282
    
    
    
    53,654,476
    
    
    
    2.93
    %Georgia
    
    
    1,275
    
    
    
    51,304,964
    
    
    
    2.81
    %Maryland
    
    
    617
    
    
    
    49,833,172
    
    
    
    2.72
    %All Others
    
    
    14,092
    
    
    
    559,480,024
    
    
    
    30.55
    %Total
    
    
    34,135
    
    
    $
    1,831,068,549
    
    
    
    100.00
    %
 Real Estate Assets Serviced for Others
  Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2010Number of Assets
    
    
    Amount
    
    
    Number of Assets
    
    
    AmountReal estate assets at June 30, 2010
    
    
    241
    
    
    $
    45,177,312
    
    
    
    241
    
    
    $
    45,177,312Real estate assets sold
    
    
    82
    
    
    $
    14,363,566
    
    
    
    145
    
    
    $
    24,630,295
 
 Results of Operations  Franklin Credit Management Corporation (FCMC)
    53




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Three Months Ended
    
    
    Three Months EndedSTATEMENT OF INCOME
    
    June 30, 2010
    
    
    June 30, 2009REVENUES:Servicing fees and other income
    
    $
    5,704,392
    
    
    $
    7,206,007Interest income
    
    
    8,535
    
    
    
    21,973Total revenues
    
    
    5,712,927
    
    
    
    7,227,980OPERATING EXPENSES:Interest expense
    
    
    22,412
    
    
    
    25,121Collection, general and administrative
    
    
    4,733,981
    
    
    
    4,552,163Depreciation
    
    
    141,518
    
    
    
    156,736Total operating expenses
    
    
    4,897,911
    
    
    
    4,734,020INCOME BEFORE PROVISION FOR INCOME TAXES
    
    $
    815,016
    
    
    $
    2,493,960Provision for income taxes
    
    
    327,000
    
    
    
    274,030NET INCOME
    
    $
    488,016
    
    
    $
    2,219,930Six Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2009REVENUES:Servicing fees and other income
    
    $
    11,380,257
    
    
    $
    15,087,327Interest income
    
    
    17,781
    
    
    
    72,586Total revenues
    
    
    11,398,038
    
    
    
    15,159,913OPERATING EXPENSES:Interest expense
    
    
    44,270
    
    
    
    29,784Collection, general and administrative
    
    
    9,165,014
    
    
    
    10,876,099Depreciation
    
    
    285,874
    
    
    
    313,384Total operating expenses
    
    
    9,495,158
    
    
    
    11,219,267INCOME BEFORE PROVISION FOR INCOME TAXES
    
    $
    1,902,880
    
    
    $
    3,940,646Provision for income taxes
    
    
    761,550
    
    
    
    433,165NET INCOME
    
    $
    1,141,330
    
    
    $
    3,507,481
  58




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BALANCE SHEET
    
    At June 30, 2010
    
    
    At December 31, 2009ASSETS:Cash and cash equivalents
    
    $
    17,472,027
    
    
    $
    15,116,880Restricted cash
    
    
    3,789,461
    
    
    
    4,770,867Receivables, fixed and other assets
    
    
    6,044,259
    
    
    
    6,436,434Total assets
    
    $
    27,305,747
    
    
    $
    26,324,181LIABILITIES:Debt
    
    $
    1,000,000
    
    
    $
    1,000,000Servicing liabilities
    
    
    3,789,461
    
    
    
    4,770,867Other liabilities
    
    
    1,907,764
    
    
    
    1,675,372Total liabilities
    
    $
    6,697,225
    
    
    $
    7,446,239STOCKHOLDERS EQUITY
    
    $
    20,608,522
    
    
    $
    18,877,942Total liabilities and stockholders equity
    
    $
    27,305,747
    
    
    $
    26,324,181SERVICING PORTFOLIO:Number of loans serviced
    
    
    34,100
    
    
    
    36,700Unpaid principal balance serviced
    
    $
    1.83
    billion
    
    $
    1.80
    billion
 Results of Operations  Franklin Credit Holding Corporation
    59




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Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
 Overview.
   Revenues.
   60




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Operating Expenses.
  61




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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
   63




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Revenues.
       64




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Operating Expenses.
  65




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67




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Liquidity and Capital Resources
 General
     Short-term Investments.
 Cash Flow from Operating, Investing and Financing Activities
    68




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Borrowings
     69




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Interest Rate Swaps
       Notional Amount
    
    
    Term
    
    Maturity Date
    
    Fixed Rate
    
    
    Estimated Fair Value*$
    275,000,000
    
    
    3 years
    
    March 5, 2011
    
    
    3.47%
    
    
    $
    (6,751,931
    )70,000,000
    
    
    3 years
    
    March 5, 2011
    
    
    3.11%
    
    
    
    (1,244,467
    )45,000,000
    
    
    4 years
    
    March 5, 2012
    
    
    3.43%
    
    
    
    (1,962,247
    )$
    390,000,000
    
    
    
    
    
    
    
    
    
    
    $
    (9,958,645
    )
 
 *
    
    Determined in accordance with Topic 820, Fair Value Measurements and Disclosures, based
upon a Level 2 valuation methodology.  70




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Impact of Inflation
  Interest Rate Risk
     71




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Real Estate Risk
  
 ITEM 4T. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Changes in Internal Controls over Financial Reporting
   72




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PART II
OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
   Risks Related to Our Business
 
    
    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 Company may not be able to continue as a going concern.
 
