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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 March 31, 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
 Yes o
No 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 March 31, 2010 and December 31, 2009
    
    
    3Consolidated
Statements of Operations for the three months ended
March 31, 2010 and March 31, 2009
    
    
    4Consolidated
Statement of Changes in Stockholders (Deficit)
for the three months ended March 31, 2010
    
    
    5Consolidated
Statements of Cash Flows for the three months ended
March 31, 2010 and March 31, 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    39Application of Critical Accounting Policies and Estimates
    
    
    40Serviced for Others Portfolio
    
    
    40Results of Operations
    
    
    44Liquidity and Capital Resources
    
    
    52Borrowings
    
    
    53Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    56Item 4T. Controls and Procedures
    
    
    57PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    58Item 1A. Risk Factors
    
    
    58Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    63Item 3. Defaults Upon Senior Securities
    
    
    63Item 4. (Removed and Reserved)
    
    
    63Item 5. Other Information
    
    
    63Item 6. Exhibits
    
    
    64Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 
  March 31, 2010
    
    
    December 31, 2009ASSETSCash and cash equivalents
    
    $
    19,003,631
    
    
    $
    15,963,115Restricted cash
    
    
    2,614,277
    
    
    
    2,611,640Investment in REIT securities
    
    
    477,316,409
    
    
    
    477,316,409Investment in trust certificates at fair value
    
    
    67,579,521
    
    
    
    69,355,735Mortgage loans and real estate held for sale
    
    
    336,595,033
    
    
    
    345,441,865Notes receivable held for sale, net
    
    
    3,345,140
    
    
    
    3,575,323Accrued interest receivable
    
    
    41,248
    
    
    
    41,337Deferred financing costs, net
    
    
    7,252,899
    
    
    
    7,287,536Other receivables
    
    
    3,198,213
    
    
    
    3,233,676Building, furniture and equipment, net
    
    
    1,389,583
    
    
    
    1,529,418Income tax receivable
    
    
    1,853,838
    
    
    
    5,592,370Other assets
    
    
    952,346
    
    
    
    692,730Total assets
    
    $
    921,142,138
    
    
    $
    932,641,154LIABILITIES AND STOCKHOLDERS (DEFICIT)Liabilities:Notes payable, net of debt discount of $190,621 at March 31, 2010
and $191,511 at December 31, 2009
    
    $
    1,369,112,044
    
    
    $
    1,367,199,323Financing agreements
    
    
    1,000,000
    
    
    
    1,000,000Nonrecourse liability
    
    
    336,595,033
    
    
    
    345,441,865Accounts payable and accrued expenses
    
    
    4,114,364
    
    
    
    4,466,779Derivative liabilities, at fair value
    
    
    12,307,535
    
    
    
    13,144,591Terminated derivative liability
    
    
    8,200,000
    
    
    
    8,200,000Total liabilities
    
    
    1,731,328,976
    
    
    
    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 March 31, 2010 and 8,012,795 at December 31, 2009
    
    
    22,082,933
    
    
    
    22,067,763Noncontrolling interest in subsidiary
    
    
    1,722,606
    
    
    
    1,657,275Accumulated other comprehensive (loss)
    
    
    (9,047,735
    )
    
    
    (12,310,764
    )Retained (deficit)
    
    
    (824,944,642
    )
    
    
    (818,225,678
    )Total stockholders (deficit)
    
    
    (810,186,838
    )
    
    
    (806,811,404
    )Total liabilities and stockholders (deficit)
    
    $
    921,142,138
    
    
    $
    932,641,154
   3




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 
   Three Months Ended March 31,2010
    
    
    2009Revenues:Interest income
    
    $
    11,475,228
    
    
    $
    16,454,325Dividend income
    
    
    10,629,299
    
    
    
    Purchase discount earned
    
    
    
    
    
    
    392,127(Loss) on mortgage loans and real estate held for sale
    
    
    
    
    
    
    (282,593,653
    )(Loss) on valuation of investment in trust certificates
and notes receivable held for sale
    
