**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**Mark One**

**x**                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterly period ended January 31, 2007**

**or**

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from               to               .**

**CommissionFile Number 0-26686**

**First Investors Financial Services Group,Inc.**

(ExactName of Registrant as Specified in its Charter)

| **Texas**                                 |   | ** **                            |
|-------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction             |   | **76-0465087**                        |
| of Incorporation  or Organization)        |   | (I.R.S. Employer  Identification No.) |
| ** **                                |   | ** **                            |
| **675  Bering Drive, Suite 710**          |   | ** **                            |
| **Houston,  Texas**                       |   | **77057**                             |
| (Address of  Principal Executive Offices) |   | (Zip Code)                            |

 

**(713)977-2600**

(Registrant’sTelephone Number, Including Area Code)

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 x No  ̈.

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large Accelerated Filer   o | Accelerated Filer   o | Non-Accelerated Filer   x |
|--------------------------------------------|--------------------------------------|------------------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes   ̈   No  x.

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latest practicabledate.

|                              | ** ** | **Shares  Outstanding At** |
|------------------------------|------------|----------------------------|
| **Class**                    | ** ** | **March  14, 2007**        |
| Common Stock-$.001 Par Value |       | 4,477,694                  |

 

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

##### **FORM10-Q**

### **JANUARY31, 2007**

##### **TABLEOF CONTENTS**

 
|                                                    |       |
|----------------------------------------------------|------------|
|                                               |       |
| **Part I   Financial  Information** |
|                                               |       |   |
|                                               | Item 1.    | Financial Statements |
|                                               |       |   |
|                                               |       | Consolidated Condensed Balance  Sheets as of April 30, 2006 and |
|                                               |       | January 31, 2007 |
|                                               |       |   |
|                                               |       | Consolidated Condensed  Statements of Earnings for the Three |
|                                               |       | and Nine Months Ended January  31, 2006 and 2007 |
|                                               |       |   |
|                                               |       | Consolidated Condensed  Statement of Shareholders’ Equity for the |
|                                               |       | Nine Months Ended January 31,  2007 |
|                                               |       |   |
|                                               |       | Consolidated Condensed  Statements of Cash Flows for the Nine |
|                                               |       | Months Ended January 31, 2006  and 2007 |
|                                               |       |   |
|                                               |       | Notes to Unaudited  Consolidated Condensed Financial Statements |
|                                               |       |   |
|                                               | Item 2.    | Management’s Discussion and  Analysis of Financial Condition and |
|                                               |       | Results of Operations |
|                                               |       |   |
|                                               | Item 3.    | Quantitative and Qualitative  Disclosures About Market Risk |
|                                               |       |   |
|                                               | Item 4.    | Controls and Procedures |
|                                               |       |   |
| **Part II   Other  Information**    |
|                                               |       |
|                                               | Item 6.    | Exhibits and Reports on Form  8-K |
|                                               |       |
| **Signatures**                                     | ** ** |
|                                               |       |
|                                               |       |

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

##### **CONSOLIDATED CONDENSED BALANCE SHEETS — APRIL30, 2006 AND JANUARY 31, 2007**

##### **(In thousands, except par value)**

| ** **                                                                                                                                                                   | ** ** | **April 30,** | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2006**           | ** ** | **2007**             | ** ** |
| ** **                                                                                                                                                                   | ** ** | **(Audited)**      | ** ** | **(Unaudited)**      | ** ** |
| **ASSETS**                                                                                                                                                                   |       |               |       |                 |       |
| Receivables Held for  Investment, net                                                                                                                                        |       | $                  | 377,399    |                 | $          | 480,464 |   |
| Cash and Short-Term  Investments                                                                                                                                             |       | 3,380              |       | 1,760                |       |
| Restricted Cash                                                                                                                                                              |       | 25,538             |       | 37,171               |       |
| Accrued Interest  Receivable                                                                                                                                                 |       | 3,218              |       | 4,104                |       |
| Assets Held for Sale                                                                                                                                                         |       | 960                |       | 1,344                |       |
| Other Assets:                                                                                                                                                                |       |               |       |                 |       |
| Funds held under  reinsurance agreement                                                                                                                                      |       | 3,431              |       | 3,655                |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,514 and $3,632                                                           |       | 5,362              |       | 5,317                |       |
| Total assets                                                                                                                                                                 |       | $                  | 419,288    |                 | $          | 533,815 |   |
|                                                                                                                                                                         |       |               |       |                 |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                               |       |               |       |                 |       |
| Debt:                                                                                                                                                                        |       |               |       |                 |       |
| Warehouse credit  facilities                                                                                                                                                 |       | $                  | 47,080     |                 | $          | 253,376 |   |
| Term notes                                                                                                                                                                   |       | 316,584            |       | 215,153              |       |
| Working capital  facility                                                                                                                                                    |       | 16,454             |       | 24,283               |       |
| Related party  note                                                                                                                                                          |       | 2,500              |       | 2,500                |       |
| Other Liabilities:                                                                                                                                                           |       |               |       |                 |       |
| Accounts payable  and accrued liabilities                                                                                                                                    |       | 6,397              |       | 6,027                |       |
| Income taxes                                                                                                                                                                 |       | 1,386              |       | 844                  |       |
| Deferred income  taxes payable                                                                                                                                               |       | 766                |       | 305                  |       |
| Total  liabilities                                                                                                                                                           |       | 391,167            |       | 502,488              |       |
|                                                                                                                                                                         |       |               |       |                 |       |
| Commitments and  Contingencies                                                                                                                                               |       |               |       |                 |       |
| Shareholders’ Equity:                                                                                                                                                   |       |               |       |                 |       |
| Common stock,  $0.001 par value, 10,000 shares authorized, 5,626 issued and 4,454  outstanding at April 30, 2006 and 5,650 issued and 4,478 outstanding at  January 31, 2007 |       | 6                  |       | 6                    |       |
| Additional  paid-in capital                                                                                                                                                  |       | 18,938             |       | 19,292               |       |
| Retained  earnings                                                                                                                                                           |       | 13,644             |       | 16,496               |       |
| Less: treasury  stock, at cost, 1,172 shares                                                                                                                                 |       | (4,467             | )          | (4,467               | )          |
| Total shareholders’  equity                                                                                                                                             |       | 28,121             |       | 31,327               |       |
| Total liabilities and  shareholders’ equity                                                                                                                             |       | $                  | 419,288    |                 | $          | 533,815 |   |
|                                                                                                                                                                         |       |               |       |                 |       |

 

The accompanying notes are an integral part of theseconsolidated condensed financial statements.

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF EARNINGS**

**For the Three and Nine Months Ended January 31, 2006 and 2007**

##### **(In thousands, except per share amount)**

**(Unaudited)**

** **
| ** **                                             | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **Ended January 31,**         | ** ** | **Ended January 31,**        | ** ** |
| ** **                                             | ** ** | **2006**                                | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                   |       |                                    |       |                                   |       |   |   |   |   |
| Interest Income                                        |       | $                                       | 10,332     |                                   | $          | 14,553 |   | $ | 28,744 |   | $ | 40,258 |   |
| Interest Expense                                       |       | 3,938                                   |       | 6,364                                  |       | 10,374 |   | 17,383 |   |
| Net interest  income                                   |       | 6,394                                   |       | 8,189                                  |       | 18,370 |   | 22,875 |   |
| Provision for Credit  Losses                           |       | 1,822                                   |       | 3,236                                  |       | 5,538 |   | 8,431 |   |
| Net Interest Income  After Provision for Credit Losses |       | 4,572                                   |       | 4,953                                  |       | 12,832 |   | 14,444 |   |
| Other Income:                                          |       |                                    |       |                                   |       |   |   |   |   |
| Servicing  revenue                                     |       | 433                                     |       | 377                                    |       | 1,506 |   | 1,053 |   |
| Other finance  charges and fees                        |       | 696                                     |       | 876                                    |       | 1,803 |   | 2,435 |   |
| Insurance  products                                    |       | 226                                     |       | 451                                    |       | 780 |   | 932 |   |
| Income from  investment                                |       | 96                                      |       | 163                                    |       | 333 |   | 418 |   |
| Other interest  income                                 |       | 336                                     |       | 482                                    |       | 869 |   | 1,342 |   |
| Other income                                           |       | 183                                     |       | —                                 |       | 569 |   | — |   |
| Realized loss on  interest rate derivative positions   |       | (195                                    | )          | —                                 |       | (175 | ) | — |   |
| Total other  income                                    |       | 1,775                                   |       | 2,349                                  |       | 5,685 |   | 6,180 |   |
| Operating Expenses:                                    |       |                                    |       |                                   |       |   |   |   |   |
| Salaries and  benefits                                 |       | 2,700                                   |       | 2,984                                  |       | 7,903 |   | 8,548 |   |
| Operating  expense                                     |       | 1,226                                   |       | 1,708                                  |       | 2,954 |   | 4,341 |   |
| General and  administrative                            |       | 1,655                                   |       | 979                                    |       | 3,668 |   | 2,978 |   |
| Other interest  expense                                |       | 357                                     |       | 500                                    |       | 922 |   | 1,374 |   |
| Total operating  expenses                              |       | 5,938                                   |       | 6,171                                  |       | 15,447 |   | 17,241 |   |
| Income Before Provision  for Income Taxes              |       | 409                                     |       | 1,131                                  |       | 3,070 |   | 3,383 |   |
| Provision (Benefit) for  Income Taxes:                 |       |                                    |       |                                   |       |   |   |   |   |
| Current                                                |       | 12                                      |       | 548                                    |       | 343 |   | 992 |   |
| Deferred                                               |       | 79                                      |       | (238                                   | )          | 719 |   | (461 | ) |
| Total provision  for income taxes                      |       | 91                                      |       | 310                                    |       | 1,062 |   | 531 |   |
| Net Earnings                                           |       | $                                       | 318        |                                   | $          | 821 |   | $ | 2,008 |   | $ | 2,852 |   |
|                                                   |       |                                    |       |                                   |       |   |   |   |   |
| Basic Net Earnings per  Common Share                   |       | $                                       | 0.07       |                                   | $          | 0.18 |   | $ | 0.45 |   | $ | 0.64 |   |
| Diluted Net Earnings per Common Share                  |       | $                                       | 0.07       |                                   | $          | 0.17 |   | $ | 0.44 |   | $ | 0.60 |   |

 

The accompanying notes are anintegral part of these consolidated condensed financial statements.

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’EQUITY**

**For the Nine Months Ended January31, 2007**

##### **(In thousands, except share amounts)**

**(Unaudited, except wherestated)**
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Treasury** | ** ** | ** **         | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|--------------|------------|--------------------|------------|
| ** **                                                         | ** ** | ** **            | ** ** | ** **     | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Stock, at** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **cost**           | ** ** | **Total** | ** ** |
| Balance at May 1, 2005                                             |       | 5,583,669             |       | $              | 6          |        | $          | 18,755       |       | $                  | 11,199     |   | ($4,467 | ) | $ | 25,493 |   |
| Net earnings.                                                      |       | —                |       | —         |       | —      |       | 2,445        |       | —             |       | 2,445 |   |
| Exercise of stock options                                          |       | 42,500                |       | —         |       | 183         |       | —       |       | —             |       | 183 |   |
| Balance at April 30,  2006 (Audited).                              |       | 5,626,169             |       | 6              |       | 18,938      |       | 13,644       |       | (4,467             | )          | 28,121 |   |
| Net earnings.                                                      |       | —                |       | —         |       | —      |       | 2,852        |       | —             |       | 2,852 |   |
| Stock compensation  expense.                                       |       | —                |       | —         |       | 224         |       | —       |       | —             |       | 224 |   |
| Excess tax benefits  from share basedarrangements                  |       | —                |       | —         |       | 23          |       | —       |       | —             |       | 23 |   |
| Issuance of common  stock related to the exercise of stock options |       | 23,501                |       | —         |       | 107         |       | —       |       | —             |       | 107 |   |
| Balance at January 31, 2007                                        |       | 5,649,670             |       | $              | 6          |        | $          | 19,292       |       | $                  | 16,496     |   | $ | (4,467 | ) | $ | 31,327 |   |
|                                                                    |            |                       |            |                |            |             |            |              |            |                    |            |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of this consolidated condensed financial statement.