    
    Our credit facilities and servicing agreement with the Bank require us to observe certain
covenants, and our failure to satisfy such covenants could render us insolvent.
 
    
    Based on our current rate of collections on the assets we transferred to the Trust under
the Restructuring Agreement, without a significant special transaction, we may not be able to
achieve the minimum amount of net remittances necessary to reduce the pledge of FCMC stock to
the Bank from 70% to a minimum of 20% (which due to a failure to achieve the first collection
target by March 31, 2010, the minimum is currently 25%) or at all.
 
    
    If our lenders fail to renew our loans under the Licensing Credit Agreement for additional
terms or provide us with refinancing opportunities, our indebtedness under the $2 million
revolving line (which effective June 20, 2010, was reduced to $1 million) will become due and
payable in 2011; and, the draw line for working capital needs of FCMC will expire on May 31,
2010 (and which expired unrenewed).
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
    
    If our lenders fail to renew our loans under the Legacy Credit Agreement for additional
terms or provide us with refinancing opportunities, our legacy indebtedness will become due
and payable in 2012.
 
    
    If our lenders fail to extend the Forbearance Agreement covering the Unrestructured Deb
(which has been extended to September 30, 2010), the Unrestructured Debt will become due and
payable and the Bank would be able to foreclose on the portion of the stock of FCMC pledged to
it.
 
    
    The Bank may transfer our rights as servicer to the assets we transferred to the Trust
under the Restructuring Agreement to a third party (including, but not limited to, any of the
loans affecting our ability to meet net worth requirements in New York).
 
    
    The Bank may transfer our rights as servicer to any of the assets retained by the Trust and
serviced under the New Trust Servicing Agreement after the Loan Sale, including, but not
limited to, any of the loans affecting our ability to meet net worth requirements in New York
or any of the assets retained by the Trust following the Loan Sale.
 
    
    Our ability to fund operating expenses depends on the cash flow received from servicing
loans for third parties.
 
    
    Our business is sensitive to, and can be materially affected by, changes in interest rates.
 
    
    The Bank may prevent our pursuing future business opportunities.
 
    
    We may not be successful in entering into or implementing our planned business of providing
servicing and other mortgage related services for other entities on a fee-paying basis.
 
    
    If we do not obtain and maintain the appropriate state licenses, we will not be allowed to
service mortgage loans in some states, which would adversely affect our operations.
 
    
    A significant amount of the mortgage loans that we originated prior to the Restructuring
and transferred to the Trust as part of the Restructuring 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.
 
    
    We may not be adequately protected against the risks inherent in servicing subprime
residential mortgage loans.
 
    
    A number of the second-lien mortgage loans that we service are subordinated to ARM or
interest-only mortgages that may be subject to monthly payment increases, which may result in
delinquencies and a decrease in servicing and collection revenues.
 
    
    We are subject to losses from the mortgage loans we acquired and originated prior to the
Restructuring due to fraudulent and negligent acts on the part of loan applicants, mortgage
brokers, sellers of loans we acquired, vendors and our employees.
 
    
    Legal proceedings could be brought which could adversely affect our financial results.
 
    
    Given the nature of the industry in which we operate, our businesses is, and in the future
may become, involved in various legal proceedings the ultimate resolution of which is
inherently
unpredictable and could have a material adverse effect on our business, financial position,
results of operations or cash flows.
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
    
    We are exposed to counter-party risk and there can be no assurances that we will manage or
mitigate this risk effectively.
 
    
    The success and growth of our servicing business will depend on our ability to adapt to and
implement technological changes, and any failure to do so could result in a material adverse
effect on our business.
 
    
    If we do not manage the changes in our businesses effectively, our financial performance
could be harmed.
 
    
    The inability to attract and retain qualified employees could significantly harm our
business.
 
    
    An interruption in or breach of our information systems may result in lost business and
increased expenses.
 
    
    We are exposed to the risk of environmental liabilities with respect to properties to which
we take title.
 
    
    A loss of our Chairman and President may adversely affect our operations.
 Risks Related to Our Financial Statements
 
    
    Our financial condition and financial results can be materially affected by Federal
Reserves Board policies and the capital markets.
 
    
    We may become subject to liability and incur increased expenditures as a result of the
restatement of our financial statements.
 
    
    We may become subject to liability and incur increased expenditures as a result of our
having reassessed our allowance for loan losses and our transfer of substantially all our
mortgage portfolio related assets to the Bank.
 
