Overview

We are a specialty finance company focused on consumers who have limited credit histories, low incomes or past credit problems, whom we refer to as sub-prime customers. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to sub-prime customers of dealers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also
(i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of vehicle purchase money loans. In this report, we refer to all of such contracts and loans as "automobile contracts."

We were incorporated and began our operations in March 1991. From inception through March 31, 2012, we have purchased a total of approximately $9.2 billion of automobile contracts from dealers. In addition, we obtained a total of approximately $842.0 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and owned by non-affiliated entities . Beginning in 2008, our managed portfolio has decreased each year due to our strategy of limiting contract purchases to conserve our liquidity in response to adverse economic conditions, as discussed further below. However, since October 2009, we have gradually increased contract purchases resulting in aggregate purchases of $284.2 million in 2011, compared to $113.0 million in 2010 and $8.6 million in 2009. Our total managed portfolio was $781.8 million at March 31, 2012, compared to $679.7 million at March 31, 2011. The increase between March 31, 2011 and 2012 reflects both our purchases of contracts from dealers and our purchase in September 2011 of a portfolio of $217.8 million of automobile contracts from Fireside Bank, a subsidiary of Kemper Corporation.

We are headquartered in Irvine, California, where most operational and administrative functions are centralized. All credit and underwriting functions are performed in our California headquarters, and we service our automobile contracts from our California headquarters and three servicing branches in Virginia, Florida and Illinois.

We purchase contracts in our own name ("CPS") and, until July 2008, also in the name of our wholly-owned subsidiary, TFC. Programs marketed under the CPS name are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. Our TFC program served vehicle purchasers enlisted in the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we suspended contract purchases under our TFC program. We purchase automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

Securitization and Warehouse Credit Facilities

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to fund the transactions. Depending on the structure, these transactions may properly be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record as expense a provision for credit losses on the contracts.

Since the third quarter of 2003, we have conducted 28 term securitizations. Of these 28, 22 were periodic (generally quarterly) securitizations of automobile contracts that we purchased from automobile dealers under our regular programs. In addition, in March 2004 and November 2005, we completed securitizations of our retained interests in other securitizations that we and our affiliates previously sponsored. The debt from the March 2004 transaction was repaid in August 2005, and the debt from the November 2005 transaction was repaid in May 2007. Also, in June 2004, we completed a securitization of automobile contracts purchased under our TFC program and acquired in a bulk purchase. Further, in December 2005 and May 2007 we completed securitizations that included automobile contracts purchased under the TFC programs, automobile contracts purchased under the CPS programs and automobile contracts we repurchased upon termination of prior securitizations. Since July 2003 all such securitizations have been structured as secured financings, except that our September 2008 and September 2010 securitizations were in substance sales of the underlying receivables, and were treated as sales for financial accounting purposes.

Our March 2012 securitization included a pre-funding feature in which a portion of the receivables to be pledged to the securitization trust were not scheduled to be delivered to the trust until after the initial closing. As a result, our restricted cash balance at March 31, 2012 included $46.3 million from the proceeds of the sale of the securitization notes that were held by the trustee pending delivery of the remaining receivables. In April 2012, the requisite additional receivables were delivered to the trust and we received the related restricted cash, a significant portion of which was used to repay amounts owed under our warehouse credit facilities.

Portfolio Acquisitions

As stated above, we have acquired approximately $822.8 million in finance receivables through four acquisitions. These transactions took place in 2002, 2003, 2004 and September 2011. The September 2011 acquisition consisted of approximately $217.8 million of finance receivables that we purchased from Fireside Bank of Pleasanton, California.

Uncertainty of Capital Markets and General Economic Conditions

We depend upon the availability of warehouse credit facilities and access to long-term financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have completed 54 term securitizations of approximately $7.2 billion in contracts. We conducted four term securitizations in 2006, four in 2007, two in 2008, one in 2010, three in 2011and one in 2012. From July 2003 through April 2008 all of our securitizations were structured as secured financings. The second of our two securitization transactions in 2008 (completed in September 2008) and our securitization in September 2010 (a re-securitization of the remaining receivables from the September 2008 transaction) were each in substance a sale of the related contracts, and have been treated as sales for financial accounting purposes. During 2011, we completed three securitizations of approximately $335.6 million in newly originated contracts, representing our first securitizations of newly originated contracts since April 2008. In March 2012, we completed a $155.0 million securitization that included $117.8 million in newly originated contracts and $37.2 million in seasoned contracts that were previously securitized, but were available as a result of the February 2012 repayment of the bonds associated with those earlier securitizations. All of the 2011 and 2012 securitizations were structured as secured financings.