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**For the Nine Months Ended January31, 2006 and 2007**

**(In thousands)**

**(Unaudited)**
| ** **                                                               | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Cash Flows From  Operating Activities:                                   |       | $        | 2,008      |     | $          | 2,852 |   |
| Net earnings                                                             |       |     |       |     |       |
| Adjustments to  reconcile net earnings to net cash (used in) provided by |       |     |       |     |       |
| operating  activities —                                             |       |     |       |     |       |
| Depreciation and  amortization expense                                   |       | 3,635    |       | 4,960    |       |
| Provision for  credit losses                                             |       | 5,538    |       | 8,431    |       |
| Reversal of  uncertain tax provision                                     |       | —   |       | (669     | )          |
| Excess tax  benefits from share-based payment arrangements               |       | —   |       | (23      | )          |
| Share-based  payment arrangements                                        |       | —   |       | 224      |       |
| (Increase)  decrease in:                                                 |       |     |       |     |       |
| Accrued interest  receivable                                             |       | (623     | )          | (886     | )          |
| Restricted cash                                                          |       | (47,647  | )          | (11,632  | )          |
| Deferred  financing costs and other assets                               |       | (1,543   | )          | (562     | )          |
| Funds held under  reinsurance agreement                                  |       | (516     | )          | (225     | )          |
| Current income  tax receivable                                           |       | 5        |       | —   |       |
| Increase  (decrease) in:                                                 |       |     |       |     |       |
| Accounts payable  and accrued liabilities                                |       | 2,144    |       | (370     | )          |
| Deferred income  taxes payable                                           |       | 719      |       | (461     | )          |
| Income taxes                                                             |       | 285      |       | 150      |       |
| Net cash (used  in) provided by operating activities                     |       | (35,995  | )          | 1,789    |       |
| Cash Flows From  Investing Activities:                                   |       |     |       |     |       |
| Origination of  Receivables Held for Investment                          |       | (189,945 | )          | (240,802 | )          |
| Payments  received from Investment                                       |       | 435      |       | 372      |       |
| Contributions to  Investment                                             |       | —   |       | (434     | )          |
| Principal  payments from Receivables Held for Investment                 |       | 82,408   |       | 118,522  |       |
| Payments  received on Assets Held for Sale                               |       | 4,887    |       | 6,733    |       |
| Purchase of  furniture and equipment                                     |       | (454     | )          | (624     | )          |
| Net cash used in  investing activities                                   |       | (102,669 | )          | (116,233 | )          |
| Cash Flows From  Financing Activities:                                   |       |     |       |     |       |
| Proceeds from  advances on—                                         |       |     |       |     |       |
| Warehouse credit  facilities                                             |       | 330,703  |       | 478,589  |       |
| Term notes                                                               |       | 364,553  |       | —   |       |
| Working capital  facility                                                |       | 4,650    |       | 7,829    |       |
| Principal  payments made on—                                        |       |     |       |     |       |
| Warehouse credit  facilities                                             |       | (480,604 | )          | (272,292 | )          |
| Term notes                                                               |       | (79,062  | )          | (101,432 | )          |
| Proceeds from  the issuance of common stock                              |       | 184      |       | 107      |       |
| Excess tax  benefits from share-based payment arrangements               |       | —   |       | 23       |       |
| Net cash  provided by financing activities                               |       | 140,424  |       | 112,824  |       |
| Increase/(Decrease) in  Cash and Short-Term Investments                  |       | 1,760    |       | (1,620   | )          |
| Cash and Short-Term  Investments at Beginning of Period                  |       | 2,413    |       | 3,380    |       |
| Cash and Short-Term  Investments at End of Period                        |       | $        | 4,173      |     | $          | 1,760 |   |
| Supplemental  Disclosures of Cash Flow Information:                      |       |     |       |     |       |
| Cash paid during  the period for—                                   |       |     |       |     |       |
| Interest                                                                 |       | $        | 9,715      |     | $          | 15,652 |   |
| Income taxes                                                             |       | 32       |       | 1,512    |       |

 

The accompanying notes are an integral part of theseconsolidated condensed financial statements

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##### **FIRST INVESTORS FINANCIAL SERVICES GROUP,INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

##### **(Dollars in thousands, except per share data)**

**January 31, 2007**

**1.****               The Company**

*Organization.*  First Investors Financial Services Group,Inc. (First Investors) was established to serve as a holding company for FirstInvestors Financial Services, Inc. (FIFS) and FIFS’s wholly-owned subsidiaries,First Investors Insurance Company (FIIC), First Investors Auto ReceivablesCorporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors ServicingCorporation (FISC), FIFS Acquisition Funding Corp. LLC, Farragut FinancialCorporation, and First Investors Auto Funding Corporation. First Investors,together with its wholly- and majority-owned subsidiaries, is hereinafterreferred to as the Company.

FIFSbegan operations in May 1989 and is principally involved in the business oforiginating and holding for investment retail installment contracts andpromissory notes secured by new and used automobiles originated by factoryauthorized franchised dealers or directly through consumers. As of January 31,2007, approximately 33% and 14% of receivables held for investment had beenoriginated in Texas and Georgia, respectively. The Company currently operates in 28 states.

FIICwas organized under the captive insurance company laws of the state of Vermontfor the purpose of reinsuring certain credit enhancement insurance policiesthat have been written by unrelated third party insurance companies.

OnOctober 2, 1998, the Company completed the acquisition of FISC and theoperations of FISC are included in the consolidated results of the Companysince the date of acquisition. Headquartered in Atlanta, Georgia, FISCperformed servicing and collection activities on a portfolio of receivablesoriginated for investment as well as on a portfolio of receivables originatedand sold pursuant to two asset securitizations. As a result of the acquisition,the Company increased the total dollar value on its balance sheet of receivables,acquired an interest in certain trust certificates related to the assetsecuritizations and acquired certain servicing rights along with furniture,fixtures, equipment and technology to perform the servicing and collectionfunctions for the portfolio of receivables under management.

OnAugust 8, 2000, the Company entered into a partnership agreement whereby asubsidiary of the Company was the general partner owning 70% of the partnershipinterests and First Union Investors, Inc. served as the limited partner andowned 30% of the partnership interests. On September 19, 2003, First Investors Financial Services, Inc.purchased the limited partnership interests previously held by First UnionInvestors, Inc.  The Partnership consistsprimarily of a portfolio of loans previously owned or securitized by FISC andcertain other financial assets including charged-off accounts owned by FISC.

OnDecember 24, 2002, the Company purchased 40% of the common stock and aninvestment in the junior mezzanine debt of First Auto Receivables Corporation (“FARC”).  FARC purchased an approximately $197,500portfolio of installment loan receivables from a subsidiary of Union AcceptanceCorporation.  FISC performs ongoingservicing and collection activities on the portfolio.

OnMarch 19, 2003, FISC entered into a servicing agreement with an unrelated thirdparty to service an approximately $300,000 portfolio of installment loanreceivables purchased from a subsidiary of Union Acceptance Corporation.

Intotal, at January 31, 2007, FISC performs servicing and collection functions ona managed receivables portfolio of approximately $532,193.

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**2.****                InterimFinancial Information**

*Basis ofPresentation*.  Theconsolidated financial statements include the accounts of First Investors andits wholly-owned and majority-owned subsidiaries. All intercompany accounts andtransactions have been eliminated. Investments in which the Company exercisessignificant influence, but which it does not control (generally a 20% to 50%ownership interest), are accounted for under the equity method of accounting,except for variable interest entities for which the Company is considered theprimary beneficiary under Financial Accounting Standards Board (“FASB”)Interpretation No. 46, *Consolidation of VariableInterest Entities, an interpretation of ARB No. 51*, as amended inDecember 2003 by Interpretation 46R.  Asof January 31, 2007, the Company does not have any variable interest entitiesunder FIN 46 as amended by Interpretation 46R.

Theresults for the interim periods are not necessarily indicative of the resultsof operations that may be expected for the fiscal year. In the opinion ofmanagement, the information furnished reflects all adjustments which are of anormal recurring nature and are necessary for a fair presentation of theCompany’s financial

position as of January 31, 2007, and the results ofits operations for the three and nine months ended January 31, 2007 and 2006,and its cash flows for the nine months ended January 31, 2007 and 2006.

The consolidated financial statements for the interim periods have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations, although the Company believesthat the disclosures are adequate to make the information not misleading. Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements included in the Company’s 2006 Annual Reporton Form 10-K filed July 27, 2006.

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers.  The Company accruesinterest income monthly using the effective interest method.  When a receivable becomes 90 days past due,the income accrual is suspended until the payments become current. When a loanis charged off or the collateral is repossessed, the remaining income accrualis written off.

*Other Income*.  Other Income consists of income received fromservicing activities, other finance charges and fees, income from investments,reinvestment revenue, income earned from the sale of GAP insurance and extendedservice contracts, and realized loss on interest rate derivativepositions.  Servicing revenue is accruedas services are rendered. Late fees and other loan-related fees are recognizedwhen received.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Income from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

*Allowance for Credit Losses*.  The Company calculates theallowance for credit losses in accordance with SFAS No. 5*, Accountingfor Contingencies.*   SFAS No.114, *Accounting by Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they comprise alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

The Company initiatesefforts to make customer contact as early as when the customer is one day pastdue and become more aggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.   Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile 

8

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lessselling related expenses.  Aftercollection of all proceeds, the Company records an adjustment, positive ornegative, based on the difference between the fair value estimate and theproceeds received.  In the event thecollateral cannot be located or if the customer refuses to pay and is notsubject to bankruptcy court protection, the Company will write off the entirebalance of the loan once it reaches 180 days past due.  If the customer is subject to bankruptcycourt protection, the loan generally remains in bankruptcy status as long aspayments are being received from the trustee. If a payment is missed, the Company seeks to repossess the collateralwith approval of the court.  If the customeris dismissed from bankruptcy, the Company resumes collection efforts.

The Company applies a systematic methodology in order to determine theamount of the allowance for credit losses. The specific methodology is a six-month migration analysis whereby theCompany compares the aging status of each loan on a date which is six monthsprior to the reporting date, to the aging status of the loan as of thereporting date.  These factors are thenapplied to the aging status of each loan at the reporting date in order tocalculate the number of loans that are expected to migrate to impairedstatus.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective forthe quarter ended April 30, 2005, the Company elected to increase its allowancefor loan losses against loans that were greater than 120 days past due andloans in which the collateral had been assigned for repossession but had notyet been repossessed as of the reporting date. The Company believes that this increase is warranted in light of the changein federal bankruptcy laws enacted during the period and the recognition thatthe migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowancefor credit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, they are reported in earnings in theperiod they become known.

*Stock-Based Compensation*.  The Company expensesstock-based compensation expense in accordance with  SFAS No. 123(R), *Share-BasedPayment - a revision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”) (see note 8).

*Reclassifications*.Certain reclassifications have been made to the fiscal 2006 amounts to conformto the fiscal 2007 presentation.

**3.     Receivables Held for Investment**

The receivablesgenerally have terms between 48 and 72 months and are collateralized by theunderlying vehicles.  Net receivablebalances consisted of the following at April 30, 2006 and January 31, 2007:
| ** **                                | ** ** | **April 30,** | ** ** | **January 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**           | ** ** | **2007**             | ** ** |
| Receivables                               |       | $                  | 368,878    |                 | $          | 470,545 |   |
| Unamortized premium and deferred fees (1) |       | 10,853             |       | 12,909               |       |
| Allowance for credit losses               |       | (2,332             | )          | (2,990               | )          |
| Net receivables                           |       | $                  | 377,399    |                 | $          | 480,464 |   |

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(1)             Includespremium and discounts paid to dealer plus deferred acquisition cost.

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Activityin the allowance for credit losses for the periods ended January 31, 2006 and2007 was as follows:
| ** **                     | ** ** | **For the Nine Months** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **Ended January 31,**        | ** ** |
| ** **                     | ** ** | **2006**                               | ** ** | **2007** | ** ** |
| Balance, beginning of period   |       | $                                      | 2,249      |   | $ | 2,332 |   |
| Provision for credit losses    |       | 5,538                                  |       | 8,431 |   |
| Charge-offs, net of recoveries |       | (5,560                                 | )          | (7,773 | ) |
| Balance, end of  period        |       | $                                      | 2,227      |   | $ | 2,990 |   |

 

**4.     Debt**

The Company finances its loan origination through two warehouse creditfacilities. The Company’s credit facilities provide for one-year terms and havebeen renewed annually. Management of the Company believes that the credit facilitieswill continue to be renewed or extended or that it would be able to securealternate financing on satisfactory terms; however, there can be no assurancethat it will be able to do so.  InNovember 2003, the Company issued $139,661 of asset-backed notes (“Term Notes”)secured by a discrete pool of receivables. In May 2005, the Company issued $175,493 in Term Notes secured by adiscrete pool of receivables.  In January2006, the Company issued $189,060 in Term Notes secured by a discrete pool ofreceivables.  Substantially allreceivables retained by the Company are pledged as collateral for the creditfacilities and the Term Notes. The weighted average interest rate for theCompany’s secured borrowings, including the effect of program fees and dealerfees, was 4.4% and 5.2% for the periods ended January 31, 2006 and 2007,respectively.

*WarehouseFacilities as of January 31, 2007*
|              | ** ** | ** **   | ** ** | ** **      | ** ** | ** **                                                                                             | ** ** | ** **               | ** ** | ** **    | ** ** | Borrowing            |
|--------------|------------|--------------|------------|-----------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------|------------|----------------------|
| ** **   | ** ** | ** **   | ** ** | ** **      | ** ** | ** **                                                                                             | ** ** | ** **               | ** ** | ** **    | ** ** | **Rate At**     |
| ** **   | ** ** | ** **   | ** ** | ** **      | ** ** | ** **                                                                                             | ** ** | ** **               | ** ** | ** **    | ** ** | **January 31,** |
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate**                                                                                 | ** ** | **Fees**                 | ** ** | **Insurance** | ** ** | **2007**             |
| FIARC        |       | $300,000     |       | $210,865        |       | Commercial paper  rate plus .3%                                                                        |       | 30% of Unused  Facility  |       | None          |       | 5.3%                 |
| FIRC         |       | $50,000      |       | $42,511         |       | Option of a)  Base Rate, which is the higher of prime rate or fed funds plus .5% or b)  LIBOR plus .5% |       | .25% of Unused  Facility |       | See below     |       | 5.8%                 |

 

*WarehouseFacilities — Credit Enhancement as of January 31, 2007*
| Facility | ** ** | **Cash Reserve**               | ** ** | **Advance Rate** | ** ** | **Insurance**             |
|----------|------------|--------------------------------|------------|------------------|------------|---------------------------|
| FIARC    |       | 1% of  outstanding receivables |       | 94%              |       | None                      |
| FIRC     |       | 1% of borrowings               |       | 100%             |       | Default  Insurance (ALPI) |

 

FIRC - In order to obtain a lower cost offunding, the Company has agreed to maintain credit enhancement insurancecovering the receivables pledged as collateral under the FIRC credit facility.The facility lenders, collectively, are named as additional insureds under thispolicy. The coverage is obtained on each receivable at the time it is purchasedby the Company and the applicable premiums are prepaid for the life of thereceivable. The insurance enhancing this facility is default insurance under astandard auto loan protection policy (known as “ALPI” insurance) which coversthe difference between the outstanding balance of a receivable and theliquidation proceeds in the event the underlying collateral is repossessed.Solely at its expense, the Company 

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carriesthis coverage.  Neither the vehiclepurchasers nor the dealers are charged for the coverage and they are unaware ofits existence. The Company’s ALPI insurance policy is written by National UnionFire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

The premiums thatthe Company paid during the three months and nine months ended January 31, 2007for its  credit enhancement insurancecoverages, of which the largest component is basic ALPI insurance, representedapproximately 0.4% and 1.2%, respectively, of the principal amount of thereceivables originated during the periods. Aggregate premiums paid for ALPIcoverage alone were $585 and $359 during the three months ended, and $3,769 and$2,211 during the nine months ended, January 31, 2006 and 2007, respectively,and accounted for 1.2% and 0.4% during the three months ended, and 1.6% and0.9% for the nine months ended, January 31, 2006 and 2007, respectively, of theprincipal amount of the receivables originated during such periods.