    
    
    
    
    
    (62,651,940
    )Fair valuation adjustments
    
    
    (3,771,042
    )
    
    
    Gain on sale of other real estate owned
    
    
    
    
    
    
    374,344Servicing fees and other income
    
    
    1,178,557
    
    
    
    2,509,557Total (losses)/revenues
    
    
    19,512,042
    
    
    
    (325,515,240
    )Operating Expenses:Interest expense
    
    
    19,019,243
    
    
    
    17,683,156Collection, general and administrative
    
    
    6,867,983
    
    
    
    18,692,995Provision for loan losses
    
    
    
    
    
    
    169,479Amortization of deferred financing costs
    
    
    34,637
    
    
    
    166,768Depreciation
    
    
    145,512
    
    
    
    156,648Total expenses
    
    
    26,067,375
    
    
    
    36,869,046(Loss) before provision for income taxes
    
    
    (6,555,333
    )
    
    
    (362,384,286
    )Income tax
    
    
    98,300
    
    
    
    Net (loss)
    
    
    (6,653,633
    )
    
    
    (362,384,286
    )Net income attributed to noncontrolling interest
    
    
    65,331
    
    
    
    Net (loss) attributed to common stockholders
    
    $
    (6,718,964
    )
    
    $
    (362,384,286
    )Net (loss) per common share:Basic and diluted
    
    $
    (0.84
    )
    
    $
    (45.33
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    8,020,256
    
    
    
    7,994,045
   4




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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
    
    
    
    15,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,170Net income attributed to minority interest
    
    
    
    
    
    
    
    
    
    
    65,331
    
    
    
    
    
    
    
    
    
    
    
    65,331Amortization  unrealized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,263,029
    
    
    
    
    
    
    
    3,263,029Net (loss) attributed to common shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,718,964
    )
    
    
    (6,718,964
    )BALANCE, MARCH 31, 2010
    
    
    8,029,795
    
    
    $
    22,082,933
    
    
    $
    1,722,606
    
    
    $
    (9,047,735
    )
    
    $
    (824,944,642
    )
    
    $
    (810,186,838
    )
    5




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FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
 
   Three Months Ended March 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) attributed to common shareholders
    
    $
    (6,718,964
    )
    
    $
    (362,384,286
    )Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:Gain on sale of other real estate owned
    
    
    
    
    
    
    (374,344
    )Depreciation
    
    
    145,512
    
    
    
    156,648Amortization 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
    
    
    3,771,042
    
    
    
    Principal collections on mortgage loans and real estate held for sale, net
    
    
    5,627,977
    
    
    
    Paid in kind interest
    
    
    8,434,273
    
    
    
    Proceeds from the sale of real estate held for sale
    
    
    3,180,865
    
    
    
    Amortization of deferred financing costs
    
    
    34,637
    
    
    
    166,768Amortization of debt discount
    
    
    890
    
    
    
    4,525Stock-based compensation
    
    
    15,170
    
    
    
    64,335Purchase discount earned
    
    
    
    
    
    
    (392,127
    )Provision for loan losses
    
    
    
    
    
    
    169,479Net income attributed to noncontrolling interest
    
    
    65,331
    
    
    
    Changes in operating assets and liabilities:Accrued interest receivable
    
    
    89
    
    
    
    1,322,687Other receivables
    
    
    35,463
    
    
    
    1,992,609Income tax receivable
    
    
    3,738,532
    
    
    
    (132,949
    )Other assets
    
    
    (259,614
    )
    
    
    (7,408,974
    )Accounts payable and accrued expenses
    
    
    2,073,558
    
    
    
    3,798,281Terminated derivative liability
    
    
    
    
    
    
    8,200,000Net cash provided by/(used in) operating activities
    
    
    20,144,761
    
    
    
    (9,523,540
    )CASH FLOWS FROM INVESTING ACTIVITIES:(Increase)/decrease in restricted cash
    
    
    (2,637
    )
    
    
    6,640,552Principal collections on notes receivable
    
    
    241,619
    
    
    
