**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** **                                               | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                 |
|------------|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                     |                                                                                                                                                                                                                                                                                   |
|       | **For the quarterly period ended October 31, 2007** |
|       |                                                     |                                                                                                                                                                                                                                                                                   |
| **OR**     |
|       |                                                     |                                                                                                                                                                                                                                                                                   |
| **o**      | ** **                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                |
| ** ** | ** **                                               | ** **                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                               | **For the transition period from                      to                    ** |

 

### **Commission File Number 0-26686**

### ** **

**FirstInvestors Financial Services Group, Inc.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Texas**                                                  | ** ** | **76-0465087**                        |
|------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation             |       | (I.R.S. Employer  Identification No.) |
| or Organization)                                           |       |                                  |
| ** **                                                 | ** ** | ** **                            |
| **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) |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o.

 

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

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

 

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

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.

 

| ** **                    | ** ** | **Shares Outstanding At** |
|-------------------------------|------------|---------------------------|
| **Class**                     | ** ** | **December 6, 2007** |
| Common  Stock-$.001 Par Value |       | 4,477,694                 |

 

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

 

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

 

### **OCTOBER 31, 2007**

 

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

##### ** **

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

 

2

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

 

##### **CONSOLIDATED CONDENSEDBALANCE SHEETS — APRIL 30, 2007 AND OCTOBER 31, 2007**

##### **(In thousands, except parvalue)**

##### ** **

| ** **                                                                                                                                       | ** ** | **April 30,  2007** | ** ** | **October 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                       |       |                     |       | **(Unaudited)**            |       |
| **ASSETS**                                                                                                                                       |       |                     |       |                       |       |
| Receivables Held  for Investment, net                                                                                                            |       | $                        | 468,022    |                       | $          | 478,174 |   |
| Cash and  Short-Term Investments                                                                                                                 |       | 1,669                    |       | 1,608                      |       |
| Restricted Cash                                                                                                                                  |       | 33,473                   |       | 34,223                     |       |
| Accrued Interest  Receivable                                                                                                                     |       | 3,781                    |       | 3,956                      |       |
| Assets Held for  Sale                                                                                                                            |       | 1,200                    |       | 1,357                      |       |
| Other Assets:                                                                                                                                    | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Equity  investments                                                                                                                              |       | 1,133                    |       | 1,364                      |       |
| Income taxes                                                                                                                                     |       | 12                       |       | 390                        |       |
| Funds held under  reinsurance agreement                                                                                                          |       | 3,355                    |       | 4,501                      |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,788 and $4,521                               |       | 3,736                    |       | 4,124                      |       |
| Total assets                                                                                                                                     |       | $                        | 516,381    |                       | $          | 529,697 |   |
| ** **                                                                                                                                       | ** ** | ** **               | ** ** | ** **                 | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                    | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Debt:                                                                                                                                            | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Warehouse credit  facilities                                                                                                                     |       | $                        | 283,282    |                       | $          | 331,862 |   |
| Term notes                                                                                                                                       |       | 169,987                  |       | 129,420                    |       |
| Working capital  facility                                                                                                                        |       | 22,753                   |       | 21,523                     |       |
| Senior  subordinated debt                                                                                                                        |       | —                   |       | 5,000                      |       |
| Related party  note                                                                                                                              |       | 2,500                    |       | 2,500                      |       |
| Other  Liabilities:                                                                                                                              |       |                     |       |                       |       |
| Accounts payable  and accrued liabilities                                                                                                        |       | 5,377                    |       | 6,247                      |       |
| Deferred income  taxes payable                                                                                                                   |       | 733                      |       | 900                        |       |
| Total  liabilities                                                                                                                               |       | 484,632                  |       | 497,452                    |       |
| ** **                                                                                                                                       | ** ** | ** **               | ** ** | ** **                 | ** ** |
| 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 October 31, 2007 |       | 6                        |       | 6                          |       |
| Additional  paid-in capital                                                                                                                      |       | 19,374                   |       | 19,574                     |       |
| Retained  earnings                                                                                                                               |       | 16,836                   |       | 17,132                     |       |
| Less, treasury  stock, at cost, 1,172 shares                                                                                                     |       | (4,467                   | )          | (4,467                     | )          |
| Total  shareholders’ equity                                                                                                                 |       | 31,749                   |       | 32,245                     |       |
| Total  liabilities and shareholders’ equity                                                                                                 |       | $                        | 516,381    |                       | $          | 529,697 |   |

 

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

 

3

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

 

**CONSOLIDATED CONDENSEDSTATEMENTS OF EARNINGS**

 

**For the Three and Six MonthsEnded October 31, 2006 and 2007**

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

**(Unaudited)**

** **
| ** **                                            | ** ** | **For the Three Months  Ended October 31,** | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                             | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                  |       |                                                                 |       |                                                               |       |   |   |   |   |
| Interest Income                                       |       | $                                                                    | 13,374     |                                                               | $          | 14,337 |   | $ | 25,705 |   | $ | 28,697 |   |
| Interest Expense                                      |       | 5,813                                                                |       | 6,865                                                              |       | 11,020 |   | 13,545 |   |
| Net interest income                                   |       | 7,561                                                                |       | 7,472                                                              |       | 14,685 |   | 15,152 |   |
| Provision for Credit Losses                           |       | 2,677                                                                |       | 3,999                                                              |       | 5,195 |   | 7,187 |   |
| Net Interest Income After Provision for Credit Losses |       | 4,884                                                                |       | 3,473                                                              |       | 9,490 |   | 7,965 |   |
| Other Income:                                         |       |                                                                 |       |                                                               |       |   |   |   |   |
| Servicing revenue                                     |       | 312                                                                  |       | 388                                                                |       | 676 |   | 666 |   |
| Other finance charges and fees                        |       | 825                                                                  |       | 1,008                                                              |       | 1,560 |   | 1,914 |   |
| Insurance products                                    |       | 268                                                                  |       | 309                                                                |       | 481 |   | 610 |   |
| Income from investment                                |       | 188                                                                  |       | 97                                                                 |       | 255 |   | 224 |   |
| Other interest income                                 |       | 454                                                                  |       | 434                                                                |       | 860 |   | 864 |   |
| Total other income                                    |       | 2,047                                                                |       | 2,236                                                              |       | 3,832 |   | 4,278 |   |
| Operating Expenses:                                   |       |                                                                 |       |                                                               |       |   |   |   |   |
| Salaries and benefits                                 |       | 2,841                                                                |       | 2,491                                                              |       | 5,565 |   | 5,309 |   |
| Operating expense                                     |       | 1,654                                                                |       | 1,383                                                              |       | 2,633 |   | 3,043 |   |
| General and administrative                            |       | 954                                                                  |       | 941                                                                |       | 1,998 |   | 1,836 |   |
| Other interest expense                                |       | 452                                                                  |       | 679                                                                |       | 874 |   | 1,268 |   |
| Total operating expenses                              |       | 5,901                                                                |       | 5,494                                                              |       | 11,070 |   | 11,456 |   |
| Income Before Provision for Income Taxes              |       | 1,030                                                                |       | 215                                                                |       | 2,252 |   | 787 |   |
| (Benefit) Provision for Income Taxes:                 |       |                                                                 |       |                                                               |       |   |   |   |   |
| Current                                               |       | (88                                                                  | )          | 63                                                                 |       | 444 |   | 120 |   |
| Deferred                                              |       | (177                                                                 | )          | 15                                                                 |       | (223 | ) | 167 |   |
| Total (benefit) provision for income  taxes           |       | (265                                                                 | )          | 78                                                                 |       | 221 |   | 287 |   |
| Net Earnings                                          |       | $                                                                    | 1,295      |                                                               | $          | 137 |   | $ | 2,031 |   | $ | 500 |   |
|                                                  |       |                                                                 |       |                                                               |       |   |   |   |   |
| Basic Net Earnings per Common Share                   |       | $                                                                    | 0.29       |                                                               | $          | 0.03 |   | $ | 0.45 |   | $ | 0.11 |   |
| Diluted Net Earnings per Common Share                 |       | $                                                                    | 0.27       |                                                               | $          | 0.03 |   | $ | 0.42 |   | $ | 0.10 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

4

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

 

**CONSOLIDATEDCONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY**

** **

**For the Six Months Ended October 31,2007**

##### **(In thousands, exceptshare amounts)**

**(Unaudited)**

** **
| ** **                               | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | **Treasury  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                             |       | —                |       | —                  |       | —       |       | 500                          |       | —     |       | 500 |   |
| Stock  compensation expense              |       | —                |       | —                  |       | 200          |       | —                       |       | —     |       | 200 |   |
|                                     |       |                  |       |                    |       |         |       |                         |       |       |       |   |   |
| Balance at October 31, 2007         |       | 5,649,670             |       | $                       | 6          |         | $          | 19,574                       |       | $          | 17,132     |   | $ | (4,467 | ) | $ | 32,245 |   |

 

The accompanying notes are an integral part ofthis consolidated financial statement.