In April 1994, the Company organized First Investors Insurance Company(the “Insurance Subsidiary”) under the captive insurance company laws of theState of Vermont. The Insurance Subsidiary is an indirect wholly-ownedsubsidiary of the Company and is a party to a reinsurance agreement whereby theInsurance Subsidiary reinsures 100% of the risk under the Company’s ALPIinsurance policy. At the time each receivable is insured by National Union, therisk is automatically reinsured to its full extent and approximately 96% of thepremium paid by the Company to National Union with respect to such receivableis ceded to the Insurance Subsidiary. When a loss covered by the ALPI policyoccurs, National Union pays it after the claim is processed, and National Unionis then reimbursed in full by the Insurance Subsidiary.  In addition to the monthly premiums and liquidityreserves of the Insurance Subsidiary, a trust account is maintained by NationalUnion to secure the Insurance Subsidiary’s obligations for losses it hasreinsured.

The result of the foregoing reinsurance structure is that NationalUnion, as the “fronting” insurer under the captive arrangement, isunconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofJanuary 31, 2007, the Insurance Subsidiary had capital and surplus of $2,270and unencumbered cash reserves of $621 in addition to the $3,297 trust account.

The ALPI coverage, as well as the Insurance Subsidiary’s liabilityunder the Reinsurance Agreement, remains in effect for each receivable that ispledged as collateral under the warehouse credit facility. Once receivables aretransferred from FIRC to FIARC and financed under the commercial paperfacility, ALPI coverage and the Insurance Subsidiary’s liability under theReinsurance Agreement is cancelled with respect to the transferred receivables.Any unearned premium associated with the transferred receivables is returned tothe Company. The Company believes the losses its Insurance Subsidiary will berequired to indemnify will be less than the premiums ceded to it. However,there can be no assurance that losses will not exceed the premiums ceded andthe capital and surplus of the Insurance Subsidiary.

FIARC —Credit enhancement for the FIARC warehouse facility is provided to thecommercial paper investors by a 6% overcollaterization and a cash reserveaccount equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, or otherwisea party to, such commercial paper.

*WarehouseFacilities — Agents and Expirations*
| Facility | ** ** | **Agent** | ** ** | **Expiration**     | ** ** | **Event if not  Renewed**                                                                                                                                                                |
|----------|------------|-----------|------------|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC    |       | Wachovia  |       | February 13,  2008 |       | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility.                                                     |
| FIRC     |       | Wachovia  |       | February 13,  2008 |       | The loan would  convert to a term loan which would mature six months thereafter and amortize  monthly in accordance with the borrowing base with the remaining balance due  at maturity. |

 

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On February 15, 2006, the FIRC facility was renewed,under similar terms and conditions, at the $50,000 commitment level untilFebruary 13, 2007.  On February 14, 2007,the FIRC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2006 and January31, 2007, there was $47,080 and $42,511, respectively, outstanding.

OnMarch 15, 2006, following a short-term extension of the then current maturitydate, the FIARC facility was renewed to February 14, 2007.  In connection with the renewal, the Companyobtained approval from the lender to eliminate the requirement that a suretybond be maintained to provide additional enhancement to the commercial paperinvestors as well as eliminating the requirement to purchase interest ratecaps.  As a result, the 0.35% surety bondpremium and the 0.25% unused surety bond premium were eliminated.  In exchange, the Company agreed to increasethe program fee paid to the lender from 0.30% to 0.55% and to increase theunused fee paid to the lender from 0.25% to 0.30%.  On October 11, 2006, the Company amended thefacility to increase the commitment from $150,000 to $300,000 in order to fundthe growth in origination volume.  OnFebruary 14, 2007, the maturity date of the FIARC facility was extended to itscurrent maturity date of February 13, 2008. As of April 30, 2006 and January 31, 2007, there was $0 and $210,865,respectively, outstanding.

Management presently intends to seek further extensions to thesewarehouse facilities prior to the current expiration dates.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that the FIRC andFIARC facilities will not be renewed at each of their respective expirationdates.

Thefollowing table contains pertinent information on the Term Notes as of January31, 2007.

 
| ** **          | ** ** | ** **             | ** ** | **Issuance** | ** ** | ** **             | ** **        | ** **      | ** ** | **Interest** |
|---------------------|------------|------------------------|------------|--------------|------------|------------------------|-------------------|-----------------|------------|--------------|
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Amount**   | ** ** | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Rate**     |
| 2003-A              |       | November 11, 2003      |       | $            | 139,661    |                   | April 20, 2011    |            | $          | 22,180       |   | 2.58 | % |
| 2005-A Class 2      |       | May 5, 2005            |       | $            | 106,493    |                   | July 16, 2012     |            | $          | 68,855       |   | 4.23 | % |
| 2006-A Class 2      |       | January 26, 2006       |       | $            | 47,000     |                   | March 16, 2009    |            | $          | 14,058       |   | 4.87 | % |
| 2006-A Class 3      |       | January 26, 2006       |       | $            | 74,000     |                   | February 15, 2011 |            | $          | 74,000       |   | 4.93 | % |
| 2006-A Class 4      |       | January 26, 2006       |       | $            | 36,060     |                   | April 15, 2013    |            | $          | 36,060       |   | 5.00 | % |

 

Creditenhancement on the Term Notes are as follows:
| **Facility** | ** ** | **Cash Reserve**                                                                                      | ** ** | **Advance Rate**                             | ** ** | **Insurance** |
|--------------|------------|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------|
| 2003-A       |       | 0.5% of Initial  Pool Balance, increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 96.5% initial  advance, decreasing to 96.1%  |       | Surety Bond   |
| 2005-A       |       | 1.0% of Initial  Pool Balance, increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 97.0% initial  advance, decreasing to 95.75% |       | Surety Bond   |
| 2006-A       |       | 1.0% of Initial  Pool Balance, increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 98.5% initial  advance, decreasing to 96.75% |       | Surety Bond   |

 

Term Notes - On November 20, 2003, the Company, throughits indirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2003-A(“2003 Auto Trust”), completed the issuance of $139,661 of 2.58% Class A 

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asset-backednotes (“2003-A Term Notes”). The initial pool of automobile receivablestransferred to the 2003 Auto Trust totaled $114,727, which was previously ownedby FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued a $5,066 Class B Note that was retainedby the Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $139,657, were used to (i) fund a $30,000 pre-fundingaccount to be used for future loan originations, (ii) repay all outstandingborrowings under the FIARC commercial paper facility, (iii) reduce theoutstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2003-A Term Note issuance, and (v) fund an initial cashreserve account of 0.5%, or $574, of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  As of April 30, 2006, and January 31, 2007,the outstanding principal balances on the 2003-A Term Notes were $37,715 and$22,180, respectively.

On May 5, 2005, the Company, through its indirect, wholly-ownedsubsidiary, First Investors Auto Owner Trust 2005-A (“2005 Auto Trust”),completed the issuance of $69,000 of 3.57% Class A-1 asset-backed notes and$106,493 of 4.23% Class A-2 asset-backed notes (collectively “2005-A Term Notes”),for a total of $175,493 of asset backed notes. The initial pool of automobilereceivables transferred to the 2005 Auto Trust totaled $150,921, was previouslyowned by FIRC and FIARC, and secures the 2005-A Term Notes.  In addition to the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued a $5,428 Class B Note thatwas retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $175,488, were used to (i) fund a $30,000pre-funding account to be used for future loan originations, (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2005-A Term Note issuance, and (v) fund an initial cashreserve account of 1%, or $1,509, of the initial receivables pledged.  The Class A-1 and Class A-2 Term Notes bearinterest at 3.57% and 4.23%, respectively, and require monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 95.75%of the outstanding balance of the underlying receivables pool. The Class A-1Notes were paid off during the fiscal year ended April 30, 2006.  The final maturity of the Class A-2 TermNotes is July 16, 2012.  The Class B Notedoes not bear interest but requires principal reductions sufficient to reducethe balance of the Class B Note to 4.25% of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  In the event that certainasset quality covenants are not met, the reserve account target level willincrease to 2% of the then current principal balance of the receivablespool.  As of April 30, 2006 and January31, 2007, the outstanding principal balances on the 2005-A Term Notes were$106,162 and $68,855, respectively.

On January 26, 2006, theCompany, through its indirect, wholly-owned subsidiary, First Investors AutoOwner Trust 2006-A (“2006 Auto Trust”), completed the issuance of $32,000 of4.57% Class A-1 asset-backed notes, $47,000 of 4.87% Class A-2 asset-backednotes, $74,000 of 4.93% Class A-3 asset-backed notes, and $36,060 of 5.00%Class A-4 asset-backed notes (collectively “2006-A Term Notes”), for a total of$189,060 of asset backed notes. The initial pool of automobile receivablestransferred to the 2006 Auto Trust totaled $151,939, was previously owned byFIRC and FIARC, and secures the 2006-A Term Notes.  In addition to the issuance of the Class A-1,Class A-2, Class A-3, and Class A-4 Notes, the 2006 Auto Trust also issued a$2,879 Class B Note that was retained by the Company and pledged to secure theWorking Capital Facility as further described below.  Proceeds from the issuance, which totaled$188,446, were used to (i) fund a $40,000 pre-funding account to be used forfuture loan originations, (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2006-A Term Noteissuance, and (v) fund an initial cash reserve account of 1% or $1,519 of theinitial receivables pledged.  The 2006-ATerm Notes require monthly principal reductions sufficient to reduce the 

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balanceof the notes to 96.75% of the outstanding balance of the underlying receivablespool. The Class A-1 notes were paid off during the quarter ended July 31,2006.  The final maturities of the ClassA-2, Class A-3, and Class A-4 Term Notes are March 16, 2009, February 15, 2011,and April 15, 2013, respectively.  TheClass B Note does not bear interest but requires principal reductionssufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2006 and January 31, 2007, the outstanding principal balances on the2006-A Class A Term Notes were $172,708 and $124,118, respectively.

*Working Capital Facility*.  The facility is provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities and the existing and future term notefacilities.  The outstanding borrowingsunder the facility bear interest at one-month LIBOR plus 2.25%.  In addition, a commitment fee of 1.5% is paidon the total amount of this facility.  OnOctober 26, 2004, the Working Capital Facility was extended until October 10,2005, increasing the commitment amount from $9,000 to $13,500.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23,500, and was subsequently extended onFebruary 15, 2006 until February 14, 2007. The interest rate remained at LIBOR plus 2.25% and the commitment feepaid on the total available amount of the facility was maintained at 1.5%.  On November 7, 2006, the Company amended thefacility to increase the commitment amount from $23,500 to $28,500.  On February 14, 2007, the working capitalfacility was extended to its current maturity date of February 13, 2008, undersimilar terms and conditions.  As ofApril 30, 2006 and January 31, 2007, there was $16,454 and $24,283,respectively, outstanding under this facility.

TheCompany presently intends to seek a renewal of the working capital facilityfrom its lender prior to maturity. Should the facility not be renewed, the outstanding balance of thereceivables would be amortized in accordance with the borrowing base.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001, the Company entered intoan agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to$2,500.  On December 6, 2004, theoriginal $2,500 shareholder loan was replaced with a $2,500 loan containingidentical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors  The proceeds of the borrowingshave been utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder this facility as of April 30, 2006 and January 31, 2007.  For the three and nine months ended January31, 2006 and January 31, 2007, the Company recorded interest expense underthese facilities of $63 and $189, respectively.

*Loan Covenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company 

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wasnot in default with respect to any financial and non-financial covenantsgoverning these financing arrangements at January 31, 2007.

*Interest Rate Management*.  The Company’s warehouse creditfacilities and working capital facilities bear interest at floating interestrates which are reset on a short-term basis while the secured Term Notes bearinterest at a fixed rate of interest. The Company’s receivables bear interestat fixed rates that do not generally vary with a change in market interestrates. Since a primary contributor to the Company’s profitability is itsability to manage its net interest spread, the Company seeks to maximize thenet interest spread while minimizing exposure to changes in interest rates. Inconnection with managing the net interest spread, the Company may periodicallyenter into interest rate swaps or caps to minimize the effects of marketinterest rate fluctuations on the net interest spread. To the extent that theCompany has outstanding floating rate borrowings or has elected to convert aportion of its borrowings from fixed rates to floating rates, the Company willbe exposed to fluctuations in short-term interest rates.

On July 18, 2005, as a requirement of the FIARCcommercial paper facility, the Company entered into an interest rate captransaction, with a strike rate of 6%. The aggregate initial notional amount of the cap was $18,804 whichamortizes over six years.  The Companypaid $59 in premium to purchase this cap. The interest rate cap was not designated as a hedge, and accordingly,changes in the fair value of the interest rate caps were recorded as anunrealized loss and are reflected in net income.  During the three and nine months endedJanuary 31, 2006, the Company recorded realized losses of $195 and $175,respectively, that are included as a separate line under other income.  This requirement was eliminated as part of thefacility’s renewal.

