**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                      |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **For the  quarterly period ended January 31, 2008**                                                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **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 FinancialServices Group, Inc.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Texas**                                                       | ** ** | **76-0465087**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction 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’s Telephone Number,Including Area Code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No  ̈.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o                                                               |   | Accelerated filer o         |
|----------------------------------------------------------------------------------------------|--------|----------------------------------|
|                                                                                         |   |                             |
| Non-accelerated filer   o (Do not check if a smaller reporting  company) |   | Smaller reporting company x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x.

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| ** **                   | ** ** | **Shares Outstanding At** |
|------------------------------|------------|-------------------------------------|
| **Class**                    | ** ** | **March 12, 2008**        |
| Common Stock-$.001 Par Value |       | 4,477,694                           |

 

 

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** **

**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

** **

##### **FORM 10-Q**

##### ** **

### **January 31, 2008**

### ** **

##### **TABLE OF CONTENTS**

 
| ** **       | ** **                | **Page No.**                                                                                                  |
|------------------|---------------------------|--------------------------------------------------------------------------------------------------------------------|
|             |                      |                                                                                                               |
| **Part I**  | **Financial Information** |                                                                                                               |   |
|             |                      |                                                                                                               |   |   |
|             | Item 1                    | Financial Statements                                                                                               |   |   |
|             |                      |                                                                                                               |   |   |
|             |                      | Consolidated  Condensed Balance Sheets as of April 30, 2007 and January 31, 2008                         |   | 3 |
|             |                      |                                                                                                               |   |   |
|             |                      | Consolidated  Condensed Statements of Earnings for the Three and Nine Months Ended  January 31, 2007 and 2008 |   | 4 |
|             |                      |                                                                                                               |   |   |
|             |                      | Consolidated  Condensed Statement of Shareholders’ Equity for the Nine Months Ended  January 31, 2008    |   | 5 |
|             |                      |                                                                                                               |   |   |
|             |                      | Consolidated  Condensed Statements of Cash Flows for the Nine Months Ended January 31,  2007 and 2008         |   | 6 |
|             |                      |                                                                                                               |   |   |
|             |                      | Notes to Unaudited Consolidated Condensed Financial  Statements                                                    |   | 7 |
|             |                      |                                                                                                               |   |   |
|             | Item 2.                   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 19 |
|             |                      |                                                                                                               |   |   |
|             | Item 3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   | 32 |
|             |                      |                                                                                                               |   |   |
|             | Item 4.                   | Controls and  Procedures                                                                                           |   | 33 |
|             |                      |                                                                                                               |   |   |
| **Part II** | **Other Information**     |                                                                                                               |   |
|             |                      |                                                                                                               |   |   |
|             | Item 6.                   | Exhibits and  Reports On Form 8-K                                                                             |   | 34 |
|             |                      |                                                                                                               |   |   |
| **Signatures**   |                      |                                                                                                               | 34 |

 

2

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** **

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

** **

##### **CONSOLIDATED CONDENSED BALANCE SHEETS — APRIL 30, 2007AND JANUARY 31, 2008**

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

 
| ** **                                                                                                                                       | ** ** | **April 30,  2007** | ** ** | **January 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                       | ** ** | ** **               | ** ** | **(Unaudited)**            | ** ** |
| **ASSETS**                                                                                                                                       |       |                     |       |                       |       |
| Receivables Held  for Investment, net                                                                                                            |       | $                        | 468,022    |                       | $          | 519,228 |   |
| Cash and  Short-Term Investments                                                                                                                 |       | 1,669                    |       | 798                        |       |
| Restricted Cash                                                                                                                                  |       | 33,473                   |       | 32,993                     |       |
| Accrued Interest  Receivable                                                                                                                     |       | 3,781                    |       | 4,392                      |       |
| Assets Held for  Sale                                                                                                                            |       | 1,200                    |       | 1,243                      |       |
| Other Assets:                                                                                                                                    | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Equity  investments                                                                                                                              |       | 1,133                    |       | 1,210                      |       |
| Income taxes                                                                                                                                     |       | 12                       |       | 124                        |       |
| Funds held under  reinsurance agreement                                                                                                          |       | 3,355                    |       | 3,543                      |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,788 and $4,920                               |       | 3,736                    |       | 3,649                      |       |
| Total assets                                                                                                                                     |       | $                        | 516,381    |                       | $          | 567,180 |   |
| ** **                                                                                                                                       | ** ** | ** **               | ** ** | ** **                 | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                    | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Debt:                                                                                                                                            | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Warehouse credit  facilities                                                                                                                     |       | $                        | 283,282    |                       | $          | 386,288 |   |
| Term notes                                                                                                                                       |       | 169,987                  |       | 113,407                    |       |
| Working capital  facility                                                                                                                        |       | 22,753                   |       | 20,023                     |       |
| Senior  subordinated debt                                                                                                                        |       | —                   |       | 5,000                      |       |
| Related party  note                                                                                                                              |       | 2,500                    |       | 2,500                      |       |
| Other  Liabilities:                                                                                                                              |       |                     |       |                       |       |
| Accounts payable  and accrued liabilities                                                                                                        |       | 5,377                    |       | 5,727                      |       |
| Deferred income  taxes payable                                                                                                                   |       | 733                      |       | 985                        |       |
| Total  liabilities                                                                                                                               |       | 484,632                  |       | 533,930                    |       |
| ** **                                                                                                                                       | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Commitments and  Contingencies                                                                                                                   | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Shareholders’  Equity:                                                                                                                      | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Common stock,  $0.001 par value, 10,000 shares authorized, 5,650 issued and 4,478  outstanding at April 30, 2007, and January 31, 2008 |       | 6                        |       | 6                          |       |
| Additional  paid-in capital                                                                                                                      |       | 19,374                   |       | 19,680                     |       |
| Retained  earnings                                                                                                                               |       | 16,836                   |       | 18,031                     |       |
| Less, treasury  stock, at cost, 1,172 shares                                                                                                     |       | (4,467                   | )          | (4,467                     | )          |
| Total  shareholders’ equity                                                                                                                 |       | 31,749                   |       | 33,250                     |       |
| Total  liabilities and shareholders’ equity                                                                                                 |       | $                        | 516,381    |                       | $          | 567,180 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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** **

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

** **

**CONSOLIDATED CONDENSEDSTATEMENTS OF EARNINGS**

** **

**For the Three and Nine MonthsEnded January 31, 2007 and 2008**

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

**(Unaudited)**

** **
| ** **                                            | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **Ended January 31,**         | ** ** | **Ended January 31,**        | ** ** |
| ** **                                            | ** ** | **2007**                                | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                  |       |                                    |       |                                   |       |   |   |   |   |
| Interest Income                                       |       | $                                       | 14,553     |                                   | $          | 15,559 |   | $ | 40,258 |   | $ | 44,255 |   |
| Interest Expense                                      |       | 6,364                                   |       | 6,790                                  |       | 17,383 |   | 20,334 |   |
| Net interest income                                   |       | 8,189                                   |       | 8,769                                  |       | 22,875 |   | 23,921 |   |
| Provision for Credit Losses                           |       | 3,236                                   |       | 3,880                                  |       | 8,431 |   | 11,066 |   |
| Net Interest Income After Provision for Credit Losses |       | 4,953                                   |       | 4,889                                  |       | 14,444 |   | 12,855 |   |
| Other Income:                                         |       |                                    |       |                                   |       |   |   |   |   |
| Servicing revenue                                     |       | 377                                     |       | 338                                    |       | 1,053 |   | 1,004 |   |
| Other finance charges and fees                        |       | 876                                     |       | 1,054                                  |       | 2,435 |   | 2,968 |   |
| Insurance products                                    |       | 451                                     |       | 453                                    |       | 932 |   | 1,062 |   |
| Income from investment                                |       | 163                                     |       | 206                                    |       | 418 |   | 430 |   |
| Other interest income                                 |       | 482                                     |       | 362                                    |       | 1,342 |   | 1,226 |   |
| Total other income                                    |       | 2,349                                   |       | 2,413                                  |       | 6,180 |   | 6,690 |   |
| Operating Expenses:                                   |       |                                    |       |                                   |       |   |   |   |   |
| Salaries and benefits                                 |       | 2,984                                   |       | 2,915                                  |       | 8,548 |   | 8,224 |   |
| Operating expense                                     |       | 1,708                                   |       | 1,945                                  |       | 4,341 |   | 4,987 |   |
| General and administrative                            |       | 979                                     |       | 850                                    |       | 2,978 |   | 2,686 |   |
| Other interest expense                                |       | 500                                     |       | 670                                    |       | 1,374 |   | 1,938 |   |
| Total operating expenses                              |       | 6,171                                   |       | 6,380                                  |       | 17,241 |   | 17,835 |   |
| Income Before Provision for Income Taxes              |       | 1,131                                   |       | 922                                    |       | 3,383 |   | 1,710 |   |
| Provision (Benefit) for Income Taxes:                 |       |                                    |       |                                   |       |   |   |   |   |
| Current                                               |       | 548                                     |       | (62                                    | )          | 992 |   | 59 |   |
| Deferred                                              |       | (238                                    | )          | 85                                     |       | (461 | ) | 252 |   |
| Total provision for income taxes                      |       | 310                                     |       | 23                                     |       | 531 |   | 311 |   |
| Net Earnings                                          |       | $                                       | 821        |                                   | $          | 899 |   | $ | 2,852 |   | $ | 1,399 |   |
|                                                  |       |                                    |       |                                   |       |   |   |   |   |
| Basic Net Earnings per Common Share                   |       | $                                       | 0.18       |                                   | $          | 0.20 |   | $ | 0.64 |   | $ | 0.31 |   |
| Diluted Net Earnings per Common Share                 |       | $                                       | 0.17       |                                   | $          | 0.19 |   | $ | 0.60 |   | $ | 0.29 |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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** **

**FIRST INVESTORS FINANCIAL SERVICESGROUP, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED CONDENSEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

** **

**For the Nine Months Ended January 31,2008**

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

**(Unaudited)**

** **
| ** **                               | ** ** | ** **            | ** ** | ** **        | ** ** | **Additional**     | ** ** | ** **         | ** ** | **Treasury** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-----------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|--------------|------------|------------|------------|
| ** **                               | ** ** | **Common Stock** | ** ** | **Paid-In ** | ** ** | **Retained ** | ** ** | **Stock, at** | ** ** | ** **   | ** ** |
| ** **                               | ** ** | **Shares**            | ** ** | **Amount**        | ** ** | **Capital**        | ** ** | **Earnings**       | ** ** | **cost**     | ** ** | **Total**  | ** ** |
| Balance at April 30, 2007           |       | 5,649,670             |       | $                 | 6          |               | $          | 19,374             |       | $            | 16,836     |       | $          | (4,467 | ) | $ | 31,749 |   |
| Cumulative  effect of adoption of FIN 48 |       | —                |       | —            |       | —             |       | (204               | )          | —       |       | (204       | )          |
| Net earnings                             |       | —                |       | —            |       | —             |       | 1,399              |       | —       |       | 1,399      |       |
| Stock  compensation expense              |       | —                |       | —            |       | 306                |       | —             |       | —       |       | 306        |       |
|                                     |       |                  |       |              |       |               |       |               |       |         |       |       |       |
| Balance at January 31, 2008         |       | 5,649,670             |       | $                 | 6          |               | $          | 19,680             |       | $            | 18,031     |       | $          | (4,467 | ) | $ | 33,250 |   |

 

The accompanying notes are an integral part of this consolidated financialstatement.

