**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 July 31, 2007**                                                                                                                                                                                     |
| ** ** |       | ** **                                                                                                                                                                                                                            |
| **OR**     |
| ** ** |       | ** **                                                                                                                                                                                                                            |
| ** ̈** | ** ** | **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**

**First Investors FinancialServices Group, Inc.**(Exact Name of Registrantas Specified in its Charter)

| **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 TelephoneNumber, 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 the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x No o.

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark 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**                     | ** ** | **September 6, 2007**     | ** ** |
| Common  Stock-$.001 Par Value |       |                      |       |

 

 

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

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

### **JULY 31, 2007**

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

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

 

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

##### **CONSOLIDATED CONDENSED BALANCE SHEETS – APRIL30, 2007 AND JULY 31, 2007(In thousands, except par value)**

| ** **                                                                                                                          | ** ** | **April 30,  2007** | ** ** | **July 31,  2007  (Unaudited)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| **ASSETS**                                                                                                                          |       |                     |       |                                 |       |
| Receivables Held for  Investment, net                                                                                               |       | $                        | 468,022    |                                 | $          | 462,747 |   |
| Cash and Short-Term  Investments                                                                                                    |       | 1,669                    |       | 1,332                                |       |
| Restricted Cash                                                                                                                     |       | 33,473                   |       | 34,506                               |       |
| Accrued Interest  Receivable                                                                                                        |       | 3,781                    |       | 3,730                                |       |
| Assets Held for Sale                                                                                                                |       | 1,200                    |       | 1,403                                |       |
| Other Assets:                                                                                                                       | ** ** | ** **               |       | ** **                           | ** ** |
| Equity  investments                                                                                                                 |       | 1,133                    |       | 1,601                                |       |
| Income taxes                                                                                                                        |       | 12                       |       | 454                                  |       |
| Funds held under  reinsurance agreement                                                                                             |       | 3,355                    |       | 3,530                                |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $3,788 and $4,139                  |       | 3,736                    |       | 3,635                                |       |
| Total assets                                                                                                                        |       | $                        | 516,381    |                                 | $          | 512,938 |   |
| ** **                                                                                                                          | ** ** | ** **               |       | ** **                           | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                      | ** ** | ** **               |       | ** **                           | ** ** |
| Debt:                                                                                                                               | ** ** | ** **               |       | ** **                           | ** ** |
| Warehouse credit  facilities                                                                                                        |       | $                        | 283,282    |                                 | $          | 300,182 |   |
| Term notes                                                                                                                          |       | 169,987                  |       | 148,457                              |       |
| Working capital  facility                                                                                                           |       | 22,753                   |       | 23,523                               |       |
| Related party  note                                                                                                                 |       | 2,500                    |       | 2,500                                |       |
| Other Liabilities:                                                                                                                  |       |                     |       |                                 |       |
| Accounts payable  and accrued liabilities                                                                                           |       | 5,377                    |       | 5,391                                |       |
| Deferred income  taxes payable                                                                                                      |       | 733                      |       | 885                                  |       |
| Total  liabilities                                                                                                                  |       | 484,632                  |       | 480,938                              |       |
|                                                                                                                                | ** ** | ** **               |       | ** **                           | ** ** |
| 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 July 31, 2007 |       | 6                        |       | 6                                    |       |
| Additional  paid-in capital                                                                                                         |       | 19,374                   |       | 19,466                               |       |
| Retained  earnings                                                                                                                  |       | 16,836                   |       | 16,995                               |       |
| Less, treasury  stock, at cost, 1,172 shares                                                                                        |       | (4,467                   | )          | (4,467                               | )          |
| Total  shareholders’ equity                                                                                                    |       | 31,749                   |       | 32,000                               |       |
| Total liabilities and  shareholders’ equity                                                                                    |       | $                        | 516,381    |                                 | $          | 512,938 |   |

 

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

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

**CONSOLIDATED CONDENSEDSTATEMENTS OF EARNINGS**

**For the Three Months Ended July31, 2006 and 2007(In thousands, except per share amounts)(Unaudited)**
| ** **                                            | ** ** | **For the Three Months** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **Ended July 31,**            | ** ** |
| ** **                                            | ** ** | **2006**                                | ** ** | **2007** | ** ** |
|                                                  |       |                                    |       |   |   |
| Interest Income                                       |       | $                                       | 12,330     |   | $ | 14,360 |   |
| Interest Expense                                      |       | 5,206                                   |       | 6,680 |   |
|    Net interest  income                |       | 7,124                                   |       | 7,680 |   |
| Provision for Credit Losses                           |       | 2,518                                   |       | 3,188 |   |
| Net Interest Income After Provision for Credit Losses |       | 4,606                                   |       | 4,492 |   |
| Other Income:                                         |       |                                    |       |   |   |
| Servicing revenue                                     |       | 364                                     |       | 278 |   |
| Other finance charges and fees                        |       | 735                                     |       | 906 |   |
| Insurance products                                    |       | 213                                     |       | 301 |   |
| Income from investment                                |       | 67                                      |       | 128 |   |
| Other interest income                                 |       | 405                                     |       | 429 |   |
|    Total other  income                 |       | 1,784                                   |       | 2,042 |   |
| Operating Expenses:                                   |       |                                    |       |   |   |
| Salaries and benefits                                 |       | 2,724                                   |       | 2,818 |   |
| Operating expense                                     |       | 979                                     |       | 1,660 |   |
| General and administrative                            |       | 1,044                                   |       | 888 |   |
| Other interest expense                                |       | 421                                     |       | 596 |   |
|    Total  operating expenses           |       | 5,168                                   |       | 5,962 |   |
| Earnings Before Provision for Income Taxes            |       | 1,222                                   |       | 572 |   |
| Provision for Income Taxes:                           |       |                                    |       |   |   |
| Current                                               |       | 532                                     |       | 57 |   |
| Deferred                                              |       | (46                                     | )          | 152 |   |
|    Total  provision for income taxes   |       | 486                                     |       | 209 |   |
| Net Earnings                                          |       | $                                       | 736        |   | $ | 363 |   |
|                                                  |       |                                    |       |   |   |
| Basic Net Earnings per Common Share                   |       | $                                       | 0.17       |   | $ | 0.08 |   |
| Diluted Net Earnings per Common Share                 |       | $                                       | 0.15       |   | $ | 0.08 |   |

 

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

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

**CONSOLIDATED CONDENSEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

**For the Three Months EndedJuly 31, 2007(In thousands, except share amounts)(Unaudited, except where stated)**
| ** **                              | ** ** | **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                            |       | —                |       | —                  |       | —             |       | 363                          |       | —     |       | 363 |   |
| Stock compensation expense              |       | —                |       | —                  |       | 92                 |       | —                       |       | —     |       | 92 |   |
| Balance at July 31, 2007                |       | 5,649,670             |       | $                       | 6          |               | $          | 19,466                       |       | $          | 16,995     |   | $ | (4,467 | ) | $ | 32,000 |   |

 

The accompanying notes are an integral part of this consolidatedfinancial statement.

