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 June 30, 2012, we have purchased a total of approximately $9.3 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 through the third quarter of 2011, our managed portfolio decreased each year due to our strategy of limiting contract purchases in 2008 and 2009 to conserve our liquidity, 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. During the six months ended June 30, 2012 we purchased $257.8 million contracts compared to $110.8 million in the six months ended June 30, 2011. Our total managed portfolio was $806.1 million at June 30, 2012, compared to $635.0 million at June 30, 2011. The increase between June 30, 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. Credit and underwriting functions are performed in our California headquarters. Certain credit functions are also performed in our Florida branch, and we service our automobile contracts from our California headquarters our 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 29 term securitizations. Of these 29, 23 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 our September 2008 and September 2010 securitizations. These transactions were in substance sales of the underlying receivables and were treated as sales for financial accounting purposes.

Our June 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 June 30, 2012 included $49.4 million from the proceeds of the sale of the securitization notes that were held by the trustee pending delivery of the remaining receivables. In July 2012, the requisite additional receivables were delivered to the trust and we received the related restricted cash, most 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 55 term securitizations of approximately $7.4 billion in contracts. We conducted four term securitizations in 2006, four in 2007, two in 2008, one in 2010, three in 2011and two so far 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, 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 called from earlier securitizations. In June 2012 we completed a securitization of $141.5 million in newly originated contracts. 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. In May 2012, the revolving period of the February 2011 facility expired by its terms and we entered into a new $100 million credit facility with a different lender. Our current maximum revolving warehouse financing capacity is $200 million. Since the beginning of 2011, we have completed five securitizations of approximately $632.1 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, since December 2010 we have had access to warehouse credit lines 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 than expected delinquencies, charge-offs and losses for contracts we purchased prior to 2009. 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 June 30, 2012 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 June 30, 2012 with the three months ended June 30, 2011

Revenues. During the three months ended June 30, 2012, revenues were $44.2 million, an increase of $13.0 million, or 41.7%, from the prior year revenue of $31.2 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended June 30, 2012 increased $13.7 million, or 49.4%, to $41.5 million from $27.8 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 $522.1 at June 30, 2011 to $758.2 at June 30, 2012.

Servicing fees totaling $595,000 in the three months ended June 30, 2012 decreased $535,000, or 47.4%, from $1.1 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 June 30, 2012 and 2011, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                                June 30, 2012                June 30, 2011
                                            Amount         %    (1)      Amount         %  (1)
         Total Managed Portfolio                             ($ in millions)
Owned by Consolidated Subsidiaries
  CPS Originated Receivables              $    654.2           81.2 %   $   522.1          82.2 %
  Fireside                                     104.0           12.9 %           -           0.0 %
Owned by Non-Consolidated Subsidiaries          27.9            3.5 %        61.7           9.7 %
Third-Party Servicing Portfolios                20.0            2.5 %        51.2           8.1 %
Total                                     $    806.1          100.0 %   $   635.0         100.0 %

(1) Percentages may not add up to 100% due to rounding.

At June 30, 2012, we were generating income and fees on a managed portfolio with an outstanding principal balance of $806.1 million (this amount includes $27.9 million of automobile contracts on which we earn servicing fees and own a residual interest and also includes another $20.0 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 $635.0 million as of June 30, 2011. At June 30, 2012 and 2011, the managed portfolio composition was as follows:

                                                    June 30, 2012                  June 30, 2011
                                                Amount              %          Amount           %
Originating Entity                                               ($ in millions)
CPS                                         $         681.5          84.5 %   $   578.7          91.1 %
Fireside                                              104.0          12.9 %           -           0.0 %
TFC                                                     0.6           0.1 %         5.1           0.8 %
Third Party Portfolio                                  20.0           2.5 %        51.2           8.1 %
Total                                       $         806.1         100.0 %   $   635.0         100.0 %

(1) Percentages may not add up to 100% due to rounding.

Other income decreased by $202,000, or 9.2%, to $2.0 million in the three months ended June 30, 2012 from $2.2 million during the prior year. The year-over-year decrease is the combination of the recognition of $257,000 related to a mark down of the fair value of the receivables and debt associated with the Fireside acquisition, decreases in sales tax refunds of $43,000, and a decrease of $14,000 in recoveries on receivables from the 2002 acquisition of MFN Financial Corporation.. These decreases in other income were partially offset by an increase of $97,000 in income from direct mail and related products and services that we offer to our dealers, and an increase of $14,000 in remittances from third-party providers of convenience fees paid by our customers for web based and other electronic payments.