 

5

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** **

**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS**

**For the Nine Months Ended January 31, 2007and 2008**

##### **(In thousands)**

**(Unaudited)**

** **
| ** **                                                                                                                        | ** ** | **2007** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                              |       |     |       |     |       |
| Cash Flows From Operating Activities:                                                                                             |       |     |       |     |       |
| Net earnings                                                                                                                      |       | $        | 2,852      |     | $          | 1,399 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities — Depreciation and  amortization expense |       | 4,960    |       | 4,954    |       |
| Provision for credit losses                                                                                                       |       | 8,431    |       | 11,066   |       |
| Reversal of uncertain tax position                                                                                                |       | (669     | )          | (329     | )          |
| Excess tax benefits from share-based payment arrangements                                                                         |       | (23      | )          | —   |       |
| Share-based payment arrangements                                                                                                  |       | 224      |       | 306      |       |
| (Increase) decrease in:                                                                                                           |       |     |       |     |       |
| Accrued interest receivable                                                                                                       |       | (886     | )          | (611     | )          |
| Restricted cash                                                                                                                   |       | (11,632  | )          | 480      |       |
| Deferred financing costs and other assets                                                                                         |       | (562     | )          | (315     | )          |
| Funds held under reinsurance agreement                                                                                            |       | (225     | )          | (188     | )          |
| Current income tax receivable                                                                                                     |       | —   |       | 373      |       |
| Increase (decrease) in:                                                                                                           |       |     |       |     |       |
| Accounts payable and accrued liabilities                                                                                          |       | (370     | )          | (339     | )          |
| Deferred income taxes payable                                                                                                     |       | (461     | )          | 252      |       |
| Income taxes                                                                                                                      |       | 150      |       | 329      |       |
| Net cash provided by operating activities                                                                                         |       | 1,789    |       | 17,377   |       |
| Cash Flows From Investing Activities:                                                                                             |       |     |       |     |       |
| Origination of Receivables Held for Investment                                                                                    |       | (240,802 | )          | (202,211 | )          |
| Payments received from Investment                                                                                                 |       | 372      |       | 829      |       |
| Contributions to Investment                                                                                                       |       | (434     | )          | (906     | )          |
| Principal payments from Receivables Held for Investment                                                                           |       | 118,522  |       | 128,022  |       |
| Payments received on Assets Held for Sale                                                                                         |       | 6,733    |       | 8,068    |       |
| Purchase of furniture and equipment                                                                                               |       | (624     | )          | (746     | )          |
| Net cash used in investing activities                                                                                             |       | (116,233 | )          | (66,944  | )          |
| Cash Flows From Financing Activities:                                                                                             |       |     |       |     |       |
| Proceeds from advances on—                                                                                                   |       |     |       |     |       |
| Warehouse credit facilities                                                                                                       |       | 478,589  |       | 359,435  |       |
| Working capital facility                                                                                                          |       | —   |       | 10,240   |       |
| Senior subordinated debt                                                                                                          |       | 7,829    |       | 5,000    |       |
| Principal payments made on—                                                                                                  |       |     |       |     |       |
| Warehouse credit facilities                                                                                                       |       | (272,292 | )          | (256,429 | )          |
| Term notes                                                                                                                        |       | (101,432 | )          | (56,580  | )          |
| Working capital facility                                                                                                          |       | —   |       | (12,970  | )          |
| Proceeds from the issuance of common stock                                                                                        |       | 107      |       | —   |       |
| Excess tax benefits from share-based payment arrangements                                                                         |       | 23       |       | —   |       |
| Net cash provided by financing activities                                                                                         |       | 112,824  |       | 48,696   |       |
| Decrease in Cash and Short-Term Investments                                                                                       |       | (1,620   | )          | (871     | )          |
| Cash and Short-Term Investments at Beginning of Period                                                                            |       | 3,380    |       | 1,669    |       |
| Cash and Short-Term Investments at End of Period                                                                                  |       | $        | 1,760      |     | $          | 798 |   |
| Supplemental Disclosures of Cash Flow Information:                                                                                |       |     |       |     |       |
| Cash paid during the period for—                                                                                             |       |     |       |     |       |
| Interest                                                                                                                          |       | $        | 15,652     |     | $          | 19,527 |   |
| Income taxes                                                                                                                      |       | 1,512    |       | 14       |       |

 

The accompanying notes are an integral part ofthese consolidated financial statements

 

6

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

 

##### **(Amountsin thousands, except per share data)**

##### ** **

##### **January 31,2008**

 

**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-ownedsubsidiaries, First Investors Insurance Company (FIIC), First Investors AutoReceivables Corporation (FIARC), F.I.R.C., Inc. (FIRC), First InvestorsServicing Corporation (FISC), FIFS Acquisition Funding Corp. LLC, FirstInvestors Residual Funding L.P., Farragut Financial Corporation, and FirstInvestors Auto Funding Corporation. First Investors, together with itswholly-owned subsidiaries, is hereinafter referred to as the Company.

 

FIFSbegan operations in May 1989 and is principally involved in the businessof originating 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 31,2008, approximately 33% and 12% 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 ofreceivables, acquired an interest in certain trust certificates related to theasset securitizations and acquired certain servicing rights along withfurniture, fixtures, equipment and technology to perform the servicing andcollection functions 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 partnerand owned 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 Partnershipconsists primarily of a portfolio of loans previously owned or securitized byFISC and certain other financial assets including charged-off accounts owned byFISC.

 

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 unrelatedthird party to service an approximately $300,000 portfolio of installment loanreceivables purchased from a subsidiary of Union Acceptance Corporation.

 

OnMay 30, 2007, FISC entered into a servicing agreement with an unrelatedthird party to service an approximately $154,211 portfolio of installment loanreceivables beginning on July 1, 2007. Additionally, the Company acquired a 50% participation in a $4,279portfolio of nonperforming loans at a purchase price of $592.  The Company accounts for these loans usingthe cost recovery method.

 

7

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

Intotal, at January 31, 2008, FISC performs servicing and collectionfunctions on a managed receivables portfolio of approximately $628,208.

 

**2.****                Interim Financial 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 the primarybeneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46,*Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51*, as amended in December 2003by Interpretation 46R.  As of January 31,2008, the Company does not have any variable interest entities under FIN 46 asamended 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 of management,the information furnished reflects all adjustments which are of a normalrecurring nature and are necessary for a fair presentation of the Company’sfinancial position as of January 31, 2008, and the results of itsoperations for the three and nine months ended January 31, 2007 and 2008,and its cash flows for the nine months ended January 31, 2007 and 2008.

 

The consolidatedfinancial statements for the interim periods have been prepared pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures are adequate tomake the information not misleading. These financial statements should be readin conjunction with the audited consolidated financial statements included inthe Company’s 2007 Annual Report on Form 10-K filed July 24, 2007.

 

*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 Companyaccrues interest 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.  The Company defers andcapitalizes certain expenses related to the origination of receivables held forinvestment, and amortizes these expenses in proportion to their underlyingreceivable.

 

*Other Income*.  Other Income consists of income received fromservicing activities, late fees and other loan related fees, income frominvestments, reinvestment revenue, and income earned from the sale of GAP insurance.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Income from the sale of GAPinsurance is recognized when sold as the Company has no further obligationafter the sale.

 

*Allowance for Credit Losses*.  The Company calculates theallowance 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.

 

TheCompany initiates efforts to make customer contact as early as when thecustomer is one day past due and become more aggressive as the loan becomesfurther past due.  Management reviewspast due loans and considers various factors including payment history, jobstatus and any events that may have occurred that prevent the customer frommaking a payment.  Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed.  Generally thisoccurs at 60 to 90 days after the loan becomes past due.   Upon

 

8

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

repossession, the uncollectible portion ofthe loan and 100% of accrued interest is written off.  The fair value of the collateral is recordedas Assets Held for Sale.  Fair value isdetermined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile 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 thecustomer is dismissed from bankruptcy, the Company resumes collection efforts.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan on a date which is six months prior tothe reporting date, to the aging status of each loan as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans 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.  The Company utilizes itsmost recent 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-BasedCompensation*(“SFAS No. 123(R)”) (see note 8).

 

*Income taxes. *The Company accounts for uncertain tax positionsin accordance with the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement 109* (“FIN 48”), which it adopted on May 1, 2007. The implementationof FIN 48 required the Company to make subjective assumptions and judgmentsregarding income tax exposure. Interpretations of and guidance surroundingincome tax laws and regulations change over time, and these may change theCompany’s subjective assumptions, which in turn, affect amounts recognized inthe condensed consolidated balance sheets and statements of earnings.

 

*Software.*  The Company accounts for internally developedsoftware costs under Statement of Position 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*(“SOP98-1”).  SOP 98-1 requires the Company tocapitalize certain costs related to the development, testing, coding, andinstallation of internally developed or purchased software.

 

**3.     Receivables Held for Investment**

 

The receivables generallyhave terms between 48 and 72 months and are collateralized by the underlyingvehicles.  Net receivable balancesconsisted of the following at April 30, 2007 and January 31, 2008:

 
| ** **                            | ** ** | **April 30,  2007** | ** ** | **January 31,  2008** | ** ** |
|---------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Receivables held  for investment      |       | $                        | 458,586    |                       | $          | 508,891 |   |
| Unamortized  premium, net (1)         |       | 4,118                    |       | 4,922                      |       |
| Deferred  acquisition costs, net      |       | 8,252                    |       | 8,716                      |       |
| Allowance for  credit losses          |       | (2,934                   | )          | (3,301                     | )          |
| Receivables held  for investment, net |       | $                        | 468,022    |                       | $          | 519,228 |   |

 

----

(1)  Includes premium less discounts paid to dealers.

 

9

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

The accrual of interest has been suspended on $1,923 and $3,282 ofdelinquent receivables as of April 30, 2007 and January 31, 2008,respectively.

 

Activityin the allowance for credit losses for the periods ended January 31, 2007 and2008 was as follows:

 
| ** **                     | ** ** | **For the Nine Months  Ended January 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                                            | ** ** | **2008** | ** ** |
| Balance, beginning of period   |       | $                                                                   | 2,332      |   | $ | 2,934 |   |
| Provision for credit losses    |       | 8,431                                                               |       | 11,066 |   |
| Charge-offs, net of recoveries |       | (7,773                                                              | )          | (10,699 | ) |
| Balance, end of period         |       | $                                                                   | 2,990      |   | $ | 3,301 |   |

 

**4.     Debt**

 

TheCompany finances its loan originations through two warehouse credit facilities.The Company’s credit facilities provide for one-year terms and have beenrenewed annually.  Management of theCompany believes that the credit facilities will continue to be renewed orextended or that it would be able to secure alternate financing on satisfactoryterms; however, there can be no assurance that it will be able to do so.  In May, 2005, the Company issued $175,000 inTerm Notes secured by a discrete pool of receivables, and in January, 2006, theCompany issued $189,000 in Term Notes secured by another 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 5.2% and 5.0% for the periods ended January 31, 2007 and 2008,respectively.