**5.     Earnings Per Share**

Earnings per share amounts are based on the weighted average number ofshares of common stock and potential dilutive common shares outstanding duringthe period. The weighted average number of shares used to compute basic anddiluted earnings per share for the three and nine months ended January 31, 2006and 2007 are as follows:
| ** **                                                          | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **January 31,**                               | ** ** | **January 31,**                              | ** ** |
| ** **                                                          | ** ** | **2006**                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Weighted average shares:                                            |       |                                               |       |                                              |       |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share   |       | 4,451,693                                          |       | 4,477,694                                         |       | 4,433,963 |   | 4,469,708 |   |
| Effect of dilutive  stock options and warrants                      |       | 294,587                                            |       | 293,426                                           |       | 181,512 |   | 318,378 |   |
| Weighted average shares outstanding for diluted  earnings per share |       | 4,746,280                                          |       | 4,771,120                                         |       | 4,615,475 |   | 4,788,086 |   |

 

Forthe three and nine months ended January 31, 2006 and 2007, the Company had63,500 and 291,000 stock options and stock warrants, respectively, which werenot included in the computation of diluted income per share because to do sowould have been antidilutive for the period presented.

**6.     Investment in First Auto Receivables Corporation**

On December 24, 2002, the Company invested $475 for a40% ownership interest in First Auto Receivables Corporation (“FARC”) and $713for junior mezzanine investments of FARC. FARC purchased a $197,500 automobile loan portfolio from UAFC-2Corporation, a subsidiary of Union Acceptance Corporation, with proceeds from$186,000 in senior bridge debt, $8,900 of senior mezzanine debt, $1,800 ofjunior mezzanine debt and $1,200 of equity.  The bridge debt interest rate is LIBOR plus 1%, the senior mezzanineinterest rate is 22.5% and the junior mezzanine interest rate is 25%.

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The Company accounts for its ownership investment inFARC using the equity method in accordance with APB Opinion 18.  In addition to the equity and debtinvestments, the Company performs loan servicing and collection activities onthe portfolio.  The Company recognizedservicing revenue of $122 and $67 for the three months ended, and $423 and $244for the nine months ended, January 31, 2006 and 2007, respectively, interestincome of $21 and $0 for the three months ended, and $76 and $9 for the ninemonths ended, January 31, 2006 and 2007, respectively, and equity in earningsin FARC of $96 and $281 for the three months ended, and $333 and $667 for thenine months ended, January 31, 2006 and 2007, respectively.  As of April 30, 2006 the equity investment inFARC of $873 and junior mezzanine debt of $80 and as of January 31, 2007, theequity investment in FARC of $1,086 and junior mezzanine debt of $0 areincluded in Deferred Financing Costs and Other Assets on the balance sheet.

**7.   New Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB Statement No. 109* (“FIN 48”),which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financialstatements the impact of a tax position if that position is more likely thannot of being overturned on audit, based on the technical merits of the position.The provisions of FIN 48 are effective for the Company on May 1,2007, with the cumulative effect of the change in accounting principle, if any,recorded as an adjustment to opening retained earnings.  The Company iscurrently evaluating the impact of adopting FIN 48 on its financialposition, cash flows, and results of operations.

In February 2006, the FASB issued SFASNo. 155, *Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140* (“SFAS155”). This statement amends SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFAS 133”), andSFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities*and resolves issues addressed in SFAS 133 Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interest in SecuritizedFinancial Assets*. This Statement: (a) permits fair valueremeasurement for any hybrid financial instrument that contains an embeddedderivative that otherwise would require bifurcation; (b) clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS 133; (c) establishes a requirement to evaluatebeneficial interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and, (e) eliminates restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain aderivative financial instrument. The standard also requires presentation withinthe financial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS 155 to all financial instruments acquired, issued orsubject to a remeasurement event beginning May 1, 2007.  The provisions of SFAS 155 are not expectedto have a financial statement impact at adoption; however, the standard couldaffect the future income recognition for securitized financial assets becausethere may be more embedded derivatives identified with changes in fair valuerecognized in net income.

InMarch 2006, the FASB issued SFAS No. 156, *Accountingfor Servicing of Financial Assets — an amendment of FASB Statement No. 140*(“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in specific situations. Additionally,the servicing asset or servicing liability shall be initially measured at fairvalue, if practicable. SFAS 156 permits an entity to choose either theamortization method or fair value measurement method for subsequent measurementof the servicing asset or servicing liability. SFAS 156 is effective for thefiscal year ending April 30, 2008. The Company is currently evaluating theimpact of adopting SFAS 156 on its financial position, cash flows, andresults of operations; however it is not expected to have a material impact onour consolidated financial position, results of operations or cash flows.

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In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements* (“SAB 108”). SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current year misstatement.Under this bulletin, registrants should quantify errors using both a balancesheet and an income statement approach and evaluate whether either approachresults in quantifying a misstatement that, when all relevant quantitative andqualitative factors are considered, is material. SAB 108 is effective for thefiscal year ending April 30, 2007.  TheCompany is currently evaluating the impact of adopting SAB 108 on its financialposition, cash flows, and results of operations.

**8.     Shareholders’ Equity**

*PreferredStock.  The Company has authorized1,000,000 shares of preferred stock with a $1.00 par value.  As of January 31, 2007, no shares had beenissued.*

*Employee**Stock OptionPlan*. In June 1995, the Board of Directors adopted the Company’s1995 Employee Stock Option Plan (the Plan). The Plan is administered by theCompensation Committee of the Board of Directors and provides that options maybe granted to officers and other key employees for the purchase of up to300,000 shares of common stock, subject to adjustment in the event of certainchanges in capitalization. On September 10, 2002, the number of shares ofcommon stock available for issuance was increased to 500,000. Options may begranted either as incentive stock options (which are intended to qualify forcertain favorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. In the case of optionsintended to be incentive stock options, the exercise price may not be less than100% of the fair market value per share of common stock on the date of grant.With respect to non-qualified stock options, the exercise price may be fixed aslow as 50% of the fair market value per share at the time of grant. In no eventmay the duration of an option exceed 10 years and no option may be grantedafter the expiration of 10 years from the adoption of the Plan. As of April 30,2006 and January 31, 2007, a total of 360,500 options had been issued, and294,500 and 278,500, respectively, options remained outstanding. This planexpired on June 27, 2005.

On September 8, 2005, the shareholders approved theCompany’s 2005 Employee Stock Option Plan (the 2005 Plan).  The 2005 Plan is administered by theCompensation Committee of the Board of Directors and provides that options maybe granted to officers and other key employees for the purchase of up to200,000 shares of common stock, which was subsequently amended on September 6,2006, increasing the number of available shares to 400,000, subject toadjustment in the event of certain changes in capitalization. Options may begranted either as incentive stock options (which are intended to qualify forcertain favorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. The exercise price maynot be less than 100% of the fair market value per share of common stock on thedate of grant, and in no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan.  As of April 30, 2006 andJanuary 31, 2007, a total of 102,500 and 197,500, respectively, options hadbeen issued and remained outstanding, leaving a remaining 97,500 and 202,500,respectively, available for issuance.

The exercise price of the option is payable in cashupon exercise. At the discretion of the Compensation Committee, options may beissued in tandem with stock appreciation rights entitling the option holder toreceive an amount in cash or in shares of common stock, or a combinationthereof, equal in value to any increase since the date of grant in the fairmarket value of the common stock covered by the option.

*Non-Employee Director StockOption Plan* - In September 2002, the Non-EmployeeDirector Stock Option Plan was established to further align the interests ofthe Company’s directors with the interests of the shareholders, as well asattracting and retaining qualified directors.  This plan was subsequently amended in July 2006 to increase the numberof options available for issuance to 900,000. The Board of Directors administers the 

17

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plan and the options will not bequalified as incentive stock options. Option types will be automatic and discretionary.   Automatic grants of 28,000 shares for eachnon-employee director, or 140,000 shares total, were approved in July2006.  Subsequent automatic grants of anoption to purchase 28,000 shares shall be made to each non-employee director onJuly 15th each year, beginning July 15, 2007. The planalso gives the Board of Directors discretionary authority to provide foradditional option grants if the Company’s annual financial performance exceedsparameters established by the Board.  Nodiscretionary grants have been awarded. As of April 30, 2006 and January 31, 2007, a total of 490,000 and630,000, respectively, options had been issued under the plan, leaving aremaining 10,000 and 270,000, respectively, available for issuance.  In addition to the options granted above,there were an additional 20,000 options granted to a director in 1995, beforethe adoption of the Non-Employee Director Stock Option Plan.  All options issued under this plan wereissued with an exercise price equal to the fair market value of the underlyingcommon stock on the date of the grant.

Effective May 1, 2006, the Company adopted theprovisions of SFAS No. 123(R) for its share-based compensation plans. TheCompany previously accounted for these plans under the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,(“APB 25”) and related interpretations and disclosure requirements establishedby Statement of Financial Accounting Standards No. 123,*  Accountingfor Stock-based Compensation*, (“SFAS No. 123”), as amended bySFAS No. 148,*  Accounting for Stock BasedCompensation—Transition and Disclosure.*

Under APB 25, no compensation expense was recorded inearnings for the Company’s stock-based options granted under the Company’s 1995Employee Stock Option Plan, 2005 Employee Stock Option Plan, and Non-Employee DirectorStock Option Plan (the “Plans”). The pro forma effects on net income and incomeper share for the awards issued under the Plans were instead disclosed in afootnote to the financial statements. Under SFAS No. 123(R), allshare-based compensation is measured at the grant date, based on the fair valueof the award, and is recognized as an expense in earnings over the requisiteservice period.

The Company adopted SFAS No. 123(R) using themodified prospective method. Under this transition method, for all share-basedawards granted prior to May 1, 2006 that remain outstanding as of thatdate, compensation cost is recognized for the unvested portion over theremaining requisite service period, using the grant-date fair value measuredunder the original provisions of SFAS No. 123 for pro forma disclosurepurposes. Furthermore, compensation costs will also be recognized for anyawards issued, modified, repurchased, or canceled after May 1, 2006.

The Company utilizes the Black-Scholes-Merton modelfor calculating the fair value pro forma disclosures under SFAS No. 123,which is an acceptable valuation approach under SFAS No. 123(R).

The following table summarizes the option-pricingmodel assumptions used to compute the weighted average fair value of stock optionsgranted during the periods below that remain outstanding as of January 31,2007:
| ** **                                      | ** ** | **For the Nine Months Ended January 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                                | ** ** | **2007** | ** ** |
| Dividend yield                                  |       | —                                                                  |       | — |   |
| Expected volatility                             |       | 19.34                                                                   | %          | 26.44 | % |
| Risk-free interest rate                         |       | 3.93                                                                    | %          | 5.02 | % |
| Estimated life (in years)                       |       | 4                                                                       |       | 6 |   |
| Weighted  average fair-value of options granted |       | $                                                                       | 1.13       |   | $ | 3.06 |   |
|                                                 |            |                                                                         |            |  |  |  |  |

 

18

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Thefollowing table summarizes the option activity under the Plans as of January31, 2007, and the options exercisable at the end of the reported period:
| ** **                                    | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding options, beginning of period      |       | 867         |       | $                                              | 4.72       |                                                        |       |                                |       |   |
| Granted                                       |       | 237         |       | $                                              | 8.05       |                                                        |       |                                |       |   |
| Forfeited and Expired                         |       | (15         | )          | $                                              | 8.97       |                                                        |       |                                |       |   |
| Exercised                                     |       | (23         | )          | $                                              | 4.56       |                                                        |       |                                |       |   |
| Outstanding  options, end of period           |       | 1,066       |       | $                                              | 5.40       |                                                        | 7.2        |                                | $          | 2,199 |   |
|                                          |       |        |       |                                           |       |                                                        |       |                                |       |
| Exercisable at  end of period                 |       | 572         |       | $                                              | 4.61       |                                                        | 5.8        |                                | $          | 1,563 |   |
| Vested and  expected to vest at end of period |       | 1,023       |       | $                                              | 5.40       |                                                        | 7.2        |                                | $          | 2,139 |   |

 

The total intrinsic value of options exercisedduring the nine months ended January 31, 2007 and 2006 was $79 and $61.  The total grant date fair value of stockoptions that became fully vested for the nine months ended January 31, 2007 wasapproximately $752.

Cash received from option exercises under all sharebased payment arrangements for the nine months ended January 31, 2007 and 2006was $107 and $145, respectively.  Theestimated tax benefit expected to be realized for the nine months ended January31, 2007 and 2006 is $23 and $0, respectively.

A summary of the status of the Company’s nonvestedshares as of January 31, 2007, and changes during the nine months ended January31, 2007, is presented below:

|                                | **Nonvested Shares** | ** ** | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|--------------------------------|---------------------------|------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Nonvested at  April 30, 2006   |                      | 428        |       | $          | 1.78       |                                                        |
| Granted                        |                      | 237        |       | 3.06       |       |
| Vested                         |                      | (167       | )          | 1.22       |       |
| Forfeited                      |                      | (4         | )          | 5.59       |       |
| Nonvested at January  31, 2007 |                      | 494        |       | $          | 1.96       |                                                        |

 

As of January 31, 2007, there was $777 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Plans. The cost is expected to be recognized over a weighted average period of2.6 years.  The total fair value of sharesvested during the nine months ended January 31, 2007 and 2006 was $1,201 and$1,186, respectively.

SFAS No. 123(R) also requires the Company toestimate forfeitures in calculating the expense relating to stock-basedcompensation as opposed to accounting for forfeitures as they occur, as allowedby SFAS No. 123. The Company adjusted for this effect with respect tounvested options as of May 1, 2006 in the stock-based compensation expenserecognized, which was recorded within general and administrative expense on theCompany’s consolidated statement of earnings. This adjustment was not recordedas a cumulative effect adjustment because no compensation cost was recognizedprior to the adoption SFAS No. 123(R). In addition, SFAS No. 123(R)requires the Company to reflect the tax savings resulting from tax deductionsin excess of expense reflected in its financial statements as a financing cashflow rather than as an operating cash flow as in prior periods.