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSFor the Three Months Ended July 31, 2006 and 2007(In thousands)****(Unaudited)**
| ** **                                                                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                       |       |     |       |     |       |
| Cash Flows From Operating Activities:                                                      |       |     |       |     |       |
| Net earnings                                                                               |       | $        | 736        |     | $          | 363 |   |
| Adjustments to reconcile net  earnings to net cash provided by operating activities — |       |     |       |     |       |
| Depreciation and amortization  expense                                                     |       | 1,642    |       | 1,686    |       |
| Provision for credit losses                                                                |       | 2,518    |       | 3,188    |       |
| Excess tax benefits from  share-based payment arrangements                                 |       | (20      | )          | —   |       |
| Share-based payment  arrangements                                                          |       | 39       |       | 92       |       |
| (Increase) decrease in:                                                                    |       |     |       |     |       |
| Accrued interest receivable                                                                |       | (129     | )          | 51       |       |
| Restricted cash                                                                            |       | (6,726   | )          | (1,033   | )          |
| Deferred financing costs and  other assets                                                 |       | 108      |       | (152     | )          |
| Funds held under reinsurance  agreement                                                    |       | (450     | )          | (175     | )          |
| Current income tax receivable                                                              |       | —   |       | 43       |       |
| Increase (decrease) in:                                                                    |       |     |       |     |       |
| Accounts payable and accrued  liabilities                                                  |       | (2,381   | )          | (674     | )          |
| Deferred income taxes payable                                                              |       | (47      | )          | 152      |       |
| Income taxes                                                                               |       | 241      |       | —   |       |
| Net cash (used in) provided by  operating activities                                       |       | (4,469   | )          | 3,541    |       |
| Cash Flows From Investing Activities:                                                      |       |     |       |     |       |
| Origination of Receivables  Held for Investment                                            |       | (80,319  | )          | (48,518  | )          |
| Payments received from  Investments                                                        |       | 72       |       | 55       |       |
| Contributions to Investments                                                               |       | —   |       | (524     | )          |
| Principal payments from  Receivables Held for Investment                                   |       | 39,563   |       | 46,343   |       |
| Payments received on Assets  Held for Sale                                                 |       | 1,802    |       | 2,727    |       |
| Purchase of furniture and  equipment                                                       |       | (312     | )          | (102     | )          |
| Net cash used in investing  activities                                                     |       | (39,194  | )          | (19      | )          |
| Cash Flows From Financing Activities:                                                      |       |     |       |     |       |
| Proceeds from advances on—                                                            |       |     |       |     |       |
| Warehouse credit facilities                                                                |       | 170,397  |       | 99,710   |       |
| Working capital facility                                                                   |       | 2,919    |       | 770      |       |
| Principal payments made on—                                                           |       |     |       |     |       |
| Warehouse credit facilities                                                                |       | (94,310  | )          | (82,809  | )          |
| Term notes                                                                                 |       | (35,998  | )          | (21,530  | )          |
| Proceeds from the issuance of  common stock                                                |       | 90       |       | —   |       |
| Excess tax benefits from  share-based payment arrangements                                 |       | 20       |       | —   |       |
| Net cash provided (used) by  financing activities                                          |       | 43,118   |       | (3,859   | )          |
| Decrease in Cash and Short-Term Investments                                                |       | (545     | )          | (337     | )          |
| Cash and Short-Term Investments at Beginning of Period                                     |       | 3,380    |       | 1,669    |       |
| Cash and Short-Term Investments at End of Period                                           |       | $        | 2,835      |     | $          | 1,332 |   |
| Supplemental Disclosures of Cash Flow Information:                                         |       |     |       |     |       |
| Cash paid during the period  for—                                                     |       |     |       |     |       |
| Interest                                                                                   |       | $        | 4,561      |     | $          | 6,402 |   |
| Income taxes                                                                               |       | 292      |       | 14       |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

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

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

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

##### **July 31, 2007**

**1.****              TheCompany**

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

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 July 31, 2007, approximately 33% and 13% ofreceivables held for investment had been originated in Texas and Georgia,respectively.  The Company currentlyoperates in 28 states.

FIIC was organized under the captiveinsurance company laws of the state of Vermont for the purpose of reinsuringcertain credit enhancement insurance policies that have been written byunrelated third party 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 collection activitieson a portfolio of receivables originated for investment as well as on aportfolio 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 enteredinto a partnership agreement whereby a subsidiary of the Company was thegeneral partner owning 70% of the partnership interests and First UnionInvestors, Inc. served as the limited partner and owned 30% of the partnershipinterests.  On September 19, 2003, FirstInvestors Financial Services, Inc. purchased the limited partnership interestspreviously held by First Union Investors, Inc. The Partnership consists primarily of a portfolio of loans previouslyowned or securitized by FISC and certain other financial assets includingcharged-off accounts owned by FISC.

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

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 acquireda 50% participation in a $4,279 portfolio of nonperforming loans at a purchaseprice of $592.  The Company accounts forthese loans using the cost recovery method.

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In total, at July 31, 2007, FISC performsservicing and collection functions on a managed receivables portfolio ofapproximately $627,842.

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

*Basis of Presentation*.  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, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*, asamended in December 2003 by Interpretation 46R. As of July 31, 2007, the Company does not have any variable interestentities under FIN 46 as amended by Interpretation 46R.

The results for theinterim periods are not necessarily indicative of the results of operationsthat may be expected for the fiscal year. In the opinion of management, theinformation furnished reflects all adjustments which are of a normal recurringnature and are necessary for a fair presentation of the Company’s financial positionas of July 31, 2007, and the results of its operations for the three monthsended July 31, 2006 and 2007, and its cash flows for the three months endedJuly 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 rulesand regulations, although the Company believes that the disclosures areadequate to make the information not misleading. These financial statementsshould be read in conjunction with the audited consolidated financialstatements included in the Company’s 2007 Annual Report on Form 10-K filed July24, 2007.

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers.  The Companyaccrues interest income monthly using the effective interest method.  When a receivable becomes 90 days past due,the income accrual is suspended until the payments become current. When a loanis charged off or the collateral is repossessed, the remaining income accrualis written off.  The Company defers andcapitalizes certain expenses related to the origination of receivables held forinvestment, and amortizes these expenses in proportion to their underlyingreceivable.

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

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

The Company initiates efforts to make customercontact as early as when the customer is one day past due and become moreaggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determined thatthe loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.

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Upon repossession, the uncollectible portion of the loan and 100% ofaccrued interest is written off.  The fairvalue of the collateral is recorded as Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging statusof each loan as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate 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 most recent recovery rates in order to assessfair 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 for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, they are reported in earnings in the period they become known.

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

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

**3.     Receivables Held for Investment**

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

|                                       | ** ** | **April 30,  2007** | ** ** | **July 31,  2007** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Receivables held  for investment      |       | $                        | 458,586    |                    | $          | 453,588 |   |
| Unamortized  premium, net (1)         |       | 4,118                    |       | 4,034                   |       |
| Deferred  acquisition costs           |       | 8,252                    |       | 8,028                   |       |
| Allowance for  credit losses          |       | (2,934                   | )          | (2,903                  | )          |
| Receivables held  for investment, net |       | $                        | 468,022    |                    | $          | 462,747 |   |

 

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(1)  Includes premiumand discounts paid to dealers.

The accrual of interest has been suspended on $1,923 and$2,600 of delinquent receivables as of April 30, 2007 and July 31, 2007,respectively.