 

*WarehouseFacilities as of January 31, 2008*

 
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                                   | ** ** | **Insurance**                  | ** ** | **Borrowing  Rate At  January 31,  2008** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------------|------------|
| FIARC        |       | $            | 350,000    |            | $          | 322,871                |       | Commercial  paper rate plus  .55%(1)                                                             |       | .30% of  Unused  Facility |       | None                                                |       | 4.4 | % |
| FIRC         |       | $            | 65,000     |            | $          | 63,417                 |       | 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                                           |       | 3.8 | % |

 

----

(1) Program fee is 1% for borrowings over $300,000

 

*WarehouseFacilities – Credit Enhancement as of January 31, 2008*

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

 

10

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

FIRC - Inorder to obtain a lower cost of funding, the Company has agreed to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders, collectively, are namedas additional insureds under this policy. The coverage is obtained on eachreceivable at the time it is originated 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. Neither the vehicle purchasers nor the dealers are charged for thecoverage and they are unaware of its existence. The Company’s ALPI insurancepolicy is written by National Union Fire Insurance Company of Pittsburgh (“NationalUnion”), which is a wholly-owned subsidiary of American International Group.

 

Aggregate premiums paidfor ALPI coverage alone were $359 and $784 during the three months ended, and$2,211 and $2,317 for nine months ended, January 31, 2007 and 2008,respectively, and accounted for 0.8% and 0.9% during the three months ended,and 1.1% and 1.2% for the nine months ended, January 31, 2007 and 2008,respectively, of the principal amount of the receivables originated during suchperiods.

 

In April 1994, the Company organizedFirst Investors Insurance Company (“Insurance Subsidiary”) under the captiveinsurance company laws of the State of Vermont. The Insurance Subsidiary is anindirect wholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100 percent of the riskunder the Company’s ALPI insurance policy. At the time each receivable isinsured by National Union, the risk is automatically reinsured to its fullextent, and approximately 96% of the premium paid by the Company to NationalUnion with respect to such receivable is ceded to the Insurance Subsidiary.When a loss covered by the ALPI policy occurs, National Union pays it after theclaim is processed, and National Union is then reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

 

Theresult of the foregoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses.  Asof January 31, 2008, the Insurance Subsidiary had capital and surplus of$3,169 and unencumbered cash reserves of $2,275 in addition to the $250 trustaccount.

 

TheALPI coverage as well as the Insurance Subsidiary’s liability under theReinsurance Agreement, remains in effect for each receivable that is pledged ascollateral 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 may 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, orotherwise a party to, such commercial paper.

 

11

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** **

**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

*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. |       |

 

On February 15, 2006, the FIRC facility wasrenewed, under similar terms and conditions, at the $50,000 commitment leveluntil February 13, 2007.  On February 14,2007, the FIRC facility was extended to a maturity date of February 13,2008.  On September 12, 2007, theFIRC facility’s commitment level was increased to $65,000.  As of April 30, 2007 and January 31,2008, there was $36,805 and $63,417, respectively, outstanding.  Effective February 12, 2008, the Companyextended the expiration of its FIRC facility to February 11, 2009, andincreased the interest rate from LIBOR plus 0.50% to LIBOR plus 0.75%.  No other material changes were made to thisfacility.

 

On March 15,2006, following a short-term extension of the then current maturity date, theFIARC 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 facility 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 amendedthe facility to increase the commitment from $150,000 to $300,000 in order tofund the growth in origination volume. On February 14, 2007, the maturity date of the FIARC facility wasextended to February 13, 2008.  On December 10,2007, the Company increased the FIARC facility from $300,000 to $350,000, andincreased the facility fee from 0.55% to 1.0% on the additional $50,000.  The facility fee on the original $300,000remained at 0.55%.  Effective February 12,2008, the Company extended the expiration of its FIARC facility to February 11,2009, and increased the facility fee on the first $300,000 from 0.55% to0.75%.  The facility fee on amounts over$300,000 remained at 1%.  No othermaterial changes were made to this facility. As of April 30,2007 and January 31, 2008, there was $246,477 and $322,871, respectively,outstanding.

 

Managementintends to seek further extensions to these warehouse facilities prior to thecurrent expiration dates.  Managementfurther considers its relationship with its lenders to be satisfactory and hasno reason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

Thefollowing table contains pertinent information on the Term Notes as of January 31,2008.

 
| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **             | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|----------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------------------|-----------------|------------|--------------------|------------|
| 2005-A  Class 2 |       | May 5, 2005       |       | $                    | 106,493    |                   | July 16, 2012     |            | $          | 38,055             |       | 4.23 | % |
| 2006-A  Class 3 |       | January 26, 2006  |       | $                    | 74,000     |                   | February 15, 2011 |            | $          | 39,292             |       | 4.93 | % |
| 2006-A  Class 4 |       | January 26, 2006  |       | $                    | 36,060     |                   | April 15, 2013    |            | $          | 36,060             |       | 5.00 | % |

 

12

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

 

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS –**

**(Continued)**

 

Credit enhancement on theTerm Notes are as follows:

 

| **Facility** | ** ** | **Cash Reserve**                                                                                       | ** ** | **Advance  Rate**                           | ** ** | **Insurance** |
|--------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2005-A       |       | 1.0% of Initial Pool  Balance increasing to 2.0% 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 2.0% of Initial Pool Balance including Pre-Funding  Amount |       | 98.5% initial advance  decreasing to 96.75% |       | Surety Bond   |

 

Term Notes -  On May 5, 2005, theCompany, through its indirect, wholly-owned subsidiary, First Investors AutoOwner Trust 2005-A (“2005 Auto Trust”), completed the issuance of $69,000 of3.57% Class A-1 asset-backed notes and $106,493 of 4.23% Class A-2asset-backed notes (collectively “2005-A Term Notes”), for a total of $175,493of asset backed notes. The initial pool of automobile receivables transferredto the 2005 Auto Trust totaled $150,921, was previously owned by FIRC andFIARC, 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 BNote that was retained by the Company and pledged to secure the Working CapitalFacility as further described below. Proceeds from the issuance, which totaled$175,488, were used to (i) fund a $30,000 pre-funding account to be usedfor future loan originations, (ii) repay all outstanding borrowings underthe FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction feesrelated 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-1and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively,and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 Notes were paid off during the fiscal yearended April 30, 2006. The final maturity of the Class A-2 Term Notesis July 16, 2012. The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 4.25% of the outstanding balance of the underlying receivables pool. Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes. In the event that certain asset quality covenantsare not met, the reserve account target level will increase to 2% of the thencurrent principal balance of the receivables pool. As of April 30, 2007and January 31, 2008, the outstanding principal balances on the 2005-ATerm notes were $59,685 and $38,055, 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-1asset-backed notes, $47,000 of 4.87% Class A-2 asset-backed notes, $74,000of 4.93% Class A-3 asset-backed notes, and $36,060 of 5.00% Class A-4asset-backed notes (collectively “2006-A Term Notes”), for a total of $189,060of asset backed notes. The initial pool of automobile receivables transferredto the 2006 Auto Trust totaled $151,939, was previously owned by FIRC andFIARC, 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 Trustalso issued a $2,879 Class B Note that was retained by the Company andpledged to secure the Working Capital Facility as further described below. Proceedsfrom the issuance, which totaled $188,446, were used to (i) fund a $40,000pre-funding account to be used for future loan originations, (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2006-A Term Note issuance, and (v) fund aninitial cash reserve account of 1%, or $1,519 of the initial receivablespledged. The 2006-A Term Notes require monthly principal reductions sufficientto reduce 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, and the Class A-2 notes were paid offduring the quarter

 

13

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

 

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS –**

**(Continued)**

 

endedApril 30, 2007. The final maturities of the Class A-3 and Class A-4Term Notes are 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 byMBIA Insurance Corporation provides credit enhancement for the Class ANotes. In the event that certain asset quality covenants are not met, thereserve account target level will increase to the greater of 2% of the initialpool balance or 6% of the then current principal balance of the receivablespool. As of April 30, 2007 and January 31, 2008, the outstandingprincipal balances on the 2006-A Class A term notes were $110,302 and$75,352, respectively.

 

*Working Capital Facility*. The facility is provided to a special-purpose, wholly-ownedsubsidiary of the Company, First Investors Residual 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 is secured solely by the residual cashflow and cash reserve accounts related to the Company’s warehouse creditfacilities and the existing and future term note facilities. The outstandingborrowings under the facility bear interest at one-month LIBOR plus 2.25%. Inaddition, a commitment fee of 1.5% is paid on the total amount of this facility.On February 15, 2006, the Working Capital Facility was extended until February 14,2007, at the same terms and conditions. On November 7, 2006, the Companyamended the facility to increase the commitment amount from $23,500 to $28,500.On February 14, 2007, the working capital facility was extended to February 13,2008, under similar terms and conditions. Effective February 12, 2008, theCompany extended the expiration of its working capital facility to February 11,2009, and increased the program fee from 2.25% to 3.25%. No other materialchanges were made to this facility. As of April 30, 2007 and January 31,2008, there was $22,753 and $20,023, respectively, outstanding under thisfacility. The Company has capitalized $1 and $7 of interest expense for thethree and nine months ended January 31, 2008, related to certain softwarecosts.

 

The Company presently intends to seek a renewal of theworking capital facility from its lender prior to maturity. Should the facilitynot be renewed, the outstanding balance of the receivables would be amortizedin accordance with the borrowing base. Management considers its relationshipwith its lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed. If the facility is not renewed, however, or ifmaterial changes are made to its terms and conditions, it could have a materialadverse effect on the Company.

 

*Senior Subordinated Debt.* On September 12, 2007, the Company issued $5 million in 12.75%senior subordinated notes due on September 11, 2017. The notes were placedby the Company in a privately negotiated transaction and were purchased by anunaffiliated institutional investor. Proceeds from the note issue were used forworking capital and general corporate purposes. As of January 31, 2008,there was $5,000 outstanding under this facility.

 

*Related Party Loans.*On December 3, 2001, the Company entered into an agreement withone of its shareholders who is a member of its Board of Directors under whichthe Company may, from time to time, borrow up to $2,500. On December 6,2004, the original $2,500 shareholder loan was replaced with a $2,500 loancontaining identical 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 thefacility bear interest at a fixed rate of 10% per annum. The facility isunsecured and expressly subordinated to the Company’s senior credit facilities.The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other credit facilities. Therewas $2,500 outstanding under this facility as of April 30, 2007 and January 31,2008, respectively. For the three and nine months ended January 31, 2007and January 31, 2008, the Company recorded interest expense under thesefacilities of $63 and $189, respectively.

