Edgar Filing: Patient Safety Technologies, Inc

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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

For the transition period from __________ to __________

Commission file number 0-17771

FRANKLIN CREDIT MANAGEMENT CORPORATION

(Exact name of Registrant as specified in its charter)

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

101 Hudson Street

Jersey City, New Jersey 07302

(201) 604-1800

(Address of principal executive offices)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

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

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

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

Yes oNo x

Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of November 10, 2006: 8,010,295

FRANKLIN CREDIT MANAGEMENT CORPORATION

FORM 10-Q

INDEX

		UPageU
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at September 30, 2006 and December 31, 2005	3
	Consolidated Statements of Operations for the three and nine months ended
	September 30, 2006 and September 30, 2005 (Restated)	4
	Consolidated Statement of Changes in Stockholders’ Equity
	for the nine months ended September 30, 2006	5
	Consolidated Statements of Cash Flows for the nine months ended
	September 30, 2006 and September 30, 2005 (Restated)	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	18
	Application of Critical Accounting Policies and Estimates	18
	Portfolio Characteristics	19
	Results of Operations	28
	Liquidity and Capital Resources	33
	Borrowings	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Submission of Matters to a Vote of Security Holders	47
Item 5.	Other Information	47
Item 6.	Exhibits and Reports on Form 8-K	48
SIGNATURES		49

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2006 (Unaudited)			December 31, 2005
ASSETS
Cash and cash equivalents	$	5,127,839		$	3,886,506
Restricted cash		26,287,705			17,008,649
Short-term investments		16,803,114			16,954,019
Notes Receivable:
Principal		1,102,342,813			934,657,413
Purchase discount		(13,925,438	)		(17,809,940	)
Allowance for loan losses		(55,361,125	)		(67,276,155	)
Net notes receivable		1,033,056,250			849,571,318

Originated loans held for sale		7,571,552			12,844,882
Originated loans held for investment, net		407,199,604			372,315,935
Accrued interest receivable		19,031,418			13,341,964
Other real estate owned		22,717,436			19,936,274
Deferred financing costs, net		10,450,580			10,008,473
Other receivables		6,884,779			7,309,505
Building, furniture and equipment, net		3,959,521			4,029,481
Other assets		4,773,770			1,033,583
Total assets	$	1,563,863,568		$	1,328,240,589

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Notes payable, net of debt discount of $2,931,637 at September 30, 2006 and $3,002,767 at December 31, 2005	$	1,428,725,988		$	1,203,880,994
Financing agreements		63,502,316			57,284,085
Accounts payable and accrued expenses		15,598,333			12,971,954
Success fee liability		6,706,541			5,721,918
Deferred income tax liability		374,098			787,470
Total liabilities		1,514,907,276			1,280,646,421

Commitments and Contingencies

Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 3,000,000; issued - none		-			-
Common stock and additional paid-in capital, $.01 par value, 22,000,000 authorized shares; issued and outstanding: 7,870,295 at September 30, 2006 and 7,539,295 at December 31, 2005		22,523,704			21,292,252
Retained earnings		26,432,588			26,599,207
Unearned compensation		-			(297,291	)
Total stockholders’ equity		48,956,292			47,594,168

Total liabilities and stockholders’ equity	$	1,563,863,568		$	1,328,240,589

See Notes to Consolidated Financial Statements.

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006			2005 (Restated)		2006			2005 (Restated)
Revenues:
Interest income	$	35,855,704		$	24,563,184	$	104,570,879		$	71,418,710
Purchase discount earned		2,660,711			3,146,839		6,863,384			8,266,115
Gain on sale of notes receivable		94,862			644,985		163,911			1,310,887
Gain on sale of originated loans		1,349,724			229,906		1,686,520			1,136,139
Gain on sale of other real estate owned		70,056			535,308		1,312,339			1,191,691
Prepayment penalties and other income		2,435,600			1,753,121		6,975,920			4,797,806
Total revenues		42,466,657			30,873,343		121,572,953			88,121,348