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

|                                | ** ** | **For the Three Months  Ended July 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                          | ** ** | **2007** | ** ** |
| Balance, beginning of period   |       | $                                                                 | 2,332      |   | $ | 2,934 |   |
| Provision for credit losses    |       | 2,518                                                             |       | 3,188 |   |
| Charge-offs, net of recoveries |       | (2,155                                                            | )          | (3,219 | ) |
| Balance,  end of period        |       | $                                                                 | 2,695      |   | $ | 2,903 |   |

 

**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 November,2003, the Company issued $140,000 in Term Notes secured by a discrete pool ofreceivables.  These notes weresubsequently called and redeemed in March, 2005.  In May, 2005, the Company issued $175,000 inTerm Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189,000in Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees and dealer fees was 5.1% and 5.6% for theperiods ended July 31, 2006 and 2007, respectively.

*Warehouse Facilities as of July 31, 2007*

| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  July 31,   2007** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| FIARC    |       | $            | 300,000    |            | $          | 271,347           |       | Commercial paper rate plus .3%                                                                        |       | .25% of Unused Facility |       | None                                    |       | 5.35 | % |
| FIRC     |       | $            | 50,000     |            | $          | 28,835            |       | 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                               |       | 5.82 | % |

 

*Warehouse Facilities – Credit Enhancement as of July 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 

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time it is originated by the Company and the applicable premiums areprepaid for the life of the receivable. The insurance enhancing this facilityis default insurance under a standard auto loan protection policy (known as “ALPI”insurance) which covers the difference between the outstanding balance of areceivable and the liquidation proceeds in the event the underlying collateralis repossessed.  Neither the vehiclepurchasers nor the dealers are charged for the coverage and they are unaware ofits existence. The Company’s ALPI insurance policy is written by National UnionFire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

Aggregate premiums paid for ALPI coverage aloneduring the three months ended July 31, 2006 and 2007 were $1,315 and $338respectively, and accounted for 1.7% and 0.7% of the aggregate principalbalance of the receivables originated during such respective periods.

In April 1994,the Company organized First Investors Insurance Company (the “InsuranceSubsidiary”) under the captive insurance company laws of the State of Vermont.The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Companyand is a party to a reinsurance agreement whereby the Insurance Subsidiaryreinsures 100 percent of the risk under the Company’s ALPI insurance policy. Atthe time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96% of the premiumpaid by the Company to National Union with respect to such receivable is cededto the Insurance Subsidiary. When a loss covered by the ALPI policy occurs,National Union pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. In addition to the monthly premiums and liquidity reserves of theInsurance Subsidiary, a trust account is maintained by National Union to securethe Insurance Subsidiary’s obligations for 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 of July 31, 2007, the Insurance Subsidiaryhad capital and surplus of $2,656 and unencumbered cash reserves of $1,193 inaddition to the $3,385 trust account.

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

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise a party to, such commercial paper.

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

 

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OnFebruary 15, 2006, the FIRC facility was renewed, under similar terms andconditions, at the $50,000 commitment level until February 13, 2007.  On February 14, 2007, the FIRC facility wasextended to its current maturity date of February 13, 2008.  As of April 30, 2007 and July 31, 2007, therewas $36,805 and $28,835, respectively, outstanding.

On March 15, 2006,following a short-term extension of the then current maturity date, the FIARCfacility was renewed to February 14, 2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from 0.25%to 0.30%.  On October 11, 2006, theCompany amended the facility to increase the commitment from $150,000 to$300,000 in order to fund the growth in origination volume.  On February 14, 2007, the maturity date ofthe FIARC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2007 and July 31,2007, there was $246,477 and $271,347, respectively, outstanding.

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

The following table contains pertinent information on the Term Notes asof July 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     |            | $          | 51,415             |       | 4.23 | % |
| 2006-A Class 3 |       | January 26, 2006  |       | $                    | 74,000     |              | February 15, 2011 |            | $          | 60,982             |       | 4.93 | % |
| 2006-A Class 4 |       | January 26, 2006  |       | $                    | 36,060     |              | April 15, 2013    |            | $          | 36,060             |       | 5.00 | % |

 

Credit enhancement 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-owned subsidiary, First Investors Auto Owner Trust2005-A (“2005 Auto Trust”), completed the issuance of $69,000 of 3.57% ClassA-1 asset-backed notes and $106,493 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,921, was previously owned by FIRC and FIARC, and secures the2005-A Term Notes.  In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trust also issueda $5,428 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$175,488, were used to (i) fund a $30,000 pre-funding account to be used forfuture loan originations, (ii) repay all outstanding borrowings under the FIARCcommercial paper 

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facility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2005-A Term Note issuance,and (v) fund an initial cash reserve account of 1%, or $1,509, of the initialreceivables pledged.  The Class A-1 andClass A-2 Term Notes bear interest at 3.57% and 4.23%, respectively, andrequire monthly principal reductions sufficient to reduce the balance of theClass A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 Notes were paid off during the fiscal yearended April 30, 2006.  The final maturityof the Class A-2 Term Notes is July 16, 2012. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 4.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2007 and July 31, 2007, theoutstanding principal balances on the 2005-A Term notes were $59,685 and$51,415, respectively.

On January 26, 2006, the Company, through itsindirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2006-A (“2006Auto Trust”), completed the issuance of $32,000 of 4.57% Class A-1 asset-backednotes, $47,000 of 4.87% Class A-2 asset-backed notes, $74,000 of 4.93% ClassA-3 asset-backed notes, and $36,060 of 5.00% Class A-4 asset-backed notes(collectively “2006-A Term Notes”), for a total of $189,060 of asset backednotes. The initial pool of automobile receivables transferred to the 2006 AutoTrust totaled $151,939, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes.  In addition to theissuance of the Class A-1, Class A-2, Class A-3, and Class A-4 Notes, the 2006Auto Trust also issued a $2,879 Class B Note that was retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $188,446, were used to (i) fund a $40,000 pre-funding account to beused for future loan originations, (ii) repay all outstanding borrowings underthe FIARC commercial paper facility, (iii) reduce the outstanding borrowingsunder the FIRC credit facility, (iv) pay transaction fees related to the 2006-ATerm Note issuance, and (v) fund an initial cash reserve account of 1% or$1,519 of the initial receivables pledged. The 2006-A Term Notes require monthly principal reductions sufficient toreduce the balance of the notes to 96.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 notes were paid off during the quarter endedJuly 31, 2006.  The final maturities ofthe Class A-2, Class A-3, and Class A-4 Term Notes are March 16, 2009, February15, 2011, and April 15, 2013, respectively. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2007 and July 31, 2007, the outstanding principal balances on the2006-A Class A term notes were $110,302 and $97,042, respectively.

*Working Capital Facility*.  Thefacility is provided to a special-purpose, wholly-owned subsidiary of theCompany, First Investors Residual Funding LP. This facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities and theexisting and future term note facilities. The outstanding borrowings under the facility bear interest at one-monthLIBOR plus 2.25%.  In addition, acommitment fee of 1.5% is paid on the total amount of this facility.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitment amountfrom $9,000 to $13,500.  The interest rateremained at LIBOR plus 2.25% and the commitment fee paid on the total availableamount of the facility was maintained at 1.5%. On August 15, 2005, the Working Capital Facility was extended untilFebruary 15, 2006, increasing the commitment amount to $23,500, and wassubsequently extended on February 15, 2006 until February 14, 2007.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On 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 was extended to its current maturity date ofFebruary 13, 2008, under similar terms and conditions.  As of April 30, 2007 and July 31, 2007, therewas $22,753 and $23,523, respectively, outstanding under this facility.