 

*Loan Covenants*.The documentation 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 of

 

14

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

 

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS –**

**(Continued)**

 

delinquencyexperience and other matters. The breach of these covenants, if not curedwithin the time limits specified, could precipitate events of default thatmight result in the acceleration of the maturity of the FIRC credit facility,the Term Notes and the working capital facility or the termination of thecommercial paper facilities. The Company was not in default with respect to allfinancial and non-financial covenants governing these financing arrangements atJanuary 31, 2008.

 

*Interest Rate Management*. The Company’s warehouse credit facilities and working capitalfacilities bear interest at floating interest rates which are reset on ashort-term basis while the secured Term Notes bear interest at a fixed rate ofinterest. The Company’s receivables bear interest at fixed rates that do notgenerally vary with a change in market interest rates. Since a primarycontributor to the Company’s profitability is its ability to manage its netinterest spread, the Company seeks to maximize the net interest spread whileminimizing exposure to changes in interest rates. In connection with managingthe net interest spread, the Company may periodically enter into interestrate swaps or caps to minimize the effects of market interest rate fluctuationson the net interest spread. To the extent that the Company has outstandingfloating rate borrowings or has elected to convert a portion of its borrowingsfrom fixed rates to floating rates, the Company will be exposed to fluctuationsin short-term interest rates.

 

**5.****             Earnings Per Share**

 

Earnings per share amounts are based on the weightedaverage number of shares of common stock and potential dilutive common sharesoutstanding during the period. The weighted average number of shares used tocompute basic and diluted earnings per share for the three and nine monthsended January 31, 2007 and 2008, are as follows:

 
| ** **                                                          | ** ** | **For the Three Months Ended  January 31,** | ** ** | **For the Nine Months Ended  January 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                                             | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Weighted average shares:                                            |       |                                                                 |       |                                                                |       |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share   |       | 4,477,694                                                            |       | 4,477,694                                                           |       | 4,469,708 |   | 4,477,694 |   |
| Effect of dilutive stock  options and warrants                      |       | 293,426                                                              |       | 224,690                                                             |       | 318,378 |   | 273.803 |   |
| Weighted average shares  outstanding for diluted earnings per share |       | 4,771,120                                                            |       | 4,702,384                                                           |       | 4,788,086 |   | 4,751,497 |   |

 

For the three and nine months ended January 31,2007 and 2008, the Company had 291 and 488 respectively, of stock options andstock warrants which were not included in the computation of diluted earningsper share because to do so would have been antidilutive for the periodpresented.

 

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

 

On December 24,2002, the Company invested $475 for a 40% ownership interest in First AutoReceivables Corporation (“FARC”) and $713 for junior mezzanine investments ofFARC. 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 LIBORplus 1%, the senior mezzanine interest rate is 22.5% and the junior mezzanineinterest rate is 25%.

 

The Companyaccounts for its ownership investment in FARC using the equity method inaccordance with APB Opinion 18. In addition to the equity and debt investments,the Company performs loan servicing and collection activities on the portfolio.The Company recognized servicing revenue of $67 and $36 for the three monthsended, and $244 and $126 for the nine months ended, January 31, 2007 and2008, respectively, interest income of $0 for the three months ended, and $9and $0 for the nine months ended, January 31, 2007 and 2008, respectively,and equity in earnings in FARC of $281 and $78 for the three months ended, and$667 and $303 for

 

15

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

 

**NOTES TO UNAUDITED CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

the nine months ended, January 31,2007 and 2008, respectively. As of January 31, 2008 the equity investmentin FARC of $1,210 is included in Equity investments on the balance sheet.

 

**7.    NewAccounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. This statementenhances existing guidance for measuring assets and liabilities using fairvalue. Prior to the issuance of SFAS No. 157, guidance for applying fairvalue was incorporated in several accounting pronouncements. This statementprovides a single definition of fair value, together with a framework formeasuring it, and requires additional disclosure about the use of fair value tomeasure assets and liabilities. SFAS No. 157 also emphasizes that fairvalue is a market-based measurement, not an entity-specific measurement, andsets out a fair value hierarchy with the highest priority being quoted pricesin active markets. Under this statement, fair value measurements are disclosedby level within that hierarchy. While SFAS No. 157 does not add any newfair value measurements, it does change current practice. Changes to practiceinclude: (1) a requirement for an entity to include its own creditstanding in the measurement of its liabilities; (2) a modification of thetransaction price presumption; (3) a prohibition on the use of blockdiscounts when valuing large blocks of securities for broker-dealers andinvestment companies; and (4) a requirement to adjust the value ofrestricted stock for the effect of the restriction even if the restrictionlapses within one year. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. The Company is currently evaluating theimpact of adopting SFAS No. 157 on its financial position, cashflows, and results of operations.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities - Including an amendment to FASB Statement No. 115*.This statement allows a company to irrevocably elect fair value as a measurementattribute for certain financial assets and financial liabilities with changesin fair value recognized in the results of operations. The statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the impact of adopting SFAS No. 159 on its financialposition, cash flows, and results of operations.

 

**8.****            ****Shareholders’ Equity**

 

*Preferred Stock*. TheCompany has authorized 1,000 shares of preferred stock with a $1.00 par value. Asof January 31, 2008, no shares have been issued.

 

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employeesfor the purchase of up to 300 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to 500.Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options. The Compensation Committee selects the persons to receiveoptions and determines the exercise price, the duration, any conditions onexercise and other terms of the options. In the case of options intended to beincentive stock options, the exercise price may not be less than 100% ofthe fair market value per share of common stock on the date of grant. Withrespect 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 begranted after the expiration of 10 years from the adoption of the Plan. As of April 30,2007 and January 31, 2008, a total of 361 options had been issued, and 295and 247, respectively, options remained outstanding. This plan expired on June 27,2005.

 

On September 8, 2005, the shareholdersapproved the Company’s 2005 Employee Stock Option Plan (the 2005 Plan). The2005 Plan is administered by the Compensation Committee of the Board ofDirectors and provides that options may be granted to officers and otherkey employees for the purchase of up to 200 shares of common stock, subject toadjustment in the event of certain changes in capitalization. Options may begranted

 

16

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

 

**NOTES TO UNAUDITED CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS –**

**(Continued)**

 

eitheras incentive stock options (which are intended to qualify for certain favorabletax treatment) or as non-qualified stock options. The Compensation Committeeselects the persons to receive options and determines the exercise price, theduration, any conditions on exercise and other terms of the options. Theexercise price may not be less than 100% of the fair market value pershare of common stock on the date of grant, and in no event may theduration of an option exceed 10 years and no option may be granted afterthe expiration of 10 years from the adoption of the Plan. As of April 30,2007 and January 31, 2008, a total of 197 and 285, respectively, optionshad been issued and remained outstanding.

 

The exercise price of the option is payable incash upon 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-Employee Director Stock Option Plan was established to further alignthe interests of the Company’s directors with the interests of theshareholders, as well as attracting and retaining qualified directors. Thisplan was subsequently amended in July 2006 to increase the number ofoptions available for issuance to 900. The Board of Directors administers theplan and the options will not be qualified as incentive stock options. Theduration of an option may not exceed 10 years and no option may begranted after the expiration of 10 years from the adoption of the Plan. Optiontypes will be automatic and discretionary. Automatic grants of 28 shares foreach non-employee director, or 140 shares total, were approved in July 2006.Subsequent automatic grants of an option to purchase 28 shares shall be made toeach non-employee director on July 15th each year, beginning July 15,2007. The plan also gives the Board of Directors discretionary authority toprovide for additional option grants if the Company’s annual financialperformance exceeds parameters established by the Board. No discretionarygrants have been awarded. As of April 30, 2007 and January 31, 2008,a total of 630 and 770, respectively, options had been issued under the plan,and 570 and 710, respectively, remained outstanding, leaving a remaining 270and 130, respectively, available for issuance. In addition to the optionsgranted above, there were an additional 20 options granted to a director in1995, before the adoption of the Non-Employee Director Stock Option Plan. Alloptions issued under this plan were issued with an exercise price equal to thefair market value of the underlying common stock on the date of the grant.

 

TheCompany utilizes the Black-Scholes-Merton model for calculating the fair valueof stock options, which is an acceptable valuation approach under SFAS No. 123(R).

 

Thefollowing table summarizes the option-pricing model assumptions used to computethe weighted average fair value of stock options granted during the periodsbelow:

 

| ** **                                      | ** ** | **For the Nine Months Ended January 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                                | ** ** | **2008** | ** ** |
| Dividend yield                                  |       | —                                                                  |       | — |   |
| Expected volatility                             |       | 26.44                                                                   | %          | 25.27 | % |
| Risk-free interest rate                         |       | 5.02                                                                    | %          | 5.03 | % |
| Estimated life (in years)                       |       | 6                                                                       |       | 6 |   |
| Weighted average fair-value of  options granted |       | $                                                                       | 3.06       |   | $ | 2.62 |   |
|                                                 |            |                                                                         |            |  |  |  |  |

 

Cash received from option exercises under all sharebased payment arrangements for the nine months ended January 31, 2007 and2008 was $107 and $0, respectively. The estimated tax benefit expected to berealized for the nine months ended January 31, 2007 and 2008 is $23 and$0, respectively.

 

The Company issued 228 options with an expected lifetime compensation cost of $546 during the nine months ended January 31,2008.

 

17

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

 

**NOTES TO UNAUDITED CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS –**

**(Continued)**

 

As of January 31, 2008, there was $934 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Plans. The cost is expected to be recognizedover a weighted average period of 1.3 years. The total fair value of sharesvested during the nine months ended January 31, 2007 and 2008 was $204 and$357, respectively.

 

Prior to the adoption of SFAS 123(R), all taxbenefits resulting from the exercise of stock options were presented asoperating cash flows in the Condensed Consolidated Statement of Cash Flows.SFAS 123(R) requires that cash flows from the exercise of stock optionsresulting from tax benefits in excess of recognized cumulative compensationcost (excess tax benefits) be classified as financing cash flows.

 

**9.****            ****Income Taxes**

 

As of May 1, 2007, the Company adopted FIN 48. Inconnection with this adoption, the Company recorded an uncertain tax benefit of$689 and an opening balance adjustment to retained earnings of $204 of which$29 would affect the effective rate. Additionally the Company recorded $16 and$43 of interest expense for the three and nine months ended January 31,2008, which is included in other interest expense on the Consolidated Statementof Earnings and penalties of $9 and $23 for the three and nine months ended January 31,2008, which is included in general and administrative expense on theConsolidated Statement of Earnings. The Company reversed $482 of unrecognizedtax benefits, and related interest and penalties for the three and nine monthsended January 31, 2008, due to the expiration of certain examinationperiods. The Company does not expect to reverse any additional uncertain taxpositions during the next 12 months.

 

 The Companyfiles a consolidated federal income tax return in the United States Federaljurisdiction and various combined and separate filings in several state andlocal jurisdictions. With limited exceptions, the Company is no longer subjectto U.S. Federal, state and local, income tax examinations by tax authoritiesfor years before 2005.

 

The Company’s continuing practice is to recognizeestimated interest as a component of other interest expense and penalties as acomponent of general and administrative expense in the Consolidated Statementof Earnings. As of May 1, 2007, the Company had accrued interest andpenalties associated with unrecognized tax benefits of $175.