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 $42.8 million for the three months ended June 30, 2012, compared to $37.6 million for the prior year, an increase of $5.2 million, or 13.9%. The increase is primarily due to the increase in the amount of new contracts we purchased and the increased costs to service our growing total managed portfolio.

Employee costs increased by $816,000 or 10.9%, to $8.3 million during the three months ended June 30, 2012, representing 19.3% of total operating expenses, from $7.5 million for the prior year, or 19.8% 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 facilities and increased our new contract purchases, 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 decreased until September 2011. In September 2011, we hired approximately 65 new Servicing department employees in connection with our acquisition of the Fireside portfolio. At June 30, 2012 we had 538 employees, compared to 445 employees as of June 30, 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 $3.6 million, a decrease of 5.2%, compared to the previous year and represented 8.4% of total operating expenses.

Interest expense for the three months ended June 30, 2012 increased by $587,000 to $19.8 million, or 3.0%, compared to $19.2 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 June 30, 2012 we incurred $4.3 million in interest expense on the Fireside related debt. Interest on securitization trust debt decreased by $2.2 million in the three months ended June 30, 2012 compared to the prior year. Interest expense on senior secured and subordinated debt decreased by $23,000. Interest expense on residual interest financing decreased $535,000 in the three months ended June 30, 2012 compared to the prior year as a result of continued principal amortization. Interest expense on warehouse debt decreased by $1.1 million for the three months ended June 30, 2012

compared to the prior year. Since December 2011 our securitizations have included a pre-funding mechanism which has allowed us to reduce our borrowings under our warehouse facilities in the current period compared to the prior year. The interest expense related to the value of outstanding derivative warrants resulted in an increase of $194,000 in interest expense.

Provision for credit losses was $7.7 million for the three months ended June 30, 2012, an increase of $3.4 million, or 76.8% compared to the prior year and represented 18.0% 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, internet lead sales, and direct mail products that we offer our dealers. Marketing expenses increased by $720,000, or 39.1%, to $2.6 million, compared to $1.8 million in the previous year, and represented 6.0% of total operating expenses. We purchased 8,871 contracts representing $137.9 million in receivables in the current period compared to 3,902 contracts representing $60.8 million in receivables in the prior year.

Occupancy expenses decreased by $36,000 or 4.7%, to $726,000 compared to $762,000 in the previous year and represented 1.7% of total operating expenses.

Depreciation and amortization expenses decreased by $30,000 or 18.4%, to $132,000 compared to $162,000 in the previous year and represented 0.3% of total operating expenses.

For the three months ended June 30, 2012, we recorded no net tax expense and reduced our valuation allowance for our deferred tax assets by $400,000. As of June 30, 2012, our net deferred tax asset of $15.0 million is net of a valuation allowance of $61.0 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.

Comparison of Operating Results for the six months ended June 30, 2012 with the six months ended June 30, 2011

Revenues. During the six months ended June 30, 2012, revenues were $88.7 million, an increase of $25.1 million, or 39.5%, from the prior year revenue of $63.6 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the six months ended June 30, 2012 increased $25.8 million, or 45.7%, to $82.2 million from $56.4 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 $522.1 at June 30, 2011 to $758.2 at June 30, 2012.

Servicing fees totaling $1.4 million in the six months ended June 30, 2012 decreased $1.2 million, or 45.2%, from $2.5 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 June 30, 2012 and 2011, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                               June 30, 2012                June 30, 2011

                                            Amount         %  (1)       Amount         %  (1)
         Total Managed Portfolio                            ($ in millions)
Owned by Consolidated Subsidiaries
  CPS Originated Receivables              $    654.2          81.2 %   $   522.1          82.2 %
  Fireside                                     104.0          12.9 %           -           0.0 %
Owned by Non-Consolidated Subsidiaries          27.9           3.5 %        61.7           9.7 %
Third-Party Servicing Portfolios                20.0           2.5 %        51.2           8.1 %
Total                                     $    806.1         100.0 %   $   635.0         100.0 %

(1) Percentages may not add up to 100% due to rounding.

At June 30, 2012, we were generating income and fees on a managed portfolio with . . .