 

5

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

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended October 31,2006 and 2007**

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

**(Unaudited)**

** **
| ** **                                                                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                 |       |     |       |     |       |
| Cash Flows From Operating Activities:                                                                |       |     |       |     |       |
| Net earnings                                                                                         |       | $        | 2,031      |     | $          | 500 |   |
| Adjustments to reconcile net earnings to net cash (used in) provided by  operating activities — |       |     |       |     |       |
| Depreciation and amortization expense                                                                |       | 3,345    |       | 3,356    |       |
| Provision for credit losses                                                                          |       | 5,195    |       | 7,187    |       |
| Reversal of uncertain tax provision                                                                  |       | (669     | )          | —   |       |
| Excess tax benefits from share-based payment arrangements                                            |       | (23      | )          | —   |       |
| Share-based payment arrangements                                                                     |       | 142      |       | 200      |       |
| (Increase) decrease in:                                                                              |       |     |       |     |       |
| Accrued interest receivable                                                                          |       | (466     | )          | (175     | )          |
| Restricted cash                                                                                      |       | (10,145  | )          | (749     | )          |
| Deferred financing costs and other assets                                                            |       | (85      | )          | (583     | )          |
| Funds held under reinsurance agreement                                                               |       | 268      |       | (1,147   | )          |
| Current income tax receivable                                                                        |       | —   |       | 107      |       |
| Increase (decrease) in:                                                                              |       |     |       |     |       |
| Accounts payable and accrued liabilities                                                             |       | (2,019   | )          | 181      |       |
| Deferred income taxes payable                                                                        |       | (223     | )          | 167      |       |
| Income taxes                                                                                         |       | (123     | )          | —   |       |
| Net cash (used in) provided by operating activities                                                  |       | (2,772   | )          | 9,044    |       |
| Cash Flows From Investing  Activities:                                                               |       |     |       |     |       |
| Origination of Receivables Held for Investment                                                       |       | (152,208 | )          | (115,346 | )          |
| Payments received from Investment                                                                    |       | 188      |       | 576      |       |
| Contributions to Investment                                                                          |       | (251     | )          | (807     | )          |
| Principal payments from Receivables Held for Investment                                              |       | 79,553   |       | 89,632   |       |
| Payments received on Assets Held for Sale                                                            |       | 4,221    |       | 5,613    |       |
| Purchase of furniture and equipment                                                                  |       | (371     | )          | (556     | )          |
| Net cash used in investing activities                                                                |       | (68,868  | )          | (20,888  | )          |
| Cash Flows From Financing Activities:                                                                |       |     |       |     |       |
| Proceeds from advances on—                                                                      |       |     |       |     |       |
| Warehouse credit facilities                                                                          |       | 315,729  |       | 203,522  |       |
| Working capital facility                                                                             |       | 5,049    |       | 3,270    |       |
| Senior subordinated debt                                                                             |       | —   |       | 5,000    |       |
| Principal payments made on—                                                                     |       |     |       |     |       |
| Warehouse credit facilities                                                                          |       | (178,221 | )          | (154,942 | )          |
| Term notes                                                                                           |       | (71,251  | )          | (40,567  | )          |
| Working capital facility                                                                             |       | —   |       | (4,500   | )          |
| Proceeds from the issuance of common stock                                                           |       | 107      |       | —   |       |
| Excess tax benefits from share-based payment arrangements                                            |       | 23       |       | —   |       |
| Net cash provided by financing activities                                                            |       | 71,436   |       | 11,783   |       |
| Increase/(Decrease) in Cash and Short-Term Investments                                               |       | (204     | )          | (61      | )          |
| Cash and Short-Term Investments at Beginning of Period                                               |       | 3,380    |       | 1,669    |       |
| Cash and Short-Term Investments at End of Period                                                     |       | $        | 3,176      |     | $          | 1,608 |   |
| Supplemental Disclosures of Cash Flow Information:                                                   |       |     |       |     |       |
| Cash paid during the period for—                                                                |       |     |       |     |       |
| Interest                                                                                             |       | $        | 9,832      |     | $          | 12,900 |   |
| Income taxes                                                                                         |       | 1,236    |       | 14       |       |

 

 

The accompanying notesare an integral part of these consolidated financial statements

 

6

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##### ** **

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

 

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

 

##### **October 31, 2007**

##### ** **

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

 

*Organization.*FirstInvestors Financial Services Group, Inc. (First Investors) was establishedto serve as a holding company for First Investors Financial Services, Inc.(FIFS) and FIFS’s wholly-owned subsidiaries, First Investors Insurance Company(FIIC), First Investors Auto Receivables Corporation (FIARC), F.I.R.C., Inc.(FIRC), First Investors Servicing Corporation (FISC), FIFS Acquisition FundingCorp. LLC, First Investors Residual Funding L.P., Farragut FinancialCorporation, and First Investors Auto Funding Corporation. First Investors,together with its wholly-owned subsidiaries, is hereinafter referred to as theCompany.

 

FIFS began operations in May 1989 and isprincipally involved in the business of originating and holding for investmentretail installment contracts and promissory notes secured by new and usedautomobiles originated by factory authorized franchised dealers or directlythrough consumers. As of October 31, 2007, approximately 33% and 13% ofreceivables held for investment had been originated in Texas and Georgia,respectively. The Company currently operates in 28 states.

 

FIIC was organized under the captive insurancecompany laws of the state of Vermont for the purpose of reinsuring certaincredit enhancement insurance policies that have been written by unrelated thirdparty insurance companies.

 

On October 2, 1998, the Company completedthe acquisition of FISC and the operations of FISC are included in theconsolidated results of the Company since the date of acquisition.Headquartered in Atlanta, Georgia, FISC performed servicing and collectionactivities on a portfolio of receivables originated for investment as well ason a portfolio of receivables originated and sold pursuant to two assetsecuritizations. As a result of the acquisition, the Company increased thetotal dollar value on its balance sheet of receivables, acquired an interest incertain trust certificates related to the asset securitizations and acquiredcertain servicing rights along with furniture, fixtures, equipment andtechnology to perform the servicing and collection functions for the portfolioof receivables under management.

 

On August 8, 2000, the Company entered intoa partnership agreement whereby a subsidiary of the Company was the generalpartner owning 70% of the partnership interests and First Union Investors, Inc.served as the limited partner and owned 30% of the partnership interests. On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc. ThePartnership consists primarily of a portfolio of loans previously owned orsecuritized by FISC and certain other financial assets including charged-offaccounts owned by FISC.

 

On December 24, 2002, the Company purchased40% of the common stock and an investment in the junior mezzanine debt of FirstAuto Receivables Corporation (“FARC”). FARC purchased an approximately $197,500portfolio of installment loan receivables from a subsidiary of Union AcceptanceCorporation. FISC performs ongoing servicing and collection activities on theportfolio.

 

On March 19, 2003, FISC entered into aservicing agreement with an unrelated third party to service an approximately$300,000 portfolio of installment loan receivables purchased from a subsidiaryof Union Acceptance Corporation.

 

On May 30, 2007, FISC entered into aservicing agreement with an unrelated third party to service an approximately$154,211 portfolio of installment loan receivables 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 Companyaccounts for these loans using the cost recovery method.

 

7

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In total, at October 31, 2007, FISCperforms servicing and collection functions on a managed receivables portfolioof approximately $612,539.

 

**2.****                Interim Financial Information**

 

*Basis ofPresentation*. The consolidated financial statements includethe accounts of First Investors and its wholly-owned and majority-ownedsubsidiaries. All intercompany accounts and transactions have been eliminated.Investments in which the Company exercises significant influence, but which itdoes not control (generally a 20% to 50% ownership interest), are accounted forunder the equity method of accounting, except for variable interest entitiesfor which the Company is considered the primary beneficiary under FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidation of Variable Interest Entities, an interpretation of ARB No. 51*,as amended in December 2003 by Interpretation 46R. As of October 31,2007, the Company does not have any variable interest entities under FIN 46 asamended by Interpretation 46R.

 

The results for the interim periods are notnecessarily indicative of the results of operations that may be expected forthe fiscal year. In the opinion of management, the information furnishedreflects all adjustments which are of a normal recurring nature and arenecessary for a fair presentation of the Company’s financial position as of October 31,2007, and the results of its operations for the three and six months ended October 31,2006 and 2007, and its cash flows for the six months ended October 31,2006 and 2007.

 

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*. 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. The Company accruesinterest income monthly using the effective interest method. When a receivablebecomes 90 days past due, the income accrual is suspended until the paymentsbecome current. When a loan is charged off or the collateral is repossessed,the remaining income accrual is written off. The Company defers and capitalizescertain expenses related to the origination of receivables held for investment,and amortizes these expenses in proportion to their underlying receivable.

 

*Other Income*.Other Income consists of income received from servicing activities, late feesand other loan related fees, income from investments, reinvestment revenue,income earned from the sale of GAP insurance and extended service contracts,and unrealized loss on interest rate derivative positions. Servicing revenue isaccrued as services are rendered. Late fees and other loan-related fees arerecognized when received. Income from investments and reinvestment revenue areaccrued based on the respective interest rate of such investment. Income fromthe sale of GAP insurance and extended service contracts is recognized whensold as the Company has no further obligation after the sale.

 

*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

 

8

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repossession,the uncollectible portion of the loan and 100% of accrued interest is writtenoff. The fair value of the collateral is recorded as Assets Held for Sale. Fairvalue is determined by estimating the proceeds from the sale of the collateral,which primarily are comprised of auction proceeds on the sale of the automobileless selling related expenses. After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received. In the event the collateralcannot be located or if the customer refuses to pay and is not subject tobankruptcy court protection, the Company will write off the entire balance ofthe loan once it reaches 180 days past due. If the customer is subject tobankruptcy court protection, the loan generally remains in bankruptcy status aslong as payments are being received from the trustee. If a payment is missed,the Company seeks to repossess the collateral with approval of the court. Ifthe customer is dismissed from bankruptcy, the Company resumes collectionefforts.

 

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 the reporting date. These factorsare then applied to the aging status of each loan at the reporting date inorder to calculate the number of loans that are expected to migrate to impairedstatus. The estimated number of impairments is then multiplied by the estimatedloss per loan, which is based on historical information. The Company utilizesits most recent recovery rates in order to assess fair value of these loans. Forloans that are not classified into these categories, the historical migrationpattern is utilized in order to establish the estimated impairment. Theallowance for credit losses is based on estimates and qualitative evaluations. Ultimatelosses may vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,they are reported in earnings in the period they become known.