Total compensation costs related to stock-basedcompensation that have been charged against income during the three monthsended January 31, 2007 were $56, net of income tax benefits of $26.  Total compensation costs 

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related to stock-based compensation that have been charged againstincome during the nine months ended January 31, 2007 were $175, net of incometax benefits of $49.  Included in thistotal are $56 and $175 for the three and nine months ended January 31, 2007,respectively, resulting from the adoption of SFAS No. 123(R), which wouldhave previously been presented in a pro forma footnote disclosure, as discussedabove.

The following table illustrates the effect on netearnings and earnings per share as if the Company had applied the fair-valuerecognition provisions of SFAS No. 123(R) to all of its share-basedcompensation awards for periods prior to the adoption of SFAS No. 123(R),and the actual effect on net earnings and earnings per share for the periodsubsequent to the adoption of SFAS No. 123(R):
| ** **                                                                                                                                           | ** ** | **For the Three Months  Ended January 31,** | ** ** | **For the Nine Months  Ended January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2006**                                                             | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net Earnings, as reported                                                                                                                            |       | $                                                                    | 318        |                                                                | $          | 821 |   | $ | 2,008 |   | $ | 2,852 |   |
| Add: Total stock  option plan compensation expense included in the determination of reported  net earnings, net of taxes                             |       | —                                                               |       | 56                                                                  |       | — |   | 175 |   |
| Deduct: Total stock option plan compensation expense determined under  fair value based method for awards granted, modified or settled, net of taxes |       | (54                                                                  | )          | (56                                                                 | )          | (157 | ) | (175 | ) |
| Pro Forma Net Earnings                                                                                                                               |       | $                                                                    | 264        |                                                                | $          | 821 |   | $ | 1,851 |   | $ | 2,852 |   |
|                                                                                                                                                 |       |                                                                 |       |                                                                |       |   |   |   |   |
| Basic Net Earnings per Common Share, as reported                                                                                                     |       | $                                                                    | 0.07       |                                                                | $          | 0.18 |   | $ | 0.45 |   | $ | 0.64 |   |
| Diluted Net Earnings per Common Share, as reported                                                                                                   |       | $                                                                    | 0.07       |                                                                | $          | 0.17 |   | $ | 0.44 |   | $ | 0.60 |   |
| Basic Net Earnings per Common Share, pro forma                                                                                                       |       | $                                                                    | 0.06       |                                                                | $          | 0.18 |   | $ | 0.41 |   | $ | 0.64 |   |
| Diluted  Net Earnings per Common Share, pro forma                                                                                                    |       | $                                                                    | 0.06       |                                                                | $          | 0.17 |   | $ | 0.40 |   | $ | 0.60 |   |

 

**9.     Income Taxes**

The Company has recorded income tax expense as apercentage of income before taxes for the three and nine months ended:
| ** **                                           | ** ** | **For the Three Months  Ended January 31,** | ** ** | **For the Nine Months  Ended January 31,**  | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** |
| Income tax -  statutory rate                         |       | 34.0                                                                 | %          | 34.0                                                                 | %          | 34.0 | % | 34.0 | % |
| State income  tax, net of federal benefit            |       | 1.3                                                                  | %          | 1.4                                                                  | %          | 0.4 | % | 1.1 | % |
| Reversal of  uncertain tax position                  |       | —                                                               |       | —                                                               |       | — |   | (19.8 | )% |
| Non-deductible  (benefit) expenses                   |       | (1.6                                                                 | )%         | —                                                               |       | 1.8 | % | 0.4 | % |
| Benefit related  to the exercise of stock options    |       | (5.1                                                                 | )%         | —                                                               |       | (0.7 | )% | — |   |
| Year to date  impact of adjustment to federal return |       | (6.5                                                                 | )%         | (5.1                                                                 | )%         | (0.9 | )% | — |   |
| Year to date  impact of adjustment to state return   |       | —                                                               |       | (2.9                                                                 | )%         | — |   | — |   |
| Effective income  tax rate                           |       | 22.1                                                                 | %          | 27.4                                                                 | %          | 34.6 | % | 15.7 | % |

 

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**ITEM2.  *MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

##### **(Dollars in thousands, except per share data)**

**Critical Accounting Policies**

FinancialReporting Release No. 60, which was issued by the Securities and Exchange Commission(“SEC”), requires all registrants to discuss critical accounting policies ormethods used in the preparation of financial statements.  Note 2 to the consolidated condensedfinancial statements includes a summary of the significant accounting policiesand methods used in the preparation of the Company’s consolidated financialstatements.

Thepreparation of financial statements includes the use of estimates andassumptions that affect the reported amounts of assets and liabilities and thereported amounts of net revenues and expenses during the reporting periods. Thefollowing is a review of the more significant assumptions and estimates, aswell as the accounting policies and methods used in the preparation of theconsolidated financial statements.

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers, which includes the amortization of premiums ordiscounts associated with the loan originations.  The Company accrues interest income monthlyusing the effective interest method. When a receivable becomes 90 days past due, the income accrual issuspended until the payments become current. When a loan is charged off or thecollateral is repossessed, the remaining income accrual is written off.

*Other Income*. Other Income consists of income received from servicing activities, latefees and other loan-related fees, income from investments, reinvestmentrevenue, GAP insurance and extended service contracts, and unrealized loss oninterest rate derivative positions. Servicing revenue is accrued as services are rendered. Late fees andother loan-related fees are recognized when received.  Income from investments and reinvestmentrevenue are accrued based on the respective interest rate of suchinvestment.  Revenue from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

*AdvertisingCosts. *TheCompany expenses advertising costs as incurred.

*Allowance for Credit Losses*.  TheCompany calculates the allowance for credit losses in accordance with SFAS No.5*, Accounting for Contingencies.*   SFAS No. 114, *Accountingby Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they comprise a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

The Company initiates efforts to make customercontact as early as when the customer is one day past due and become moreaggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determined thatthe loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.   Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging 

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status of each loan on a date which is six months prior to thereporting date, to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During the quarter endedApril 30, 2005, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite the increasein allowance associated with the higher delinquency loans and bankrupt accounts,the total allowance for loan losses decreased during the period as a percentageof Receivables Held for Investment due to improving overall delinquency trendsand lower repossession and loss rates. The allowance for credit losses is based on estimates and qualitativeevaluations.  Ultimate losses may varyfrom current estimates. These estimates are reviewed periodically and asadjustments, either positive or negative, become necessary, are reported inearnings in the period they become known.

*Stock-Based Compensation*.  The Company expenses stock-based compensationexpense in accordance with  SFAS No.123(R), *Share-Based Payment - a revision to SFAS No. 123,Accounting for Stock-Based Compensation*(“SFAS No. 123(R)”).  Prior to SFAS 123R adoption, we accounted forshare-based payments under APB 25 and accordingly, accounted for our stock*-*based compensation using the intrinsic value method.

**ManagedReceivables**

TheCompany’s managed receivables are:
| ** **                                                                            | ** ** | **As of or for the Periods** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Ended January 31,**                       | ** ** |
| ** **                                                                            | ** ** | **2006**                                              | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                                                      |       |                                                  |       |   |   |
| Number                                                                                |       | 21,113                                                |       | 28,011 |   |
| Principal balance                                                                     |       | $                                                     | 336,300    |   | $ | 470,545 |   |
| Average principal balance of  receivables outstanding  during the  nine-month period  |       | $                                                     | 301,737    |   | $ | 418,509 |   |
| Average principal balance of receivables  outstanding  during the three-month  period |       | $                                                     | 329,993    |   | $ | 449,705 |   |
| Other Servicing:                                                                      |       |                                                  |       |   |   |
| Number                                                                                |       | 10,866                                                |       | 7,478 |   |
| Principal balance                                                                     |       | $                                                     | 123,825    |   | $ | 61,648 |   |
| Total Managed Receivables Portfolio:                                                  |       |                                                  |       |   |   |
| Number                                                                                |       | 32,282                                                |       | 35,489 |   |
| Principal balance                                                                     |       | $                                                     | 460,125    |   | $ | 532,193 |   |
| Average principal balance of  receivables outstanding  during the  nine-month period  |       | $                                                     | 456,789    |   | $ | 500,362 |   |
| Average principal balance of receivables outstanding  during the three-month period   |       | $                                                     | 463,722    |   | $ | 517,215 |   |

 

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The following table sets forth information with regard to the Company’snet interest spread, which represents the difference between the effectiveyield on Receivables Held for Investment and the Company’s average cost of debtutilized to fund these receivables, and its net interest margin (averages basedon month-end balances):
| ** **                                             | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                       |       |                                               |       |                                              |       |   |   |   |   |
| Effective yield on Receivables  Heldfor Investment (1) |       | 12.5                                               | %          | 13.0                                              | %          | 12.7 | % | 12.8 | % |
| Average cost of debt (2)                               |       | 4.6                                                | %          | 5.7                                               | %          | 4.5 | % | 5.5 | % |
| Net interest spread (3)                                |       | 7.9                                                | %          | 7.3                                               | %          | 8.2 | % | 7.3 | % |
| Net interest margin (4)                                |       | 7.8                                                | %          | 7.3                                               | %          | 8.1 | % | 7.3 | % |

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(1)             Represents interest income as a percentage ofaverage Receivables Held for Investment outstanding.

(2)             Represents interest expense as a percentage ofaverage debt outstanding.

(3)             Represents yield on Receivables Held forInvestment less average cost of debt.

(4)             Represents net interest income as a percentage ofaverage Receivables Held for Investment outstanding.

Net interest income is the differencebetween interest earned from the receivables portfolio and interest expenseincurred on the credit facilities used to finance the receivables. Net interestincome was $8,189 and $22,875 for the three and nine months ended January 31,2007, respectively, an increase of 28.1% and 24.5% when compared to amountsreported for the three and nine months ended January 31, 2006, respectively.

Theamount of net interest income is the result of the relationship between theaverage principal amount of receivables held and average rate earned thereonand the average principal amount of debt incurred to finance such receivablesand the average rates paid thereon. Changes in the principal amount and rate componentsassociated with the receivables and debt can be segregated to analyze theperiodic changes in net interest income. The following table analyzes thechanges attributable to the principal amount and rate components of netinterest income:
| ** **                        | ** ** | **Three Months Ended  January 31, 2006 to 2007** | ** ** | **Nine Months Ended  January 31, 2006 to 2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Increase (Decrease) Due to Change in**              | ** ** | **Increase (Decrease) Due to Change in**             | ** ** |
| ** **                        | ** ** | **Average  Principal  Amount**                                                 | ** ** | **Average  Rate**                                                             | ** ** | **Total Net** | ** ** | **Average  Principal  Amount** | ** ** | **Average  Rate** | ** ** | **Total Net** | ** ** |
|                              |       |                                                                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment: |       |                                                                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                                                              | 3,491      |                                                                          | $          | 730 |   | $ | 4,221 |   | $ | 11,112 |   | $ | 402 |   | $ | 11,514 |   |
| Interest expense                  |       | 1,243                                                                          |       | 1,183                                                                         |       | 2,426 |   | 3,773 |   | 3,236 |   | 7,009 |   |
| Net interest income               |       | $                                                                              | 2,248      |                                                                          | $          | (453 | ) | $ | 1,795 |   | $ | 7,339 |   | $ | (2,834 | ) | $ | 4,505 |   |

 

**Results of Operations**

*Three andNine Months Ended January 31, 2007 and 2006*

*Key Factors.*Thecritical factors affecting the Company’s profitability during any period are  (i) loan origination volume and thecorresponding growth in Receivables Held For Investment; (2) the level of netinterest spread, which is defined as the difference between the effective yieldon Receivables Held for Investment and the cost of funds under the Company’scredit facilities and securitizations utilized to finance these receivables;(3) the level of provision for credit losses; (4) the amount of income derivedfrom other activities; and (5) the ability of the Company to control operatingexpenses relative to the total amount of the managed portfolio.

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*Executive Summary. *Net earnings for the threeand nine months ended January 31, 2007 were $821 and $2,852, respectively,compared to $318 and $2,008 for the three and nine months ended January 31,2006, respectively.  Basic earnings percommon share were $0.18 and $0.64, respectively, for the three and nine monthsended January 31, 2007, compared to $0.07 and $0.45, respectively, for thethree and nine months ended January 31, 2006. Diluted earnings per common share were $0.17 and $0.60, respectively,for the three and nine months ended January 31, 2007, compared to $0.07 and$0.44, respectively, for the three and nine months ended January 31, 2006.  The increase in net earnings for the threeand nine months ended January 31, 2007 compared to January 31, 2006 is due toseveral factors, including  (i) a $4,221increase in interest income for the three months ended January 31, 2007, and an$11,514 increase in interest income for the nine months ended January 31, 2007due to a 36% and 39% increase in the average balance of Receivables Held forInvestment for the three and nine months ended January 31, 2007, respectively,(ii) an increase in other interest income due to higher average cash balances,(iii) a decrease in general and administrative expenses primarily due to thesettlement and defense of a class action lawsuit during the three and ninemonths ended January 31, 2006, and (iv) a decrease in the effective income taxrate for the nine months ended January 31, 2007, primarily due to therecognition of a $669 income tax benefit that was previously recorded as anuncertain tax provision.  This ispartially offset by several factors, including (i) an increase in interestexpense of $2,426 and $7,009 for the three and nine months ended January 31,2007, respectively, due to a 32% and 36% increase in the average debtoutstanding and a 106 and 103 basis point increase in interest rates for thethree and nine months ended January 31, 2007, respectively, (ii) a $1,414 and$2,893 increase in provision for credit losses, for the three and nine monthsended January 31, 2007, respectively, primarily associated with the growth in the portfolio of ReceivablesHeld for Investment and an associated increase in the allowance for creditlosses, (iii) a $284 and $645 increase in salaries and benefits expense, forthe three and nine months ended January 31, 2007, respectively, to support anincrease in origination volume, staffing for the Company’s inbound call centerwhich was moved from a third party provider during the fiscal year ended April30, 2006, and the implementation of FASB 123(R) during the period, (iv) a $482 and $1,387 increase in operatingcosts, for the three and nine months ended January 31, 2007, respectively,associated with an increase in origination volume and a decrease in the dollaramount of expenses which the Company was able to capitalize as deferredacquisition costs and, (v) a $143 and $452 increase in other interestexpense, for the three and nine months ended January 31, 2007, respectively,due to an increase in the average outstanding balance of the Company’s workingcapital facility.  The increase in net interest income waspartially offset by a reduction in the net interest spread created by effectiveyields on the portfolio of Receivables Held for Investment increasing at aslower pace than the cost of funds.  Thedecline in net interest spread reduced net interest income by $453 and $2,834for the three and nine months ended January 31, 2007 as compared to the threeand nine months ended January 31, 2006, respectively.