Operating Expenses:
Interest expense		29,494,108			18,283,805		81,884,172			47,777,134
Collection, general and administrative		10,420,831			6,874,657		28,801,503			21,462,817
Provision for loan losses		1,709,165			1,080,155		6,740,440			3,331,087
Amortization of deferred financing costs		1,550,790			1,233,089		3,589,221			2,938,810
Depreciation		286,616			365,170		849,934			779,997
Total expenses		43,461,510			27,836,876		121,865,270			76,289,845

(Loss)/income before provision for income taxes		(994,853	)		3,036,467		(292,317	)		11,831,503
Income tax (benefit)/expense		(430,898	)		1,381,029		(125,698	)		5,431,118
Net (loss)/income	$	(563,955	)	$	1,655,438	$	(166,619	)	$	6,400,385

Net (loss)/income per common share:
Basic	$	(0.07	)	$	0.23	$	(0.02	)	$	1.01
Diluted	$	(0.07	)	$	0.22	$	(0.02	)	$	0.91

Weighted average number of shares outstanding:
Basic		7,755,628			7,060,989		7,635,989			6,353,526
Diluted		7,755,628			7,610,161		7,635,989			7,005,029

See Notes to Consolidated Financial Statements.

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED)

	Common Stock and Additional Paid-in Capital
	Shares		Amount			Retained Earnings			Unearned Compensation			Total
BALANCE, JANUARY 1, 2006		7,539,295	$	21,292,252		$	26,599,207		$	(297,291	)	$	47,594,168

Reclassification adjustment on adoption of FASB 123(R)		-		(297,291	)		-			297,291			-
Options and warrants exercised		217,000		335,805			-			-			335,805
Stock-based compensation		114,000		653,263			-			-			653,263
Excess tax benefit		-		539,675			-			-			539,675
Net loss		-		-			(166,619	)		-			(166,619	)

BALANCE, SEPTEMBER 30, 2006		7,870,295	$	22,523,704		$	26,432,588		$	-		$	48,956,292

See Notes to Consolidated Financial Statements.

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)

	Nine Months Ended September 30,
	2006			2005 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income	$	(166,619	)	$	6,400,385
Adjustments to reconcile income to net cash provided by/(used in) operating activities:
Gain on sale of notes receivable		(163,911	)		(1,310,887	)
Gain on sale of other real estate owned		(1,312,339	)		(1,191,691	)
Gain on sale of originated loans		(1,686,520	)		(1,136,139	)
Depreciation		849,934			779,997
Amortization of deferred costs and fees on originated loans		1,036,244			1,289,376
Amortization of deferred financing costs		3,589,221			2,938,810
Amortization of debt discount and success fees		1,055,753			720,713
Excess tax benefit		(539,675	)		-
Non-cash compensation		653,263			377,760
Proceeds from the sale of and principal collections on loans held for sale		26,808,669			49,938,438
Origination of loans held for sale		(21,856,300	)		(44,672,145	)
Deferred tax provision		(413,372	)		(88,409	)
Purchase discount earned		(6,863,384	)		(8,266,115	)
Provision for loan losses		6,740,440			3,331,087
Changes in operating assets and liabilities:
Accrued interest receivable		(5,689,454	)		(2,906,914	)
Other receivables		424,726			(3,142,805	)
Other assets		(3,200,512	)		927,569
Accounts payable and accrued expenses		2,626,379			5,393,985
Net cash provided by operating activities		1,892,543			9,383,015