    10,622,170Principal collections on loans held for investment
    
    
    
    
    
    
    5,857,079Proceeds from sale of other real estate owned
    
    
    
    
    
    
    19,227,015Purchase of building, furniture and equipment
    
    
    (5,677
    )
    
    
    (3,370
    )Net cash provided by investing activities
    
    
    233,305
    
    
    
    42,343,446CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments of notes payable
    
    
    (6,522,443
    )
    
    
    (31,255,859
    )Payments on nonrecourse liability
    
    
    (10,815,107
    )
    
    
    Proceeds from financing agreements
    
    
    
    
    
    
    975,667Net cash (used in) financing activities
    
    
    (17,337,550
    )
    
    
    (30,280,192
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    3,040,516
    
    
    
    2,539,714CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    15,963,115
    
    
    
    21,426,777CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    19,003,631
    
    
    $
    23,966,491SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest
    
    $
    7,892,289
    
    
    $
    11,954,108Cash payments for taxes
    
    $
    173,525
    
    
    $
    201,408NON-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
 March 2009 Restructuring
     7




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Amendment and Extension of Licensing Credit Agreement .
 December 2008 Corporate Reorganization and Holding Company Structure
   8




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Going Concern Uncertainty  Franklin Holding
  Operating Losses  Franklin Holding
    9




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Licenses to Service Loans
      10




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11




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Franklins Business  Franklin Credit Management Corporation (FCMC)
  Transfers and Servicing
  Loan Servicing
    12




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Loan Servicing and Collection Operations
  Loan Boarding and Administration .
  Customer Service .
 Client Relations .
  13




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Collections .
 Loss Mitigation .
   Real Estate .
  14




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Deficiency Recovery & Judgment Processing Department (Recovery) .
 Face to Face Home Solutions (Face to Face) .
 Training .
 Quality Control .
 Home Affordable Modification Program
  Bosco Servicing Agreement
   15




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Due Diligence Services
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   16




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Recent Accounting Pronouncements
 Transfers and Servicing
(Topic 860)  Accounting for Transfers of Financial Assets
 Revenue Recognition  Multiple Deliverable Revenue
Arrangements Revenue
Recognition  Multiple-Element Arrangements
 Income Taxes, (Topic 740) Accounting for Certain
Tax Effects of the Health Care Reform Acts
 Derivatives and Hedging
  17




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Consolidation (Topic 810) .
 Subsequent Events (Topic 855)  Amendments to
Certain Recognition and Disclosure Requirement
 Technical Corrections to Various Topics
 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
  18




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Consolidations (Topic 810)  Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
 3. INVESTMENT IN TRUST CERTIFICATES AT FAIR VALUE, MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE,
AND NOTES RECEIVABLE HELD FOR SALE
  Three Months EndedMarch 31, 2010Balance, January 1
    
    $
    69,355,735Trust distributions
    
    
    (3,142,005
    )Transfers (out)
    
    
    (640,045
    )Fair value adjustments, net
    
    
    2,005,836Balance, March 31
    
    $
    67,579,521
   Three Months EndedMarch 31, 2010Balance, January 1
    
    $
    345,441,865REO sales
    
    
    (3,180,865
    )Principal payments
    
    
    (7,634,242
    )Loans written off
    
    
    (7,021
    )Fair value adjustments, net
    
    
    1,975,296Balance, March 31
    
    $
    336,595,033
  19




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Three Months EndedMarch 31, 2010Balance, January 1
    
    $
    3,575,323Principal payments
    
    
    (241,619
    )Loans written off
    
    
    (4,748
    )Fair value adjustments, net
    
    
    16,184Balance, March 31
    
    $
    3,345,140
  4. FAIR VALUATION ADJUSTMENTS
   Three Months EndedMarch 31, 2010Gain on OREO sold
    