    
    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 service 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.
 
    
    We may be subject to fines or other penalties based upon the conduct of our independent
brokers.
 
    
    We are subject to reputation risks from negative publicity concerning the subprime mortgage
industry.
  75




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
    
    We are subject to significant legal and reputation risks and expenses under federal and
state laws concerning privacy, use and security of customer information.
 
    
    If many of the borrowers of the loans we service become subject to the Servicemembers Civil
Relief Act of 2003, our cash flows and service fee income may be adversely affected.
 
    
    Legislative action to provide mortgage relief may negatively impact our business.
 Risks Related to Our Securities
 
    
    Thomas J. Axon effectively controls our company, substantially reducing the influence of
our other stockholders.
 
    
    Our common stock is quoted only on the OTC Bulletin Board, which may adversely impact the
price and liquidity of the common stock, and our ability to raise capital.
 
    
    Our organizational documents, Delaware law and our Restructuring Agreements may make it
harder for us to be acquired without the consent and cooperation of our board of directors,
management and our Bank.
 
    
    Our quarterly operating results may fluctuate and cause our stock price to decline.
 
    
    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 Risks Related to Our Business
 
    
    Under the Servicing Agreement entered into on March 31, 2009 as part of the Restructuring
with the Bank, which was amended and restated as of August 1, 2010, the Bank with notice could
terminate the Servicing Agreement if FCMC fails to maintain all material licenses and
approvals required and necessary in each state where any mortgaged property, other real estate
property serviced under the Servicing Agreement, or borrowers are located and such failure
continues unremedied for five (5) business days.
 
    
    There is no assurance that the New York State Banking Department will find the written
capital plan of FCMC acceptable and not request modifications to the capital plan or deny
FCMCs application for registration as a mortgage servicer or that FCMC will be able to regain
compliance with regulatory net worth requirements in New York State.
 
    
    A denial of our application to be a registered mortgage servicer in the State of New York
by the New York State Banking Department would entitle the Bank (with notice) to terminate the
Servicing Agreement. In addition, such a failure to obtain or maintain our license to service
mortgages loans as a registered mortgage servicer in New York would be a default under the
Licensing Credit Agreement and Legacy Credit Agreement and, with notice, the Bank could also
call an event of default under those agreements entered into in connection with the
Restructuring, which, among other remedies, would entitle the Bank to foreclose on the assets
of the Company
pledged to the Bank, including on Franklin Holdings pledge of 70% of the common stock of
FCMC.
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
    
    The Bank may transfer our rights as servicer to any of the assets retained by the Trust and
serviced under the New Trust Servicing Agreement after the Loan Sale, including, but not
limited to, any of the loans affecting our ability to meet net worth requirements in New York
or any of the assets retained by the Trust following the Loan Sale.
 
    
    The Purchaser of substantially all of the first mortgage liens owned by the Trust may
transfer our rights as servicer to a third party.
  
    
    Due to the expected significant reduction in revenue for FCMC and early termination
provisions under its only significant servicing contracts with independent third parties
(i.e., the New Trust Servicing Agreement with the Trust and the Loan Sale Servicing Agreement
with the Purchaser of loans from the Trust), compared to what had been earned previously for
the servicing of the same assets, FCMC may be unable to add business or take appropriate cost
saving measures to replace the reduced revenues.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. (REMOVED AND RESERVED)
 
 ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
 ExhibitNumber3.1
    
    First Amended and Restated Certificate of Incorporation.
Incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K, filed with the
Securities and Exchange Commission (the Commission) on
December 24, 2008.3.2
    
    Amended and Restated By-laws. Incorporated by reference to
Exhibit 3.2 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008.10.3*
    
    Amendment No.1 to Amended and Restated Credit Agreement and
Replacement of Schedule to Amended and Restated Security
Agreement by and among Franklin Credit Asset Corporation,
Tribeca Lending Corp., Franklin Asset, LLC and the Other
Borrowers Party thereto as Borrowers, the Financial
Institutions Party thereto as Lenders, and the Huntington
National Bank, as Administrative Agent, dated June 11,
2010.10.4
    
    Amendment No. 5 to First Amended and Restated Forbearance
Agreement and Amendment to Credit Agreements, effective as
of June 28, 2010, by and among the Registrant, Franklin
Credit Asset Corporation, Flow 2006 F Corp., FCMC 2006 M
Corp., FCMC 2006 K Corp. and The Huntington National Bank.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on June 28, 2010.31.1*
    
    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*
    
    Section 1350 Certification of Chief Executive Officer of
the Registrant in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    Section 1350 Certification of Chief Financial Officer of
the Registrant in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.  78




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SIGNATURES
    By:
    /s/ THOMAS J. AXONThomas J. AxonPresident
(Principal Executive Officer)  By:
    /s/ PAUL D. COLASONOPaul D. ColasonoExecutive Vice President and Chief Financial Officer
(Principal Financial Officer)