 

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,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                                             | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Income tax - statutory rate                       |       | 34.0                                                                 | %          | 34.0                                                                | %          | 34.0 | % | 34.0 | % |
| State income tax, net of federal benefit          |       | 1.4                                                                  | %          | 2.0                                                                 | %          | 1.1 | % | 2.0 | % |
| Reversal of uncertain tax position                |       | —                                                               |       | (35.6                                                               | )%         | (19.8 | )% | (19.2 | )% |
| Non-deductible (benefit) expenses                 |       | —                                                               |       | 0.5                                                                 | %          | 0.4 | % | 0.5 | % |
| Year to date impact of adjustment to federal rate |       | (5.1                                                                 | )%         | 0.6                                                                 | %          | — |   | 0.4 | % |
| Year to date impact of adjustment to state rate   |       | (2.9                                                                 | )%         | 1.0                                                                 | %          | — |   | 0.5 | % |
| Effective income tax rate                         |       | 27.4                                                                 | %          | 2.5                                                                 | %          | 15.7 | % | 18.2 | % |

 

18

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**ITEM 2. *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS***

 

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

##### ** **

**CriticalAccounting Policies**

 

FinancialReporting Release No. 60, which was issued by the Securities and ExchangeCommission (“SEC”), requires all registrants to discuss critical accountingpolicies or methods used in the preparation of financial statements. Note 2 tothe consolidated condensed financial statements includes a summary of thesignificant accounting policies and methods used in the preparation of theCompany’s consolidated financial statements.

 

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*. ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers, which includes theamortization of premiums or discounts associated with the loan originations. TheCompany accrues interest income monthly using the effective interest method. Whena receivable becomes 90 days past due, the income accrual is suspended untilthe payments become current. When a loan is charged off or the collateral isrepossessed, the remaining income accrual is written off.

 

*Other Income*.Other Income consists of income received from servicing activities, late feesand other loan related fees, income from investments, reinvestment revenue, andincome earned from the sale of GAP insurance. Servicing revenue is accrued asservices are rendered. Late fees and other loan-related fees are recognizedwhen received. Income from investments and reinvestment revenue are accruedbased on the respective interest rate of such investment. Income from the saleof GAP insurance is recognized when sold as the Company has no furtherobligation after the sale.

 

*Advertising Costs.*TheCompany expenses advertising costs as incurred.

 

*Allowance for Credit Losses*. The Company calculates the allowance for credit losses in accordancewith SFAS No. 5*, Accounting forContingencies.*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 dueloans and considers various factors including payment history, job status andany events that may have occurred that prevent the customer from making apayment. Through the evaluation, if it is determined that the loan isuncollectible, the collateral is typically repossessed. Generally this occursat 60 to 90 days after the loan becomes past due. Upon repossession, theuncollectible portion of the loan and 100% of accrued interest is written off. Thefair value of the collateral is recorded as Assets Held for Sale. Fair value isdetermined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile lessselling related expenses. After collection of all proceeds, the Company recordsan adjustment, positive or negative, based on the difference between the fairvalue estimate and the proceeds received. In the event the collateral cannot belocated or if the customer refuses to pay and is not subject to bankruptcycourt protection, the Company will write off the entire balance of the loanonce 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, theCompany seeks to repossess the collateral with approval of the court. If thecustomer is dismissed from bankruptcy, the Company resumes collection efforts.

 

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses. The specificmethodology is a six-month migration analysis whereby the Company compares theaging status of each loan on a date which is six months prior to the reportingdate, to the aging status of each loan as of

 

19

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thereporting date. These factors are then applied to the aging status of each loanat the reporting date in order to calculate the number of loans that are expectedto migrate to impaired status. The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation. The Company utilized its most recent recovery rates in order toassess 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 allowance for credit losses is based on estimatesand qualitative evaluations. Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, are reported in earnings in the periodthey become known.

 

*Stock-Based Compensation*. The Companyexpenses stock-based compensation expense in accordance with  SFAS No. 123(R), *Share-BasedPayment - a revision to SFAS No. 123, Accounting for Stock-BasedCompensation*(“SFAS No. 123(R)”)

 

*Income taxes.*TheCompany accounts for uncertain tax positions in accordance with the provisionsof FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement 109* (“FIN 48”), which it adopted on May 1,2007. The implementation of FIN 48 required the Company to make subjectiveassumptions and judgments regarding income tax exposure. Interpretations of andguidance surrounding income tax laws and regulations change over time, andthese may change the Company’s subjective assumptions, which in turn,affect amounts recognized in the condensed consolidated balance sheets andstatements of earnings.

 

*Software.*TheCompany accounts for internally developed software costs under Statement ofPosition 98-1, *Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use*(“SOP 98-1”). SOP98-1 requires the Company to capitalize certain costs related to thedevelopment, testing, coding, and installation of internally developed orpurchased software.

 

**Managed Receivables**

 

The Company’s managedreceivables are (dollars in thousands):

 

| ** **                                                                            | ** ** | **As of or for the Periods** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Ended January 31,**                       | ** ** |
| ** **                                                                            | ** ** | **2007**                                              | ** ** | **2008** | ** ** |
| Receivables Held for  Investment:                                                     |       |                                                  |       |   |   |
| Number                                                                                |       | 28,011                                                |       | 30,507 |   |
| Principal balance                                                                     |       | $                                                     | 470,545    |   | $ | 508,891 |   |
| Average principal balance of  receivables outstanding  during the  nine-month period  |       | $                                                     | 418,509    |   | $ | 468,739 |   |
| Average principal balance of  receivables outstanding  during the  three-month period |       | $                                                     | 449,705    |   | $ | 487,869 |   |
| Other Servicing:                                                                      |       |                                                  |       |   |   |
| Number                                                                                |       | 7,478                                                 |       | 15,996 |   |
| Principal balance                                                                     |       | $                                                     | 61,648     |   | $ | 119,317 |   |
| Total Managed Receivables  Portfolio:                                                 |       |                                                  |       |   |   |
| Number                                                                                |       | 35,489                                                |       | 46,503 |   |
| Principal balance                                                                     |       | $                                                     | 532,193    |   | $ | 628,208 |   |
| Average principal balance of  receivables outstanding  during the  nine-month period  |       | $                                                     | 500,362    |   | $ | 584,234 |   |
| Average principal balance of  receivables outstanding  during the  three-month period |       | $                                                     | 517,215    |   | $ | 619,457 |   |

 

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The followingtable sets forth information with regard to the Company’s net interest spread,which represents the difference between the effective yield on Receivables Heldfor Investment and the Company’s average cost of debt utilized to fund thesereceivables, and its net interest margin (averages based on month-endbalances):

 
| ** **                                              | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                 | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| Receivables Held for Investment:                        |       |                                     |       |                                    |       |   |   |   |   |
| Effective yield on Receivables Held  for Investment (1) |       | 13.0                                     | %          | 12.8                                    | %          | 12.8 | % | 12.6 | % |
| Average cost of debt (2)                                |       | 5.7                                      | %          | 5.7                                     | %          | 5.5 | % | 5.9 | % |
| Net interest spread (3)                                 |       | 7.3                                      | %          | 7.1                                     | %          | 7.3 | % | 6.7 | % |
| Net interest margin (4)                                 |       | 7.3                                      | %          | 7.2                                     | %          | 7.3 | % | 6.8 | % |

 

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(1)           Represents interest income as a percentage of average Receivables Heldfor Investment outstanding.

 

(2)           Represents interest expense (including all feesand amortized costs) as a percentage of average debt outstanding.

 

(3)           Represents yield on Receivables Held for Investment less average cost ofdebt.

 

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

 

Netinterest income is the difference between interest earned from the receivablesportfolio and interest expense incurred on the credit facilities used tofinance the receivables. Net interest income was $8,769 and $23,921 for thethree and nine months ended January 31, 2008, respectively, an increase of7.1% and 4.6% when compared to amounts reported for the three and nine monthsended January 31, 2007, respectively.

 

The amount of netinterest income is the result of the relationship between the average principalamount of receivables held and average rate earned thereon and the averageprincipal amount of debt incurred to finance such receivables and the averagerates 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, 2007 to 2008** | ** ** | **Nine Months Ended  January 31, 2007 to 2008** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **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                   |       | $                                                                              | 1,236      |                                                                          | $          | (230 | ) | $ | 1,006 |   | $ | 4,832 |   | $ | (835 | ) | $ | 3,997 |   |
| Interest expense                  |       | 440                                                                            |       | (14                                                                           | )          | 426 |   | 1,856 |   | 1,095 |   | 2,951 |   |
| Net interest income               |       | $                                                                              | 796        |                                                                          | $          | (216 | ) | $ | 580 |   | $ | 2,976 |   | $ | (1,930 | ) | $ | 1,046 |   |

 

**Results of Operations**

 

*Three andNine  Months Ended January 31, 2007and 2008*

 

*Key Factors.*The critical factors affecting theCompany’s profitability during any period are  (i) loan origination volume and the corresponding growth inReceivables Held for Investment; (2) the level of net interest spread,which is defined as the difference between the effective yield on receivablesheld for investment and the cost of funds under the Company’s credit facilitiesand securitizations utilized to finance these receivables; (3) the levelof provision for credit losses; (4) the amount of income derived fromother 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. *Netearnings for the three and nine months ended January 31, 2007 were $821and $2,852 compared to $899 and $1,399 for the three and nine months ended January 31,2008.  Basic earnings per common sharewere $0.18 and $0.64 for the three and nine months ended January 31, 2007compared to $0.20 and $0.31 for the three and nine months ended January 31,2008.  Diluted earnings per common sharewere $0.17 and $0.60 for the three and nine months ended January 31, 2007compared to $0.19 and $0.29 for the three and nine months ended January 31,2008.  The increase in net earnings forthe three months ended January 31, 2008 compared to January 31, 2007is due to several factors, including: (i) a $1,006 increase in interestrevenue due to an 8% increase in the average balance of Receivables Held forInvestment, (ii) an increase in other finance charges and fees due to an8% increase in the average balance of Receivables Held for Investment, (ii) adecrease in general and administrative expenses due to a decrease in operatinglease expenses and (iv) the reversal of $482 of an uncertain tax position,including accrued penalties and interest, due to the expiration of certainexamination dates.  These are partially offset by: (i) a $426increase in interest expense due to a 7% increase in the average debtoutstanding, (ii) a $644 increase in provision for credit losses primarilyassociated with an increase in the allowance for loan losses, due in part togrowth in the portfolio of receivables held for investment, and (iii) a $237 increase in operating expenses due to an increase in postage andprinting expenses associated with the Company’s direct portfolio and anincrease in outsourced collections due to an increase in rates and the additionof a new portfolio of loans in May, 2007.