*Interest Income*. Interest income for the three and nine monthsended January 31, 2007 increased to $14,553 and $40,258 compared to $10,332 and$28,744 for the three and nine months ended January 31, 2006.

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of theportfolio of Receivables Held for Investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectlending activities and the level of early prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased 41% and****40% for thethree and nine months ended January 31, 2007 compared to the three and ninemonths ended January 31, 2006.  Theincrease in interest income for the three and nine months ended January 31,2007 is primarily due to a 36% and 39% increase in the average portfoliooutstanding for the three and nine months ended January 31, 2007 compared tothe three and nine months ended January 31, 2006.

*Interest Expense.*Interest expense for the three and nine monthsended January 31, 2007 increased to $6,364 and $17,383 compared to $3,938 and$10,374 for the three and nine months ended January 31, 2006. Interest expenseincreased 62% and 68% for the three and nine months ended January 31,2007.  The increase in interest expenseis primarily due to (i) a $107,493 or 32% and $111,469, or 36%, increase in theaverage debt outstanding  for the threeand nine months ended January 31, 2007, compared to the three and nine monthsended January 31, 2006 as a result of a 36% and 39% increase in the averageportfolio of Receivables Held for Investment, (ii) an increase in overallmarket interest rates as a result of short-term market rate increases and (iii)the Company’s decision to lock in interest rates on $189,060 of debt in January2006 through the issuance of term notes to minimize the risk of future interestrate increases, as longer term fixed rate term notes typically carry higherinterest rates than shorter term floating rate debt.  The combined effects of the increase inoverall market interest rates and the decision to lock in a fixed interest rateon $189,060 of debt resulted in a 106 and 103 basis point 

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increase in the average interest rate for the three and nine months endedJanuary 31, 2007, as compared to the three and nine months ended January 31,2006.

*Provisionfor Credit Losses*. The provision forcredit losses for the three and nine months ended January 31, 2007 increased to$3,236 and $8,431 as compared to $1,821 and $5,538 for the three and ninemonths ended January 31, 2006. The increase in provision for credit losses isprimarily due to a 36% and 39% increase in the average portfolio outstandingfor the three and nine months ended January 31, 2007, compared to the three andnine months ended January 31, 2006. Provision for credit losses as a percentage of average Receivables Heldfor Investment on an annual basis increased to 2.9% and 2.7% for the three andnine months ended January 31, 2007, respectively,  as compared to 2.2% and 2.4% for the threeand nine months ended January 31, 2006, respectively.

Net charge-offs forthe three and nine months ended January 31, 2007 increased to $2,993 and $7,773compared to $1,853 and $5,560 for the three and nine months ended January 31,2006.  The increase in net charge-offsfor the three and nine months ended January 31, 2007 is primarily due to a 36%and 39% increase in the average portfolio outstanding for the three and ninemonths ended January 31, 2007, compared to the three and nine months endedJanuary 31, 2006.  This is partiallyoffset by an increase in recoveries from defaulted loans.  As a result, the allowance for loan loss as apercentage of the portfolio of Receivables Held for Investment decreased from0.7% as of January 31, 2006 to 0.6% as of January 31, 2007.  This compares to 0.6% as of April 30, 2006.

The level of provision for credit losses is a key driver of overallfinancial performance and should be positively impacted by improvement ingeneral economic conditions, improvements in wholesale used car prices andlower delinquency rates and net losses projected for the portfolio ofReceivables Held for Investment.  Anyadditional economic deterioration or decline in wholesale used car prices willnegatively impact provision expense to the extent that these events cause anincrease in delinquency rates, bankruptcy rates or net charge-off rates in theportfolio of Receivables Held for Investment.

*ServicingRevenue*. On December 24, 2002, the Company entered into an agreement to provideloan servicing and collection activities on behalf of FARC.  FARC, which is 40% owned by the Company,purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$377 and $1053****for the three and nine months endedJanuary 31, 2007 compared to $433 and $1,506 for three and nine months endedJanuary 31, 2006.  The decrease inservicing revenue for the three and nine months ended January 31, 2007 is dueto the liquidation of serviced receivables during the periods.  Revenue derived from servicing activitieswill increase or decrease in direct proportion to the average outstandingbalance of serviced receivables.

*OtherFinance Charges and Fees*.  Other finance charges and fees increased to$876 and $2,435 for the three  and ninemonths ended January 31, 2007, compared to $696 and $1,803 for the three andnine months ended January 31, 2006.  Theincrease is primarily attributable to (i) increased assessment and collectionof fees due to a 36% and 39% increase in the average portfolio of ReceivablesHeld for Investment and (ii) an increase in fees related to collectionactivities.  Income derived from late fees and collection activities is recognizedwhen received, and therefore can be potentially volatile from period to periodbased on overall cash collection, seasonality, delinquency rates and otherfactors.  Late and loan related fees are driven by a number of factors includingoverall delinquency rates, the percentage of customers utilizing electronicpayment products and growth rates in the Company’s direct lending business.

*InsuranceProducts.* Revenue from insurance products increased to $451 and $932 for the threeand nine months ended January 31, 2007, compared to $226 and $780 for the threeand nine months ended January 31, 2006. The increase is attributable to (i) increased penetration rates and (ii)an 85% and 23% increase in originations for the three and nine months endedJanuary 31, 2007 as compared to January 31, 2006.  This is partially offset by  the Company’s decision to stop sellingextended warranties.  Insurance productsrevenue is primarily driven by growth rates in the Company’s direct lendingbusiness, which will affect the ability of the Company to generate fee incomefrom marketing insurance products.

*Income fromInvestments.*  Income from investments increased to $163 and$418 for the three and nine months ended January 31, 2007, compared to $96 and$333 for the three and nine months ended January 31, 2006.  

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The increase is primarily attributable to the increasein earnings in FARC, which is accounted for under the equity method ofaccounting for investments.

*OtherInterest Income.*  Other interest income increased to $482 and$1,342 for the three and nine months ended January 31, 2007, compared to $336and $869 for the three and nine months ended January 31, 2006.  The increase is attributable to (i) anincrease in the average cash on hand balance due to increased collections as aresult of a 36% and 39% increase in the average portfolio of Receivables Heldfor Investment and (ii) an increase in overall market interest rates as aresult of the current economic environment and market rate increases adopted bythe Federal Reserve System.

*OtherIncome.* Other income decreased to $0 for the three and nine months ended January31, 2007, compared to $183 and $569 for the three and nine months ended January31, 2006.  The decrease is attributableto the cancellation of a marketing program with several dealerships.

*RealizedLoss on Interest Rate Derivative Positions.*  Realized loss on interest ratederivative positions decreased to $0 for the three and nine months endedJanuary 31, 2007, compared to $195 and $175 for the three and nine months endedJanuary 31, 2006.  The decrease isattributable to the Company’s elimination of the requirement to purchaseinterest rate caps under the FIARC credit facility.  The Company had no purchases during the threeand nine months ended January 31, 2007.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$2,984 and $8,548 for the three and nine months ended January 31, 2007,compared to $2,700 and $7,903 for the three and nine months ended January 31,2006.  The increase is primarily due to(i) the Company implementing a call center that was previously outsourced, (ii)additional staffing levels necessary to support the increase in loanorigination volume, and (iii) an additional $82 and $224 of expense for thethree and nine months ended January 31, 2007, due to the implementation of SFAS123(R)

*Operating Expenses.*  OperatingExpenses increased to $1,708 and $4,341 for the three and nine months endedJanuary 31, 2007, compared to $1,226 and $2,954 for the three and nine monthsended January 31, 2006.   Expensescharacterized as operating expenses are generally variable in nature and aretypically dependent on a number of factors including origination volume, theoutstanding balance of the managed portfolio, credit quality and operatingefficiency levels.  The increase wasprimarily due to (i) an increase in postage and printing expense associatedwith the growth in the Company’s direct originations, (ii) an increase in otherloan origination costs including credit bureau and verification fees associatedwith the increase in total origination volume, (iii) increased repossession andcollection related costs, and (iv) a decrease in the dollar amount of expenseswhich the Company was able to capitalize as deferred acquisition costs.  These were partially offset by (i) lowertemporary help and third party fees associated with completion of the Company’sinbound call center location which had previously been outsourced and (ii) lower marketing commissions.

*General and Administrative.* General and administrative expenses decreased to$979 and $2,978 for the three and nine months ended January 31, 2007, compared to $1,655 and $3,668 for thethree and nine months ended January 31, 2006. The decrease is primarily attributable to the settlement of a classaction lawsuit and the related  legalexpenses associated with the defense of that lawsuit during the fiscal yearended April 30, 2006. General and administrative costs tend to be more fixed innature and not as dependent on the overall level of managed receivables.

*Other Interest Expense*. Other interest expense increased to $500 and $1,374 forthe three and nine months ended January 31, 2007, compared to $357 and $922 forthe three and nine months ended January 31, 2006. The increase was due to (i) a54% and 58% increase in the average outstanding borrowings on the Company’sworking capital line for the three and nine months ended January 31, 2007compared to the three and nine months ended January 31, 2006, and (ii) an increase in overall market interest rates as aresult of short-term rate increases adopted by the Federal Reserve System.

*Provision for Income Taxes.*  Provisionfor income taxes decreased to $531 for the nine months ended January 31, 2007,compared to $1,062 for the nine months ended January 31, 2006.  The decrease is primarily due to therecognition of $669 related to an uncertain tax provision that was previouslyclassified as a liability.

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**PortfolioCharacteristics**

*General*.  In selecting receivables for inclusion in itsportfolio, the Company seeks to identify potential borrowers whom it regards ascreditworthy despite credit histories that limit their access to traditionalsources of consumer credit. In addition to personal credit qualifications, theCompany attempts to assure that the characteristics of the automobile sold andthe terms of the sale are likely to result in a consistently performingreceivable. These considerations include amount financed, monthly paymentsrequired, duration of the loan, age of the automobile, mileage on theautomobile and other factors.

*CustomerProfile*. The Company’s primary goal in credit evaluation is to make loans tocustomers having stable personal situations, predictable incomes and theability and inclination to perform their obligations in a timely manner. Manyof the Company’s customers are persons who have experienced credit difficultiesin the past by reason of illness, divorce, job loss, reduction in pay or otheradversities, but who appear to the Company to have the capability andcommitment to meet their obligations. Through its credit evaluation process, theCompany seeks to distinguish these persons from those applicants who arechronically poor credit risks.

**Credit Evaluation**

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto reduce unacceptable risks. This involves a three-step process in which (i)the creditworthiness of the borrower and the terms of the proposed transactionare evaluated and either approved, declined or modified by the Company’s creditverification department, (ii) the loan documentation and collateralization isreviewed by the Company’s funding department, and (iii) additional collateralverification procedures and customer interviews are conducted by the Company.During the course of this process, the Company’s credit verification andfunding personnel coordinate closely with the finance and insurance departmentsof the dealers or with individuals to whom the Company lends directly. TheCompany has developed financing programs under which it approves loans thatvary in pricing and loan terms depending on the relative credit risk determinedfor each loan. Credit or default risk is evaluated by the Company’s loanofficers in conjunction with a proprietary, empirical credit scoring modeldeveloped from the Company’s 17 year database of non-prime lending results.

In addition tothis credit underwriting process, and prior to the origination of a receivableby the Company, the Company performs additional procedures to validate thedetails of the credit application, including income and/or employmentinformation, to verify that the collateral is insured, and to confirm that thematerial terms of the sale conform to the purchaser’s understanding of thetransaction.  The Company will originatea receivable only after receipt and review of a satisfactory audit report.

# **Liquidity and Capital Resources**

*Sources and Uses of Cash Flows*.  The Company’s business requires significantcash flow to support its operating activities. The principal cash requirementsinclude (i) amounts necessary to acquire receivables from dealers and fundrequired reserve accounts, (ii) amounts necessary to fund premiums for creditenhancement insurance or other credit enhancement required by the Company’sfinancing programs, and (iii) amounts necessary to fund costs to retainreceivables, primarily interest expense. The Company also requires asignificant amount of cash flow for working capital to fund fixed operatingexpenses, primarily salaries and benefits.

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company originated $88,594 and $240,802 of Receivables Heldfor Investment for the three and nine months ended January 31, 2007 compared to$41,604 and $189,945 for the three and nine months ended January 31, 2006.