 

*Stock-Based Compensation*. The Company expenses stock-based compensation expense in accordancewith SFAS No. 123(R), *Share-Based Payment - arevision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”) (see note 8).

 

*Income taxes.*TheCompany accounts for uncertain tax positions in accordance with the provisionsof FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”), which it adopted on May 1, 2007. Theimplementation of FIN 48 required the Company to make subjective assumptionsand judgments regarding income tax exposure. Interpretations of and guidancesurrounding income tax laws and regulations change over time, and these maychange the Company’s subjective assumptions, which in turn, affect amountsrecognized in the condensed consolidated balance sheets and statements ofearnings.

 

*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.

 

**3.     Receivables Held forInvestment**

 

Thereceivables generally have terms between 48 and 72 months and arecollateralized by the underlying vehicles. Net receivable balances consisted ofthe following at April 30, 2007 and October 31, 2007:

 
| ** **                            | ** ** | **April 30,  2007** | ** ** | **October 31,  2007** | ** ** |
|---------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Receivables held  for investment      |       | $                        | 458,586    |                       | $          | 468,557 |   |
| Unamortized  premium, net (1)         |       | 4,118                    |       | 4,337                      |       |
| Deferred  acquisition costs, net      |       | 8,252                    |       | 8,343                      |       |
| Allowance for  credit losses          |       | (2,934                   | )          | (3,063                     | )          |
| Receivables held  for investment, net |       | $                        | 468,022    |                       | $          | 478,174 |   |

 

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(1) Includes premium less discounts paid to dealers.

 

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The accrual of interest has been suspended on $1,923 and$2,989 of delinquent receivables as of April 30, 2007 and October 31,2007, respectively.

 

Activityin the allowance for credit losses for the periods ended October 31, 2006and 2007 was as follows:

 
| ** **                     | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                           | ** ** | **2007** | ** ** |
| Balance, beginning of period   |       | $                                                                  | 2,332      |   | $ | 2,934 |   |
| Provision for credit losses    |       | 5,195                                                              |       | 7,187 |   |
| Charge-offs, net of recoveries |       | (4,799                                                             | )          | (7,058 | ) |
| Balance, end of period         |       | $                                                                  | 2,728      |   | $ | 3,063 |   |

 

 

**4.     Debt**

 

The Company finances its loan originations throughtwo warehouse credit facilities. The Company’s credit facilities provide forone-year terms and have been renewed annually. Management of the Companybelieves that the credit facilities will continue to be renewed or extended orthat it would be able to secure alternate financing on satisfactory terms;however, there can be no assurance that it will be able to do so. In May, 2005,the Company issued $175,000 in Term Notes secured by a discrete pool ofreceivables, and January, 2006, the Company issued $189,000 in Term Notessecured by another discrete pool of receivables. Substantially all receivablesretained by the Company are pledged as collateral for the credit facilities andthe Term Notes. The weighted average interest rate for the Company’s securedborrowings, including the effect of program fees and dealer fees, was 5.2% and5.6% for the periods ended October 31, 2006 and 2007, respectively.

 

*Warehouse Facilities as of October 31, 2007*

 
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                                   | ** ** | **Insurance**             | ** ** | **Borrowing  Rate At  October 31,  2007** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------------------------|------------|
| FIARC        |       | $            | 300,000    |            | $          | 281,804                |       | Commercial  paper rate plus  .3%                                                                           |       | .25% of  Unused  Facility |       | None                                                |       | 5.3 | % |
| FIRC         |       | $            | 65,000     |            | $          | 50,058                 |       | Option of a (Base  Rate, which is  the higher of  prime rate or fed  funds plus .5% or  b) LIBOR plus

.5% |       | .25% of Unused Facility   |       | See below                                           |       | 5.4 | % |

 

 

*Warehouse Facilities – Credit Enhancement as of October 31, 2007*

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

 

FIRC - In order to obtain a lower cost of funding, the Company has agreedto maintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders,

 

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collectively,are named as additional insureds under this policy. The coverage is obtained oneach receivable 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 thedealers are charged for the coverage and they are unaware of its existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

 

Aggregatepremiums paid for ALPI coverage alone were $536 and $1,194 during the threemonths ended, and $2,883 and $1,532 for six months ended, October 31, 2006and 2007, respectively, and accounted for 0.8% and 1.8% during the three monthsended, and 1.1% and 1.4% for the six months ended, October 31, 2006 and2007, respectively, of the principal amount of the receivables originatedduring such respective periods.

 

In April 1994,the Company organized First Investors Insurance Company (“Insurance Subsidiary”)under the captive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100percent of the risk under the Company’s ALPI insurance policy. At the time eachreceivable is insured by National Union, the risk is automatically reinsured toits full extent, and approximately 96% of the premium paid by the Company toNational Union with respect to such receivable is ceded to the InsuranceSubsidiary. When a loss covered by the ALPI policy occurs, National Union paysit after the claim is processed, and National Union is then reimbursed in fullby the Insurance Subsidiary. In addition to the monthly premiums and liquidityreserves of the Insurance Subsidiary, a trust account is maintained by NationalUnion to secure the Insurance Subsidiary’s obligations for losses it hasreinsured.

 

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofOctober 31, 2007, the Insurance Subsidiary had capital and surplus of$2,929 and unencumbered cash reserves of $868 in addition to the $3,680 trustaccount.

 

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

 

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC. The Company isnot a guarantor of, or otherwise a party to, such commercial paper.

 

*Warehouse Facilities – Agents and Expirations*

 

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

 

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On February 15, 2006,the FIRC facility was renewed, under similar terms and conditions, at the$50,000 commitment level until February 13, 2007. On February 14,2007, the FIRC facility was extended to its current maturity date of February 13,2008. On September 12, 2007, the FIRC facility’s commitment level wasincreased to $65,000. As of April 30, 2007 and October 31, 2007,there was $36,805 and $50,058, respectively, outstanding.

 

On March 15, 2006, following a short-termextension of the then current maturity date, the FIARC facility was renewed to February 14,2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated. Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%. On October 11, 2006, the Company amended the facility toincrease the commitment from $150,000 to $300,000 in order to fund the growthin origination volume. On February 14, 2007, the maturity date of theFIARC facility was extended to its current maturity date of February 13,2008. As of April 30, 2007 and October 31, 2007, there was $246,477and $281,804, respectively, outstanding.

 

Management intends to seek further extensions tothese warehouse facilities prior to the current 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 October 31,2007.

 

| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance Amount** | ** ** | **Maturity Date** | ** **             | **Outstanding** | ** ** | **Interest Rate** | ** ** |
|----------------------|------------|------------------------|------------|--------------------------|------------|------------------------|------------------------|-----------------|------------|------------------------|------------|
| 2005-A  Class 2 |       | May 5, 2005       |       | $                        | 106,493    |                   | July 16, 2012     |            | $          | 44,223                 |       | 4.23 | % |
| 2006-A  Class 3 |       | January 26, 2006  |       | $                        | 74,000     |                   | February 15, 2011 |            | $          | 49,137                 |       | 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% of Initial Pool Balance  including Pre-Funding Amount |       | 97.0% initial advance decreasing to 95.75% |       | Surety Bond   |
| 2006-A       |       | 1.0% of Initial Pool Balance increasing to 2% of Initial Pool Balance  including Pre-Funding Amount |       | 98.5% initial advance decreasing to 96.75% |       | Surety Bond   |

 

Term Notes - On May 5, 2005, the Company, through its indirect, wholly-ownedsubsidiary, First Investors Auto Owner Trust 2005-A (“2005 Auto Trust”), completedthe issuance of $69,000 of 3.57% Class A-1 asset-backed notes and $106,493of 4.23% Class A-2 asset-backed notes (collectively “2005-A Term Notes”),for a total of $175,493 of asset backed notes. The initial pool of automobilereceivables transferred to the 2005 Auto Trust totaled $150,921, was previouslyowned by FIRC and FIARC, and secures the 2005-A Term Notes. In addition to 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. Proceedsfrom the issuance, which totaled $175,488, were used to (i) fund a $30,000pre-funding account to be used for future loan originations, (ii) repayall outstanding borrowings under the FIARC commercial paper

 

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facility,(iii) reduce the outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1%, or $1,509, of the initial receivablespledged. The Class A-1 and Class A-2 Term Notes bear interest at3.57% and 4.23%, respectively, and require monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 95.75% ofthe outstanding balance of the underlying receivables pool. The Class A-1Notes were paid off during the fiscal year ended April 30, 2006. The finalmaturity of the Class A-2 Term 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. A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes. In theevent that certain asset quality covenants are not met, the reserve accounttarget level will increase to 2% of the then current principal balance of thereceivables pool. As of April 30, 2007 and October 31, 2007, theoutstanding principal balances on the 2005-A Term notes were $59,685 and$44,223, 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) pay transactionfees related to the 2006-A Term Note issuance, and (v) fund an initialcash reserve account of 1% or $1,519 of the initial receivables pledged. The2006-A Term Notes require monthly principal reductions sufficient to reduce thebalance of the notes to 96.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the quarterended July 31, 2006, and the Class A-2 notes were paid off during thequarter 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 B Note does not bear interest but requiresprincipal reductions sufficient to reduce the balance of the Class B Noteto 3.25% 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 the greater of2% of the initial pool balance or 6% of the then current principal balance ofthe receivables pool. As of April 30, 2007 and October 31, 2007, theoutstanding principal balances on the 2006-A Class A term notes were$110,302 and $85,197, 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 August 15, 2005, the Working Capital Facility was extended until February 15,2006, increasing the commitment amount to $23,500, and was subsequentlyextended on February 15, 2006 until February 14, 2007. The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%. On November 7,2006, the Company amended the facility to increase the commitment amount from$23,500 to $28,500. On February 14, 2007, the working capital facility wasextended to its current maturity date of February 13, 2008, under similarterms and conditions. As of April 30, 2007 and October 31, 2007,there was $22,753 and $21,523, respectively, outstanding under this facility. TheCompany has capitalized $6 of interest expense for the three and six monthsended October 31, 2007, related to certain software costs.