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

*Related Party Loans. *On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500.  On December 6, 2004, the original $2,500shareholder loan was replaced with a $2,500 loan containing identical terms andconditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors  The proceeds of the borrowings have beenutilized to fund certain private and open market purchases of the Company’scommon stock pursuant to a Stock Repurchase Plan authorized by the Board ofDirectors and for general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10% perannum.  The facility is unsecured andexpressly subordinated to the Company’s senior credit facilities. The facilitymatures on December 3, 2008 but may be repaid at any time unless the Company isin default on one of its other credit facilities.  There was $2,500 outstanding under this facilityas of April 30, 2007 and July 31, 2007, respectively.  For the three months ended July 31, 2006 andJuly 31, 2007, the Company recorded interest expense under these facilities of$63.

*Loan Covenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at July 31,2007.

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

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**5.     Earnings Per Share**

Earnings per shareamounts are based on the weighted average number of shares of common stock andpotential dilutive common shares outstanding during the period. The weightedaverage number of shares used to compute basic and diluted earnings per sharefor the three months ended July 31, 2006 and 2007, are as follows:

|                                                                    | ** ** | **For the Three Months Ended  July 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                                          | ** ** | **2007** | ** ** |
| Weighted average shares:                                           |       |                                                              |       |   |   |
| Weighted average shares  outstanding for basic earnings per share  |       | 4,457                                                             |       | 4,478 |   |
| Effect of dilutive stock  options and warrants                     |       | 323                                                               |       | 302 |   |
| Weighted average shares outstanding for diluted earnings per share |       | 4,780                                                             |       | 4,780 |   |

 

For the three monthsended July 31, 2006 and 2007, the Company had 258 and 518 respectively, ofstock options and stock warrants which were not included in the computation ofdiluted earnings per share because to do so would have been antidilutive forthe period presented.

**6.     Investment in First Auto ReceivablesCorporation**

On December 24, 2002, the Company invested $475 for a 40% ownershipinterest in First Auto Receivables Corporation (“FARC”) and $713 for juniormezzanine investments of FARC.  FARCpurchased a $197,500 automobile loan portfolio from UAFC-2 Corporation, asubsidiary of Union Acceptance Corporation, with proceeds from $186,000 insenior bridge debt, $8,900 of senior mezzanine debt, $1,800 of junior mezzaninedebt and $1,200 of equity.   The bridgedebt interest rate is LIBOR plus 1%, the senior mezzanine interest rate is22.5% and the junior mezzanine interest rate is 25%.

The Company accounts for its ownership investment inFARC using the equity method in accordance with APB Opinion 18.  In addition to the equity and debtinvestments, the Company performs loan servicing and collection activities onthe portfolio.  For the three monthsended July 31, 2006 and 2007, the Company recognized $94 and $49 respectivelyof servicing revenue, $6 and $0 of interest income respectively, and $67 and$128 respectively of equity in the income from investment in FARC.  At July 31, 2007, the equity investment in FARCof $1,222 is included in Equity investments on the balance sheet.

**7.     New Accounting Pronouncements**

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. This statement enhances existing guidance formeasuring assets and liabilities using fair value. Prior to the issuance ofSFAS No. 157, guidance for applying fair value was incorporated in severalaccounting pronouncements. This statement provides a single definition of fairvalue, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFASNo. 157 also emphasizes that fair value is a market-based measurement, notan entity-specific measurement, and sets out a fair value hierarchy with the highestpriority being quoted prices in active markets. Under this statement, fairvalue measurements are disclosed by level within that hierarchy. While SFASNo. 157 does not add any new fair value measurements, it does changecurrent practice. Changes to practice include: (1) a requirement for anentity to include its own credit standing in the measurement of itsliabilities; (2) a modification of the transaction price presumption;(3) a prohibition on the use of block discounts when valuing large blocksof 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 afterNovember 15, 2007, and interim periods within those fiscal years. TheCompany is currently evaluating the impact of adopting SFAS 157 on itsfinancial position, cash flows, and results of operations.

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

**8.     Shareholders’ Equity**

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of July 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, the numberof shares of common stock available for issuance was increased to 500. Options maybe granted either as incentive stock options (which are intended to qualify forcertain favorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. In the case of optionsintended to be incentive stock options, the exercise price may not be less than100% of the fair market value per share of common stock on the date of grant.With respect to non-qualified stock options, the exercise price may be fixed aslow as 50% of the fair market value per share at the time of grant. In no eventmay the duration of an option exceed 10 years and no option may be grantedafter the expiration of 10 years from the adoption of the Plan. As of April 30,2007 and July 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 shareholders approved the Company’s 2005 Employee Stock Option Plan (the2005 Plan).  The 2005 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 200 shares of common stock, subject to adjustment in theevent of certain changes in capitalization. Options may be granted either asincentive stock options (which are intended to qualify for certain favorabletax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. The exercise price maynot be less than 100% of the fair market value per share of common stock on thedate of grant, and in no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan.  As of April 30, 2007 andJuly 31, 2007, a total of 197 and 285, respectively, options had been issuedand remained outstanding.

The exercise price ofthe option is payable in cash upon exercise. At the discretion of theCompensation Committee, options may be issued in tandem with stock appreciationrights entitling the option holder to receive an amount in cash or in shares ofcommon stock, or a combination thereof, equal in value to any increase sincethe date of grant in the fair market value of the common stock covered by theoption.

*Non-Employee Director Stock Option Plan.*  In September 2002, the Non-Employee DirectorStock Option Plan was established to further align the interests of the Company’sdirectors with the interests of the shareholders, as well as attracting andretaining qualified directors.   Thisplan was subsequently amended in July 2006 to increase the number of optionsavailable for issuance to 900.  The Boardof Directors administers the plan and the options will not be qualified asincentive stock options.  The duration ofan option may not exceed 10 years and no option may be granted after theexpiration of 10 years from the adoption of the Plan.  Option types will be automatic anddiscretionary.   Automatic grants of 28shares for each non-employee director, or 140 shares total, were approved inJuly 2006.  Subsequent automatic grantsof an option to purchase 28 shares shall be made 

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to eachnon-employee director on July 15th each year, beginning July 15, 2007. The planalso gives the Board of Directors discretionary authority to provide foradditional option grants if the Company’s annual financial performance exceedsparameters established by the Board.  Nodiscretionary grants have been awarded. As of April 30, 2007 and July 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 270 and 130,respectively, available for issuance.  Inaddition to the options granted above, there were an additional 20 optionsgranted to a director in 1995, before the adoption of the Non-Employee DirectorStock Option Plan.  All options issuedunder this plan were issued with an exercise price equal to the fair marketvalue of the underlying common stock on the date of the grant.

The Company utilizes the Black-Scholes-Merton model for calculating thefair value of stock options, which is an acceptable valuation approach underSFAS No. 123(R).

The following table summarizes the option-pricing model assumptionsused to compute the weighted average fair value of stock options granted duringthe periods below that remain outstanding as of July 31, 2007:
|                                                 | ** ** | **For the three months ended July 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 three months ended July 31, 2007 and 2006was $90 and $0, respectively.  Theestimated tax benefit expected to be realized for the three months ended July31, 2006 and 2007 is $0 and $21, respectively.

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

As of July 31, 2007, there was $1,149 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Plans. The cost is expected to be recognized over a weighted average period of3.2 years.  The total fair value ofshares vested during the three months ended July 31, 2006 and 2007 was $151 and$304, respectively.

