Consumer Portfolio Services, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 9, 2016. The filing also reports fourth-quarter 2015 results. CPS is a specialty finance company that buys and services U.S. subprime auto contracts, funding purchases primarily through warehouse facilities and asset-backed securitizations.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $363.7 million | $300.3 million | +21.1% |
| Interest income | $349.9 million | $286.7 million | +22.0% |
| Income before tax | $61.4 million | $52.2 million | +17.5% |
| Net income | $34.7 million | $29.5 million | +17.5% |
| Diluted EPS | $1.10 | $0.92 | Up |
| Net interest margin | 16.1% | 17.0% | Down 0.9 percentage points |
| Provision for credit losses | $142.6 million | $108.2 million | +31.8% |
| Net charge-offs / average servicing portfolio | 6.4% | 5.8% | Up 0.6 percentage points |
Fourth-quarter 2015 revenue was $95.3 million, pretax income $15.8 million, net income $9.0 million and diluted EPS $0.29.
Growth in interest income principally reflected expansion in the consolidated receivables portfolio. Contract purchases rose 12.2% to $1.06 billion, and the managed portfolio increased 23.6% to $2.03 billion. The weighted-average rate on purchased contracts was 19.3%, versus 19.6% in 2014. Credit costs rose faster than revenue, partly reflecting portfolio growth and worsening performance; management also said required servicing changes under the FTC consent decree may have contributed.
Cash flow, balance sheet and funding
- Operating cash flow was $187.6 million, compared with $135.8 million in 2014. Investing activities used $441.3 million and financing activities provided $255.2 million; cash and cash equivalents ended at $19.3 million.
- Restricted cash was $106.1 million. The company reported $103.5 million available under its three $100 million warehouse facilities, subject to eligible collateral.
- Total assets were $2.14 billion and shareholders’ equity was $161.2 million. Debt outstanding was approximately $1.95 billion, including $1.73 billion of securitization trust debt and $196.5 million of warehouse borrowings. Debt increased from approximately $1.69 billion at year-end 2014.
- Allowance for finance credit losses was $75.6 million, or 3.7% of contracts held by consolidated subsidiaries, unchanged as a percentage from 2014. The company was in compliance with debt covenants at year-end.
Material changes, outlook and risks
- Delinquencies increased: 31-plus-day delinquencies were 7.6% of the gross servicing portfolio, versus 5.5% a year earlier; delinquencies plus repossessions rose to 9.5% from 7.2%. Accounts with extensions also increased substantially.
- CPS completed three securitizations totaling $795 million in 2015, compared with four totaling $923 million in 2014. It deferred its planned December 2015 transaction to January 2016. The January transaction issued $329.5 million of notes backed by $340 million of receivables, with a stated weighted-average yield of approximately 4.34%, including retained notes.
- Management expected quarterly profits during 2016 but cautioned that there was no assurance. Contract purchases and earnings depend on securitization access, warehouse funding, cash releases from trusts, portfolio credit performance, and funding costs.
- Key risks include subprime borrower defaults, rising interest rates and funding spreads, limited liquidity, substantial leverage, dependence on securitizations and residual cash flows, competition, regulatory changes, and potential restrictions on trust cash releases. A material portion of cash is restricted or dependent on pool performance.
- Regulatory matters include a 2014 FTC consent decree requiring customer restitution, a $2 million government penalty, servicing and reporting changes, and independent monitoring. CPS had produced documents in response to a 2015 Department of Justice subpoena concerning subprime auto originations and securitizations; the investigation’s outcome was uncertain. The filing estimated reasonably possible legal losses above recorded reserves at $0 to $250,000, while warning actual outcomes could exceed reserves.
- CPS repurchased approximately $5.9 million of common stock in 2015. It did not expect to pay dividends in the foreseeable future. The filing also notes a $37.6 million net deferred tax asset and $67.3 million of state net operating loss carryforwards beginning to expire in 2016.
Important facts for investors to verify
- Whether delinquencies, extensions, repossessions and charge-offs continue to rise, and whether newer loan vintages perform as expected.
- Actual availability and cost of warehouse financing and securitization markets, and the amount of cash released or trapped by securitization trusts.
- Liquidity after restricted cash, collateral requirements and near-term debt obligations; confirm warehouse availability remains subject to eligible collateral.
- Progress and potential consequences of the DOJ investigation, FTC monitoring and consumer litigation.
- Assumptions supporting the expected realization of deferred tax assets and the planned 2016 profitability outlook.