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash		(9,279,056	)		(8,654,784	)
Purchase of notes receivable		(417,334,295	)		(291,141,892	)
Principal collections on notes receivable		207,537,510			202,769,050
Principal collections on loans held for investment		177,590,686			58,553,146
Origination of loans held for investment		(274,236,127	)		(254,693,532	)
Investment in marketable securities		150,905			(12,584,482	)
Proceeds from sale of other real estate owned		23,245,259			25,649,992
Proceeds from sale of loans		60,810,585			8,375,669
Proceeds from sale of notes receivable		3,807,050			15,120,539
Purchase of building, furniture and equipment		(779,974	)		(2,967,855	)
Net cash used in investing activities		(228,487,457	)		(259,574,149	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		678,872,363			556,081,930
Principal payments of notes payable		(454,098,499	)		(311,115,759	)
Proceeds from financing agreements		318,708,828			301,055,917
Principal payments of financing agreements		(312,490,597	)		(301,471,013	)
Excess tax benefit		539,675			-
Payment of deferred financing costs		(4,031,328	)		(4,664,925	)
Exercise of options		335,805			225,190
Proceeds from issuance of common stock		-			12,656,006
Net cash provided by financing activities		227,836,247			252,767,346

NET CHANGE IN CASH AND CASH EQUIVALENTS		1,241,333			2,576,212
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,886,506			5,127,732
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,127,839		$	7,703,944

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest	$	78,912,461		$	45,253,723
Cash payments for taxes	$	3,625,115		$	3,367,101

NON-CASH INVESTING AND FINANCING ACTIVITY:
Transfer of loans from held for sale to loans held for investment	$	483,604		$	5,278,073
Transfer from notes receivable and loans held for investment to OREO	$	35,353,176		$	20,408,512

See Notes to Consolidated Financial Statements.

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BUSINESS

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

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

From inception through September 30, 2006, we had purchased and originated in excess of $3.64 billion in mortgage loans. As of September 30, 2006, we had total assets of $1.56 billion, our portfolios of notes receivable and loans held for investment, net, totaled $1.44 billion and we serviced approximately 30,000 loans.

Loan Acquisitions

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

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

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

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

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

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

We refer to the S&D loans we acquire as “notes receivable.” In the third quarter of 2006, we purchased notes receivable with an aggregate unpaid principal balance of $215.0 million at an aggregate purchase price equal to 94% of the face amount of the notes. During the nine months ended September 30, 2006, we acquired $452.3 million of notes receivable at an aggregate purchase price equal to 92% of the face amount of the notes.

Loan Originations

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

During the third quarter of 2006, we originated $91.7 million in non-prime mortgage loans, 87% of which were adjustable-rate (fixed-rate for the first two years) loans. We originated approximately 44% of these mortgage loans on a retail basis and the remainder through our wholesale network of mortgage brokers. During the nine months ended September 30, 2006, we originated $296.1 million in non-prime mortgage loans, 92% of which were adjustable-rate (fixed rate for the first two years) loans. We originated approximately 36% of these mortgage loans on a retail basis and the remainder through our wholesale network of mortgage brokers. We hold the majority of mortgages we originate in our portfolio and sell the remainder for cash in the whole loan market, depending on market conditions and our own portfolio goals. During the third quarter of 2006, we sold $51.5 million of newly originated loans to various investors for cash, realizing a pre-tax net gain of $1.3 million.

Loan Servicing

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

2. RESTATEMENT

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

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

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

	Net Income (As Previously Reported)		Deferred Acquisition Costs (SFAS No. 91)			Success Fees (SFAS No. 133)			Other		Net Income (Restated)
Three months ended September 30, 2005	$	1,842,800	$	(159,054	)	$	(186,373	)	$	158,065	$	1,655,438
Nine months ended September 30, 2005	$	7,022,291	$	(405,264	)	$	(394,092	)	$	177,450	$	6,400,385

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

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

	Three Months Ended September 30, 2005				Nine Months Ended September 30, 2005
	As Previously Reported		Restated		As Previously Reported		Restated
REVENUES:
Gain on sale of loans held for sale	$	542,588	$	229,906	$	2,232,681	$	1,136,139
Prepayment penalties and other income		2,245,954		1,753,121		6,291,800		4,797,806
Total revenues		31,678,858		30,873,343		90,711,884		88,121,348

