CPSS

Business Context and Reporting Period

Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: CPS is a specialty finance company that purchases and services retail automobile installment sale contracts, primarily for sub-prime customers. The company funds these purchases through warehouse credit facilities and long-term securitizations.

Key Financial Metrics

Note: Total Debt calculated as sum of Warehouse lines of credit ($8,692), Residual interest financing ($68,250), Securitization trust debt ($1,550,717), Senior secured debt ($19,813), and Subordinated renewable notes ($28,182).

Material Changes vs. Prior Period

• Profitability: The company reported a net loss of $6.3 million for the quarter and $2.7 million for the nine-month period, compared to net income of $3.7 million and $10.4 million, respectively, in the prior year periods.
• Revenue: Quarterly revenues decreased 10.7% to $91.7 million, driven by a 10% drop in interest income due to a shrinking portfolio. Nine-month revenues increased 3.1% to $293.8 million, primarily due to higher interest income from a larger average portfolio balance earlier in the year.
• Portfolio Size: The managed portfolio decreased from $2.13 billion at December 31, 2007, to $1.83 billion at September 30, 2008, as the company curtailed new contract purchases to preserve liquidity.
• Loss on Sale: A significant non-recurring loss of $14.0 million was recognized in the third quarter from the structured sale of $198.7 million in receivables, as the company could not arrange a traditional securitization.
• Interest Expense: Interest expense increased 12.6% for the quarter and 21.4% for the nine-month period, attributed to higher rates on new securitizations and subordinated debt issued in mid-2008.

Guidance, Outlook, and Risks

• Capital Market Constraints: Management reports unprecedented adverse changes in the asset-backed securities market since late 2007, including reduced liquidity and a lack of financial guaranty insurance. This has prevented the company from completing term securitizations for new receivables.
• Liquidity Strategy: To conserve capital, CPS has significantly curtailed the purchase of new automobile contracts. The company relies on warehouse credit facilities (total capacity $400 million) which are set to expire in November 2008. Renewal is not guaranteed due to market conditions.
• Outlook: Management believes current cash flows are sufficient for near-term operating needs but warns that continued portfolio decline will reduce revenues. If warehouse facilities cannot be renewed or replaced, the company may be forced to cease new purchases entirely.
• Legal Proceedings: The company is involved in the "Stanwich Litigation." An agreement in principle to resolve the matter for $625,000 was rejected by the bankruptcy court and is under appeal. No assurance can be given regarding the ultimate outcome.
• Credit Quality: Annualized net charge-offs increased to 7.1% for the nine months ended September 30, 2008, compared to 5.0% in the prior year period.

Investor Verification Checklist

• Warehouse Facility Renewal: Verify the status of the two $200 million warehouse credit facilities expiring in November 2008 and the likelihood of renewal or replacement.
• Securitization Market Access: Assess the company's ability to return to the securitization market to fund new originations and reduce reliance on expensive short-term debt.
• Portfolio Contraction: Monitor the rate of decline in the managed portfolio and its impact on future interest income and servicing fee revenue.
• Legal Contingencies: Track the appeal of the Stanwich bankruptcy court ruling and potential exposure beyond the recorded liability.
• Credit Performance: Review trends in delinquency and net charge-off rates, which have risen significantly year-over-year.