TheCompany funds loan originations through a combination of two warehouse creditfacilities. The FIRC credit facility generally permits the Company to borrow upto the outstanding principal balance of qualified receivables, not to exceed$50,000.  Receivables that haveaccumulated in the FIRC credit facility may be transferred to the FIARCcommercial paper facility at the option of the Company. The FIARC commercialpaper facility provides an additional financing source of up to $300,000.Additionally, the Company has transferred receivables from the warehouse creditfacilities and issued term notes. Substantially all of the Company’s 

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receivables arepledged to collateralize these credit facilities and term notes.  The Company is obligated to meet certainfinancial covenants.  Noncompliance maysignificantly affect cash flow.

TheCompany’s most significant source of cash flow is the principal and interestpayments received from its receivables portfolios. The Company received suchpayments in the amount of $53,101 and $157,893 during the three and nine monthsended January 31, 2007, and $34,654 and $110,529 during the three and ninemonths ended January 31, 2006.  Such cashflow funds were used to repay amounts borrowed under the Company’s creditfacilities and other holding costs, primarily interest expense, and servicingand custodial fees.  During the three andnine months ended January 31, 2007, the Company required net cash of $35,493and $82,909 as compared to $6,950 and $79,416 for the three and nine monthsended January 31, 2006, as the receivables originated exceeded portfoliocollections.  The Company relies onborrowed funds to provide cash flow in periods of growth.  As of January 31, 2007, the Company had$96,624 of available capacity in the FIRC and FIARC credit facilities to fundfuture growth.

In addition to the cash flow generated from the principal and interestcollections on its receivables portfolio, the Company collects servicing feesfunded from each of the servicing portfolios. Servicing fees range from 1.4% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees are received after month end, but relate tothe prior month activity.  Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations.   At January 31, 2007 and 2006, the Company’sunencumbered cash was $1,760 and $4,173, respectively.  The decrease in available cash is primarilydue to an increase in operating expenses due to the Company’s continuedgrowth.  This is partially offset by anincrease in revenues due to a 36% and 39% increase in the average portfolio ofReceivables Held for Investment for the three and nine months ended January 31,2007.  Management believes theunencumbered cash and cash inflows and amounts available under the workingcapital facility are adequate to fund cash requirements for operations.

*Capitalization*. TheCompany expects to rely primarily on its credit facilities and the issuance ofsecured term notes to acquire and retain receivables. The Company believes itsexisting credit facilities have adequate capacity to fund the increase of thereceivables portfolio expected in the foreseeable future. While the Company hasno reason to believe that these facilities will not continue to be available,their termination could have a material adverse effect on the Company’soperations if substitute financing on comparable terms was not obtained.

*Financing Arrangements. * The Company finances its loanorigination through two warehouse credit facilities. The Company’s creditfacilities provide for one-year terms and have been renewed annually.Management of the Company believes that the credit facilities will continue tobe renewed or extended or that it would be able to secure alternate financingon satisfactory terms; however, there can be no assurance that it will be ableto do so.  In November 2003, the Companyissued $139,661 of asset-backed notes (“Term Notes”) secured by a discrete poolof receivables.  In May 2005, the Companyissued $175,493 in Term Notes secured by a discrete pool of receivables.  In January 2006, the Company issued $189,060in Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowings,including the effect of program fees and dealer fees, was 4.4% and 5.2% for theperiods ended January 31, 2006 and 2007, respectively.

 

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*Warehouse Facilities as of January 31, 2007*
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**              | ** ** | **Borrowing  Rate At  January 31, 2007** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| FIARC        | ** ** | $            | 300,000    |            | $          | 210,865                |       | Commercial paper  rate plus .3%                                                                       |       | .30%  of  Unused  Facility |       | None                                                    |       | 5.3 | % |
| FIRC         | ** ** | $            | 50,000     |            | $          | 42,511                 |       | Option of a) Base Rate,  which is the higher of prime rate or fed funds plus .5% or b) LIBOR plus .5% |       | .25% of  Unused  Facility  |       | See below                                               |       | 5.8 | % |

 

*Warehouse Facilities — Credit Enhancement as of January 31, 2007*

| Facility | ** ** | **Cash Reserve**          | ** ** | **Advance  Rate** | ** ** | **Insurance**             | ** ** |
|----------|------------|--------------------------------|------------|-------------------|------------|---------------------------|------------|
| FIARC    |       | 1% of outstanding  receivables |       | 94                | %          | None                      |       |
| FIRC     |       | 1% of borrowings               |       | 100               | %          | Default Insurance  (ALPI) |       |

 

FIRC - In order to obtain a lower cost of funding, the Company has agreedto maintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders, collectively,are named as additional insureds under this policy. The coverage is obtained oneach receivable at the time it is purchased by the Company and the applicablepremiums are prepaid for the life of the receivable. The insurance enhancingthis facility is default insurance under a standard auto loan protection policy(known as “ALPI” insurance) which covers the difference between the outstandingbalance of a receivable and the liquidation proceeds in the event theunderlying collateral is repossessed. Solely at its expense, the Companycarries this coverage.  Neither thevehicle purchasers nor the dealers are charged for the coverage and they areunaware of its existence. The Company’s ALPI insurance policy is written byNational Union Fire Insurance Company of Pittsburgh (“National Union”), whichis a wholly-owned subsidiary of American International Group.

Thepremiums that the Company paid during the three months and nine months endedJanuary 31, 2007 for its  creditenhancement insurance coverages, of which the largest component is basic ALPIinsurance, represented approximately 0.4% and 1.2%, respectively, of theprincipal amount of the receivables originated during the periods. Aggregatepremiums paid for ALPI coverage alone were $585 and $359 during the threemonths ended, and $3,769 and $2,211 during the nine months ended, January 31,2006 and 2007, respectively, and accounted for 1.2% and 0.4% during the threemonths ended, and 1.6% and 0.9% for the nine months ended, January 31, 2006 and2007, respectively, of the principal amount of the receivables originatedduring such periods.

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100% of the risk under theCompany’s ALPI insurance policy. At the time each receivable is insured byNational Union, the risk is automatically reinsured to its full extent andapproximately 96% of the premium paid by the Company to National Union withrespect to such receivable is ceded to the Insurance Subsidiary. When a losscovered by the ALPI policy occurs, National Union pays it after the claim isprocessed, and National Union is then reimbursed in full by the Insurance Subsidiary.  In addition to the monthly premiums andliquidity reserves of the Insurance Subsidiary, a trust account is maintainedby National Union to secure the Insurance Subsidiary’s obligations for lossesit has reinsured.

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for 

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all such losses. As of January 31, 2007, the Insurance Subsidiary hadcapital and surplus of $2,270 and unencumbered cash reserves of $621 inaddition to the $3,297 trust account.

The ALPI coverage, as well as the InsuranceSubsidiary’s liability under the Reinsurance Agreement, remains in effect foreach receivable that is pledged as collateral under the warehouse creditfacility. Once receivables are transferred from FIRC to FIARC and financedunder the commercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses itsInsurance Subsidiary will be required to indemnify will be less than thepremiums ceded to it. However, there can be no assurance that losses will notexceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

FIARC — Credit enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization and a cash reserveaccount equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise a party to, such commercial paper.

*Warehouse Facilities — Agents and Expirations*
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**     | ** ** | **Event if not Renewed**                                                                                                                                                  | ** ** |
|--------------|------------|-----------|------------|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| FIARC        |       | Wachovia  |       | February  13, 2008 |       | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility.                                                     |       |
| FIRC         |       | Wachovia  |       | February 13, 2008  |       | The loan would convert  to a term loan which would mature six months thereafter and amortize monthly  in accordance with the borrowing base with the remaining balance due at  maturity. |       |

 

OnFebruary 15, 2006, the FIRC facility was renewed, under similar terms andconditions, at the $50,000 commitment level until February 13, 2007.  On February 14, 2007, the FIRC facility wasextended to its current maturity date of February 13, 2008.  As of April 30, 2006 and January 31, 2007,there was $47,080 and $42,511, respectively, outstanding.

On March 15, 2006,following a short-term extension of the then current maturity date, the FIARCfacility was renewed to February 14, 2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%.  On October 11, 2006, theCompany amended the facility to increase the commitment from $150,000 to$300,000 in order to fund the growth in origination volume.  On February 14, 2007, the maturity date ofthe FIARC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2006 and January31, 2007, there was $0 and $210,865, respectively, outstanding.

Management presently intends to seek furtherextensions to these warehouse facilities prior to the current expirationdates.  Management considers itsrelationship with its lenders to be satisfactory and has no reason to believethat the FIRC and FIARC facilities will not be renewed at each of theirrespective expiration dates.

The following table contains pertinent information on the Term Notes asof January 31, 2007.
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|------------|------------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A              |       | November  11, 2003     |       | $                    | 139,661    |                   | April  20, 2011    |            | $          | 22,180             |       | 2.58 | % |
| 2005-A Class 2      |       | May  5, 2005           |       | $                    | 106,493    |                   | July  16, 2012     |            | $          | 68,855             |       | 4.23 | % |
| 2006-A Class 2      |       | January  26, 2006      |       | $                    | 47,000     |                   | March  16, 2009    |            | $          | 14,058             |       | 4.87 | % |
| 2006-A Class 3      |       | January  26, 2006      |       | $                    | 74,000     |                   | February  15, 2011 |            | $          | 74,000             |       | 4.93 | % |
| 2006-A Class 4      |       | January 26, 2006       |       | $                    | 36,060     |                   | April 15, 2013     |            | $          | 36,060             |       | 5.00 | % |

 

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Credit enhancement on the Term Notes are as follows:

| Facility | ** ** | **Cash Reserve**                                                                                        | ** ** | **Advance Rate**                             | ** ** | **Insurance** |
|----------|------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------|
| 2003-A   |       | 0.5% of Initial  Pool Balance,  increasing to 2% of Initial  Pool Balance including  Pre-Funding Amount |       | 96.5% initial  advance, decreasing to 96.1%  |       | Surety Bond   |
| 2005-A   |       | 1.0% of Initial  Pool Balance,  increasing to 2% of Initial  Pool Balance including  Pre-Funding Amount |       | 97.0% initial  advance, decreasing to 95.75% |       | Surety Bond   |
| 2006-A   |       | 1.0% of Initial  Pool Balance,  increasing to 2% of Initial  Pool Balance including  Pre-Funding Amount |       | 98.5% initial  advance, decreasing to 96.75% |       | Surety Bond   |

 

Term Notes - On November 20, 2003, the Company, through its indirect,wholly-owned subsidiary, First Investors Auto Owner Trust 2003-A (“2003 AutoTrust”), completed the issuance of $139,661 of 2.58% Class A asset-backed notes(“2003-A Term Notes”). The initial pool of automobile receivables transferredto the 2003 Auto Trust totaled $114,727, which was previously owned by FIRC andFIARC, secure the 2003-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2003 Auto Trust also issueda $5,066 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,657, were used to (i) fund a $30,000 pre-funding account to be used forfuture loan originations, (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2003-A Term Noteissuance, and (v) fund an initial cash reserve account of 0.5%, or $574, of theinitial receivables pledged.  The Class ATerm Notes bear interest at 2.58% and require monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 96.1% of theoutstanding balance of the underlying receivables pool. The final maturity ofthe 2003-A Term Notes is April 20, 2011. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.9% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2006, and January 31, 2007,the outstanding principal balances on the 2003-A Term Notes were $37,715 and$22,180, respectively.

On May 5, 2005, the Company, through its indirect,wholly-owned subsidiary, First Investors Auto Owner Trust 2005-A (“2005 AutoTrust”), completed the issuance of $69,000 of 3.57% Class A-1 asset-backednotes and $106,493 of 4.23% Class A-2 asset-backed notes (collectively “2005-ATerm Notes”), for a total of $175,493 of asset backed notes. The initial poolof automobile receivables transferred to the 2005 Auto Trust totaled $150,921,was previously owned by FIRC and FIARC, and secures the 2005-A Term Notes.  In addition to the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued a $5,428 Class B Note thatwas retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $175,488, were used to (i) fund a $30,000pre-funding account to be used for future loan originations, (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2005-A Term Note issuance, and (v) fund an initial cash reserveaccount of 1%, or $1,509, of the initial receivables pledged.  The Class A-1 and Class A-2 Term Notes bearinterest at 3.57% and 4.23%, respectively, and require monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 95.75%of the outstanding balance of the underlying receivables pool. The Class A-1Notes were paid off during the fiscal year ended April 30, 2006.  The final maturity of the Class A-2 TermNotes is July 16, 2012.  The Class B Notedoes not bear interest but requires principal reductions sufficient to reducethe balance of the Class B Note to 4.25% of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation 

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provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2006 and January 31, 2007,the outstanding principal balances on the 2005-A Term Notes were $106,162 and$68,855, respectively.

On January 26, 2006, the Company, through itsindirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2006-A (“2006Auto Trust”), completed the issuance of $32,000 of 4.57% Class A-1 asset-backednotes, $47,000 of 4.87% Class A-2 asset-backed notes, $74,000 of 4.93% ClassA-3 asset-backed notes, and $36,060 of 5.00% Class A-4 asset-backed notes(collectively “2006-A Term Notes”), for a total of $189,060 of asset backednotes. The initial pool of automobile receivables transferred to the 2006 AutoTrust totaled $151,939, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes.  In addition to theissuance of the Class A-1, Class A-2, Class A-3, and Class A-4 Notes, the 2006Auto Trust also issued a $2,879 Class B Note that was retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $188,446, were used to (i) fund a $40,000 pre-funding account to beused for future loan originations, (ii) repay all outstanding borrowings underthe FIARC commercial paper facility, (iii) reduce the outstanding borrowingsunder the FIRC credit facility, (iv) pay transaction fees related to the 2006-ATerm Note issuance, and (v) fund an initial cash reserve account of 1% or$1,519 of the initial receivables pledged. The 2006-A Term Notes require monthly principal reductions sufficient toreduce the balance of the notes to 96.75% of the outstanding balance of theunderlying receivables pool. The Class A-1 notes were paid off during thequarter ended July 31, 2006.  The finalmaturities of the Class A-2, Class A-3, and Class A-4 Term Notes are March 16,2009, February 15, 2011, and April 15, 2013, respectively.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 3.25% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2006 and January 31, 2007, the outstanding principal balances on the2006-A Class A Term Notes were $172,708 and $124,118, respectively.