OPERATING EXPENSES:
Interest expense		18,018,930		18,283,805		47,319,051		47,777,134
Collection, general and administrative		7,600,208		6,874,657		23,368,940		21,462,817
Total expenses		28,297,552		27,836,876		77,737,885		76,289,845

INCOME BEFORE PROVISION FOR INCOME TAXES		3,381,306		3,036,467		12,973,999		11,831,503
PROVISION FOR INCOME TAXES		1,538,506		1,381,029		5,951,708		5,431,118
NET INCOME		1,842,800		1,655,438		7,022,291		6,400,385

EARNINGS PER SHARE:
Basic	$	0.26	$	0.23	$	1.09	$	1.01
Diluted	$	0.24	$	0.22	$	1.00	$	0.91

Weighted average shares, basic		7,158,406		7,060,989		6,444,943		6,353,526
Weighted average shares, diluted		7,825,406		7,610,161		7,043,554		7,005,029

Restated Statement of Cash Flows Information for Nine Months Ended September 30, 2005 (Unaudited)

	Nine Months Ended September 30, 2005
	As Previously Reported			Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,022,291		$	6,400,385
Adjustments to reconcile income to net cash provided by/(used in) operating activities:
Gain on sale of originated loans held for sale		(2,232,681	)		(1,136,139	)
Amortization of deferred costs and fees on originated loans		-			1,289,376
Amortization of debt discount and success fees		-			720,713
Non-cash compensation		430,190			377,760
Proceeds from the sale of and principal collections on loans held for sale		51,352,615			49,938,438
Changes in operating assets and liabilities:
Deferred income tax		2,368,276			(88,409	)
Other assets		(849,291	)		927,569
Accounts payable and accrued expenses		4,029,934			5,393,985
Net cash provided by operating activities		4,972,820			9,383,015

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash		-			(8,654,784	)
Loan fees		(2,481,179	)		-
Net cash used in investing activities		(251,097,785	)		(259,574,149	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing costs		-			(4,664,925	)
Net cash provided by financing activities		257,432,272			252,767,346

NET CHANGE IN CASH AND CASH EQUIVALENTS		11,307,307			2,576,212
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		19,648,271			5,127,732
CASH AND CASH EQUIVALENTS, END OF PERIOD		30,955,578			7,703,944

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Originated Loans Held for Investment - During the third quarter of 2006, the Company modified its estimate of the collectibility of accrued interest on certain fully secured loans that are in the foreclosure process. The Company now continues to accrue interest on secured real estate first mortgage loans originated by the Company up to 209 days contractually delinquent with a recency payment in the last 179 days, and that are judged to be fully recoverable for both principal and accrued interest based on a foreclosure analysis, which includes and updated estimate of the realizable value of the property securing the loan. This change in estimate increased interest income by approximately $1.7 million (pre-tax) in the three months ended September 30, 2006.

Generally, interest is accrued on loans that are performing and are carried at the amortized cost of the loan. In general, interest on originated loans held for investment is calculated based on contractual interest rates applied to daily balances of the principal amount outstanding using the accrual method. The Company’s decision to revise its estimate of collectibility was based on recent collection information, which shows that the Company is collecting 100% of principal and between 95% to 100% of delinquent interest when these loans in the foreclosure process are paid off or settled.

The accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful, which can be less than 209 days contractually delinquent with a recency payment in the last 179 days. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Subsequent recognition of income occurs only to the extent payment is received, subject to management’s assessment of the collectibility of the remaining interest and principal. A non-accrual loan is restored to an accrual status when the collectibility of interest and principal is no longer in doubt and past due interest is recognized at that time.

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

The compensation cost recognized in income for the plans described below was $169,025 and $84,521 for the three months ended September 30, 2006 and 2005, respectively. The compensation cost recognized in income for the plans described below was $653,263 and $377,760 for the nine months ended September 30, 2006 and 2005, respectively.