 

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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 thiscredit facility will not be renewed. If the facility is not renewed, however,or if 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 theCompany 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 October 31, 2007,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 limitedpartnership that is affiliated with a current shareholder and member of theBoard of Directors The proceeds of the borrowings have been utilized to fundcertain private and open market purchases of the Company’s common stockpursuant to a Stock Repurchase Plan authorized by the Board of Directors andfor general corporate purposes. Borrowings under the facility bear interest ata fixed rate of 10% per annum. The facility is unsecured and expresslysubordinated to the Company’s senior credit facilities. The facility matures onDecember 3, 2008 but may be repaid at any time unless the Company is indefault on one of its other credit facilities. There was $2,500 outstandingunder this facility as of April 30, 2007 and October 31, 2007,respectively. For the three and six months ended October 31, 2006 and October 31,2007, the Company recorded interest expense under these facilities of $63 and$126, 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 ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at October 31,2007.

 

*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 interest rateswaps or caps to minimize the effects of market interest rate fluctuations onthe 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.

 

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**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 six months endedOctober 31, 2006 and 2007, are as follows:

 
| ** **                                                         | ** ** | **For the Three Months Ended  October 31,** | ** ** | **For the Six Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                                             | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Weighted average shares:                                           |       |                                                                 |       |                                                               |       |   |   |   |   |
| Weighted average shares outstanding for basic earnings per share   |       | 4,474                                                                |       | 4,478                                                              |       | 4,466 |   | 4,478 |   |
| Effect of dilutive stock options and warrants                      |       | 333                                                                  |       | 287                                                                |       | 331 |   | 295 |   |
| Weighted average shares outstanding for diluted earnings per share |       | 4,807                                                                |       | 4,765                                                              |       | 4,797 |   | 4,773 |   |

 

For the three and six months ended October 31,2006 and 2007, the Company had 258 and 487 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 AutoReceivables 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 fromUAFC-2 Corporation, a subsidiary of Union Acceptance Corporation, with proceedsfrom $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 isLIBOR plus 1%, the senior mezzanine interest rate is 22.5% and the juniormezzanine interest 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 $83 and $41 for the three monthsended, and $178 and $90 for the six months ended, October 31, 2006 and2007, respectively, interest income of $3 and $0 for the three months ended,and $9 and $0 for the six months ended, October 31, 2006 and 2007,respectively, and equity in earnings in FARC of $319 and $75 for the threemonths ended, and $386 and $203 for the six months ended, October 31, 2006and 2007, respectively. As of October 31, 2007 the equity investment inFARC of $1,233 is included in Equity investments on the balance sheet.

 

**7.     New Accounting 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

 

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yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The Company is currently evaluating the impact of adopting SFAS No. 157on its financial position, cash flows, and results of operations.

 

In February 2007, 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 ameasurement attribute for certain financial assets and financial liabilitieswith changes in fair value recognized in the results of operations. The statementalso 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.

 

**8.     Shareholders’Equity**

 

*Preferred Stock*. TheCompany has authorized 10,000 shares of preferred stock with a $1.00 par value.As of October 31, 2007, 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 employees forthe purchase of up to 300 shares of common stock, subject to adjustment in theevent 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 are intended toqualify for certain favorable tax treatment) or as non-qualified stock options.The Compensation Committee selects the persons to receive options anddetermines the exercise price, the duration, any conditions on exercise andother terms of the options. In the case of options intended to be incentivestock options, the exercise price may not be less than 100% of the fair marketvalue per share of common stock on the date of grant. With respect tonon-qualified stock options, the exercise price may be fixed as low as 50% ofthe fair market value per share at the time of grant. In no event may theduration of an option exceed 10 years and no option may be granted after theexpiration of 10 years from the adoption of the Plan. As of April 30, 2007and October 31, 2007, a total of 361 options had been issued, and 295 and247, 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 other keyemployees for the purchase of up to 200 shares of common stock, subject toadjustment in the event of certain changes in capitalization. Options may begranted either as incentive stock options (which are intended to qualify forcertain favorable tax treatment) or as non-qualified stock options. TheCompensation Committee selects the persons to receive options and determinesthe exercise price, the duration, any conditions on exercise and other terms ofthe options. The exercise price may not be less than 100% of the fair marketvalue per share 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 after the expirationof 10 years from the adoption of the Plan. As of April 30, 2007 and October 31,2007, a total of 197 and 285, respectively, options had been issued andremained outstanding.

 

The exercise price of the option is payable incash upon exercise. At the discretion of the Compensation Committee, optionsmay be issued in tandem with stock appreciation rights entitling the optionholder to receive an amount in cash or in shares of common stock, or acombination thereof, equal in value to any increase since the date of grant inthe fair market 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

 

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years and no option may be granted afterthe expiration of 10 years from the adoption of the Plan. Option types will beautomatic and discretionary. Automatic grants of 28 shares for eachnon-employee director, or 140 shares total, were approved in July 2006. Subsequentautomatic grants of an option to purchase 28 shares shall be made to eachnon-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 October 31, 2007,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 that remain outstanding as of October 31, 2007:

 
| ** **                                     | ** ** | **For the Six Months Ended October 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                                               | ** ** | **2007** | ** ** |
| 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 six months ended October 31, 2006 and2007 was $107 and $0, respectively. The estimated tax benefit expected to berealized for the six months ended October 31, 2006 and 2007 is $23 and $0,respectively.

 

The Company issued 228 options with an expected lifetime compensation cost of $546 during the six months ended October 31,2007.

 

As of October 31, 2007, there was $1,041 oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the Plans. The cost is expected to berecognized over a weighted average period of 2.9 years. The total fair value ofshares vested during the six months ended October 31, 2006 and 2007 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.     IncomeTaxes**

 

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 $14 and$28 of interest expense for the three and six months ended October 31,2007, which is included in other interest expense on the Consolidated Statementof Earnings and penalties of $8 and $15 for the three and six months ended October 31,2007, which is included in general and administrative expense on theConsolidated Statement of Earnings.  The amount of unrecognized taxbenefits did not materially change as of October 31, 2007. The Company anticipatesrecognizing a $431 gain in the next 12 months due to the expiration of certainexamination periods.

 

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The Company files a consolidated federal income taxreturn in the United States Federal jurisdiction and various combined andseparate filings in several state and local jurisdictions.  With limitedexceptions, the Company is no longer subject to U.S. Federal, state and local,income tax examinations by tax authorities for years before 2002.

 

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 six months ended:

 
| ** **                                | ** ** | **For the Three Months  Ended October 31,** | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                             | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Income tax -  statutory rate              |       | 35.0                                                                 | %          | 34.0                                                               | %          | 35.0 | % | 34.0 | % |
| State income  tax, net of federal benefit |       | 3.7                                                                  | %          | 2.0                                                                | %          | 3.9 | % | 2.0 | % |
| Reversal of  uncertain tax position       |       | (65.0                                                                | )%         | —                                                             |       | (29.7 | )% | — |   |
| Non-deductible  expenses                  |       | 0.6                                                                  | %          | 0.5                                                                | %          | 0.6 | % | 0.5 | % |
| Effective income  tax rate                |       | (25.7                                                                | )%         | 36.5                                                               | %          | 9.8 | % | 36.5 | % |

 

**10.****      ****Correction of an Error**

 

During the Company’s review process related to thepurchase and implementation of its new origination software system, managementidentified certain costs related to the three months ended July 31, 2007,that were not capitalized in accordance with our accounting policy, which isconsistent with SOP 98-1. The Company has determined that these costs areimmaterial to the results of operation for the full year, and therefore theincorrectly expensed costs were reversed and capitalized during the threemonths ended October 31, 2007.

 

Had the corrections been made in the first quarter,the effect on previously issued financial statements for the three months endedJuly 31, 2007 would have been as follows:

 
| **Financial Statement Line** | ** ** | **As Reported** | ** ** | **Correction of Error** | ** ** | **As Corrected** | ** ** |
|----------------------------------------|------------|----------------------|------------|-----------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | ** **           | ** ** | ** **                        | ** ** | ** **            | ** ** |
| Salaries and  benefits                 |       | $                    | 2,818      |                              | $          | (99                   | )          | $ | 2,719 |   |
|                                   |       |                 |       |                              |       |                  |       |
| General and  Administrative            |       | 888                  |       | (5                                | )          | 883                   |       |
|                                   |       |                 |       |                              |       |                  |       |
| Other interest  expense                |       | 596                  |       | (4                                | )          | 592                   |       |
|                                   |       |                 |       |                              |       |                  |       |
| Earnings before  taxes                 |       | 572                  |       | (108                              | )          | 464                   |       |
|                                   |       |                 |       |                              |       |                  |       |
| Provision for  income taxes - current  |       | 57                   |       | 39                                |       | 96                    |       |
|                                   |       |                 |       |                              |       |                  |       |
| Net earnings                           |       | $                    | 363        |                              | $          | (69                   | )          | $ | 432 |   |
|                                   |       |                 |       |                              |       |                  |       |
| Basic net  earnings per common share   |       | $                    | 0.08       |                              | $          | 0.02                  |       | $ | 0.10 |   |
|                                   |       |                 |       |                              |       |                  |       |
| Diluted net  earnings per common share |       | $                    | 0.08       |                              | $          | 0.01                  |       | $ | 0.09 |   |

 

**11.  Subsequent Event**

 

Effective December 10,2007, the Company increased the limit on its FIARC facility from $300,000 to$350,000, and increased the facility fee from 0.5% to 1.0% for the additional$50,000. The facility fee on the original $300,000 remained at 0.5%

 

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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, GAPinsurance and extended service contracts, and unrealized loss on interest ratederivative positions. Servicing revenue is accrued as services are rendered.Late fees and other loan-related fees are recognized when received. Income frominvestments and reinvestment revenue are accrued based on the respectiveinterest rate of such investment. Revenue from the sale of GAP insurance andextended service contracts is recognized when sold as the Company has nofurther obligation after the sale. Unrealized loss on interest rate derivativesis recognized when incurred.