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

**9.     Income Taxes**

As of May 1, 2007, the Company adopted FIN 48.  In connection with this adoption, the Companyrecorded an uncertain tax benefit of $689 and an opening balance adjustment toretained earnings of $204 of which $29 would affect the effective rate.  Additionally the Company recorded $22 ofinterest and penalties for the three months ended July 31, 2007, which isincluded in other interest expense on the Consolidated Statement ofEarnings.  The amount of unrecognized tax benefits did not materiallychange as of July 31, 2007.  The Companyanticipates recognizing a $431 gain in the next 12 months due to the expirationof certain examination periods.

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.

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The Company’s continuing practice is to recognizeestimated interest and penalties as a component of other interest expense inthe Consolidated Statement of Earnings.  As of May 1, 2007, the Companyhad accrued interest and penalties associated with unrecognized tax benefits of$175.

For the three months ended July 31, 2007, theCompany had an effective tax rate of 36.5%, which consisted of a Federalstatutory rate of 34%, an estimated 2% for state taxes, net of federal benefit,and an estimated 0.5% for non-deductible expenses.

**10.  Subsequent Event**

On September 12, 2007, the Company issued $5 million in 12.75% seniorsubordinated notes due on September 11, 2017. The notes were placed by the Company in a privately-negotiated transactionand were purchased by an unaffiliated institutional investor.  Proceeds from the note issue will be used forworking capital and general corporate purposes.

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

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

**Critical Accounting Policies**

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

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

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

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

*AdvertisingCosts. *TheCompany expenses advertising costs as incurred.

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

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

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

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status of each loan on a date which is six months prior to thereporting date, to the aging status of each loan as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  The Company utilized itsmost recent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowancefor credit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, are reported in earnings in the periodthey become known.

*Stock-Based Compensation*.  The Company expenses stock-based compensationexpense in accordance with SFAS No. 123(R), *Share-Based Payment - arevision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”)

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

**ManagedReceivables**

The Company’s managedreceivables are (dollars in thousands):
| ** **                                                                            | ** ** | **As of or for the** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **Three Months Ended**         | ** ** |
| ** **                                                                            | ** ** | **July 31,**                        | ** ** |
| ** **                                                                            | ** ** | **2006**                                 | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                                                      |       |                                     |       |   |   |
| Number                                                                                |       | 24,694                                   |       | 27,703 |   |
| Principal balance                                                                     |       | $                                        | 403,569    |   | $ | 453,588 |   |
| Average principal balance of  receivables outstanding  during the  three-month period |       | $                                        | 387,367    |   | $ | 456,260 |   |
| Other Servicing:                                                                      |       |                                     |       |   |   |
| Number                                                                                |       | 9,021                                    |       | 21,499 |   |
| Principal balance                                                                     |       | $                                        | 88,339     |   | $ | 174,254 |   |
| Average principal balance of  receivables outstanding  during the  three-month period |       | $                                        | 96,807     |   | $ | 77,961 |   |
| Total Managed Receivables Portfolio:                                                  |       |                                     |       |   |   |
| Number                                                                                |       | 33,715                                   |       | 49,202 |   |
| Principal balance                                                                     |       | $                                        | 491,908    |   | $ | 627,842 |   |
| Average principal balance of receivables outstanding  during the three-month period   |       | $                                        | 484,174    |   | $ | 534,221 |   |

 

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The following table sets forth information with regard to the Company’snet interest spread, which represents the difference between the effectiveyield on Receivables Held for Investment and the Company’s average cost of debtutilized to fund these receivables, and its net interest margin (averages basedon month-end balances):
|                                                         | ** ** | **Three Months Ended  July 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                        | ** ** | **2007** | ** ** |
| Receivables Held for Investment:                        |       |                                            |       |   |   |
| Effective yield on Receivables  Held for Investment (1) |       | 12.7                                            | %          | 12.6 | % |
| Average cost of debt (2)                                |       | 5.3                                             | %          | 5.9 | % |
| Net interest spread (3)                                 |       | 7.4                                             | %          | 6.7 | % |
| Net interest margin (4)                                 |       | 7.4                                             | %          | 6.7 | % |

 

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

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

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

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

Net interest income is the differencebetween interest earned from the receivables portfolio and interest expenseincurred on the credit facilities used to acquire the receivables. Net interestincome was $7,680 for the three months ended July 31, 2007, an increase of 7.8%when compared to amounts reported for the three months ended July 31, 2006.

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  July 31, 2006 to 2007** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Increase (Decrease)  Due to  Change in**                   | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Average  Principal  Amount**                                              | ** ** | **Average  Rate** | ** ** | **Total Net  Increase  (Decrease)** | ** ** |
|                             |       |                                                                        |       |   |   |   |   |
| Receivables Held for Investment: |       |                                                                        |       |   |   |   |   |
| Interest income                  |       | $                                                                           | 2,193      |   | $ | (163 | ) | $ | 2,030 |   |
| Interest expense                 |       | 875                                                                         |       | 599 |   | 1,474 |   |
| Net interest income              |       | $                                                                           | 1,318      |   | $ | (762 | ) | $ | 556 |   |

 

**Results of Operations**

*ThreeMonths Ended July 31, 2006 and 2007*

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

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*Executive Summary. *Net earnings for the threemonths ended July 31, 2006 was $736 compared to $363 for year the three monthsended July 31, 2007.  Basic earnings percommon share was $0.17 and $0.08 and diluted earnings per common share was$0.15 and $0.08 for the three months ended July 31, 2006 and July 31, 2007,respectively.  The decrease in netearnings for the three months ended July 31, 2006 compared to July 31, 2007 isdue to several factors including (i) a $1,474 increase in interest expense dueto a 17% increase in the average debt outstanding and a 60 basis point increasein the average interest rate (ii) a $670 increase in provision for creditlosses primarily associated with the growth in the portfolio of receivablesheld for investment and an associated increase in the allowance for creditlosses, (iii) an $86 reduction in servicing revenue due to a liquidatingportfolio, (iv) a $94 increase in salaries and benefits expense due toincreased health insurance costs and an increase in stock compensation, (v) a$681 increase in operating costs due to an increase in printing and postagecosts and a decrease in the dollaramount of expenses which the Company was able to capitalize as deferredacquisition costs, and (vi) a$175 increase in other interest expense due to an increase in the averagebalance of the Company’s working capital line of credit and an increase in thecost of debt.  These are partially offsetby (i) a $2,030 increase in interest income due to an 18% increase inthe average balance of receivables held for investment, (ii) an increase inother finance charges and fees due to an 18% increase in the average balance ofreceivables held for investment, (iii) an increase in income from insuranceproducts due to higher penetration rates, and (iv) a decrease in general andadministrative expenses due to a decrease in operating lease expenses.

*Interest Income*. Interest income for the three months ended July31, 2007 increased to $14,360 compared to $12,330 for the three months endedJuly 31, 2006.

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of the portfolioof Receivables Held for Investment, the weighted average interest rate onreceivables originated by the Company, the mix of direct and indirect lendingactivities and the level of early prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased****16% for thethree months ended July 31, 2007 compared to the three months ended July 31,2006.  The increase in interest incomefor the three months ended July 31, 2007 is primarily due to an 18% increase inthe average portfolio outstanding for the period ended July 31, 2007 comparedthe period ended July 31, 2006.

*Interest Expense.*Interest expense for the three months ended July31, 2007 increased to $6,680 compared to $5,206 for the three months ended July31, 2006. Interest expense increased 28% for the three months ended July 31,2007.  The increase in interest expenseis primarily due to (i) a $65,111 or 17% increase in the average debtoutstanding for the three months ended July 31, 2007, compared to the threemonths ended July 31, 2006 as a result of an 18% increase in the averageportfolio of Receivables Held for Investment and (ii) a 58 basis point increasein interest rates as a result of short-term market rate increases adopted bythe Federal Reserve System.