    $
    1,772,900Valuation gain on mortgage loans and OREO
    
    
    1,975,296Valuation (loss) on nonrecourse liability
    
    
    (1,975,296
    )Valuation gain on trust certificates
    
    
    2,005,836Valuation gain on notes receivable
    
    
    16,184Other adjustments
    
    
    (7,565,962
    )(Loss) on valuation
    
    $
    (3,771,042
    )
  5. DERIVATIVES
 Derivatives and Hedging
  20




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Notional Amount
    
    
    Term
    
    
    Maturity Date
    
    
    Fixed Rate
    
    
    Estimated Fair Value$
    275,000,000
    
    
    3 years
    
    
    March 5, 2011
    
    
    
    3.47
    %
    
    $
    (8,621,583
    )70,000,000
    
    
    3 years
    

    
    March 5, 2011
    

    
    
    3.11
    %
    
    
    (1,702,058
    )45,000,000
    
    
    4 years
    
    
    March 5, 2012
    
    
    
    3.43
    %
    
    
    (1,983,894
    )$
    390,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (12,307,535
    )
     Three Months EndedMarch 31, 2010Balance, January 1
    
    $
    (13,144,591
    )Cash settlements
    
    
    3,021,296Fair value adjustments
    
    
    (2,184,240
    )Balance, March 31
    
    $
    (12,307,535
    )
 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.
    22




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Level 3Interest-rate swaps
    
    $
    
    
    
    $
    (12,307,535
    )
    
    $
    
    
    
    $
    Investment in trust certificates
    
    
    
    
    
    
    
    
    
    
    67,579,521
    
    
    
    Nonrecourse liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336,595,033
    )Total
    
    $
    
    
    
    $
    (12,307,535
    )
    
    $
    67,579,521
    
    
    $
    (336,595,033
    )
   Investments
    
    
    LiabilitiesBalance, January 1, 2010
    
    $
    69,355,735
    
    
    $
    (345,441,865
    )Total unrealized gains/(losses)
    
    
    2,005,836
    
    
    
    (7,159,260
    )Transfers in/(out)
    
    
    (640,045
    )
    
    
    7,021Distributions/payments
    
    
    (3,142,005
    )
    
    
    15,999,071Balance, March 31, 2010
    
    $
    67,579,521
    
    
    $
    (336,595,033
    )
     Level 1
    
    
    Level 2
    
    
    Level 3Mortgage loans and real estate held for sale
    
    $
    
    
    
    $
    
    
    
    $
    336,595,033
 7. NOTES PAYABLE AND FINANCING AGREEMENTS
      23




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Restructuring Agreements with Lead Lending Bank
   March 2009 Restructuring
            24




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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,
 (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.
  25




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(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%)
 (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, including a $5 million facility for working capital and to support various
servicer licenses, a $2 million revolving facility and a $6.5 million letter of credit
facility to support various servicer licenses.
 
 *
    
    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%).   (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;
  26




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(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.
 1.
    
    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);
 (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).
  27




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2.
    
    Amended and restated substantially all of its outstanding debt.
    28




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Terms of the Restructured Indebtedness Under the Legacy Credit Agreement.
 Outstanding
    
    
    OutstandingPrincipal Amount
    
    
    Principal Amount
    
    
    Applicable Interest
    
    
    Required Monthlyat March 31, 2009 
    
    
    at March 31, 2010 
    
    
    Margin Over LIBOR
    
    
    PrincipalFranklin Asset/Tribeca
    
    
    Franklin Asset/Tribeca
    
    
    (basis points)
    
    
    AmortizationTranche A
    
    $
    838,000,000
    
    
    $
    765,000,000
    
    
    
    225
    
    
        NoneTranche B
    
    $
    407,000,000
    
    
    $
    420,000,000
    
    
    
    275
    
    
        NoneTranche C
    
    $
    125,000,000
    
    
    $
    145,000,000
    
    
    
    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%.    29




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30




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3.
    
    Entered into an amended and restated credit agreement to fund FCMCs licensing obligations
and working capital.
          31




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4.
    