 

*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

 

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statusof each loan on a date which is six months prior to the reporting date, to theaging status of each loan as of the reporting date. These factors are thenapplied to the aging status of each loan at the reporting date in order tocalculate the number of loans that are expected to migrate to impaired status. Theestimated number of impairments is then multiplied by the estimated loss perloan, which is based on historical information. The Company utilized its mostrecent recovery rates in order to assess fair value of these loans. For loansthat are not classified into these categories, the historical migration patternis utilized in order to establish the estimated impairment. The allowance forcredit losses is based on estimates and qualitative evaluations. Ultimatelosses may vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,are reported in earnings in the period they 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* (“FIN 48”), which it adopted on May 1, 2007. Theimplementation of FIN 48 required the Company to make subjective assumptionsand judgments regarding income tax exposure. Interpretations of and guidancesurrounding income tax laws and regulations change over time, and these maychange the Company’s subjective assumptions, which in turn, affect amountsrecognized in the condensed consolidated balance sheets and statements ofearnings.

 

*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 October 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                                                           | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                                                    |       |                                                                               |       |   |   |
| Number                                                                              |       | 25,879                                                                             |       | 28,382 |   |
| Principal balance                                                                   |       | $                                                                                  | 428,416    |   | $ | 468,557 |   |
| Average principal balance of receivables outstanding  during the six-month period   |       | $                                                                                  | 402,098    |   | $ | 457,781 |   |
| Average principal balance of receivables outstanding  during the three-month period |       | $                                                                                  | 417,196    |   | $ | 458,254 |   |
| Other Servicing:                                                                    |       |                                                                               |       |   |   |
| Number                                                                              |       | 8,127                                                                              |       | 17,769 |   |
| Principal balance                                                                   |       | $                                                                                  | 73,499     |   | $ | 143,982 |   |
| Total Managed Receivables Portfolio:                                                |       |                                                                               |       |   |   |
| Number                                                                              |       | 34,006                                                                             |       | 46,151 |   |
| Principal balance                                                                   |       | $                                                                                  | 501,915    |   | $ | 612,539 |   |
| Average principal balance of receivables outstanding  during the six-month period   |       | $                                                                                  | 490,954    |   | $ | 568,150 |   |
| Average principal balance of receivables outstanding  during the three-month period |       | $                                                                                  | 497,972    |   | $ | 617,002 |   |

 

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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  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                        |       |                                               |       |                                             |       |   |   |   |   |
| Effective yield on Receivables Held  for Investment (1) |       | 12.8                                               | %          | 12.5                                             | %          | 12.8 | % | 12.5 | % |
| Average cost of debt (2)                                |       | 5.6                                                | %          | 6.1                                              | %          | 5.5 | % | 6.0 | % |
| Net interest spread (3)                                 |       | 7.2                                                | %          | 6.4                                              | %          | 7.3 | % | 6.5 | % |
| Net interest margin (4)                                 |       | 7.3                                                | %          | 6.5                                              | %          | 7.3 | % | 6.6 | % |

 

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

 

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

 

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

 

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

 

Net interest income is the difference betweeninterest earned from the receivables portfolio and interest expense incurred onthe credit facilities used to finance the receivables. Net interest income was$7,472 and $15,152 for the three and six months ended October 31, 2007,respectively, a decrease of 1.2% and an increase of 3.2% when compared toamounts reported for the three and six months ended October 31, 2006,respectively.

 

Theamount of net interest income is the result of the relationship between theaverage principal amount of receivables held and average rate earned thereonand the average principal amount of debt incurred to finance such receivablesand the average rates paid thereon. Changes in the principal amount and ratecomponents associated with the receivables and debt can be segregated toanalyze the periodic changes in net interest income. The following tableanalyzes the changes attributable to the principal amount and rate componentsof net interest income:

 
| ** **                        | ** ** | **Three Months Ended  October 31, 2006 to 2007** | ** ** | **Six Months Ended  October 31, 2006 to 2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Increase (Decrease) Due to Change in**              | ** ** | **Increase (Decrease) Due to Change in**            | ** ** |
| ** **                        | ** ** | **Average  Principal  Amount**                                                 | ** ** | **Average  Rate**                                                            | ** ** | **Total  Net** | ** ** | **Average  Principal  Amount** | ** ** | **Average  Rate** | ** ** | **Total  Net** | ** ** |
|                              |       |                                                                           |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment: |       |                                                                           |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                                                              | 1,316      |                                                                         | $          | (353 | ) | $ | 963 |   | $ | 3,560 |   | $ | (568 | ) | $ | 2,992 |   |
| Interest expense                  |       | 481                                                                            |       | 571                                                                          |       | 1,052 |   | 1,384 |   | 1,141 |   | 2,525 |   |
| Net interest income               |       | $                                                                              | 835        |                                                                         | $          | (924 | ) | $ | (89 | ) | $ | 2,176 |   | $ | (1,709 | ) | $ | 467 |   |

 

**Results of Operations**

 

*Three and Six Months Ended October 31, 2006 and 2007*

 

*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.*Net earnings for the three and sixmonths ended October 31, 2006 was $1,295 and $2,031 compared to $137 and$500 for year the three and six months ended October 31, 2007. Basicearnings per common share was $0.29 and $0.45 for the three and six monthsended October 31, 2006 compared to $0.03 and $0.11 for the three and sixmonths ended October 31, 2007. Diluted earnings per common share was $0.27and $0.42 for the three and six months ended October 31, 2006 compared to$0.03 and $0.10 for the three and six months ended October 31, 2007. Thedecrease in net earnings for the three and six months ended October 31,2006 compared to October 31, 2007 is due to several factors including (i) a$1,052 and $2,525 increase in interest expense for the three and six monthsended October 31, 2007 due to an 8% and 13% increase in the average debtoutstanding for the three and six months ended October 31, 2007 and a 50basis point increase in the average interest rate (ii) a $1,322 and $1,992for the three and six months ended October 31, 2007 and 2006 increase inprovision for credit losses primarily associated with an increase in theallowance for loan losses, due in part to growth in the portfolio ofreceivables held for investment, and(iii) a $227 and $394 increase inother interest expense for the three and six months ended October 31,2007, due to an increase in the average balance of the Company’s working capitalline of credit, the issuance of the senior subordinated debt, and an increasein the cost of debt. These are partially offset by (i) a $963 and$2,992 increase in interest income for the three and six months ended October 31,2007 due to a 10% and 14% increase in the average balance of receivables heldfor investment for the three and six months ended October 31, 2007, (ii) anincrease in other finance charges and fees due to an 10% and 14% increase inthe average balance of receivables held for investment, (iii) an increasein income from insurance products due to higher penetration rates, and (iv) adecrease in general and administrative expenses due to a decrease in operatinglease expenses.

 

*Interest Income*.Interest income for the three and six months ended October 31, 2007increased to $14,337 and $28,697 compared to $13,374 and $25,705 for the threeand six months ended October 31, 2006.

 

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of theportfolio of Receivables Held for Investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectlending activities and the level of early prepayments and charge-offs. Interestincome on Receivables Held for Investment increased****7%and 12% for the three and six months ended October 31, 2007 compared tothe three and six months ended October 31, 2006. The increase in interestincome for the three and six months ended October 31, 2007 is primarilydue to a 10% and 14% increase in the average portfolio outstanding for thethree and six months ended October 31, 2007 compared to the period ended October 31,2006, partially offset by a 31 and 25 basis point decrease in the averageinterest rate.

 

*Interest Expense.*Interestexpense for the three and six months ended October 31, 2007 increased to$6,865 and $13,545 compared to $5,813 and $11,020 for the three and six monthsended October 31, 2006. The increase in interest expense is primarily dueto (i) a $34,568 or 8% increase in the average debt outstanding for thethree months ended and a $50,546 or 13% increase in the average debtoutstanding for the six months ended October 31, 2007, compared to thethree and six months ended October 31, 2006 as a result of a 10% and 14%increase in the average portfolio of Receivables Held for Investment for thethree and six months ended October 31, 2007, and (ii) a 50 basispoint increase in interest rates for the three and six months ended October 31,2007 as a result of market rate increases.

 

*Provision for Credit Losses*. The provision for credit losses for the three and six months ended October 31,2007 increased to $3,999 and $7,187 as compared to $2,677 and $5,195 for thethree and six months ended October 31, 2006. The increase in provision forcredit losses is primarily due an increase in the allowance for loan losses,due in part to growth in the portfolio of receivables held for investment. Provisionfor credit losses as a percentage of average receivables held for investment onan annual basis increased to 3.5% and 3.1% for the three and six months ended October 31,2007 as compared to 2.6% for the three and six months ended October 31,2006.