 

The decrease in earnings for the nine months ended January 31,2008, compared to January 31, 2007 is due to several factors,including:  (i) a $2,951 increase ininterest expense due to an 11% increase in the average debt outstanding, (ii) a$2,635 increase in the provision for credit losses due to the growth in theportfolio of Receivables Held for Investment, (iii) a $646 increase inoperating expenses primarily due to an increase in postage and printingexpenses associated with the Company’s direct portfolio and an increase inoutsourced collections due to an increase in rates and the addition of a newportfolio of loans in May, 2007, and a (iv) $564 increase in otherinterest expense primarily due to the issuance of $5,000 of senior subordinateddebt and increased rates under the working capital facility.  These are partially offset by (i) a$3,997 increase in interest income due to a 12% increase in the average balanceof Receivables Held for Investment for the nine months ended January 31,2008, (ii) an increase in other finance charges and fees due to a 12%increase in the average balance of Receivables Held for Investment, (iii) anincrease in income from insurance products due to higher penetration rates, (iv) adecrease in salaries and benefits due to lower bonus expense and (v) adecrease in general and administrative expenses due to a decrease in operatinglease expenses.

 

*Interest Income*.Interest income for the three and nine months ended January 31, 2008increased to $15,559 and $44,255 compared to $14,553 and $40,258 for the threeand nine months ended January 31, 2007.

 

Thelevel of interest income, a primary driver of financial results, is impacted bythe average outstanding balance of the portfolio of Receivables Held forInvestment, the weighted average interest rate on receivables originated by theCompany, the mix of direct and indirect lending activities and the level ofearly prepayments and charge-offs. Interest income on Receivables Held for Investment increased****7% and 10% for the three and nine months ended January 31,2008 compared to the three and nine months ended January 31, 2007.  The increase in interest income for the threeand nine months ended January 31, 2008 is primarily due to a 9% and 12%increase in the average portfolio outstanding for the three and nine monthsended January 31, 2008 compared to the period ended January 31, 2007,partially offset by a 19 and 24 basis point decrease in the average interestrate.

 

*Interest Expense.*Interestexpense for the three and nine months ended January 31, 2008 increased to$6,790 and $20,334 compared to $6,364 and $17,383 for the three and nine monthsended January 31, 2007.  Theincrease in interest expense is primarily due to (i) a $30,941 or 7%increase in the average debt outstanding for the three months ended and a$44,623 or 11% increase in the average debt outstanding for the nine monthsended January 31, 2008, compared to the three and nine months ended January 31,2007 as a result of an 8% and 12% increase in the average portfolio ofReceivables Held for Investment for the three and nine months ended January 31,2008,  and (ii) a 32 basis pointincrease in interest rates for the nine months ended January 31, 2008 as aresult of market rate increases.  Ratesfor the three months ended January 31, 2008 and 2007 were constant.

 

*Provision for Credit Losses*. The provision for credit losses for the three and nine months ended January 31,2008 increased to $3,880 and $11,066 as compared to $3,236 and $8,431 for thethree and nine months ended January 31, 2007. The increase in provisionfor credit losses is due an increase in the allowance for loan losses, 

 

22

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duein part to growth in the portfolio of receivables held for investment and anincrease in frequency and severity of repossessions.  Provision for credit losses as a percentageof average receivables held for investment on an annual basis increased to 3.2%for the three and nine months ended January 31, 2008 as compared to 2.9%and 2.7% for the three and nine months ended January 31, 2007.

 

Net charge-offs for the three and nine months ended January 31,2008 increased to $3,641 and $10,699 compared to $2,993 and $7,773 for thethree and nine months ended January 31, 2007.  The increase in net charge-offs for the threeand nine months ended January 31, 2008 is due to (i) an 8% and 12%increase in the average portfolio outstanding for the three and nine monthsended January 31, 2008, compared to the three and nine months ended January 31,2007, (ii) an increase in loss frequency and severity from repossessions,and (iii) an increase in loss frequency and severity from non-repossessionlosses.  This is partially offset by anincrease in recoveries from defaulted loans. The allowance for loan loss as a percentage of the portfolio ofreceivables held for investment remained constant at 0.6% as of April 30,2007 and January 31, 2008.

 

The level ofprovision for credit losses is a key driver of overall financial performanceand should be positively impacted by improvement in general economicconditions, improvements in wholesale used car prices and lower delinquencyrates and net losses projected for the portfolio of Receivables Held forInvestment.  Any additional economicdeterioration or decline in wholesale used car prices will negatively impactprovision expense to the extent that these events cause an increase indelinquency rates, bankruptcy rates or net charge-off rates in the portfolio ofReceivables Held for Investment.

 

*Servicing Revenue*.  On December 24, 2002, the Companyentered into an agreement to provide loan servicing and collection activitieson behalf of FARC.  FARC, which is 40%owned by the Company, purchased a portfolio of approximately $200,000 ofinstallment loan receivables.  On March 19,2003, the Company entered into an agreement to provide loan servicing andcollection activities on $276,000 of installment loan receivables for unrelatedthird parties.  On May 30,2007, the Company entered into a servicing agreement with an unrelated thirdparty to service an approximately $154,211 portfolio of installment loanreceivables.  The servicing of thesereceivables began on July 1, 2007.  Servicing revenue decreased to $338 and $1,004****for the three and nine months ended January 31, 2008compared to $377 and $1,053 for three months ended January 31, 2007.  The decrease in servicing revenue for thethree and nine months ended January 31, 2008 is due to the liquidation ofserviced receivables during the three and nine months ended January 31,2008.  This is partially offset by theservicing of new third party receivables. Revenue derived from servicing activities will increase or decrease indirect proportion to the average outstanding balance of serviced receivables.

 

*Other Finance Charges and Fees*.  Other finance charges and feesincreased to $1,054 and $2,968 for the three and nine months ended January 31,2008, compared to $876 and $2,435 for the three and nine months ended January 31,2007.  Theincrease is attributable to (i) increased assessment and collection offees due to an 8% and 12% increase in the average portfolio of Receivables Heldfor Investment for the three and nine months ended January 31, 2008 and (ii) increaseddelinquencies for the three and nine months ended January 31, 2008,resulting in increased fees.  Income derived from late fees and collectionactivities is recognized when received, and therefore can be volatile fromperiod to period based on overall cash collection, seasonality, delinquencyrates and other factors.  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. *Insurance Products revenue increased to $1,062 for thenine months ended January 31, 2008, compared to $932 for the nine monthsended January 31, 2007.  Theincrease is attributable to (i) increased penetration rates and (ii) higher gross margins.  This ispartially offset by a decrease in originations.  Insurance products revenue is primarily driven by growth rates in theCompany’s direct lending business which will affect the ability of the Companyto generate fee income from marketing insurance products.

 

*Income from Investments.*  Income from investments increasedto $206 and $430 for the three and nine months ended January 31, 2008,compared to $163 and $418 for the three and nine months ended January 31,2007.  The increase is primarily relatedto the Company’s 50% participation in a portfolio of nonperforming loans on July 1,2007.  These loans are accounted forunder the cost recovery method, and the Company fully realized its initialinvestment during the three months ended January 31, 2008. This ispartially offset by the liquidation of the FARC portfolio.

 

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*Other interest income.*  Other interest income decreasedto $362 and $1,226 for the three and nine months ended January 31, 2008,compared to $482 and $1,342 for the three and nine months ended January 31,2007.  The decrease is primarily due to adecrease in the reinvestment rates for the three and nine months ended January 31,2008.

 

*Salaries and Benefits.*  Salaries and benefits decreasedto $2,915 and $8,224 for the three and nine months ended January 31, 2008,compared to $2,984 and $8,548 for the three and nine months ended January 31,2007.  The decrease is attributable to (i) lowerbonus expense and (ii) the capitalization of payroll costs related to theongoing implementation of a new loan origination system.

 

*Operating Expenses.*  Operating expensesincreased to $1,945 and $4,987 for the three and nine months ended January 31,2008, compared to $1,708 and $4,341 for the three and nine months ended January 31,2007.  Expenses characterized asoperating expenses are generally variable in nature and are typically dependenton a number of factors including origination volume, the outstanding balance ofthe managed portfolio, credit quality and operating efficiency levels.  The increase was primarily due to (i) anincrease in postage and printing expense associated with the Company’s directoriginations, (ii) an increase in outsourced collections due to anincrease in rates and the addition of a new portfolio of loans in May, 2007, (iii) increasedactivity fees in the Company’s loan origination system due to a change insystems and (iv) a decrease in the dollar amount of expenses which theCompany was able to capitalize as deferred acquisition costs.

 

*General and Administrative.* General and administrative expenses decreased to $850 and $2,686 for thethree and nine months ended January 31, 2008, compared to $979 and $2,978for the three and nine months ended January 31, 2007.  The decrease is attributable to decreasedoperating lease expense due to (i) the expiration of certain equipmentoperating leases and (ii) the reversal of penalties related to anuncertain tax position that was reversed during the three and nine months endedJanuary 31, 2008 due to the expiration of certain examinationperiods.  General and administrativecosts tend to be more fixed in nature and not as dependent on the overall levelof managed receivables.

 

*Other Interest Expense*. Otherinterest expense increased to $670 and $1,938 for the three and nine monthsended January 31, 2008, compared to $500 and $1,374 for the three and ninemonths ended January 31, 2007. The increase for the three months ended January 31,2008 was due to (i) the issuance of $5,000 of senior subordinated debt and(ii) an increase in the averagecost of debt.  This was partially offsetby (i) the reversal of interest expense related to an uncertain taxposition due to the expiration of certain examination periods and (ii) adecrease in the average outstanding borrowings on the Company’s working capitalline.  The increase for the nine monthsended January 31, 2008 was due to (i) the issuance of $5,000 of seniorsubordinated debt, (ii) an increasein the average cost of debt and (iii) an increase in the averageoutstanding borrowings on the Company’s working capital line.  This was partially offset by the reversal ofinterest expense related to uncertain tax positions due to the expiration ofcertain examination periods.

 

**Portfolio Characteristics**

 

*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 the automobileand other factors.

 

*Customer Profile*.  The Company’s primary goal in creditevaluation is to make loans to customers having stable personal situations,predictable incomes and the ability and inclination to perform theirobligations in a timely manner. Many of the Company’s customers are persons whohave experienced credit difficulties in the past by reason of illness, divorce,job loss, reduction in pay or other adversities, but who appear to the Companyto have the capability and commitment to meet their obligations. Through itscredit evaluation process, the Company seeks to distinguish these persons fromthose applicants who are chronically poor credit risks.

 

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**Credit Evaluation**

 

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which (i) thecreditworthiness of the borrower and the terms of the proposed transaction areevaluated and either approved, declined or modified by the Company’s creditverification department, (ii) the loan documentation and collateralizationis reviewed by the Company’s funding department, and (iii) additionalcollateral verification procedures and customer interviews are conducted by theCompany. During the course of this process, the Company’s credit verificationand funding personnel coordinate closely with the finance and insurancedepartments of the dealers or with individuals to whom the Company lendsdirectly. The Company has developed financing programs under which it approvesloans that vary in pricing and loan terms depending on the relative credit riskdetermined for each loan. Credit or default risk is evaluated by the Company’sloan officers in conjunction with a proprietary, empirical credit scoring modeldeveloped from the Company’s 17 year database of non-prime lending results.