    Entered into a servicing agreement with the New Trust.
        32




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Forbearance Agreements with Lead Lending Bank
        33




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8. NONCONTROLLING INTEREST
     Three Months EndedMarch 31, 2010Balance, January 1, 2010
    
    $
    1,657,275Net income attributed to noncontrolling interest
    
    
    65,331Balance, March 31, 2010
    
    $
    1,722,606
    34




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##### Table of Contents



9. CERTAIN CONCENTRATIONS
  Third Party Servicing Agreements
    Financing
 10. RELATED PARTY TRANSACTIONS
  Restructuring
  Bosco Servicing Agreement
    35




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36




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Other Significant Related Party Transactions with the Companys Chairman
    37




---



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38




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Safe Harbor Statements.
  39




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Application of Critical Accounting Policies and Estimates
  Transfers and Servicing
 
 Serviced for Others Portfolio
        40




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March 31, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalProperty Types
    
    of Loans
    
    
    Principal Balance
    
    
    Principal BalanceResidential 1-4 family
    
    
    20,551
    
    
    $
    1,329,850,377
    
    
    
    70.87
    %Condos, co-ops, PUD dwellings
    
    
    3,382
    
    
    
    206,441,685
    
    
    
    11.00
    %Manufactured and mobile homes
    
    
    501
    
    
    
    14,325,925
    
    
    
    0.76
    %Secured, property type unknown(1)
    
    
    1,437
    
    
    
    23,230,123
    
    
    
    1.24
    %Commercial
    
    
    39
    
    
    
    3,276,711
    
    
    
    0.17
    %Unsecured loans(2)
    
    
    8,913
    
    
    
    299,239,555
    
    
    
    15.96
    %Total
    
    
    34,823
    
    
    $
    1,876,364,376
    
    
    
    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.  41




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March 31, 2010Contractual DelinquencyDays Past Due
    
    Amount
    
    
    %Performing  Current
    
    0 - 30 days
    
    $
    246,586,028
    
    
    
    13.14
    %Delinquent
    
    31 - 60 days
    
    
    16,303,578
    
    
    
    0.87
    %61 - 90 days
    
    
    12,196,274
    
    
    
    0.65
    %90+ days
    
    
    786,247,887
    
    
    
    41.90
    %Modified Loans
    
    0 - 30 days
    
    
    220,008,602
    
    
    
    11.73
    %Delinquent
    
    31 - 60 days
    
    
    35,388,050
    
    
    
    1.89
    %61 - 90 days
    
    
    21,852,940
    
    
    
    1.16
    %90+ days
    
    
    69,046,982
    
    
    
    3.68
    %Bankruptcy
    
    0 - 30 days
    
    
    32,095,079
    
    
    
    1.71
    %Delinquent
    
    31 - 60 days
    
    
    3,167,831
    
    
    
    0.17
    %61 - 90 days
    
    
    3,625,113
    
    
    
    0.19
    %90+ days
    
    
    152,803,828
    
    
    
    8.14
    %Foreclosure
    
    0 - 30 days
    
    
    
    
    
    
    Delinquent
    
    31 - 60 days
    
    
    
    
    
    
    61 - 90 days
    
    
    659,259
    
    
    
    0.04
    %90+ days
    
    
    276,382,925
    
    
    
    14.73
    %Total
    
    $
    1,876,364,376
    
    
    
    100.00
    %All current loans
    
    0 - 30 days
    
    $
    498,689,709
    
    
    
    26.58
    %
    42




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March 31, 2010Contractual DelinquencyDays Past Due
    
    Number of Loans
    
    
    %Performing  Current
    
    0 - 30 days
    
    
    5,933
    
    
    
    17.04
    %Delinquent
    
    31 - 60 days
    
    
    377
    
    
    
    1.08
    %61 - 90 days
    
    
    276
    
    
    
    0.79
    %90+ days
    
    
    18,803
    
    
    
    54.00
    %Modified Loans
    
    0 - 30 days
    
    
    2,689
    
    
    
    7.72
    %Delinquent
    
    31 - 60 days
    
    
    356
    
    
    