 

Net charge-offs for thethree and six months ended October 31, 2007 increased to $3,838 and $7,057compared to $2,644 and $4,799 for the three and six months ended October 31,2006. The increase in net charge-offs for the three months ended October 31,2007 is due to (i) a 10% and 14% increase in the average portfoliooutstanding for the three and six months ended October 31, 2007, comparedto the three and six months ended October 31, 2006, (ii) an increasein loss frequency and severity from repossessions, and (iii) an increasein loss frequency and severity from non-repossession losses. This is partiallyoffset by an increase in recoveries from

 

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defaulted loans. The allowance for loan loss as apercentage of the portfolio of receivables held for investment remainedconstant at 0.6% as of April 30, 2007 and October 31, 2007.

 

Thelevel of provision for credit losses is a key driver of overall financialperformance and should be positively impacted by improvement in generaleconomic conditions, improvements in wholesale used car prices and lowerdelinquency rates and net losses projected for the portfolio of ReceivablesHeld for Investment. Any additional economic deterioration or decline inwholesale used car prices will negatively impact provision expense to theextent that these events cause an increase in delinquency rates, bankruptcyrates or net charge-off rates in the portfolio of Receivables Held forInvestment.

 

*Servicing Revenue*.On December 24, 2002, the Company entered into an agreement to provideloan servicing and collection activities on behalf of FARC. FARC, which is 40%owned by the Company, purchased a portfolio of approximately $200,000 ofinstallment loan receivables. On March 19, 2003, the Company entered intoan agreement to provide loan servicing and collection activities on $276,000 ofinstallment loan receivables for unrelated third 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 these receivables began on July 1, 2007. Servicingrevenue increased to $388****for the threemonths ended October 31, 2007 compared to $312 for three months ended October 31,2006. The increase in servicing revenue for the three months ended October 31,2007 is due to the servicing of new third party receivables. This is partiallyoffset by the liquidation of serviced receivables during the quarter. Servicingrevenue decreased to $666 for the six months ended October 31, 2007compared to $676 for the six months ended October 31, 2006. The decreasein servicing revenue for the six months ended October 31, 2007 is due tothe liquidation of serviced receivables during the six months ended October 31,2007. This is partially offset by the servicing of new third party receivables.Revenue derived from servicing activities will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

 

*Other Finance Charges and Fees*. Other finance charges and fees increased to $1,008 and $1,914 for thethree and six months ended October 31, 2007, compared to $825 and $1,560for the three and six months ended October 31, 2006. Theincrease is attributable to (i) increased assessment and collection offees due to a 10% and 14% increase in the average portfolio of Receivables Heldfor Investment for the three and six months ended October 31, 2007 and (ii) increaseddelinquencies for the three and six months ended October 31, 2007,resulting in increased fees. Income derivedfrom late fees and collection activities is recognized when received, andtherefore can be volatile from period to period based on overall cashcollection, seasonality, delinquency rates 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 $309 and $610 for the three andsix months ended October 31, 2007, compared to $268 and $481 for the threeand six months ended October 31, 2006. The increase is attributable to (i) increasedpenetration rates and (ii) higher grossmargins. This is partially offset by a decrease in originations. Insuranceproducts revenue is primarily driven by growth rates in the Company’s directlending business which will affect the ability of the Company to generate feeincome from marketing insurance products.

 

*Income from Investments.*Income from investments decreased to $97 and $224 for the three and sixmonths ended October 31, 2007, compared to $188 and $255 for the three andsix months ended July 31, 2006. The decrease is primarily due to theliquidation of the FARC portfolio.

 

*Salaries and Benefits.*Salaries and benefits decreased to $2,491 and $5,309 for the three andsix months ended October 31, 2007, compared to $2,841 and $5,565 for thethree and six months ended October 31, 2006. The decrease is attributableto (i) decreased bonus expense due to a decrease in earnings and (ii) thecapitalization of payroll costs related to the ongoing implementation of a newloan origination system.

 

*Operating Expenses.*  Operating expensesdecreased to $1,383 for the three months ended October 31, 2007, comparedto $1,654 for the three months ended October 31, 2006. Expensescharacterized as operating expenses are generally variable in nature and aretypically dependent on a number of factors including origination volume, theoutstanding balance of the managed portfolio, credit quality and operatingefficiency levels. The decrease was

 

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primarilydue to (i) an increase in the amount per loan the Company was able tocapitalize as deferred acquisition costs, (ii) a decrease in costs relatedto the Company’s direct business due to increased efficiencies, and (iii) lowercredit bureau fees primarily due to improved efficiencies in the way potentialcustomers are sourced in connection with the Company’s direct lending business.This was partially offset by (i) an increase in outsourced collections dueto an increase in rates and the addition of a new portfolio of loans in May,2007, and (ii) an increase in postage and printing expense associated withthe Company’s direct originations. Operating expenses increased to $3,043 forthe six months ended October 31, 2007, compared to $2,633 for the sixmonths ended October 31, 2006. 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. These werepartially offset by lower credit bureau fees primarily due to improvedefficiencies in the way potential customers are sourced in connection with theCompany’s direct lending business.

 

*General and Administrative.* General and administrative expenses decreased to $1,836 for the sixmonths ended October 31, 2007, compared to $1,998 for the six months endedOctober 31, 2006. The decrease is attributable to decreased operatinglease expense due to the expiration of certain equipment operating leases. Generaland administrative costs tend to be more fixed in nature and not as dependenton the overall level of managed receivables.

 

*Other Interest Expense*. Otherinterest expense increased to $679 and $1,268 for the three and six monthsended October 31, 2007, compared to $452 and $874 for the three and sixmonths ended October 31, 2006. The increase was due to (i) a 7% and18% increase in the average outstanding borrowings on the Company’s workingcapital line for the three and six months ended October 31, 2007 (ii) theissuance of $5,000 of senior subordinated debt, (iii) an increase in the average cost of debt and (iv) interestaccrued pursuant to the adoption of FIN 48.

 

**Portfolio Characteristics**

 

*General*.In selecting receivables for inclusion in its portfolio, the Company seeks toidentify potential borrowers whom it regards as creditworthy despite credithistories that limit their access to traditional sources of consumer credit. Inaddition to personal credit qualifications, the Company attempts to assure thatthe characteristics of the automobile sold and the terms of the sale are likelyto result in a consistently performing receivable. These considerations includeamount financed, monthly payments required, duration of the loan, age of theautomobile, mileage on the automobile and other factors.

 

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

 

**Credit Evaluation**

 

*General*.In connection with the origination of a receivable by the Company, the Companyfollows systematic procedures designed to eliminate unacceptable risks. Thisinvolves a three-step process in which (i) the creditworthiness of theborrower and the terms of the proposed transaction are evaluated and eitherapproved, declined or modified by the Company’s credit verification department,(ii) the loan documentation and collateralization is reviewed by theCompany’s funding department, and (iii) additional collateral verificationprocedures and customer interviews are conducted by the Company. During thecourse of this process, the Company’s credit verification and funding personnelcoordinate closely with the finance and insurance departments of the dealers orwith individuals to whom the Company lends directly. The Company has developedfinancing programs under which it approves loans that vary in pricing and loanterms depending on the relative credit risk determined for each loan. Credit ordefault risk is evaluated by the Company’s loan officers in conjunction with aproprietary, empirical credit scoring model developed from the Company’s 17 yeardatabase of non-prime lending results.

 

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In addition to thiscredit underwriting process, and prior to the origination of a receivable bythe Company, the Company performs additional procedures to validate the detailsof the credit application, including income and/or employment information, toverify that the collateral is insured, and to confirm that the material termsof the sale conform to the purchaser’s understanding of the transaction. TheCompany will originate a receivable only after receipt and review of asatisfactory audit report.

 

# **Liquidity and Capital Resources**

# ** **

*Sourcesand Uses of Cash Flows*. The Company’s business requiressignificant cash flow to support its operating activities. The principal cashrequirements include (i) amounts necessary to acquire receivables fromdealers and fund required reserve accounts, (ii) amounts necessary to fundpremiums for credit enhancement insurance or other credit enhancement requiredby the Company’s financing programs, and (iii) amounts necessary to fundcosts to retain receivables, primarily interest expense. The Company alsorequires a significant amount of cash flow for working capital to fund fixedoperating expenses, primarily salaries and benefits.

 

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company originated $70,972 and $149,852 of receivables to beheld for investment for the three and six months ended October 31, 2006compared to $65,602 and $113,377 for the three and six months ended October 31,2007.

 

TheCompany funds loan originations through a combination of two warehouse creditfacilities. The FIRC credit facility generally permits the Company to borrow upto the outstanding principal balance of qualified receivables, not to exceed$65,000. Receivables that have accumulated in the FIRC credit facility may betransferred to the FIARC commercial paper facility at the option of theCompany. The FIARC commercial paper facility provides an additional financingsource of up to $300,000. Additionally, the Company has transferred receivablesfrom the warehouse credit facilities and issued term notes. Substantially allof the Company’s receivables are pledged to collateralize these credit facilitiesand term notes. The Company is obligated to meet certain financial covenants. Noncompliancemay significantly affect cash flow.

 

TheCompany’s most significant source of cash flow is the principal and interestpayments received from its receivables portfolios. The Company received suchpayments in the amount of $53,027 and $104,792 during the three and six monthsended October 31, 2006, and $57,400 and $118,154 during the three and sixmonths ended October 31, 2007. Such cash flow funds were used to repayamounts borrowed under the Company’s credit facilities and other holding costs,primarily interest expense, and servicing and custodial fees. During the threemonths ended October 31, 2006 and 2007, the Company required net cash of$17,949 and $8,202, as the receivables originated exceeded portfoliocollections. During the six months ended October 31, 2006, the Companyrequired net cash of $45,060, as the receivables originated exceeded portfoliocollections. During the six months ended October 31, 2007, the Companyreceived net cash of $4,777 as portfolio collections exceeded receivablesoriginated. The Company relies on borrowed funds to provide cash flow inperiods of growth. As of October 31, 2007, the Company had $33,138 ofavailable capacity in the FIRC and FIARC credit facilities to fund futuregrowth.