*Provisionfor Credit Losses*. The provision forcredit losses for the three months ended July 31, 2007 increased to $3,188 ascompared to $2,518 for the three months ended July 31, 2006. The increase inprovision for credit losses is primarily due to an 18% increase in the averageportfolio outstanding for the period ended July 31, 2007, compared to theperiod ended July 31, 2006.  Provisionfor credit losses as a percentage of average receivables held for investment onan annual basis increased to 2.8% as compared to 2.6% for the three monthsended July 31, 2006.

Net charge-offs forthe three months ended July 31, 2007 increased to $3,219 compared to $2,155 forthe three months ended July 31, 2006. The increase in net charge-offs for the three months ended July 31, 2007is due to (i) an 18% increase in the average portfolio outstanding for theperiod ended July 31, 2007, compared to the period ended July 31, 2006 and (ii)an increase in loss frequency and severity from repossessions.  This is partially offset by an increase inrecoveries from defaulted loans.  Theallowance for loan loss as a percentage of the portfolio of receivables heldfor investment remained constant at 0.6% as April 30, 2007 and July 31, 2007.

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

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*ServicingRevenue*. On December 24, 2002, the Company entered into an agreement to provideloan servicing and collection activities on behalf of FARC.  FARC, which is 40% owned by the Company, purchaseda portfolio of approximately $200,000 of installment 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 intoa servicing agreement with an unrelated third party to service an approximately$154,211 portfolio of installment loan receivables.  The servicing of these receivables began onJuly 1, 2007.  Servicing revenue decreased to $278****for the three months ended July 31, 2007 compared to $364for three months ended July 31, 2006. The decrease in servicing revenue for the three months ended July 31,2007 is due to the liquidation of serviced receivables during the quarter.  Revenue derived from servicing activitieswill increase or decrease in direct proportion to the average outstandingbalance of serviced receivables.

*OtherFinance Charges and Fees*.  Other finance charges and fees increased to$906 for the three months ended July 31, 2007, compared to $735 for the threemonths ended July 31, 2006.  Theincrease is primarily attributable to increased assessment and collection offees due to an 18% increase in the average portfolio of Receivables Held forInvestment.  Income derived from late fees and collection activities are recognizedwhen received, and therefore can be potentially volatile from period to periodbased on overall cash collection, seasonality, delinquency rates and otherfactors.  Late and loan related fees are driven by a number of factors includingoverall delinquency rates, the percentage of customers utilizing electronicpayment products and growth rates in the Company’s direct lending business.

*Insurance Products. *Insurance Productsrevenue increased to $301 for the three months ended July 31, 2007, compared to$213 for the three months ended July 31, 2006. The increase is attributable to (i) increased penetration rates and (ii)higher gross margins. This is partially offset by a decrease in originations.  Insurance products revenue is primarily driven by growth rates in theCompany’s direct lending business which will affect the ability of the Companyto generate fee income from marketing insurance products.

*Income frominvestments.*  Income from investments increased to $128 forthe three months ended July 31, 2007 compared to $67 for the three months endedJuly 31, 2006.  The increase is primarilydue to increased recognition of investment income related to the FARCportfolio.

*Operating Expenses.*  OperatingExpenses increased to $1,660 for the three months ended July 31, 2007, comparedto $979 for the three months ended July 31, 2006.   Expenses characterized as operating expensesare generally variable in nature and are typically dependent on a number offactors including origination volume, the outstanding balance of the managedportfolio, credit quality and operating efficiency levels.  The increase was primarily due to (i) anincrease in postage and printing expense associated with the Company’s directoriginations, (ii) an increase in outsourced collections due to an increase inrates and the servicing of a new portfolio of loans, (iii) increased activityfees in the Company’s loan origination system due to a change in systems and(iv) a decrease in the dollar amount of expenses which the Company was able tocapitalize as deferred acquisition costs. These were partially offset by a decrease in credit bureau expense dueto lower application volume.

*General and Administrative.* General and administrative expenses decreased to$888 for the three months ended July 31, 2007, compared to $1,044 for the threemonths ended July 31, 2006.  The decreaseis attributable to decreased operating lease expense due to the expiration ofcertain operating leases which were not renewed.  General and administrative costs tend to bemore fixed in nature and not as dependent on the overall level of managedreceivables.

*Other Interest Expense*. Other interest expense increased to $596 for the threemonths ended July 31, 2007, compared to $421 for the three months ended July31, 2006. The increase was due to (i) a 30% increase in the average outstandingborrowings on the Company’s working capital line, (ii) an increase in the average cost of debt and (iii)interest and penalties accrued pursuant to the adoption of FIN 48.

**PortfolioCharacteristics**

*General*.  In selecting receivables for inclusion in itsportfolio, the Company seeks to identify potential borrowers whom it regards ascreditworthy despite credit histories that limit their access to traditionalsources of consumer credit. In addition to personal credit qualifications, theCompany attempts to assure that the

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characteristics of the automobile soldand the terms of the sale are likely to result in a consistently performingreceivable. These considerations include amount financed, monthly paymentsrequired, duration of the loan, age of the automobile, mileage on theautomobile and other factors.

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

**Credit Evaluation**

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which(i) the creditworthiness of the borrower and the terms of the proposedtransaction are evaluated and either approved, declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews areconducted by the Company. During the course of this process, the Company’scredit verification and funding personnel coordinate closely with the financeand insurance departments of the dealers or with individuals to whom theCompany lends directly. The Company has developed financing programs underwhich it approves loans that vary in pricing and loan terms depending on therelative credit risk determined for each loan. Credit or default risk isevaluated by the Company’s loan officers in conjunction with a proprietary,empirical credit scoring model developed from the Company’s 17 year database ofnon-prime lending results.

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

# **Liquidity and Capital Resources**

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

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company originated $47,775 of receivables to be held forinvestment for the three months ended July 31, 2007 compared to $78,879 for thethree months ended July 31, 2006.

TheCompany funds loan originations through a combination of two warehouse creditfacilities. The FIRC credit facility generally permits the Company to borrow upto the outstanding principal balance of qualified receivables, not to exceed$50,000.  Receivables that haveaccumulated in the FIRC credit facility may be transferred to the FIARC commercialpaper facility at the option of the Company. The FIARC commercial paperfacility provides an additional financing source of up to $300,000.Additionally, the Company has transferred receivables from the warehouse creditfacilities and issued term notes. Substantially all of the Company’sreceivables are pledged to collateralize these credit facilities and termnotes.  The Company is obligated to meetcertain financial covenants. Noncompliance may 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 $60,754 during the three months

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ended July 31,2007, and $51,764 during the three months ended July 31, 2006.  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 three months ended July 31, 2007,the Company received net cash of $12,979 as compared to cash required of$27,115 for the three months ended July 31, 2006, as portfolio collections forthe three months ended July 31, 2007 exceeded originations, while thereceivables originated exceeded portfolio collections for the three monthsended July 31, 2006.  The Company relieson borrowed funds to provide cash flow in periods of growth.  As of July 31, 2007, the Company had $49,818of available capacity in the FIRC and FIARC credit facilities to fund futuregrowth.

