IRVINE, Calif. — In addition to discussing second-quarter financial results, Consumer Portfolio Services' officials explained exactly how their business works in their annual report. The company is an indirect specialty finance lender working in the subprime arena.

For the second quarter of this year, CPS reported that it purchased $340 million contracts from dealers, compared with $330.3 million during the first quarter of 2007 and $268.8 million during the second quarter of 2006.

Meanwhile, for first half of the year, CPS purchased $676.3 million contracts from dealers, compared with $523.2 million during the same period of 2006. According to officials, contract purchases increased 29.3 percent compared to the same period of 2006.

Managed receivables came in at $1.9 billion, up $525 million, or 38.2 percent, from $1.375 announced during the same period of 2006.

"The second quarter marks our largest quarter of new-contract originations in the history of the company," explained Charles Bradley, CPS president and chief executive officer.

"The controlled growth strategy that we implemented in the first quarter of 2004 has proven successful as we have grown our total managed portfolio from $741 million at the end of 2003 to $1.9 billion at the end of the second quarter of 2007," he continued.

Net income for the quarter was $3.5 million, compared with net income of $2.6 million for the same quarter of 2006, officials said.

Moreover, for the three-month period, executives said total company revenues were up $28.6 million, or 42.6 percent, to $95.8 million, compared with $67.2 million for the same time frame of the prior year. Total expenses for the quarter came in at $89.6 million, a $25-million climb, versus $64.6 million in the previous year.

For the six-month period, the company said net income was $6.7 percent, compared with net income of $4.4 million in 2006. As for revenues, officials said they increased by about $57 million, or 45.5 percent, to $182.3 million, as opposed to $125.3 million for the same six months of 2006.

CPS completed a term securitization in May of receivables originated by the company and its subsidiary, The Finance Co., with the sale of $113.3 million of asset backed notes. Executives said this transaction was on top of their usual quarterly securitization program covering the June sale of $315 million of asset-backed notes.

The company noted that the quarterly transaction was completed with lower credit enhancement requirements than the first quarter transaction. By the end of the second quarter, officials said they issued $60 million of two-year notes under a new $120-million revolving and term residual interest financing facility.

Reviewing losses, CPS said annualized net charge-offs were 4.6 percent of the average owned portfolio, compared with 3.71 percent in the same time frame of 2006. Additionally, delinquencies greater than 30 days were 4.85 percent of the owned portfolio, compared with 3.87 percent last year.

"With respect to the second-quarter's financial results, our continued year-over-year pretax income growth validates our executives in growing our total managed portfolio and our ongoing efforts to improve operating efficiencies," Bradley pointed out.

"Credit performance remains good and within the range of our expectations," he said. "In addition, the new residual interest financing facility we recently established provides significant liquidity and additional flexibility to our capital structure."

How Does CPS Work?

According to the company's most recent annual report, the company provides indirect financing to consumers with limited credit histories, low income or past credit problems via dealers.

By far, the majority of contracts CPS approves, 87 percent, are for used vehicles, while 13 percent are new cars, the report stated. This reflects a shift to more used cars, as the company said 81 percent of financing was for used vehicles in 2005, whereas 19 percent was for new vehicles.

The company's credit and underwriting functions are centralized, servicing contracts from its California headquarters and from three branches in Virginia, Florida and Illinois.

Marketing representatives affiliated with the company are responsible for contacting dealer candidates to explain CPS services, in addition to offering training and support after a relationship is established, officials explained.

"As of Dec. 31, 2006, we had 94 marketing representatives and we were a party to dealer agreements with over 8,600 dealers in 48 states," executives reported. "Approximately 90 percent of these dealers are franchised new-car dealers that sell both new and used vehicles, with the remaining percentage representing independent dealers."

The company was founded in 1991 and has purchased about $7.1 billion contracts so far. In the annual report, officials also noted that they completed several acquisitions.

In March 2002, CPS purchased MFN Financial Corp. and its subsidiaries. Later, in May 2003, the company bought TFC Enterprises and its subsidiaries. Executives said CPS acquires $381.8 million contracts with the MFN merger, and an additional $152.1 million with TFC.

Moving on, in April 2004, the company said it purchased $74.9 million in auto contracts from SeaWest Financial Corp. and its subsidiaries.

Breaking down how the company receives applications, executives said about 81 percent come through DealerTrack, 9 percent through the CPS site and about 10 percent via fax. The company's goal is to respond to a dealer within an hour as to whether CPS will purchase a contract.

According to the annual report, dealers are under no obligation to submit contracts to CPS, nor is the company obligated to buy contracts. In fact, officials said that no dealer accounted for more than 1 percent of all the contracts purchased in 2006.

Under TFC, the marketing representatives work directly with independent dealers and the consumers the cars are sold to need to be enlisted personnel of the U.S. Armed Forces, executives highlighted.

Overall, contracts are purchased under a variety of programs and normally at a price equal to the total amount financed, adjusted for acquisition fee, which can increase or decrease depending on perceived credit risk and sometimes interest rate, the company explained.

"For the years ended Dec. 31, 2006, 2005 and 2004, the average acquisition fee charged per automobile contract purchased under our programs was $240, $150 and $226, respectively, or 1.6 percent, 1 percent and 1.6 percent, respectively, of the amount financed," officials said.

Underwriting guidelines for the company's programs usually limit the maximum principal amount to 115 percent of the wholesale book value for used vehicles, or 115 percent of the manufacturer's invoice for new vehicles, including sales tax, licensing and any add-on products.

"We generally do not finance vehicles that are more than eight-model years old or have in excess of 85,000 miles," executives said. "Under most of our programs, the maximum term of a purchased contract is 72 months; a shorter maximum term may be applicable based on mileage and age of the vehicle."

According to the company, the average original principal amount financed for 2006 was $15,382, with a median original term of 63 months and an average down payment of 12.3 percent. Generally, the purchase price of vehicles came in at $15,667, without tax, license fees and add-on products, the company said.

Moreover, officials explained that the average age of a vehicle was three years and consumers were about 38 years of age on average, with about $40,440 in household income and five years of history with current employer.

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