Prior to January 1, 2006, our stock-based compensation was accounted for under the recognition and measurement principles of APB Opinion 25 and related interpretations. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards during the three and nine months ended September 30, 2005.

	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income - as reported	$	1,655,438		$	6,400,385
Stock-based compensation expense determined under fair value method, net of related tax effects⁽¹⁾		(123,317	)		(228,805	)
Net income - pro forma	$	1,532,121		$	6,171,580

Earnings per share:
Basic - as reported	$	0.23		$	1.01
Basic - pro forma	$	0.22		$	0.97
Diluted - as reported	$	0.22		$	0.91
Diluted - pro forma	$	0.20		$	0.88

__________________

(1)

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

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

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

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

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

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

	Shares		Weighted Average Exercise		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance, January 1, 2006		667,500	$	2.88		5.1 years	$	3,901,085

Granted		15,000		7.73		10 years		-
Exercised		130,000		1.39		1.75 years		723,140
Canceled		-		-		-		-
Forfeited		20,000		10.70		8.5 years		26,950

Balance, September 30, 2006		532,500		3.05		5.5 years	$	2,629,260

Options exercisable at September 30, 2006		501,750	$	2.40		5.32 years

There were 15,000 stock option awards granted, which vested at the time of grant, during the nine months ended September 30, 2006. A total of 106,500 options were granted to management and the board of directors during the nine months ended September 30, 2005.

As of September 30, 2006, there was $178,811 of unrecognized compensation cost related to the Company’s stock option awards. The weighted average period over which this cost is expected to be recognized is one year. Cash received from the exercise of stock options for the nine months ended September 30, 2006 and 2005 was $335,805 and $225,190, respectively.

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

2006 Stock Incentive Plan

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

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

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

	Shares		Weighted Average Grant Date Fair Value
Non-vested balance, January 1, 2006		27,000	$	12.92

Granted		122,000		7.82
Vested		31,000		9.12
Forfeited		8,000		13.00

Non-vested balance, September 30, 2006		110,000	$	8.29

The total fair value of the Company’s restricted stock that vested during the nine months ended September 30, 2006 was $328,350.

As of September 30, 2006, there was $820,521 of unrecognized compensation cost related to the Company’s restricted stock awards.

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

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

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

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

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

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

	Three Months Ended September 30,
	2006			2005
UAccretable DiscountU
Balance, beginning of period	$	14,240,528		$	6,721,220
New Acquisitions		4,000			2,964,243
Accretion		(1,010,378	)		(460,587	)
Transfers from nonaccretable		695,508			-
Net reductions relating to loans sold		(93,020	)		(108,110	)
Net reductions relating to loans repurchased		(4,297	)		(2,015	)
Other		32,530			(55,607	)
Balance, end of period	$	13,864,871		$	9,059,144

UNonaccretable DiscountU
Balance, beginning of period	$	39,212,462		$	14,624,151
New Acquisitions		13,741,125			124,147
Transfers to accretable		(695,508	)		-
Net reductions relating to loans sold		(77,996	)		(11,391	)
Net reductions relating to loans repurchased		-			(1,881	)
Other, loans transferred to OREO		(3,036,816	)		(81,055	)
Balance, end of period	$	49,143,267		$	14,653,971

	Nine Months Ended September 30,
	2006			2005
UAccretable DiscountU
Balance, beginning of period	$	11,360,617		$	-
New Acquisitions		2,549,873			19,233,009
Accretion		(2,936,851	)		(717,572	)
Transfers from nonaccretable		2,883,125			(9,221,874	)
Net reductions relating to loans sold		(93,020	)		(163,857	)
Net reductions relating to loans repurchased		(6,486	)		(14,954	)
Other		107,613			(55,608	)
Balance, end of period	$	13,864,871		$	9,059,144

