CPSS

Business Context and Reporting Period

Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2005
Business Model: CPS specializes in purchasing, selling, and servicing retail automobile installment contracts ("Contracts") originated by licensed dealers. The company focuses on providing indirect financing to "Sub-Prime Customers" (borrowers with limited credit histories or past credit problems). CPS does not lend directly to consumers but purchases contracts from dealers.

Key Financial Metrics (Six Months Ended June 30, 2005)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 48.8% to $89.6 million from $60.2 million in the prior year period. This was driven primarily by a 66.2% increase in interest income ($76.7 million vs. $46.1 million), largely due to the accounting change in securitization structures implemented in 2003 which shifted receivables onto the balance sheet.
• Expense Increases: Total operating expenses rose 44.5% to $89.3 million. The provision for credit losses increased 111.0% to $27.5 million, and interest expense increased 66.5% to $22.3 million, reflecting the growth in consolidated portfolio assets.
• Profitability: The company reported a net income of $306,000 for the six months ended June 30, 2005, compared to a net loss of $1.58 million in the same period in 2004.
• Portfolio Composition: The managed portfolio grew to $966.2 million from $900.3 million. The portion of the portfolio owned by consolidated subsidiaries increased from 54.6% to 80.0%, while non-consolidated subsidiaries decreased from 35.9% to 16.8%.
• Credit Experience: Annualized net charge-offs as a percentage of the average servicing portfolio improved to 5.0% for the six months ended June 30, 2005, compared to 7.8% for the twelve months ended December 31, 2004.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The company recognized a one-time, non-cash impairment charge of $1.9 million against certain non-auto finance receivable assets during the six-month period.
• Liquidity and Covenant Breach: CPS terminated a $125 million warehouse facility in June 2005. This action resulted in a breach of a covenant in six term securitizations requiring the maintenance of at least two warehouse facilities with aggregate capacity of $200 million. The company has until October 27, 2005, to cure this breach. Failure to do so could result in an event of default, potentially leading to the transfer of servicing rights and trapping of cash flows.
• Outlook: Management expects to continue structuring securitizations as secured financings, which defers revenue recognition and accelerates expense recognition compared to previous "sale" structures. The company is dependent on the performance of securitized contracts to release cash from trusts and on the availability of warehouse financing to purchase new contracts.
• Risks: Key risks include dependence on warehouse financing, the performance of sub-prime borrowers (delinquencies and losses), potential increases in interest rates affecting the spread between contract rates and borrowing costs, and regulatory changes.

Investor Verification Checklist

• Covenant Compliance: Verify if CPS successfully secures a replacement warehouse facility by October 27, 2005, to cure the covenant breach in six securitization agreements.
• Credit Quality Trends: Monitor delinquency and charge-off rates, particularly given the company's focus on sub-prime borrowers and the potential impact of economic downturns.
• Liquidity Position: Assess the sufficiency of unrestricted cash ($15.7 million) and available warehouse capacity ($66.5 million) to fund ongoing contract purchases and operations.
• Securitization Market: Evaluate the company's ability to complete term securitizations on favorable terms, which is critical for generating cash proceeds for new purchases.
• Impairment Charges: Review the nature and potential recurrence of the $1.9 million non-cash impairment charge on non-auto assets.