*Working Capital Facility*.  Thefacility is provided to a special-purpose, wholly-owned subsidiary of theCompany, First Investors Residual Funding LP. This facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities and theexisting and future term note facilities. The outstanding borrowings under the facility bear interest at one-monthLIBOR plus 2.25%.  In addition, acommitment fee of 1.5% is paid on the total amount of this facility.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitment amountfrom $9,000 to $13,500.  The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  On August 15, 2005, the Working CapitalFacility was extended until February 15, 2006, increasing the commitment amountto $23,500, and was subsequently extended on February 15, 2006 until February14, 2007.  The interest rate remained atLIBOR plus 2.25% and the commitment fee paid on the total available amount ofthe facility was maintained at 1.5%.  OnNovember 7, 2006, the Company amended the facility to increase the commitmentamount from $23,500 to $28,500.  OnFebruary 14, 2007, the working capital facility was extended to its currentmaturity date of February 13, 2008, under similar terms and conditions.  As of April 30, 2006 and January 31, 2007,there was $16,454 and $24,283, respectively, outstanding under this facility.

The Company presentlyintends to seek a renewal of the working capital facility from its lender priorto maturity.  Should the facility not berenewed, the outstanding balance of the receivables would be amortized inaccordance with the borrowing base. Management considers its relationship with its lenders to besatisfactory and has no reason to believe that this credit facility will not berenewed.  If the facility is not renewed,however, or if material changes are made to its terms and conditions, it couldhave a material adverse effect on the Company.

*Related Party Loans. *On December 3, 2001, the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500.  On December 6, 2004, the original $2,500shareholder loan was replaced with a $2,500 loan containing identical terms andconditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors  The proceeds of the borrowings have beenutilized to fund certain private and open market purchases of the Company’scommon stock pursuant to a Stock Repurchase 

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Plan authorized by the Board of Directors and for general corporatepurposes.  Borrowings under the facilitybear interest at a fixed rate of 10% per annum. The facility is unsecured and expressly subordinated to the Company’ssenior credit facilities. The facility matures on December 3, 2008 but may berepaid at any time unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder this facility as of April 30, 2006 and January 31, 2007.  For the three and nine months ended January31, 2006 and January 31, 2007, the Company recorded interest expense underthese facilities of $63 and $189, respectively.

*Loan Covenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at January31, 2007.

*Interest Rate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bearinterest at floating interest rates which are reset on a short-term basis whilethe secured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage its net interest spread, the Companyseeks to maximize the net interest spread while minimizing exposure to changesin interest rates. In connection with managing the net interest spread, theCompany may periodically enter into interest rate swaps or caps to minimize theeffects of market interest rate fluctuations on the net interest spread. To theextent that the Company has outstanding floating rate borrowings or has electedto convert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

On July 18, 2005, as arequirement of the FIARC commercial paper facility, the Company entered into aninterest rate cap transaction, with a strike rate of 6%.  The aggregate initial notional amount of thecap was $18,804 which amortizes over six years.  The Company paid $59 in premium to purchasethis cap.  The interest rate cap was notdesignated as a hedge, and accordingly, changes in the fair value of theinterest rate caps were recorded as an unrealized loss and are reflected in netincome.  During the three and nine monthsended January 31, 2006, the Company recorded realized losses of $195 and $175,respectively, that are included as a separate line under other income.  This requirement was eliminated as part ofthe facility’s renewal.

**Delinquency and Credit LossExperience**

The Company’s results of operations,financial condition and liquidity may be adversely affected by nonperformingreceivables. The Company seeks to manage its risk of credit loss through (i)prudent credit evaluations, (ii) risk management activities, (iii) effectivecollection procedures, and (iv) by maximizing recoveries on defaulted loans.The allowance for credit losses of $2,990 as of January 31, 2007, and $2,332 asof April 30, 2006, as a percentage of Receivables Held for Investment of$470,545 as of January 31, 2007, and $368,878 as of April 30, 2006, was 0.6%.

The Company considers aloan to be delinquent when the borrower fails to make a scheduled payment ofprincipal and interest. Accrual of interest is suspended when the payment fromthe borrower is over 90 days past due. Generally, repossession procedures areinitiated 60 to 90 days after the payment default.

The Company retains thecredit risk associated with the receivables originated. The Company purchasescredit enhancement insurance from third party insurers which covers the risk ofloss upon default and certain other risks. The Company established a captiveinsurance subsidiary to reinsure certain risks under the credit enhancementinsurance coverage for all receivables. In addition, receivables financed under the Auto Trust and FIARCcommercial paper facilities do not carry default insurance.  Provisions for credit losses of $3,236 and $8,431for the three and nine months ended January 31, 2007 compared to $1,821 and$5,538 for the three and nine months ended January 31, 2006 have been recorded.

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TheCompany calculates the allowance for credit losses in accordance with SFAS No.5*, Accounting for Contingencies.*   SFAS No. 114, *Accountingby Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they are comprised of a large group ofsmaller balance homogenous loans that are evaluated collectively forimpairment.

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging loanstatus as of the reporting date.  Thesefactors are then applied to the aging status of each loan at the reporting datein order to calculate the number of loans that are expected to migrate toimpaired status.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowancefor credit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, they are reported in earnings in theperiod they become known.

Thefollowing table sets forth certain information regarding the Company’sdelinquency and charge-off experience over the nine month periods indicated(dollars in thousands):

 
| ** **                                                                                | ** ** | **For the Nine Months Ended January 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                                                | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **Number**                                                              | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                                            | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held for  Investment:                                                         |       |                                                                    |       |   |   |   |   |   |   |
| Delinquent amount  outstanding (1):                                                       |       |                                                                    |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 89                                                                      |       | $ | 791 |   | 95 |   | $ | 1,033 |   |
| 60 - 89 days                                                                              |       | 34                                                                      |       | 288 |   | 57 |   | 451 |   |
| 90 days or more                                                                           |       | 54                                                                      |       | 340 |   | 64 |   | 628 |   |
| Total delinquencies                                                                       |       | 177                                                                     |       | $ | 1,419 |   | 216 |   | 2,112 |   |
| Total delinquencies as  a percentage of outstanding receivables.                          |       | 0.8                                                                     | %          | 0.4 | % | 0.8 | % | 0.4 | % |
| Net charge-offs as a percentage of average receivables outstanding during  the period (2) |       |                                                                    |       | 2.5 | % |   |   | 2.5 | % |
|                                                                                           |            |                                                                         |            |  |  |  |  |  |  |  |  |

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(1)             Delinquent amounts outstanding do not includeloans in bankruptcy status since collection activity is limited and highlyregulated for bankrupt accounts.

(2)             Thepercentages have been annualized and are not necessarily indicative of theresults for a full year.

As of January 31, 2007,there were 271 accounts totaling $3,400 that were in bankruptcy status and weremore than 30 days past due.  As ofJanuary 31, 2006, there were 298 accounts totaling $3,348 that were inbankruptcy status and were more than 30 days past due.  As of January 31, 2007 and 2006, 91% and 80%of the bankruptcy delinquencies filed for protection under Chapter 13.

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**NewAccounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB Statement No. 109* (“FIN 48”),which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financialstatements the impact of a tax position if that position is more likely thannot of being sustained on audit, based on the technical merits of the position.The provisions of FIN 48 are effective for the Company on May 1,2007, with the cumulative effect of the change in accounting principle, if any,recorded as an adjustment to opening retained earnings.  The Company iscurrently evaluating the impact of adopting FIN 48 on its financialposition, cash flows, and results of operations.

 InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140* (“SFAS 155”). This statement amends SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities* (“SFAS 133”), and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities* and resolves issues addressed in SFAS 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterest in Securitized Financial Assets”. This Statement: (a) permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement to evaluatebeneficial interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and, (e) eliminates restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain a derivativefinancial instrument. The standard also requires presentation within thefinancial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS 155 to all financial instruments acquired, issued orsubject to a remeasurement event beginning May 1, 2007 although earlyadoption is permitted as of the beginning of an entity’s fiscal year. Theprovisions of SFAS 155 are not expected to have a financial statement impact atadoption; however, the standard could affect the future income recognition forsecuritized financial assets because there may be more embedded derivatives identifiedwith changes in fair value recognized in net income.

InMarch 2006, the FASB issued SFAS No. 156, *Accountingfor Servicing of Financial Assets — an amendment of FASB Statement No. 140*(“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract in specific situations.Additionally, the servicing asset or servicing liability shall be initiallymeasured at fair value, if practicable. SFAS 156 permits an entity to chooseeither the amortization method or fair value measurement method for subsequentmeasurement of the servicing asset or servicing liability. SFAS 156 iseffective for the fiscal year ending April 30, 2008. The Company iscurrently evaluating the impact of adopting SFAS 156 on its financialposition, cash flows, and results of operations; however it is not expected tohave a material impact on our consolidated financial position, results of operationsor cash flows.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements* (“SAB 108”). SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current yearmisstatement. Under this bulletin, registrants should quantify errors usingboth a balance sheet and an income statement approach and evaluate whethereither approach results in quantifying a misstatement that, when all relevantquantitative and qualitative factors are considered, is material. SAB 108 iseffective for the fiscal year ending April 30, 2007.  The Company is currently evaluating theimpact of adopting SAB 108 on its financial position, cash flows, and resultsof operations.

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**ITEM3.     *QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

The market riskdiscussion and the estimated amounts generated from the analysis that followsare forward-looking statements of market risk assuming certain adverse marketconditions occur. Actual results in the future may differ materially due tochanges in the Company’s product and debt mix, developments in the financialmarkets, and further utilization by the company of risk-mitigating strategiessuch as hedging.

The Company’s operatingrevenues are derived almost entirely from the collection of interest on thereceivables it retains and its primary expense is the interest that it pays onborrowings incurred to purchase and retain such receivables. The Company’scredit facilities bear interest at floating rates which are reset on ashort-term basis, whereas its receivables bear interest at fixed rates which donot generally vary with changes in interest rates. The Company is thereforeexposed primarily to market risks associated with movements in interest rateson its credit facilities. The Company believes that it takes the necessarysteps to appropriately reduce the potential impact of interest rate increaseson the Company’s financial position and operating performance.

The Company reliesalmost exclusively on revolving credit facilities to fund its origination ofreceivables. Periodically, the Company will transfer receivables from arevolving to a term credit facility. Currently all of the Company’s creditfacilities in bear interest at floating rates tied to either a commercial paperindex or LIBOR.

As of January 31, 2007, the Company had$277,659 of floating rate secured debt outstanding under the FIRC and FIARCwarehouses and working capital facility. For every 1% increase in LIBOR annual after-tax earnings would decreaseby approximately $1,791 assuming the Company maintains a level amount offloating rate debt and assuming an immediate increase in rates.  As of January 31, 2006, the Company had$36,811 of floating rate secured debt outstanding net of swap and capagreements. For every 1% increase in commercial paper rates or LIBOR, annualafter-tax earnings would decrease by approximately $234 assuming the Companymaintains a level amount of floating rate debt and assuming an immediateincrease in rates.

**Forward Looking Information**

Statements and financial discussion andanalysis included in this report that are not historical are considered to beforward-looking in nature. Forward-looking statements involve a number of risksand uncertainties that may cause actual results to differ materially fromanticipated results. Specific factors that could cause such differences includeunexpected fluctuations in market interest rates, changes in economicconditions, changes in the competition for loans, or the inability to renew orobtain financing. Further information concerning risks and uncertainties isincluded in this report and the company’s other reports filed with theSecurities and Exchange Commission.

TheCompany believes the factors discussed in its reports are important factorsthat could cause actual results to differ materially from those expressed inany forward looking statement made herein or elsewhere by the Company or on itsbehalf.  The factors listed are notnecessarily all of the important factors. Unpredictable or unknown factors not discussed could also have materialadverse effects on actual results.  TheCompany does not intend to update its description of important factors eachtime a potential important factor arises. The Company advises its stockholders that they should:  (1) be aware that important factors notdescribed herein could affect the accuracy of our forward looking statements,and (2) use caution and common sense when analyzing our forward lookingstatements in this document or elsewhere. All of such forward looking statements are qualified in their entiretyby this cautionary statement.

**ITEM4.    CONTROLS AND PROCEDURES**

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of January 31, 2007 to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

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There has been no change in our internal controls overfinancial reporting that occurred during the three months ended January 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

**ITEM6.      *EXHIBITS ANDREPORTS ON FORM 8-K***

(a)          Exhibits

| 31.1   |   | Certification of Chief  Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                 |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                 |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                 |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                 |
|   |   | Filed with this 10-Q                                                                                 |

_____________________

(b)         Reports on Form 8-K

Form8-K filed December 6, 2006, press release announcing the quarter end October31, 2006 financial results.

### **SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                      |   | First Investors Financial  Services Group, Inc.  |
|----------------------|--------|--------------------------------------------------|
|                 |   | (Registrant)                                     |
|                 |   |                                             |
|                 |   |                                             |
| Date: March 14, 2007 |   | By: /s/TOMMY A. MOORE, JR.                       |
|                 |   | Tommy A. Moore, Jr.                              |
|                 |   | President and Chief Executive Officer            |
|                 |   |                                             |
|                 |   |                                             |
| Date: March 14, 2007 |   | By: /s/BENNIE H. DUCK                            |
|                 |   | Bennie H. Duck                                   |
|                 |   | Secretary, Treasurer and Chief Financial Officer |

 

 

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