In addition to the cash flow generated from the principal and interestcollections on its receivables portfolio, the Company collects servicing feesfunded from each of the servicing portfolios. Servicing fees range from 0.7% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees are received after month end, but relate tothe prior month activity.  Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations.   At July 31, 2006 and 2007, the Company’sunencumbered cash was $2,835 and $1,332 respectively.  Management believes the unencumbered cash andcash inflows and amounts available under the working capital facility areadequate to fund cash requirements for operations.

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

*Financing Arrangements. *The Company finances its loan 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 no assurancethat it will be able to do so. In November, 2003, the Company issued $140,000in Term Notes secured by a discrete pool of receivables.  These notes were subsequently called andredeemed in March, 2005.  In May, 2005,the Company issued $175,000 in Term Notes secured by a discrete pool ofreceivables.  In January, 2006, theCompany issued $189,000 in Term Notes secured by a discrete pool ofreceivables.  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 5.1% and5.6% for the periods ended July 31, 2006 and 2007, respectively.

*Warehouse Facilities as of July 31, 2007*

| Facility | ** ** | **Capacity** | ** ** | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At  July 31,  2007** | ** ** |
|----------|------------|--------------|------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| FIARC    |       | $            | 300,000    |            | $          | 271,347           |       | Commercial paper  rate plus .3%                                                                        |       | .25% of Unused  Facility |       | None                                   |       | 5.35 | % |
| FIRC     |       | $            | 50,000     |            | $          | 28,835            |       | 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                              |       | 5.82 | % |

 

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*Warehouse Facilities – Credit Enhancement as of July 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 the dealers are charged for thecoverage and they are unaware of its existence. The Company’s ALPI insurancepolicy is written by National Union Fire Insurance Company of Pittsburgh (“NationalUnion”), which is a wholly-owned subsidiary of American International Group.

Aggregate premiums paid for ALPI coverage aloneduring the three months ended July 31, 2006 and 2007 were $1,315 and $338respectively, and accounted for 1.7% and 0.7% of the aggregate principalbalance of the receivables originated during such respective periods.

In April 1994,the Company organized First Investors Insurance Company (the “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 additionto the monthly premiums and liquidity reserves of the Insurance Subsidiary, atrust account is maintained by National Union to secure the InsuranceSubsidiary’s obligations for 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 of July 31, 2007, the Insurance Subsidiaryhad capital and surplus of $2,656 and unencumbered cash reserves of $1,193 inaddition to the $3,385 trust account.

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

FIARC – Credit Enhancement for the FIARC warehouse facility is provided tothe commercial paper investors by a 6% overcollaterization level and a cashreserve account equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise a party to, such commercial paper.

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

 

OnFebruary 15, 2006, the FIRC facility was renewed, under similar terms andconditions, at the $50,000 commitment level until February 13, 2007.  On February 14, 2007, the FIRC facility wasextended to its current maturity date of February 13, 2008.  As of April 30, 2007 and July 31, 2007, therewas $36,805 and $28,835, respectively, outstanding.

On March 15, 2006,following a short-term extension of the then current maturity date, the FIARCfacility was renewed to February 14, 2007. In connection with the renewal, the Company obtained approval from thelender to eliminate the requirement that a surety bond be maintained to provideadditional enhancement to the commercial paper investors as well as eliminatingthe requirement to purchase interest rate caps. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%.  On October 11, 2006, theCompany amended the facility to increase the commitment from $150,000 to$300,000 in order to fund the growth in origination volume.  On February 14, 2007, the maturity date ofthe FIARC facility was extended to its current maturity date of February 13,2008.  As of April 30, 2007 and July 31,2007, there was $246,477 and $271,347, respectively, outstanding.

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

The following table contains pertinent information on the Term Notes asof July 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     |            | $          | 51,415             |       | 4.23 | % |
| 2006-A Class 3 |       | January 26, 2006  |       | $                    | 74,000     |              | February 15, 2011 |            | $          | 60,982             |       | 4.93 | % |
| 2006-A Class 4 |       | January 26, 2006  |       | $                    | 36,060     |              | April 15, 2013    |            | $          | 36,060             |       | 5.00 | % |

 

Credit enhancement 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   |

 

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Term Notes -  On May 5, 2005, the Company,through its indirect, wholly-owned subsidiary, First Investors Auto Owner Trust2005-A (“2005 Auto Trust”), completed the issuance of $69,000 of 3.57% ClassA-1 asset-backed notes and $106,493 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,921, was previously owned by FIRC and FIARC, and secures the2005-A Term Notes.  In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trust also issueda $5,428 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$175,488, were used to (i) fund a $30,000 pre-funding account to be used forfuture loan originations, (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (iv) pay transaction fees related to the 2005-A Term Noteissuance, and (v) fund an initial cash reserve account of 1%, or $1,509, of theinitial receivables pledged.  The ClassA-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively,and require monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The Class A-1 Notes were paid off during the fiscal yearended April 30, 2006.  The final maturityof the Class A-2 Term Notes is July 16, 2012. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 4.25% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2007 and July 31, 2007, theoutstanding principal balances on the 2005-A Term notes were $59,685 and$51,415, respectively.

On January 26, 2006, the Company, through itsindirect, wholly-owned subsidiary, First Investors Auto Owner Trust 2006-A (“2006Auto Trust”), completed the issuance of $32,000 of 4.57% Class A-1 asset-backednotes, $47,000 of 4.87% Class A-2 asset-backed notes, $74,000 of 4.93% ClassA-3 asset-backed notes, and $36,060 of 5.00% Class A-4 asset-backed notes(collectively “2006-A Term Notes”), for a total of $189,060 of asset backed notes.The initial pool of automobile receivables transferred to the 2006 Auto Trusttotaled $151,939, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes.  In addition to theissuance of the Class A-1, Class A-2, Class A-3, and Class A-4 Notes, the 2006Auto Trust also issued a $2,879 Class B Note that was retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $188,446, were used to (i) fund a $40,000 pre-funding account to beused for future loan originations, (ii) repay all outstanding borrowings underthe FIARC commercial paper facility, (iii) reduce the outstanding borrowingsunder the FIRC credit facility, (iv) pay transaction fees related to the 2006-ATerm Note issuance, and (v) fund an initial cash reserve account of 1% or$1,519 of the initial receivables pledged. The 2006-A Term Notes require monthly principal reductions sufficient toreduce the balance of the notes to 96.75% of the outstanding balance of theunderlying receivables pool. The Class A-1 notes were paid off during thequarter ended July 31, 2006.  The finalmaturities of the Class A-2, Class A-3, and Class A-4 Term Notes are March 16,2009, February 15, 2011, and April 15, 2013, respectively.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 3.25% of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2007 and July 31, 2007, the outstanding principal balances on the2006-A Class A term notes were $110,302 and $97,042, respectively.

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

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facility was maintained at 1.5%. On November 7, 2006, the Company amended the facility to increase thecommitment amount from $23,500 to $28,500. On February 14, 2007, the working capital facility was extended to itscurrent maturity date of February 13, 2008, under similar terms and conditions.  As of April 30, 2007 and July 31, 2007, therewas $22,753 and $23,523, respectively, outstanding under this facility.

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

*Related Party Loans. *On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2,500.  On December 6, 2004, the original $2,500shareholder loan was replaced with a $2,500 loan containing identical terms andconditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors The proceeds ofthe borrowings have been utilized to fund certain private and open marketpurchases of the Company’s common stock pursuant to a Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2,500 outstandingunder this facility as of April 30, 2007 and July 31, 2007, respectively.  For the three months ended July 31, 2006 andJuly 31, 2007, the Company recorded interest expense under these facilities of$63.