 

In addition to the cash flowgenerated from the principal and interest collections on its receivablesportfolio, the Company collects servicing fees funded from each of theservicing portfolios. Servicing fees range from 0.7% to 2.5% of the outstandingprincipal balance of the loans in the portfolio. Cash flow and servicing feesare received after month end, but relate to the prior month activity. Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations. At October 31, 2006 and2007, the Company’s unencumbered cash was $3,176 and $1,608 respectively. Managementbelieves the unencumbered cash and cash inflows and amounts available under theworking capital 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, theirtermination could have a material adverse effect on the Company’s operations ifsubstitute financing on comparable terms was not obtained.

 

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*Financing Arrangements.*The Company finances its loan originations through two warehouse creditfacilities. The Company’s credit facilities provide for one-year terms and havebeen renewed annually. Management of the Company believes that the creditfacilities will continue to be renewed or extended or that it would be able tosecure alternate financing on satisfactory terms; however, there can be noassurance that it will be able to do so. In May, 2005, the Company issued$175,000 in Term Notes secured by a discrete pool of receivables, and January,2006, the Company issued $189,000 in Term Notes secured by another discretepool of receivables. Substantially all receivables retained by the Company arepledged as collateral for the credit facilities and the Term Notes. Theweighted average interest rate for the Company’s secured borrowings, includingthe effect of program fees and dealer fees, was 5.2% and 5.8% for the periodsended October 31, 2006 and 2007, respectively.

 

*Warehouse Facilities as of October 31, 2007*

 
| **Facility** | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                                  | ** ** | **Insurance**             | ** ** | **Borrowing  Rate At  October 31,  2007** | ** ** |
|--------------|------------|--------------|------------|-----------------|------------|------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------------------------|------------|
| FIARC        |       | $            | 300,000    |            | $          | 281,804                |       | Commercial  paper rate plus  .3%                                                                          |       | .25% of  Unused  Facility |       | None                                                |       | 5.3 | % |
| FIRC         |       | $            | 65,000     |            | $          | 50,058                 |       | Option of a Base  Rate, which is  the higher of  prime rate or fed  funds plus .5% or  b) LIBOR plus  .5% |       | .25% of  Unused  Facility |       | See below                                           |       | 5.4 | % |

 

 

*Warehouse Facilities – Credit Enhancement as of October 31, 2007*

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

 

FIRC - In order to obtain a lower cost of funding, the Company has agreedto maintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders, collectively,are named as additional insureds under this policy. The coverage is obtained oneach receivable at the time it is 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 thedealers are charged for the coverage and they are unaware of its existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

 

Aggregatepremiums paid for ALPI coverage alone were $536 and $1,194 during the threemonths ended, and $2,883 and $1,532 for six months ended, October 31, 2006and 2007, respectively, and accounted for 0.8% and 1.8% during the three monthsended, and 1.1% and 1.4% for the six months ended, October 31, 2006 and2007, respectively, of the principal amount of the receivables originatedduring such respective periods.

 

In April 1994,the Company organized First Investors Insurance Company (“Insurance Subsidiary”)under the captive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100percent of the risk under the Company’s ALPI insurance policy. At the time eachreceivable is insured by

 

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National Union, the risk is automaticallyreinsured to its full extent, and approximately 96% of the premium paid by theCompany to National Union with respect to such receivable is ceded to theInsurance Subsidiary. When a loss covered by the ALPI policy occurs, NationalUnion pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. In addition to the monthlypremiums and liquidity reserves of the Insurance Subsidiary, a trust account ismaintained by National Union to secure the Insurance Subsidiary’s obligationsfor losses it has reinsured.

 

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofOctober 31, 2007, the Insurance Subsidiary had capital and surplus of$2,929 and unencumbered cash reserves of $868 in addition to the $3,680 trustaccount.

 

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

 

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC. The Company isnot a guarantor of, or otherwise a party to, such commercial paper.

 

*Warehouse Facilities – Agents and Expirations*

 

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

 

On February 15, 2006,the FIRC facility was renewed, under similar terms and conditions, at the$50,000 commitment level until February 13, 2007. On February 14,2007, the FIRC facility was extended to its current maturity date of February 13,2008. On September 12, 2007, the FIRC facility’s commitment level wasincreased to $65,000. As of April 30, 2007 and October 31, 2007,there was $36,805 and $50,058, respectively, outstanding.

 

On March 15, 2006, following a short-termextension of the then current maturity date, the FIARC facility was renewed to February 14,2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated. Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%. On October 11, 2006, the Company amended the facility toincrease the commitment from $150,000 to $300,000 in order to fund the growthin origination volume. On February 14, 2007, the maturity date of theFIARC facility was extended to its current maturity date of February 13,2008. As of April 30, 2007 and October 31, 2007, there was $246,477and $281,804, respectively, outstanding.

 

Management intends to seek further extensions tothese warehouse facilities prior to the current 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.

 

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Thefollowing table contains pertinent information on the Term Notes as of October 31,2007.

 

 

| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** ** | **Maturity Date** | ** **             | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|----------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------------------|-----------------|------------|--------------------|------------|
| 2005-A  Class 2 |       | May 5, 2005       |       | $                    | 74,000     |                   | February 15, 2011 |            | $          | 44,223             |       | 4.23 | % |
| 2006-A  Class 3 |       | January 26, 2006  |       | $                    | 74,000     |                   | February 15, 2011 |            | $          | 49,137             |       | 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% of Initial Pool Balance  including Pre-Funding Amount |       | 97.0% initial advance decreasing to 95.75% |       | Surety Bond   |
| 2006-A       |       | 1.0% of Initial Pool Balance increasing to 2% of Initial Pool Balance  including Pre-Funding Amount |       | 98.5% initial advance decreasing to 96.75% |       | Surety Bond   |

 

Term Notes - On May 5, 2005, the Company, through its indirect, wholly-ownedsubsidiary, First Investors Auto Owner Trust 2005-A (“2005 Auto Trust”),completed the issuance of $69,000 of 3.57% Class A-1 asset-backed notesand $106,493 of 4.23% Class A-2 asset-backed notes (collectively “2005-ATerm Notes”), for a total of $175,493 of asset backed notes. The initial poolof automobile receivables transferred to the 2005 Auto Trust totaled $150,921,was previously owned by FIRC and FIARC, and secures the 2005-A Term Notes. Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the2005 Auto Trust also issued a $5,428 Class B Note that was retained by theCompany and pledged to secure the Working Capital Facility as further describedbelow. Proceeds from the issuance, which totaled $175,488, were used to (i) funda $30,000 pre-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 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1%, or $1,509, of the initial receivablespledged. The Class A-1 and Class A-2 Term Notes bear interest at3.57% and 4.23%, respectively, and require monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 95.75% ofthe outstanding balance of the underlying receivables pool. The Class A-1Notes were paid off during the fiscal year ended April 30, 2006. The finalmaturity of the Class A-2 Term 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. A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes. In theevent that certain asset quality covenants are not met, the reserve accounttarget level will increase to 2% of the then current principal balance of thereceivables pool. As of April 30, 2007 and October 31, 2007, theoutstanding principal balances on the 2005-A Term notes were $59,685 and$44,223, 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

 

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facility,(iii) reduce the 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 receivables pledged.The 2006-A Term Notes require monthly principal reductions sufficient to reducethe balance of the notes to 96.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the quarterended July 31, 2006. The final maturities of the Class A-2, Class A-3,and Class A-4 Term Notes are March 16, 2009, February 15, 2011,and April 15, 2013, respectively. The Class B Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.25% of the outstanding balance of the underlyingreceivables pool. A surety bond issued by MBIA Insurance Corporation providescredit enhancement for the Class A Notes. In the event that certain assetquality covenants are not met, the reserve account target level will increaseto the greater of 2% of the initial pool balance or 6% of the then currentprincipal balance of the receivables pool. As of April 30, 2007 and October 31,2007, the outstanding principal balances on the 2006-A Class A term noteswere $110,302 and $85,197, 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 August 15, 2005, the Working Capital Facility was extended until February 15,2006, increasing the commitment amount to $23,500, and was subsequentlyextended on February 15, 2006 until February 14, 2007. The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%. On November 7,2006, the Company amended the facility to increase the commitment amount from$23,500 to $28,500. On February 14, 2007, the working capital facility wasextended to its current maturity date of February 13, 2008, under similarterms and conditions. As of April 30, 2007 and October 31, 2007,there was $22,753 and $21,523, respectively, outstanding under this facility. TheCompany has capitalized $6 of interest expense for the three and six monthsended October 31, 2007.

 

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 thiscredit facility will not be renewed. If the facility is not renewed, however,or if 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 theCompany 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 October 31, 2007,there was $5,000 outstanding under this facility.

 

*Related Party Loans.*On December 3, 2001 the Company entered into an agreement with oneof its shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500. On December 6, 2004,the original $2,500 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 borrowings have been utilized to fund certainprivate and open market purchases of the Company’s common stock pursuant to a StockRepurchase Plan authorized by the Board of Directors and for general corporatepurposes. Borrowings under the facility bear interest at a fixed rate of 10%per annum. The facility is unsecured and expressly subordinated to the Company’ssenior credit facilities. The facility matures on December 3, 2008 but maybe repaid at any time unless the Company is in default on one of its othercredit facilities. There was $2,500 outstanding under this facility as of April 30,2007 and October 31, 2007, respectively. For the three and six monthsended October 31, 2006 and October 31, 2007, the Company recordedinterest expense under these facilities of $63 and $126, 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

 

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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 FIRC credit facility, the Term Notesand the working capital facility or the termination of the commercial paperfacilities. The Company was not in default with respect to any financial andnon-financial covenants governing these financing arrangements at October 31,2007.