From the fourth quarter of 2007 through the end of 2009, we observed unprecedented adverse changes in the market for securitized pools of automobile contracts. These changes included reduced liquidity, and reduced demand for asset-backed securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime automobile receivables. Moreover, many of the firms that previously provided financial guarantees, which were an integral part of our securitizations, suspended offering such guarantees. The

adverse changes that took place in the market from the fourth quarter of 2007 through the end of 2009 caused us to conserve liquidity by significantly reducing our purchases of automobile contracts. However, since October 2009, we have gradually increased our contract purchases by utilizing one $50 million revolving credit facility that we established in September 2009 and another $50 million term funding facility that we established in March 2010. In September 2010 we took advantage of improvement in the market for asset-backed securities by re-securitizing the remaining underlying receivables from our unrated September 2008 securitization. By doing so we were able to pay off the bonds associated with the September 2008 transaction and issue rated bonds with a significantly lower weighted average coupon. The September 2010 transaction was our first rated term securitization since 1993 that did not utilize a financial guaranty. More recently, we increased our short-term funding capacity by $200 million with the establishment of a new $100 million credit facility in December 2010 and an additional $100 million credit facility in February 2011. The September 2009 revolving facility terminated in September 2011, and the March 2010 term facility was fully utilized by December 2010. In February 2012, we amended the February 2011 facility to extend the revolving period from February 2012 to May 2012 and reduced the maximum advance from $100 million to $35 million. Our current maximum revolving warehouse financing capacity is $135 million. Since the beginning of 2011, we have completed four securitizations of approximately $490.6 million in receivables. In spite of the improvements we have seen in the capital markets, if the trend of improvement in the markets for asset-backed securities should reverse, or if we should be unable to obtain additional credit facilities or to complete additional term securitizations, we may curtail or cease our purchases of new automobile contracts, which could lead to a material adverse effect on our operations.

The downturn in economic conditions and the capital markets that began in the fourth quarter of 2007 has negatively affected many aspects of our industry. First, throughout 2008 and 2009 there was reduced demand for asset-backed securities secured by consumer finance receivables, including sub-prime automobile receivables, as compared to 2007 and earlier. During 2010, however, we observed that yield requirements for investors that purchase securities backed by consumer finance receivables, including sub-prime automobile receivables, decreased significantly and approached pre-2008 levels, albeit with significantly fewer transactions in the market. Second, there have been fewer lenders who provide short-term warehouse credit facilities for sub-prime automobile finance companies due to more uncertainty regarding the prospects of obtaining long-term financing through the issuance of asset-backed securities than before 2008. Many capital market participants such as investment banks, financial guaranty providers and institutional investors who previously played a role in the sub-prime auto finance industry have withdrawn from the industry, or in some cases, have ceased to do business. These developments resulted in our incurring higher interest costs for receivables we financed in 2009 and 2010 compared to pre-2008 levels. However, in December 2010 we entered into a $100 million two-year warehouse credit line with a significantly lower cost of funds than the facilities we used in 2009 and 2010. Finally, broad economic weakness and high levels of unemployment from 2008 onward have made many of our customers less willing or able to pay, resulting in higher delinquencies, charge-offs and losses. Each of these factors has adversely affected our results of operations. Should existing economic conditions worsen, both our ability to purchase new contracts and the performance of our existing managed portfolio may be impaired, which, in turn, could have a further material adverse effect on our results of operations.

Financial Covenants

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of March 31, we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.

Results of Operations

Comparison of Operating Results for the three months ended March 31, 2012 with the three months ended March 31, 2011

Revenues. During the three months ended March 31, 2012, revenues were $44.5 million, an increase of $12.1 million, or 37.4%, from the prior year revenue of $32.4 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended March 31, 2012 increased $12.0 million, or 42.1%, to $40.6 million from $28.6 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries which increased from $546.3 at March 31, 2011 to $721.6 at March 31, 2012.