*Loan Covenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at July 31,2007.

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

**Delinquency and Credit LossExperience**

The Company’s results of operations,financial condition and liquidity may be adversely affected by nonperformingreceivables. The Company seeks to manage its risk of credit loss through (i)prudent credit evaluations, (ii) risk management activities, (iii) effectivecollection procedures, and (iv) by maximizing recoveries on defaulted loans.The allowance for credit losses of $2,903 as of July 31, 2007, and $2,934 as ofApril 30, 2007, as a percentage of Receivables Held for Investment of $453,588as of July 31, 2007, and $458,586 as of April 30, 2007, was 0.6%.

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

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The Company retains thecredit risk associated with the receivables originated. The Company purchasescredit enhancement insurance from third party insurers which covers the risk ofloss upon default and certain other risks. The Company established a captiveinsurance subsidiary to reinsure certain risks under the credit enhancementinsurance coverage for all receivables. In addition, receivables financed under the Auto Trust and FIARCcommercial paper facilities do not carry default insurance.  Provisions for credit losses of $2,518 and$3,188 have been recorded for the three months ended July 31, 2006 and July 31,2007, respectively.

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

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging statusof each loan as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate 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 most recent recovery rates in order to assessfair 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 for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, they are reported in earnings in the period they become known.

Thefollowing table sets forth certain information regarding the Company’sdelinquency and charge-off experience over its last two fiscal years (inthousands):

|                                                                                           | ** ** | **For the three months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                                              | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **Number**                                                            | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                                     | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                         |       |                                                                  |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                                                  |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 77                                                                    |       | $ | 839 |   | 125 |   | $ | 1,390 |   |
| 60 - 89 days                                                                              |       | 36                                                                    |       | 374 |   | 53 |   | 633 |   |
| 90 days or more                                                                           |       | 17                                                                    |       | 193 |   | 68 |   | 766 |   |
| Total  delinquencies                                                                      |       | 130                                                                   |       | $ | 1,406 |   | 246 |   | $ | 2,789 |   |
| Total  delinquencies as a percentage of outstanding receivables                           |       | 0.5                                                                   | %          | 0.3 | % | 0.9 | % | 0.6 | % |
| Net charge-offs as a  percentage of average receivables outstanding during the period (2) |       |                                                                  |       | 2.2 | % |   |   | 2.8 | % |

 

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

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

The higher annualized charge-off rateresults from an increase in repossessions and lower recovery rates on therepossessed vehicles.

As of July 31, 2007,there were 254 accounts totaling $3,197 that were in bankruptcy status and weremore than 30 days past due.  As of July31, 2006, there were 156 accounts totaling $2,001 that were in bankruptcystatus and were more than 30 days past due. As of July 31, 2006 and 2007, 86% and 89%, respectively, of thebankruptcy delinquencies filed for protection under Chapter 13.

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**NewAccounting Pronouncements**

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements*. Thisstatement enhances existing guidance for measuring assets and liabilities usingfair value. Prior to the issuance of SFAS No. 157, guidance for applyingfair value was incorporated in several accounting pronouncements. Thisstatement provides a single definition of fair value, together with a frameworkfor measuring it, and requires additional disclosure about the use of fairvalue to measure assets and liabilities. SFAS No. 157 also emphasizes thatfair value is a market-based measurement, not an entity-specific measurement,and sets out a fair value hierarchy with the highest priority being quotedprices in active markets. Under this statement, fair value measurements aredisclosed by level within that hierarchy. While SFAS No. 157 does not addany new fair value measurements, it does change current practice. Changes topractice include: (1) a requirement for an entity to include its owncredit standing in the measurement of its liabilities; (2) a modificationof the transaction price presumption; (3) a prohibition on the use ofblock discounts when valuing large blocks of securities for broker-dealers andinvestment companies; and (4) a requirement to adjust the value ofrestricted stock for the effect of the restriction even if the restrictionlapses within one year. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. The Company is currently evaluating theimpact of adopting SFAS 157 on its financial position, cash flows, andresults of operations.

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

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

Themarket risk discussion and the estimated amounts generated from the analysisthat follows are forward-looking statements of market risk assuming certainadverse market conditions occur. Actual results in the future may differmaterially due to changes in the Company’s product and debt mix, developmentsin the financial markets, and further utilization by the company ofrisk-mitigating strategies such as hedging.

TheCompany’s operating revenues are derived almost entirely from the collection ofinterest on the receivables it retains and its primary expense is the interestthat it pays on borrowings incurred to originate and retain such receivables.The Company’s credit facilities bear interest at floating rates which are reseton a short-term basis, whereas its receivables bear interest at fixed rateswhich do not generally vary with changes in interest rates. The Company istherefore exposed primarily to market risks associated with movements ininterest rates on its credit facilities. The Company believes that it takes thenecessary steps to appropriately reduce the potential impact of interest rateincreases on the Company’s financial position and operating performance.

TheCompany relies almost exclusively on revolving credit facilities to fund itsorigination of receivables. Periodically, the Company will transfer receivablesfrom a revolving to a term credit facility. Currently all of the Company’scredit facilities in bear interest at floating rates tied to either acommercial paper index or LIBOR.

As of July 31, 2007, the Company had$323,705 of floating rate secured debt outstanding under the FIRC warehouse andworking capital facilities.  For every 1%increase in LIBOR annual after-tax earnings would decrease by approximately$2,056 assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of July 31, 2006, the Company had $142,541 of floating rate secureddebt outstanding net of swap and cap agreements. For every 1% increase incommercial paper rates or LIBOR, annual after-tax earnings would decrease byapproximately $941 assuming the Company maintains a level amount of floatingrate debt and assuming an immediate increase 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 incredit spreads is reflected in the difference between the LIBOR rate and therate at which the asset-backed commercial paper conduit facility utilized bythe Company issue commercial paper.

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Recently, credit spreads in the asset-backed commercial paper marketand in 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 debt marketin general.  While the Company’s creditfacilities do not expire until February 2008 and while the Company hadapproximately $55 million in unused capacity as of July 31, 2007, furtherdeterioration in the commercial paper market and the asset-backed term notemarket will negatively impact interest expense and may limit the Company’sability to achieve significant growth in its receivables portfolio.

**Forward Looking Information**

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

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

**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 onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of July31, 2007 to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

Therehas been no change in our internal controls over financial reporting thatoccurred during the three months ended July 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

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

##### **OTHER INFORMATION**

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

(a)          Exhibits

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

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

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

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

Filed with this 10-Q

(b)         Reports on Form 8-K

Form8-K filed July 12, 2007, press release announcing fiscal year end April 30,2007 financial results.

### **SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        |               | First Investors Financial Services Group, Inc.   |
|--------|--------------------|--------------------------------------------------|
|   |               | (Registrant)                                     |
|   |               |                                             |
| Date:  | September 13, 2007 |                                             |   | By: /s/TOMMY A. MOORE, JR. |
|   |               | Tommy A. Moore, Jr.                              |
|   |               | President and Chief Executive Officer            |
|   |               |                                             |
| Date:  | September 13, 2007 |                                             |   | By: /s/BENNIE H. DUCK |
|   |               | Bennie H. Duck                                   |
|   |               | Secretary, Treasurer and Chief Financial Officer |

 

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