 

*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 interest rateswaps or caps to minimize the effects of market interest rate fluctuations onthe 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.

 

**Delinquencyand Credit Loss Experience**

 

The Company’s results of operations, financialcondition and liquidity may be adversely affected by nonperforming receivables.The Company seeks to manage its risk of credit loss through (i) prudentcredit evaluations, (ii) risk management activities, (iii) effectivecollection procedures, and (iv) by maximizing recoveries on defaultedloans. The allowance for credit losses of $3,063 as of October 31, 2007,and $2,934 as of April 30, 2007, as a percentage of Receivables Held forInvestment of $468,557 as of October 31, 2007, and $458,586 as of April 30,2007, was 0.6%.

 

The Company considers a loan to be delinquent when theborrower fails to make a scheduled payment of principal and interest. Accrualof interest is suspended when the payment from the borrower is over 90 dayspast due. Generally, repossession procedures are initiated 60 to 90 days afterthe payment default.

 

The Company retains the credit risk associated withthe receivables originated. The Company purchases credit enhancement insurancefrom third party insurers which covers the risk of loss upon default andcertain other risks. The Company established a captive insurance subsidiary toreinsure certain risks under the credit enhancement insurance coverage for allreceivables. In addition, receivables financed under the Auto Trust and FIARCcommercial paper facilities do not carry default insurance. Provisions forcredit losses of $2,677 and $5,195 for the three and six months ended October 31,2006 compared to $3,999 and $7,187 for the three and six months ended October 31,2007 have been recorded.

 

TheCompany calculates the allowance for credit losses in accordance with SFAS No. 5*, Accounting for Contingencies.*SFAS No. 114, *Accounting by Creditors for Impairment of a Loan* does notapply to loans currently held by the Company because they are comprised of alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

 

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 the reporting date. These factorsare then applied to the aging status of each loan at the reporting date inorder to calculate the number of loans that are expected to migrate to impairedstatus. The estimated number of impairments is then multiplied by the estimatedloss per loan, which is based on historical information. The Company utilizedits most recent recovery rates in order to assess fair value of these loans. Forloans that are not classified into these categories, the historical migrationpattern is utilized in order to establish the estimated impairment. Theallowance for credit losses is based on estimates and qualitative evaluations. Ultimatelosses may vary from current estimates. These estimates are reviewed periodicallyand as adjustments, either positive or negative, become necessary, they arereported in earnings in the period they become known.

 

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Thefollowing table sets forth certain information regarding the Company’sdelinquency and charge-off experience over the six month periods (inthousands):

 
| ** **                                                                                | ** ** | **For the Six Months Ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                                               | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **Number  of Loans**                                                   | ** ** | **Amount** | ** ** | **Number  of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                         |       |                                                                   |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                                                   |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 109                                                                    |       | $ | 1,282 |   | 117 |   | $ | 1,564 |   |
| 60 - 89 days                                                                              |       | 44                                                                     |       | 385 |   | 63 |   | 696 |   |
| 90 days or more                                                                           |       | 40                                                                     |       | 306 |   | 94 |   | 889 |   |
| Total  delinquencies                                                                      |       | 193                                                                    |       | $ | 1,973 |   | 274 |   | $ | 3,149 |   |
| Total  delinquencies as a percentage of outstanding receivables.                          |       | 0.8                                                                    |  %    | 0.5 |  % | 1.0 |  % | 0.7 |  % |
| Net charge-offs  as a percentage of average receivables outstanding during the period (2) |       |                                                                   |       | 2.4 | % |   |   | 3.1 | % |

 

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(1)Delinquent amountsoutstanding do not include loans in bankruptcy status since collection activityis limited and highly regulated for bankrupt accounts.

 

(2)The percentages have been annualized and are notnecessarily indicative of the results for a full year.

The higher annualized charge-off rate resultsfrom an increase in repossessions and lower recovery rates on the repossessedvehicles.

 

As of October 31, 2007, there were 264 accountstotaling $3,246 that were in bankruptcy status and were more than 30 days pastdue. As of October 31, 2006, there were 182 accounts totaling $2,522 thatwere in bankruptcy status and were more than 30 days past due. As of October 31,2006 and 2007, 86% and 88%, respectively, of the bankruptcy delinquencies filedfor protection under Chapter 13.

 

**New Accounting 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 fair valueis a market-based measurement, not an entity-specific measurement, and sets outa fair value hierarchy with the highest priority being quoted prices in activemarkets. Under this statement, fair value measurements are disclosed by levelwithin that hierarchy. While SFAS No. 157 does not add any new fair valuemeasurements, it does change current practice. Changes to practice include: (1) arequirement for an entity to include its own credit standing in the measurementof its liabilities; (2) a modification of the transaction pricepresumption; (3) a prohibition on the use of block discounts when valuinglarge blocks of securities 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 financialposition, cash flows, 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 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,

 

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2007.The Company is currently evaluating the impact of adopting SFAS No. 159on its financial position, cash flows, and results of operations.

 

**ITEM 3. *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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 withchanges in interest rates. The Company is therefore exposed primarily to marketrisks associated 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.

 

As of October 31, 2007, the Company had$353,385 of floating rate secured debt outstanding under the FIRC and FIARCwarehouse and working capital facilities. For every 1% increase in LIBOR,annual after-tax earnings would decrease by approximately $2,244 assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates. As of October 31, 2006, the Company had$206,090 of floating rate secured debt outstanding net of swap and capagreements. For every 1% increase in commercial paper rates or LIBOR, annualafter-tax earnings would decrease by approximately $1,309 assuming the Companymaintains a level amount of floating rate debt and assuming an immediateincrease in rates.

 

In addition to an increase in commercial paper ratesor LIBOR, the Company’s interest expense will also be negatively impacted byincreasing credit spreads, which in the case of the FIARC facility are passedthrough to the Company. This increase in credit spreads is reflected in thedifference between the LIBOR rate and the rate at which the asset-backedcommercial paper conduit facility utilized by the Company issues commercialpaper. Recently, credit spreads in the asset-backed commercial paper market andin the asset-backed term market have increased significantly as a result ofdeteriorating market liquidity and a risk aversion attributable to conditionsin the subprime mortgage industry which appear to have spread to the debtmarket in general. While the Company’s credit facilities do not expire until February 2008and while the Company had approximately $33,138 in unused capacity as of October 31,2007, 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**

 

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

 

TheCompany believes the factors discussed in its reports are important factorsthat could cause actual results to differ materially from those expressed inany forward looking statement made herein or elsewhere by the Company or on itsbehalf. The factors listed are not necessarily all of the important factors. Unpredictableor unknown factors not discussed could also have material adverse effects onactual results. The Company does not intend to update its description ofimportant factors each time a potential important factor arises. The Companyadvises its stockholders that they should: (1) be aware that importantfactors not described herein could affect the

 

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accuracy of our forwardlooking statements, and (2) use caution and common sense when analyzingour forward looking statements in this document or elsewhere. All of suchforward looking statements are qualified in their entirety by this cautionary statement.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod 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 October 31, 2007 to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

Additionalcontrols over financial reporting have been implemented to address the errorthat was noted during the six months ended October 31, 2007.

 

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###### **PART II**

###### ** **

##### **OTHER INFORMATION**

##### ** **

**ITEM 6. *EXHIBITS AND REPORTS ON FORM 8-K***

 

(a)   Exhibits

 

10.139 (y)       Note Purchase Agreement datedSeptember 12, 2007, between First Investors Financial ServicesGroup, Inc. and Wachovia Bank, National Association.

 

10.140 (y)       Subsidiary Guarantee Agreement datedSeptember 12, 2007, between First Investors Financial Services, Inc.,Farragut Financial Corporation, First Investors Servicing Corp, and FirstInvestors Financial Services Group, Inc.

 

10.141 (y)       Amendment No 13 to Second Amendment andRestated Agreement dated September 12, 2007, between F.I.R.C., Inc.,Wachovia Bank, National Association, and Wachovia Bank Capital Markets, LLC.

 

10.142 (y)       Amendment Number 3 to Second Amended andRestated Security Agreement dated December 10, 2007, between First InvestorsAuto Receivables Corporation, First Investors Financial Services, Inc.,First Investors Servicing Corporation, Variable Funding Capital Company, LLC,Wachovia Capital Markets, LLC, and Wells Fargo Bank, National Association.

 

 

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

 

31.2   Certificationof Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of2002.

 

32.1   Certificationof Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

32.2   Certificationof Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

Filed with this 10-Q

 

(b)         Reports on Form 8-K

 

Form 8-Kfiled September 12, 2007, press release announcing the quarter end July 31,2007 financial results.

 

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### ** **

### **SIGNATURES**

### ** **

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|   |              | First Investors Financial  Services Group, Inc. |
|--------|-------------------|------------------------------------------------------|
|   |              | (Registrant)                                         |
|   |              |                                                 |
| Date:  | December 12, 2007 |                                                 |   | By: /s/TOMMY A. MOORE, JR. |
|   |              | Tommy A. Moore, Jr.                             |
|   |              | President and Chief Executive  Officer               |
|   |              |                                                 |
| Date:  | December 12, 2007 |                                                 |   | By: /s/BENNIE H. DUCK |
|   |              | Bennie H. Duck                                       |
|   |              | Secretary, Treasurer and Chief  Financial Officer    |

 

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