 

In addition to this credit underwritingprocess, and prior to the origination of a receivable by the Company, theCompany performs additional procedures to validate the details of the creditapplication, including income and/or employment information, to verify that thecollateral is insured, and to confirm that the material terms of the sale conformto the purchaser’s understanding of the transaction.  The Company will originate a receivable onlyafter receipt and review of a satisfactory audit report.

 

# **Liquidity and CapitalResources**

# ** **

*Sourcesand Uses of Cash Flows*. The Company’s business requires significant cash flow to support itsoperating activities. The principal cash requirements include (i) amountsnecessary to acquire receivables from dealers and fund required reserveaccounts, (ii) amounts necessary to fund premiums for credit enhancementinsurance or other credit enhancement required by the Company’s financingprograms, and (iii) amounts necessary to fund costs to retain receivables,primarily interest expense. The Company also requires a significant amount ofcash flow for working capital to fund fixed operating expenses, primarilysalaries and benefits.

 

The Company’s mostsignificant cash flow requirement is for the origination of receivables. TheCompany originated $87,475 and $237,327 of receivables to be held forinvestment for the three and nine months ended January 31, 2007 comparedto $85,626 and $199,003 for the three and nine months ended January 31,2008.

 

The Company funds loanoriginations through a combination of two warehouse credit facilities. The FIRCcredit facility generally permits the Company to borrow up to the outstandingprincipal balance of qualified receivables, not to exceed $65,000.  Receivables that have accumulated in the FIRCcredit facility may be transferred to the FIARC commercial paper facility atthe option of the Company. The FIARC commercial paper facility provides anadditional financing source of up to $350,000. Additionally, the Company hastransferred receivables from the warehouse credit facilities and issued termnotes. Substantially all of the Company’s receivables are pledged tocollateralize these credit facilities and term notes.  The Company is obligated to meet certainfinancial covenants.  Noncompliance maysignificantly affect cash flow.

 

The Company’s mostsignificant source of cash flow is the principal and interest payments receivedfrom its receivables portfolios. The Company received such payments in theamount of $53,101 and $157,893 during the three and nine months ended January 31,2007, and $53,628 and $171,781 during the three and nine months ended January 31,2008.  Such cash flow funds were used torepay amounts borrowed under the Company’s credit facilities and other holdingcosts, primarily interest expense, and servicing and custodial fees.  During the three and nine months ended January 31,2007, the Company required net cash of $34,373 and $79,433, as the receivablesoriginated exceeded portfolio collections. During the three and nine months ended January 31, 2008, theCompany required net cash of $31,998 and $27,222, as the receivables originatedexceeded portfolio collections.  TheCompany relies on borrowed funds to provide cash flow in periods ofgrowth.  As of January 31, 2008, theCompany had $28,712 of available capacity in the FIRC and FIARC creditfacilities to fund future growth.

 

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In addition to the cash flow generated from theprincipal and interest collections on its receivables portfolio, the Companycollects servicing fees funded from each of the servicing portfolios.  Servicing fees range from 0.7% to 2.5% of theoutstanding principal balance of the loans in the portfolio.  Cash flow and servicing fees are receivedafter month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash available tofund operations.   At January 31,2007 and 2008, the Company’s unencumbered cash was $1,760 and $798respectively.  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 loan originationsthrough two warehouse credit facilities. The Company’s credit facilitiesprovide for one-year terms and have been renewed annually.  Management of the Company believes that thecredit facilities will continue to be renewed or extended or that it would beable to secure alternate financing on satisfactory terms; however, there can beno assurance that it will be able to do so. In May, 2005, the Company issued $175,000 in Term Notes secured by adiscrete pool of receivables, and in January, 2006, the Company issued $189,000in Term Notes secured by another 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 5.2% and 5.0% for theperiods ended January 31, 2007 and 2008, respectively.

 

*WarehouseFacilities as of January 31, 2008*

 
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                             | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  January 31,  2008** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| FIARC        |       | $            | 350,000    |            | $          | 322,871                |       | Commercial paper rate  plus .55%(1)                                                                  |       | .30% of Unused Facility |       | None                                                |       | 4.4 | % |
|         |       |         |       |            |       |                   |       |                                                                                                 |       |                    |       |                                                |       |   |   |
| FIRC         |       | $            | 65,000     |            | $          | 63,417                 |       | 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                                           |       | 3.8 | % |

 

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(1) Program fee is 1% for borrowings over $300,000

 

*WarehouseFacilities – Credit Enhancement as of January 31, 2008*

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

 

FIRC - Inorder to obtain a lower cost of funding, the Company has agreed to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders, collectively, are namedas additional insureds under this policy. The coverage is obtained on eachreceivable at the time it is originated by the Company and the applicablepremiums are prepaid for the life of the receivable. The 

 

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insurance enhancing this facility is defaultinsurance under a standard auto loan protection policy (known as “ALPI”insurance) which covers the difference between the outstanding balance of areceivable and the liquidation proceeds in the event the underlying collateralis repossessed.  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.

 

Aggregate premiums paidfor ALPI coverage alone were $359 and $784 during the three months ended, and$2,211 and $2,317 for nine months ended, January 31, 2007 and 2008,respectively, and accounted for 0.8% and 0.9% during the three months ended,and 1.1% and 1.2% for the nine months ended, January 31, 2007 and 2008,respectively, of the principal amount of the receivables originated during suchperiods.

 

In April 1994, the Company organizedFirst Investors Insurance Company (“Insurance Subsidiary”) under the captiveinsurance company laws of the State of Vermont. The Insurance Subsidiary is anindirect wholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100 percent of the riskunder the Company’s ALPI insurance policy. At the time each receivable isinsured by National Union, the risk is automatically reinsured to its fullextent, and approximately 96% of the premium paid by the Company to NationalUnion with respect to such receivable is ceded to the Insurance Subsidiary.When a loss covered by the ALPI policy occurs, National Union pays it after theclaim is processed, and National Union is then reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

 

Theresult of the foregoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses.  Asof January 31, 2008, the Insurance Subsidiary had capital and surplus of$3,169 and unencumbered cash reserves of $2,275 in addition to the $250 trustaccount.

 

TheALPI coverage as well as the Insurance Subsidiary’s liability under theReinsurance Agreement, remains in effect for each receivable that is pledged ascollateral 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 may 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, orotherwise a 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. |

 

On February 15, 2006, the FIRC facility wasrenewed, under similar terms and conditions, at the $50,000 commitment leveluntil February 13, 2007.  On February 14,2007, the FIRC facility was extended to a maturity date of February 13,2008.  On September 12, 2007, theFIRC facility’s commitment level was increased to $65,000.  As of April 30, 2007 and January 31,2008, there was $36,805 and $63,417, respectively, outstanding.  

 

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Effective February 12, 2008, the Company extended the expirationof its FIRC facility to February 11, 2009, and increased the interest ratefrom LIBOR plus 0.50% to LIBOR plus 0.75%. No other material changes were made to this facility.

 

On March 15,2006, following a short-term extension of the then current maturity date, theFIARC 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 facility 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 amendedthe facility to increase the commitment from $150,000 to $300,000 in order tofund the growth in origination volume. On February 14, 2007, the maturity date of the FIARC facility wasextended to February 13, 2008.  On December 10,2007, the Company increased the FIARC facility from $300,000 to $350,000, andincreased the facility fee from 0.55% to 1.0% on the additional $50,000.  The facility fee on the original $300,000remained at 0.55%.  Effective February 12,2008, the Company extended the expiration of its FIARC facility to February 11,2009, and increased the facility fee on the first $300,000 from 0.55%to0.75%.  The facility fee on amounts over$300,000 remained at 1%.  No othermaterial changes were made to this facility. As of April 30,2007 and January 31, 2008, there was $246,477 and $322,871, respectively,outstanding.

 

Managementintends to seek further extensions to these warehouse facilities prior to thecurrent expiration dates.  Managementfurther considers its relationship with its lenders to be satisfactory and hasno reason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

Thefollowing table contains pertinent information on the Term Notes as of January 31,2008.

 
| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **             | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|----------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------------------|-----------------|------------|--------------------|------------|
| 2005-A  Class 2 |       | May 5, 2005       |       | $                    | 106,493    |                   | July 16, 2012     |            | $          | 38,055             |       | 4.23 | % |
| 2006-A  Class 3 |       | January 26, 2006  |       | $                    | 74,000     |                   | February 15, 2011 |            | $          | 39,292             |       | 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** |
|--------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2005-A       |       | 1.0%  of Initial Pool Balance increasing to 2.0% 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 2.0% of Initial Pool Balance including  Pre-Funding Amount |       | 98.5%  initial advance decreasing to 96.75% |       | Surety  Bond  |

 

Term Notes-  On May 5, 2005, the Company,through its indirect, wholly-owned subsidiary, First Investors Auto Owner Trust2005-A (“2005 Auto Trust”), completed the issuance of $69,000 of 3.57% Class A-1asset-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 backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,921, was previously owned by FIRC and FIARC, and secures the2005-A Term Notes.  In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trustalso issued a $5,428 Class B Note that was retained by the Company andpledged to secure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$175,488, were used to (i) fund a $30,000 pre-funding account to be usedfor future loan originations, (ii) repay all outstanding borrowings underthe FIARC commercial paper 

 

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facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction feesrelated 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 TermNotes bear interest at 3.57% and 4.23%, respectively, and require monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The Class A-1 Notes were paid off during the fiscal year ended April 30,2006.  The final maturity of the Class A-2Term Notes is July 16, 2012.  The Class BNote does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 4.25% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 2% of the then current principal balance of thereceivables pool.  As of April 30,2007 and January 31, 2008, the outstanding principal balances on the2005-A Term notes were $59,685 and $38,055, respectively.

 

OnJanuary 26, 2006, the Company, through its indirect, wholly-ownedsubsidiary, First Investors Auto Owner Trust 2006-A (“2006 Auto Trust”),completed the issuance of $32,000 of 4.57% Class A-1 asset-backed notes,$47,000 of 4.87% Class A-2 asset-backed notes, $74,000 of 4.93% Class A-3asset-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-4Notes, the 2006 Auto Trust also issued a $2,879 Class B Note that wasretained by the Company and pledged to secure the Working Capital Facility asfurther described below.  Proceeds fromthe issuance, which totaled $188,446, were used to (i) fund a $40,000pre-funding account to be used for future loan originations, (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2006-A Term Note issuance, and (v) fund aninitial cash reserve account of 1%, or $1,519 of the initial receivablespledged.  The 2006-A Term Notes requiremonthly principal reductions sufficient to reduce the balance of the notes to96.75% of the outstanding balance of the underlying receivables pool. The Class A-1notes were paid off during the quarter ended July 31, 2006, and the Class A-2notes were paid off during the quarter ended April 30, 2007.  The final maturities of the Class A-3and Class A-4 Term Notes are February 15, 2011 and April 15,2013, respectively.  The Class BNote does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 3.25% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to the greater of 2% of the initial pool balance or 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2007 and January 31,2008, the outstanding principal balances on the 2006-A Class A term noteswere $110,302 and $75,352, 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’s othercredit 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.  OnFebruary 15, 2006, the Working Capital Facility was extended until February 14,2007, at the same terms and conditions. On November 7, 2006, the Company amended the facility to increasethe commitment amount from $23,500 to $28,500. On February 14, 2007, the working capital facility was extended to February 13,2008, under similar terms and conditions.   Effective February 12, 2008, the Company extended the expiration ofits working capital facility to February 11, 2009, and increased theprogram fee from 2.25% to 3.25%.  Noother material changes were made to this facility.  As of April 30, 2007 and January 31,2008, there was $22,753 and $20,023, respectively, outstanding under thisfacility.  The Company has capitalized $1and $7 of interest expense for the three and nine months ended January 31,2008, related to certain software costs.