UNonaccretable DiscountU
Balance, beginning of period	$	23,981,013		$	-
New Acquisitions		32,430,347			14,807,954
Transfers to accretable		(2,883,125	)		-
Net reductions relating to loans sold		(85,881	)		(71,047	)
Net reductions relating to loans repurchased		(204,026	)		(1,881	)
Other, loans transferred to OREO		(4,095,061	)		(81,055	)
Balance, end of period	$	49,143,267		$	14,653,971

The Company purchased $215,021,204 and $452,311,109 of loans subject to SOP 03-3, respectively, during the three and nine months ended September 30, 2006. The outstanding balance of notes receivable subject to SOP 03-3 at September 30, 2006 was $762,320,937.

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

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

	For the Three Months Ended September 30,
	2006			2005
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	28,939,922		$	23,042,339
Mortgage banking		13,526,735			7,831,004
Consolidated revenue	$	42,466,657		$	30,873,343

CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(1,558,423	)	$	724,414
Mortgage banking		994,468			931,024
Consolidated net (loss)/income	$	(563,955	)	$	1,655,438

	For the Nine Months Ended September 30,
	2006			2005
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	84,774,301		$	69,562,213
Mortgage banking		36,798,652			18,559,135
Consolidated revenue	$	121,572,953		$	88,121,348

CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(3,149,719	)	$	3,899,932
Mortgage banking		2,983,100			2,500,453
Consolidated net (loss)/income	$	(166,619	)	$	6,400,385

	September 30, 2006		December 31, 2005
CONSOLIDATED ASSETS:
Portfolio asset acquisition and resolution	$	1,116,766,233	$	924,564,871
Mortgage banking		447,097,335		403,675,718
Consolidated assets	$	1,563,863,568	$	1,328,240,589

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

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

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. While SFAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating the effect of the statement, if any, on the Company’s results of operations and financial condition.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement

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

General

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

Application of Critical Accounting Policies and Estimates

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

Portfolio Characteristics

Overall Portfolio

At September 30, 2006, our portfolio (excluding OREO) consisted of $1.17 billion of notes receivable (inclusive of purchase discount not reflected on the face of the balance sheet), $410.1 million of loans held for investment and $7.7 million of loans held for sale. Our total loan portfolio grew 17% to $1.58 billion as of September 30, 2006, from $1.36 billion at December 31, 2005. Not boarded loans represent loans serviced by the seller on a temporary basis. Included in not boarded loans is a $116.6 million pool of loans acquired on September 29, 2006. The following table sets forth information regarding the types of properties securing our loans.

UProperty TypesU	UPrincipal BalanceU		Percentage of Total UPrincipal BalanceU
Residential 1-4 family	$	1,172,210,436		74.04	%
Condos, co-ops, PUD dwellings		138,646,211		8.76	%
Manufactured homes		22,950,301		1.45	%
Multi-family		1,063,149		0.07	%
Secured, property type unknown		44,586,128		2.82	%
Commercial		2,401,119		0.15	%
Unsecured loans		18,600,365		1.17	%
Other		320,104		0.02	%
Not boarded		182,376,537		11.52	%
Total	$	1,583,154,350		100.00	%

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

ULocationU	UPrincipal BalanceU		Percentage of Total UPrincipal BalanceU
New York	$	169,260,260		10.69	%
New Jersey		146,524,881		9.26	%
California		122,712,896		7.75	%
Florida		93,859,322		5.93	%
Pennsylvania		76,644,719		4.84	%
Ohio		72,716,812		4.59	%
Texas		71,374,521		4.51	%
Michigan		51,010,182		3.22	%
Georgia		45,963,949		2.90	%
Illinois		45,659,326		2.89	%
All Others		687,427,482		43.42	%
Total	$	1,583,154,350		100.00	%

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

Asset Quality

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

			September 30, 2006
			Contractual Delinquency					Recency Delinquency
	Days Past Due		Amount		%			Amount		%
Current		0 - 30 days	$	786,552,422		50	%	$	910,635,040		58	%
Delinquent		31 - 60 days		87,119,194		5	%		36,810,730		2	%
		61 - 90 days		11,749,264		1	%		23,937,836		1	%
		90+ days		142,342,422		9	%		56,379,696		4	%