    1.02
    %61 - 90 days
    
    
    205
    
    
    
    0.59
    %90+ days
    
    
    911
    
    
    
    2.62
    %Bankruptcy
    
    0 - 30 days
    
    
    763
    
    
    
    2.19
    %Delinquent
    
    31 - 60 days
    
    
    87
    
    
    
    0.25
    %61 - 90 days
    
    
    87
    
    
    
    0.25
    %90+ days
    
    
    3,024
    
    
    
    8.69
    %Foreclosure
    
    0 - 30 days
    
    
    
    
    
    
    Delinquent
    
    31 - 60 days
    
    
    
    
    
    
    61 - 90 days
    
    
    5
    
    
    
    0.01
    %90+ days
    
    
    1,307
    
    
    
    3.75
    %Total
    
    
    34,823
    
    
    
    100.00
    %All current loans
    
    0 - 30 days
    
    
    9,385
    
    
    
    26.95
    %
     March 31, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalLien Position
    
    of Loans
    
    
    Principal Balance
    
    
    Principal Balance1st Liens
    
    
    6,639
    
    
    $
    716,398,083
    
    
    
    38.18
    %2nd Liens
    
    
    28,184
    
    
    
    1,159,966,293
    
    
    
    61.82
    %Total
    
    
    34,823
    
    
    $
    1,876,364,376
    
    
    
    100.00
    %
  43




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March 31, 2010Number
    
    
    Unpaid
    
    
    Percentage of TotalLocation
    
    of Loans
    
    
    Principal Balance
    
    
    Principal BalanceCalifornia
    
    
    5,649
    
    
    $
    480,958,309
    
    
    
    25.63
    %New York
    
    
    1,471
    
    
    
    166,975,834
    
    
    
    8.90
    %Florida
    
    
    2,785
    
    
    
    149,404,783
    
    
    
    7.96
    %New Jersey
    
    
    931
    
    
    
    131,186,696
    
    
    
    6.99
    %Texas
    
    
    3,354
    
    
    
    90,823,601
    
    
    
    4.84
    %Pennsylvania
    
    
    1,165
    
    
    
    64,868,196
    
    
    
    3.46
    %Ohio
    
    
    1,892
    
    
    
    61,984,803
    
    
    
    3.30
    %Illinois
    
    
    1,299
    
    
    
    54,480,552
    
    
    
    2.90
    %Michigan
    
    
    1,786
    
    
    
    52,333,113
    
    
    
    2.79
    %Georgia
    
    
    1,293
    
    
    
    51,681,483
    
    
    
    2.75
    %All Others
    
    
    13,198
    
    
    
    571,667,006
    
    
    
    30.48
    %Total
    
    
    34,823
    
    
    $
    1,876,364,376
    
    
    
    100.00
    %
 Real Estate Assets Serviced for Others
   Three Months EndedMarch 31, 2010Number of Assets
    
    
    AmountReal estate assets at March 31, 2010
    
    
    227
    
    
    $
    44,453,028Real estate assets sold
    
    
    65
    
    
    $
    10,427,195
 
 Results of Operations  Franklin Credit Management Corporation (FCMC)
      44




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45




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46




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Three Months Ended
    
    
    Three Months EndedSTATEMENT OF INCOME
    
    March 31, 2010
    
    
    March 31, 2009REVENUES:Servicing fees and other income
    
    $
    5,675,865
    
    
    $
    7,881,321Interest income
    
    
    9,246
    
    
    
    50,612Total revenues
    
    
    5,685,111
    
    
    
    7,931,933OPERATING EXPENSES:Interest expense
    
    
    21,858
    
    
    
    4,664Collection, general and administrative
    
    
    4,431,033
    
    
    
    6,323,936Depreciation
    
    
    144,356
    
    
    
    156,648Total operating expenses
    
    
    4,597,247
    
    
    
    6,485,248INCOME BEFORE PROVISION FOR INCOME TAXES
    
    $
    1,087,864
    
    
    $
    1,446,685Provision for income taxes
    
    
    434,550
    
    
    
