Franklin Credit Management Reports Increase in Revenue, Drop in Loss for Q3

Franklin Credit Management Corporation FCMC, a specialty consumer finance company primarily engaged in the acquisition, origination, servicing and resolution of performing, reperforming and nonperforming residential mortgage loans, today announced its operating results for the third quarter and first nine months of 2006.

Total revenues increased 38% to $42.5 million in the quarter ended September 30, 2006, compared with $30.9 million in the third quarter of 2005. The increase in revenues was essentially offset by a 61% increase in interest expense, resulting in a net loss of $564,000 for the three months ended September 30, 2006, compared with a net loss of $1.4 million in the second quarter of 2006 and net income of $1.7 million in the three months ended September 30, 2005. On a diluted per-share basis, the Company reported a net loss of $0.07 in the three months ended September 30, 2006, compared with a net loss of $0.18 per diluted share in the second quarter of 2006 and net income of $0.22 per diluted share in the prior-year quarter. The weighted average number of basic shares outstanding totaled 7.76 million in the quarter ended September 30, 2006, versus 7.06 million shares in the quarter ended September 30, 2005.

For the nine months ended September 30, 2006, total revenues increased 38% to $121.6 million, compared with $88.1 million in the first nine months of 2005. Interest expense increased 71% to $81.9 million, from $47.8 million in the corresponding period of the previous year, driven in part by a rise of approximately 161 basis points in short term interest rates during the past twelve months. The Company reported a net loss for the nine months ended September 30, 2006 of $167,000, or $0.02 per diluted share, compared with net income of $6.4 million, or $0.91 per diluted share, in the nine months ended September 30, 2005.

Total assets increased 6.1% during the third quarter and 17.7% during the nine months ended September 30, 2006, to $1.56 billion at September 30, 2006, compared with total assets of $1.33 billion as of December 31, 2005. During the third quarter of 2006, the Company acquired and originated $307 million in loans, compared with $233 million in the second quarter of 2006. Total assets increased 36% during the past twelve months, when compared with total assets of $1.15 billion at September 30, 2005. Stockholders’ equity totaled $49.0 million, or $6.23 per share, at September 30, 2006, and the Company’s stockholders’ equity-to-assets ratio was 3.13% as of September 30, 2006, compared with 3.58% at December 31, 2005.

While the Federal Reserve did not raise short-term interest rates at its August meeting, Franklin Credit’s third quarter net loss was principally the result of seventeen consecutive Federal Reserve interest rate hikes and a concomitant increase of approximately 400 basis points in the 30-day LIBOR rate since mid-2004. The quarter ended September 30, 2006 included $1.4 million (pre-tax) in gains from the sales of loans, which almost offset the increase in the Company’s interest expense for the quarter, when compared with the prior-year period. The Company sold, for cash and servicing released, $51.5 million of recently originated loans during the third quarter of 2006. “We continue to be optimistic regarding our efforts to position the Company for a resumption in earnings growth,” commented Gordon Jardin, Chief Executive Officer of Franklin Credit Management Corporation.

The Federal Home Loan Bank of Cincinnati’s 30-day advance rate, upon which the Company’s borrowing interest rates are based, increased 22 basis points during the third quarter of 2006. The increase was effective July 1, 2006 and, therefore, negatively impacted the full quarter. This was a major contributor to the $1.6 million (pre-tax) increase in interest expense in the third quarter of 2006, when compared with the quarter ended June 30, 2006. Interest income increased by $583,000 in the third quarter of 2006, compared with the second quarter of 2006, notwithstanding a reduction in the balance of net notes receivable and loans held for investment during the most recent quarter (excluding a $113 million portfolio acquisition on September 29, 2006), when compared with June 30, 2006. Interest income in the 2006 third quarter benefited from a modification of the Company’s accrual policy for loans held for investment, which was based on more seasoning of the portfolio and experience with collection of substantially all interest and principal when these loans are paid off. The third quarter provision for loan losses totaled $1.7 million, compared with a provision of $3.2 million in the second quarter of 2006. The provision in the 2006 second quarter reflected primarily an increase in charge-offs and expected losses on certain portfolios acquired in mid-2004. Gains on loan sales and a lower provision for loan losses contributed to a reduction in the net loss for the 2006 third quarter, when compared with the quarter ended June 30, 2006.

Higher short-term interest rates were also a key factor in the net loss recorded in the third quarter of 2006, when compared with the corresponding quarter in the previous year. A 46% increase in interest income, when compared with the prior-year quarter, was more than offset by a 61% increase in interest expense. As of September 30, 2006, the weighted average interest rate on the Company’s borrowed funds had increased to 8.10%, compared with 7.26% at the end of 2005 and 6.95% at September 30, 2005.

“The interest rate margin on approximately $497 million of existing term debt was reduced by 25 basis points on October 1, 2006 and will be reduced by an additional 25 basis points on at least $445 million in term debt commencing January 1, 2007,” commented Paul Colasono, the Company’s Chief Financial Officer. “While we are pleased with these pricing improvements on about a third of our term debt, more needs to be done in order to lower our overall costs of borrowing. We are vigorously pursuing further improvements in financing terms with our banks and continue to seek additional sources of funding.”

“While we continue to value the commitment and support of our lead senior lender, which has been with us for 18 years, we recognize the importance of achieving a broader diversification of our funding sources at an overall lower cost,” added Mr. Jardin.

In addition to the Company’s higher cost of borrowed funds, operating results during the most recent quarter, when compared with the prior-year period, were negatively impacted by a $3.5 million increase in collection, general and administrative expenses. This increase reflected, for the most part, growth in the Company’s business — a 35% increase in the Company’s total assets, higher aggregate acquisition and loan origination volume, and a 38% increase in the number of loans serviced — over the past twelve months. As a percentage of average assets, collection, general and administrative expenses increased to 2.75% during the third quarter of 2006, compared with 2.50% in the prior-year quarter. The Company employed 232 people at September 30, 2006, compared with 206 employees at the end of September 2005, and third- party costs of servicing delinquent loans and originating/acquiring loans increased, including in particular foreclosure legal fees, appraisal costs and title search expenses.

During the third quarter of 2006, the Company purchased a $300 million (notional amount) one-month LIBOR cap with a strike price of 5.75% and a $500 million (notional amount) one-month LIBOR cap with a strike price of 6.0%, both of which will be in effect for one year. “We were able to take advantage of very favorable cap pricing in the capital markets to partially limit our exposure to further increases in our borrowing costs on $300 million of term debt should the 30-day LIBOR rate exceed 5.75% and on a total of $800 million of term debt should such rate exceed 6.0%,” noted Mr. Colasono. “This marks the first time Franklin Credit has utilized the capital markets to hedge a portion of its interest rate risk.”

“While significantly higher funding costs during this very difficult interest rate environment have continued to negatively impact our financial performance, I am confident that Franklin Credit is well-positioned to take strategic advantage of a residential real estate market that continues to deteriorate,” noted Tom Axon, Chairman and President of the Company. “Our business model is designed to manage nonperforming mortgage assets more efficiently than traditional real estate lenders and loan servicing companies, and we are in an excellent position to acquire additional nonperforming mortgage assets in coming quarters. I assure you that I am focused on reducing our overall funding costs.”