 

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 

 

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has no reason tobelieve that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have amaterial adverse effect on the Company.

 

*SeniorSubordinated Debt.* OnSeptember 12, 2007, the Company issued $5 million in 12.75% seniorsubordinated notes due on September 11, 2017.  The notes were placed by the Company in aprivately negotiated transaction and were purchased by an unaffiliatedinstitutional investor.    Proceeds fromthe note issue were used for working capital and general corporate purposes.  As of January 31, 2008, there was $5,000outstanding under this facility.

 

*Related Party Loans. *On December 3, 2001, the Company enteredinto an 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 atany time unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder this facility as of April 30, 2007 and January 31, 2008,respectively.  For the three and ninemonths ended January 31, 2007 and January 31, 2008, the Companyrecorded interest expense under these facilities of $63 and $189, respectively.

 

*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of thematurity of the FIRC credit facility, the Term Notes and the working capitalfacility or the termination of the commercial paper facilities. The Company wasnot in default with respect to all financial and non-financial covenantsgoverning these financing arrangements at January 31, 2008.

 

*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.

 

**Delinquency and Credit LossExperience**

 

TheCompany’s results of operations, financial condition and liquidity may beadversely affected by nonperforming receivables. The Company seeks to manageits risk of credit loss through (i) prudent credit evaluations, (ii) riskmanagement activities, (iii) effective collection procedures, and (iv) bymaximizing recoveries on defaulted loans. The allowance for credit losses of$3,301 as of January 31, 2008, and $2,934 as of April 30, 2007, as apercentage of Receivables Held for Investment of $508,891 as of January 31,2008, and $458,586 as of April 30, 2007, was 0.6%.

 

TheCompany considers a loan to be delinquent when the borrower fails to make ascheduled payment of principal and interest. Accrual of interest is suspendedwhen the payment from the borrower is over 90 days past due. Generally,repossession procedures are initiated 60 to 90 days after the payment default.

 

TheCompany retains the credit risk associated with the receivables originated. TheCompany purchases credit enhancement insurance from third party insurers whichcovers the risk of loss upon default and certain other 

 

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risks. The Companyestablished a captive insurance subsidiary to reinsure certain risks under thecredit enhancement insurance coverage for all receivables.  In addition, receivables financed under theAuto Trust and FIARC commercial paper facilities do not carry defaultinsurance.  Provisions for credit lossesof $3,236 and $8,431 for the three and nine months ended January 31, 2007compared to $3,880 and $11,066 for the three and nine months ended January 31,2008 have been recorded.

 

The Company calculatesthe 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.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan on a date which is six months prior tothe reporting date, to the aging status of each loan as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans 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 historical information.  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.  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.

 

The following table setsforth certain information regarding the Company’s delinquency and charge-offexperience over the nine month periods (in thousands):

 

| ** **                                                                                | ** ** | **For the Nine Months Ended January 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                                                | ** ** | **2008** | ** ** |
| ** **                                                                                | ** ** | **Number**                                                              | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                                            | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                         |       |                                                                    |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                                                    |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 98                                                                      |       | $ | 1,079 |   | 165 |   | $ | 2,143 |   |
| 60 - 89 days                                                                              |       | 64                                                                      |       | 569 |   | 70 |   | 687 |   |
| 90 days or more                                                                           |       | 65                                                                      |       | 638 |   | 98 |   | 951 |   |
| Total  delinquencies                                                                      |       | 227                                                                     |       | $ | 2,286 |   | 333 |   | $ | 3,781 |   |
| Total  delinquencies as a percentage of outstanding receivables                           |       | 0.8                                                                     | %          | 0.5 | % | 1.1 | % | 0.7 | % |
| Net charge-offs  as a percentage of average receivables outstanding during the period (2) |       |                                                                    |       | 2.5 | % |   |   | 3.0 | % |

 

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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. The higher annualized charge-off rate results from anincrease in repossessions and lower recovery rates on the repossessed vehicles.

 

As of January 31,2008, there were 317 accounts totaling $4,300 that were in bankruptcy statusand were more than 30 days past due.  Asof January 31, 2007, there were 271 accounts totaling $3,400 that were inbankruptcy status and were more than 30 days past due.  As of January 31, 2007 and 2008, 91% and89%, respectively, of the bankruptcy delinquencies filed for protection underChapter 13.

 

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**New Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. This statement enhances existing guidance formeasuring assets and liabilities using fair value. Prior to the issuance ofSFAS No. 157, guidance for applying fair value was incorporated in severalaccounting pronouncements. This statement provides a single definition of fairvalue, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFAS No. 157also emphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy with thehighest priority being quoted prices in active markets. Under this statement,fair value measurements are disclosed by level within that hierarchy. WhileSFAS No. 157 does not add any new fair value measurements, it does changecurrent practice. Changes to practice include: (1) a requirement for anentity to include its own credit standing in the measurement of itsliabilities; (2) a modification of the transaction price presumption; (3) aprohibition on the use of block discounts when valuing large blocks ofsecurities for broker-dealers and investment companies; and (4) arequirement to adjust the value of restricted stock for the effect of therestriction even if the restriction lapses within one year. This statement iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company is currentlyevaluating the impact of adopting SFAS No. 157 on its financial position,cash flows, and results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment to FASB Statement No. 115*.This statement allows a company to irrevocably elect fair value as ameasurement attribute for certain financial assets and financial liabilitieswith changes in fair value recognized in the results of operations. Thestatement also establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. The Companyis currently evaluating the impact of adopting SFAS No. 159 on itsfinancial position, cash flows, and results of operations.

 

**ITEM 3.     *QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

The market risk discussion and the estimatedamounts generated from the analysis that follows are forward-looking statementsof market risk assuming certain adverse market conditions occur. Actual resultsin the future may differ materially due to changes in the Company’s product anddebt mix, developments in the financial markets, and further utilization by thecompany of risk-mitigating strategies such as hedging.

 

The Company’s operating revenues are derivedalmost entirely from the collection of interest on the receivables it retainsand its primary expense is the interest that it pays on borrowings incurred tooriginate and retain such receivables. The Company’s credit facilities bearinterest at floating rates which are reset on a short-term basis, whereas itsreceivables bear interest at fixed rates which do not generally vary with changesin interest rates. The Company is therefore exposed primarily to market risksassociated with movements in interest rates on its credit facilities. TheCompany believes that it takes the necessary steps to appropriately reduce thepotential impact of interest rate increases on the Company’s financial positionand operating performance.

 

The Company relies almost exclusively onrevolving credit facilities to fund its origination of receivables.Periodically, the Company will transfer receivables from a revolving to a termcredit facility. Currently all of the Company’s credit facilities bear interestat floating rates tied to either a commercial paper index or LIBOR.

 

Asof January 31, 2008, the Company had $406,311 of floating rate secureddebt outstanding under the FIRC and FIARC warehouse and working capitalfacilities.  For every 1% increase inLIBOR, annual after-tax earnings would decrease by approximately $2,580assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of January 31, 2007, the Company had $277,659 of floating ratesecured debt outstanding under the FIRC and FIARC warehouses and workingcapital facility.  For every 1% increasein LIBOR annual after-tax earnings would decrease by approximately $1,791assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates.

 

Inaddition to an increase in commercial paper rates or LIBOR, the Company’sinterest expense will also be negatively impacted by increasing credit spreads,which in the case of the FIARC facility are passed through to the Company.  This increase in credit spreads is reflectedin the difference between the LIBOR rate and the rate at which the asset-backedcommercial paper conduit facility utilized by the Company issues commercialpaper.  

 

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Recently, credit spreads in the asset-backedcommercial paper market and in the asset-backed term market have increasedsignificantly as a result of deteriorating market liquidity and a risk aversionattributable to conditions in the subprime mortgage industry which appear tohave spread to the debt market in general. While the Company’s credit facilities do not expire until February 2009and while the Company had approximately $28,712 in unused capacity as of January 31,2008, further deterioration in the commercial paper market and the asset-backedterm note market will negatively impact interest expense and may limit theCompany’s ability to achieve significant growth in its receivables portfolio.

 

**Forward Looking Information**

 

Statementsand financial discussion and analysis included in this report that are nothistorical are considered to be forward-looking in nature. Forward-looking statementsinvolve a number of risks and uncertainties that may cause actual results todiffer materially from anticipated results. Specific factors that could causesuch differences include unexpected fluctuations in market interest rates,changes in economic conditions, changes in the competition for loans, or theinability to renew or obtain financing. Further information concerning risksand uncertainties is included in this report and the company’s other reportsfiled with the Securities and Exchange Commission.

 

The Company believes thefactors discussed in its reports are important factors that could cause actualresults to differ materially from those expressed in any forward lookingstatement made herein or elsewhere by the Company or on its behalf.  The factors listed are not necessarily all ofthe important factors.  Unpredictable orunknown factors not discussed could also have material adverse effects onactual results.  The Company does notintend to update its description of important factors each time a potentialimportant factor arises.  The Companyadvises its stockholders that they should: (1) be aware that important factors not described herein couldaffect the accuracy of our forward looking statements, and (2) use cautionand common sense when analyzing our forward looking statements in this documentor elsewhere.  All of such forwardlooking statements are qualified in their entirety by this cautionarystatement.

 

**ITEM 4.    CONTROLS ANDPROCEDURES**

 

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, 2008 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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###### **PART II**

###### ** **

###### **OTHER INFORMATION**

##### ** **

**ITEM 6.      *EXHIBITS ANDREPORTS ON FORM 8-K***

 

(a)          Exhibits

 

31.1            Certification of Chief Executive Officer pursuantto section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2            Certification of Chief Financial Officer pursuantto section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1            Certification of Chief Executive Officer pursuantto section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2            Certification of Chief Financial Officer pursuantto section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed with this 10-Q

 

(b)         Reports on Form 8-K

 

Form 8-Kfiled December 6, 2007, press release announcing the quarter end October 31,2007 financial results.

 

### **SIGNATURES**

### ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                      | First Investors Financial Services Group, Inc. |
|---------------------------|-----------------------------------------------------|
|                      | (Registrant)                                        |
|                      |                                                |
| Date: March 12, 2008 | By: /s/ TOMMY A. MOORE, JR.                         |
|                      | Tommy A. Moore, Jr.                            |
|                      | President and Chief Executive Officer               |
|                      |                                                |
| Date: March 12, 2008 | By: /s/ BENNIE H. DUCK                              |
|                      | Bennie H. Duck                                      |
|                      | Secretary, Treasurer and Chief Financial Officer    |

 

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