    578,674NET INCOME
    
    $
    653,314
    
    
    $
    868,011
 BALANCE SHEET
    
    At March 31, 2010
    
    
    At December 31, 2009ASSETS:Cash and cash equivalents
    
    $
    14,811,750
    
    
    $
    15,116,880Restricted cash
    
    
    3,456,757
    
    
    
    4,770,867Receivables, fixed and other assets
    
    
    7,768,773
    
    
    
    6,436,434Total assets
    
    $
    26,037,280
    
    
    $
    26,324,181LIABILITIES:Debt
    
    $
    1,000,000
    
    
    $
    1,000,000Servicing liabilities
    
    
    3,456,757
    
    
    
    4,770,867Other liabilities
    
    
    1,713,017
    
    
    
    1,675,372Total liabilities
    
    $
    6,169,774
    
    
    $
    7,446,239STOCKHOLDERS EQUITY
    
    $
    19,867,506
    
    
    $
    18,877,942Total liabilities and stockholders equity
    
    $
    26,037,280
    
    
    $
    26,324,181SERVICING PORTFOLIO:Number of loans serviced
    
    
    35,000
    
    
    
    36,700Unpaid principal balance serviced
    
    $
    1.88 billion
    
    
    $
    1.80 billion
 Results of Operations  Franklin Credit Holding Corporation
    47




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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
  Overview.
    48




---



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Revenues.
            49




---



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Operating Expenses.
    50




---



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51




---



##### Table of Contents



Liquidity and Capital Resources
 General
        52




---



##### Table of Contents



Short-term Investments.
 Cash Flow from Operating, Investing and Financing Activities
             
 Borrowings
    53




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Interest Rate Swaps
        54




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Notional Amount
    
    
    Term
    
    
    Maturity Date
    
    
    Fixed Rate
    
    

Estimated Fair Value*$
    275,000,000
    
    
    3 years
    
    
    March 5, 2011
    
    
    3.47
    %
    
    $
    (8,621,583
    )70,000,000
    
    
    3 years
    

    
    March 5, 2011
    
    
    3.11
    %
    
    
    (1,702,058
    )45,000,000
    
    
    4 years
    
    
    March 5, 2012
    
    
    3.43
    %
    
    
    (1,983,894
    )$
    390,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (12,307,535
    )
 
 *
    
    Determined in accordance with Topic 820, Fair Value Measurements and Disclosures,
based upon a Level 2 valuation methodology.  55




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Impact of Inflation
   Interest Rate Risk
        56




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##### Table of Contents



Real Estate Risk
   
 ITEM 4T.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
    57




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##### Table of Contents



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 will become due and payable in 2011; and, the draw line for working capital
needs of FCMC will expire on May 31, 2010.
 
    
    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.
  58




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
    
    If our lenders fail to extend the Forbearance Agreement covering the Unrestructured Debt,
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).
 
    
    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.
 
    
    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.
  59




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##### Table of Contents




    
    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.
 
    
    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.
  60




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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.
   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
        61




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A denial of our application to be a registered mortgage servicer in the State of New York by
the New York State Banking Department could result in an event of default under the Servicing
Agreement entitling the Bank to terminate the Servicing Agreement, as well as a default under the
Licensing Credit Agreement and Legacy Credit Agreement, which would entitle the Bank to foreclose
on our assets pledged to the Bank, including on the Franklin Holdings pledge of 70% of the common
stock of Franklin Credit Management Corporation.
   
 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, 2008.10.1
    *
    
    Employment Agreement, effective as of January 11, 2010,
between Franklin Credit Management Corporation and Jimmy
Yan.()10.2
    *
    
    Employee Restricted Stock Grant Agreement, dated as of
January 11, 2010, between the Registrant and Jimmy
Yan.()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.()
    
    Management contracts and compensation plans and arrangements.  64




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SIGNATURES
   FRANKLIN CREDIT HOLDING CORPORATIONMay 17, 2010
    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)