Servicing fees totaling $801,000 in the three months ended March 31, 2012 decreased $615,000, or 43.4%, from $1.4 million in the prior year. The decrease in servicing fees is due to the amortization and resulting decrease in the principal balance of the two portfolios on which we earn base servicing fees. We earned base servicing fees on our September 2010 term securitization transaction (a re-securitization of the remaining receivables from the September 2008 securitization, treated as a sale for financial accounting purposes) and on a portfolio of sub-prime automobile receivables owned by a bankruptcy remote subsidiary of CompuCredit Corporation. As of March 31, 2012 and 2011, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                          March 31, 2012           March 31, 2011
                                       Amount        %  (1)     Amount        %  (1)
       Total Managed Portfolio                        ($ in millions)
Owned by Consolidated Subsidiaries
  CPS Originated Receivables           $ 588.4         75.3 %   $ 546.3         80.4 %
  Fireside                               133.2         17.0 %         -          0.0 %
Owned by Non-Consolidated Subsidiaries    34.4          4.4 %      71.6         10.5 %
Third-Party Servicing Portfolios          25.8          3.3 %      61.8          9.1 %
Total                                  $ 781.8        100.0 %   $ 679.7        100.0 %

At March 31, 2012, we were generating income and fees on a managed portfolio with an outstanding principal balance of $781.8 million (this amount includes $34.4 million of automobile contracts on which we earn servicing fees and a residual interest and also includes another $25.8 million of automobile contracts on which we earn servicing fees and own a note collateralized by such contracts), compared to a managed portfolio with an outstanding principal balance of $679.7 million as of March 31, 2011. At March 31, 2012 and 2011, the managed portfolio composition was as follows:

                        March 31, 2012         March 31, 2011

                      Amount         %           Amount             %
Originating Entity                     ($ in millions)
CPS                   $ 621.7        79.5 %   $       611.6         90.0 %
Fireside                133.2        17.0 %               -          0.0 %
TFC                       1.1         0.1 %             6.3          0.9 %
Third Party Portfolio    25.8         3.3 %            61.8          9.1 %
Total                 $ 781.8       100.0 %   $       679.7        100.0 %

Other income increased by $710,000, or 29.6%, to $3.1 million in the three months ended March 31, 2012 from $2.4 million during the prior year. The year-over-year increase is the result of an increase of $422,000 in income from direct

mail and related products and services that we offer to our dealers, the recognition of $355,000 in other income related to a mark up of the fair value of the receivables associated with the Fireside acquisition and an increase of $118,000 in remittances from third-party providers of convenience fees paid by our customers for web based and other electronic payments. The increases in other income were offset by a decrease of $76,000 in sales tax refunds and a decrease of $104,000 in recoveries on receivables from the 2002 acquisition.

Expenses. Our operating expenses consist largely of provision for credit losses, interest expense, employee costs and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during a period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income (loss) include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and the unemployment level.

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $44.0 million for the three months ended March 31, 2012, compared to $36.6 million for the prior year, an increase of $7.4 million, or 20.2%. The increase is primarily due to the increase in the amount of new contracts we purchased and in the balance of our outstanding managed portfolio and the related costs to service it.

Employee costs increased by $1.2 million, or 16.3%, to $8.9 million during the three months ended March 31, 2012, representing 20.2% of total operating expenses, from $7.6 million for the prior year, or 20.8% of total operating expenses. During 2008 and most of 2009, we reduced staff through attrition and reductions in force as a result of the uncertainty in capital markets and the related limited access to financing for new contract purchases. Since October 2009, however, as we have gradually acquired new financing resources and increased our contract purchase volumes, we have added employees in our Originations and Marketing departments. These additions have offset reductions in our Servicing department staff that have been necessary as our total managed portfolio has decreased. In addition, we hired approximately 65 new Servicing department employees in September 2011 in connection with our acquisition of the Fireside portfolio. At March 31, 2012 we had 548 employees, compared to 435 employees at March 31, 2011.

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $4.5 million, an increase of 23.6%, compared to the previous year and represented 10.2% of total operating expenses.