UBankruptcyU		0 - 30 days		41,750,029		3	%		106,879,192		7	%
Delinquent		31 - 60 days		9,008,145		1	%		8,576,306		1	%
		61 - 90 days		4,766,021		-			4,931,368		-
		90+ days		102,485,338		6	%		37,622,667		2	%

UForeclosureU		0 - 30 days		679,077		-			9,935,003		1	%
Delinquent		31 - 60 days		1,156,319		-			2,654,996		-
		61 - 90 days		561,828		-			5,774,443		-
		90+ days		212,607,754		13	%		196,640,536		12	%

Not BoardedP⁽¹⁾^P				182,376,537		12	%		182,376,537		12	%
		Total	$	1,583,154,350		100	%	$	1,583,154,350		100	%
Total loans		0 - 30 days	$	828,981,528		53	%	$	1,027,449,235		66	%

__________________

(1)

Not boarded represents recently acquired loans serviced by the seller on a temporary basis and recently originated loans that have been funded but have not yet been entered into the servicing system. These loans include a $116.6 million pool of loans (unpaid principal balance) acquired on September 29, 2006, all of which were current 0 - 30 days on a contractual basis at the time of acquisition.

			December 31, 2005
			Contractual Delinquency					Recency Delinquency
	Days Past Due		Amount		%			Amount		z%
Current		0 - 30 days	$	687,887,057		51	%	$	791,779,227		58	%
Delinquent		31 - 60 days		76,225,331		6	%		36,316,774		3	%
		61 - 90 days		19,629,463		1	%		15,938,651		1	%
		90+ days		139,882,279		10	%		79,589,478		6	%

UBankruptcyU		0 - 30 days		38,018,748		3	%		108,931,183		8	%
Delinquent		31 - 60 days		11,207,345		1	%		7,845,350		1	%
		61 - 90 days		4,725,448		-			4,851,743		-
		90+ days		113,808,976		8	%		46,132,241		3	%

UForeclosureU		0 - 30 days		793,327		-			8,414,493		1	%
Delinquent		31 - 60 days		606,737		-			2,934,832		-
		61 - 90 days		895,794		-			2,444,743		-
		90+ days		131,112,327		10	%		119,614,117		9	%

Not BoardedP⁽¹⁾^P				132,573,874		10	%		132,573,874		10	%
		Total	$	1,357,366,706		100	%	$	1,357,366,706		100	%
Total loans		0 - 30 days	$	726,699,132		54	%	$	909,124,903		67	%

__________________

(1)

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

Notes Receivable Portfolio

At September 30, 2006, our notes receivable portfolio, which consists of purchased loans, included approximately 28,100 loans with an aggregate unpaid principal balance (“UPB”) of $1.17 billion and a net UPB of $1.11 billion (after allowance for loan losses of $55 million), compared with approximately 23,684 loans with an aggregate UPB of $970 million and a net UPB of $903 million (after allowance for loan losses of $67 million) as of December 31, 2005. Impaired loans comprise and will continue to comprise a significant portion of our portfolio. Many of the loans we acquire are impaired loans at the time of purchase. We generally purchase such loans at significant discounts and have considered the payment status, underlying collateral value and expected cash flows when determining our purchase price. While interest income is not accrued on impaired loans, interest and fees are received on a portion of loans classified as impaired. The following table provides a breakdown of the notes receivable portfolio by year:

	September 30, 2006		December 31, 2005
Performing loans	$	716,294,477	$	536,974,892
Allowance for loan losses		8,219,839		14,266,781
Total performing loans, net of allowance for loan losses		708,074,638		522,708,111

Impaired loans		266,679,937		244,986,933
Allowance for loan losses		47,141,285		43,691,572
Total impaired loans, net of allowance for loan losses		219,538,652		201,295,361

Not yet boarded onto servicing system		182,376,537		188,037,218
Allowance for loan losses		-		9,317,802
Not yet boarded onto servicing system, net of allowance for loan losses		182,376,537		178,719,416
Total notes receivable, net of allowance for loan losses		1,109,989,827		902,722,888

*Accretable Discount		13,864,871		11,360,617
*Nonaccretable Discount		49,143,267		23,981,013

Total Notes Receivable, net of allowance for loan losses and accretable/nonaccretable discounts	$	1,046,981,689	$	867,381,258

__________________

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

The following table provides a breakdown of the balance of our portfolio of notes receivable between fixed-rate and adjustable-rate loans, net of allowance for loan losses and excluding loans purchased but not yet boarded onto our servicing operations system as of September 30, 2006 of $182,376,537.

	September 30, 2006		December 31, 2005
Performing Loans:
Fixed-rate Performing Loans	$	600,769,766	$	393,982,311
Adjustable Performing Loans		107,304,872		128,725,800
Total Performing Loans	$	708,074,638	$	522,708,111

Impaired Loans:
Fixed-rate Impaired Loans	$	178,712,801	$	167,093,004
Adjustable Impaired Loans		40,825,852		34,202,357
Total Impaired Loans	$	219,538,653	$	201,295,361
Total Notes	$	927,613,291	$	724,003,472

*Accretable Discount	$	13,864,871	$	11,360,617
*Nonaccretable Discount	$	39,694,604	$	13,953,006
Total Notes Receivable, net of allowance for loan losses and accretable/nonaccretable discounts, excluding loans not boarded onto servicing systems	$	874,053,816	$	698,689,849

Loan Acquisitions

We purchased approximately $215.0 million in assets (principally residential single-family first and second lien loans) during the third quarter of 2006, compared with approximately $121.6 million in assets (principally residential single-family first and second lien loans) during the third quarter of 2005. For the nine months ended September 30, 2006, we purchased $452.3 million of loans as compared with $315.2 million for the same period in 2005. The following table sets forth the amounts and purchase prices of our mortgage loan acquisitions during the three and nine months ended September 30, 2006 and September 30, 2005:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Number of loans	3,650			2,329			14,058			7,491
Aggregate unpaid principal balance at acquisition	$	215,021,204		$	121,637,069		$	452,311,109		$	315,220,868
Purchase price	$	201,280,078		$	117,734,210		$	417,334,296		$	291,141,892
Purchase price percentage		94	%		97	%		92	%		92	%
Percentage of 1^st liens		5	%		32	%		9	%		36	%
Percentage of 2^nd liens		93	%		68	%		90	%		64	%
Percentage of Other		2%*			-			1	%		-

__________________

Represents $5.0 million of REO that was acquired in the third quarter of 2006.

Notes Receivable Dispositions

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Sale of Performing Loans
Aggregate unpaid principal balance	$	3,784,126	$	6,236,508	$	3,784,126	$	13,573,871
Gain on sale	$	94,862	$	644,985	$	94,862	$	1,263,866

Sale of Non-Performing Loans
Aggregate unpaid principal balance	$	-	$	-	$	161,149	$	23,491,405*
Gain on sale	$	-	$	-	$	69,049	$	47,021

Total gain on sale	$	94,862	$	644,985	$	163,911	$	1,310,887

__________________

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

Tribeca’s Loan Originations

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Number of loans originated	376		476		1,320		1,349
Original principal balance	$	91,679,220	$	106,058,640	$	296,092,427	$	299,365,677
Average loan amount	$	243,828	$	222,812	$	224,312	$	221,917

Originated as fixed	$	11,813,000	$	11,347,840	$	22,292,900	$	28,624,745
Originated as ARM*	$	79,866,220	$	94,710,800	$	273,799,527	$	270,740,932

Number of loans sold		235		69