Interest expense for the three months ended March 31, 2012 increased by $3.2 million to $22.3 million, or 16.6%, compared to $19.1 million in the previous year. In September 2011 we established a credit facility exclusively for the acquisition of the Fireside portfolio. For the three months ended March 31, 2012 we incurred $5.8 million in interest expense on the Fireside related debt. Interest on securitization trust debt decreased by $2.0 million in the three months ended March 31, 2012 compared to the prior year. Interest expense on senior secured and subordinated debt increased by $612,000. The increase is due primarily to our issuance during 2011 of $12.8 million in new senior secured debt. Interest expense on residual interest financing decreased $595,000 in the three months ended March 31, 2012 compared to the prior year as a result of continued principal amortization. Interest expense on warehouse debt decreased by $947,000 for the three months ended March 31, 2012 compared to the prior year. The interest expense related to the value of outstanding derivative warrants resulted in an increase of $307,000 in interest expense.

Provision for credit losses was $4.8 million for the three months ended March 31, 2012, an increase of $1.1 million, or 31.0% compared to the prior year and represented 11.0% of total operating expenses. The provision for credit losses maintains the allowance for loan losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. The increase in provision expense is the result of the increase in our contract purchase volumes and the size of the portfolio owned by our consolidated subsidiaries.

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a salary plus commissions based on our volume of contract purchases and sales of training programs, lead sales, and direct mail products that we offer our dealers. Marketing expenses increased by $1.0 million, or 64.2%, to $2.6 million, compared to $1.6 million in the previous year, and represented 6.0% of total operating expenses. We purchased 7,942 contracts representing $119.9 million in receivables in the current period compared to 3,296 contracts representing $50.0 million in receivables in the prior year.

Occupancy expenses decreased by $40,000 or 5.3%, to $721,000 compared to $761,000 in the previous year and represented 1.6% of total operating expenses.

Depreciation and amortization expenses decreased by $12,000 or 7.6%, to $152000 compared to $164,000 in the previous year and represented 0.2% of total operating expenses.

For the three months ended March 31, 2012, we recorded no net tax expense and reduced our valuation allowance for our deferred tax assets by $195,000. As of March 31, 2012, our net deferred tax asset of $15.0 million is net of a valuation allowance of $61.4 million. We have considered the circumstances that may affect the ultimate realization of our deferred tax assets and have concluded that the valuation allowance is appropriate at this time. However, if future events change our expected realization of our deferred tax assets, we may be required to increase the valuation allowance against that asset in the future.

Credit Experience

Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. Our internal credit performance data consistently show that new receivables have lower levels of delinquency and losses early in their lives, with delinquencies increasing throughout their lives and losses gradually increasing to a peak between 36 and 42 months, after which they gradually decrease. The weighted average seasoning of our portfolio represented in the tables below (excluding the Fireside portfolio) was 23 months, 36 months and 27 months as of March 31, 2012, March 31, 2011, and December 31, 2011, respectively. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we were servicing and owned as of the respective dates shown. The tables do not include the experience of third party servicing portfolios.

                           Delinquency Experience (1)
                    Total Owned Portfolio Excluding Fireside

                                                  March 31, 2012                      March 31, 2011                       December 31, 2011
                                          Number of                           Number of                             Number of
                                          Contracts           Amount          Contracts          Amount             Contracts            Amount
                                                                                   (Dollars in thousands)
Delinquency Experience
Gross servicing portfolio (1)                 68,975     $        622,807         78,222     $       618,006             69,765     $         588,993
Period of delinquency (2)
  31-60 days                                   1,081                5,962          1,332               8,023              2,051                10,709
  61-90 days                                     567                3,823            815               5,395              1,038                 6,572
  91+ days                                       515                3,377            804               5,593              1,601                 8,908
Total delinquencies (2)                        2,163               13,162          2,951              19,011              4,690                26,189
Amount in repossession (3)                     1,932                9,204          2,829              16,932              2,218                10,097
Total delinquencies and amount in              4,095     $         22,366          5,780     $        35,943              6,908     $          36,286
repossession (2)


Delinquencies as a percentage of gross           3.1 %                2.1 %          3.8 %               3.1 %              6.7 %                 4.4 %
servicing portfolio

Total delinquencies and amount in
repossession as
a percentage of gross servicing                  5.9 %                3.6 %          7.4 %               5.8 %              9.9 %                 6.2 %
portfolio




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