Business context and reporting period
Consumer Portfolio Services, Inc. is a specialty finance company that purchases and services automobile installment contracts, primarily for subprime borrowers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Total revenue | $88.4, up 23.4% | $174.4, up 24.8% |
| Interest income | $84.9, up 24.4% | $167.3, up 25.6% |
| Income before tax | $15.2, up from $12.3 | $29.9, up from $24.1 |
| Net income | $8.5, up from $7.0 | $16.9, up from $13.7 |
| Diluted earnings per share | $0.27, versus $0.22 | $0.53, versus $0.43 |
| Provision for credit losses | $35.7, up 39.2% | $69.1, up 39.6% |
| Interest expense | $13.7, versus $11.9 | $26.9, versus $25.3 |
| Net interest yield | 16.3%, versus 17.2% | 16.4%, versus 16.9% |
Growth in revenue and earnings principally reflected a larger owned portfolio: managed receivables were $1,822.2 at quarter-end, versus $1,373.6 a year earlier. Contract purchases totaled $503.8 in the first half, up from $401.3. Management attributed higher provisions and operating costs to portfolio expansion; receivable yields declined as the company offered dealers lower acquisition fees and accepted slightly lower contract rates on some purchases.
At June 30, total assets were $2,031.9 and shareholders’ equity was $145.9. Finance receivables, net of allowance, were $1,710.3; the allowance was $74.5, compared with $61.5 at year-end 2014. Cash and cash equivalents were $18.4, while restricted cash was $200.1 and generally supports securitizations. Total reported debt was approximately $1,863.6, principally $1,775.6 of securitization trust debt, plus warehouse lines, residual interest financing and subordinated notes.
For the first half, operating cash flow was $88.9, investing cash outflow was $262.4 and financing cash inflow was $174.1. Cash and cash equivalents ended at $18.4, up $0.6 from year-end. The company reported $70.5 and $67.7 of availability under two warehouse facilities, subject to sufficient eligible collateral; it reported $32.6 of eligible collateral at quarter-end. It also noted $94.9 of securitization prefunding proceeds in restricted cash; additional receivables were delivered in July and most related cash was used to repay warehouse borrowings.
Material changes and credit performance
- Portfolio expansion raised interest income, but credit costs increased faster: first-half provision rose 39.6% to $69.1. Net charge-offs as a percentage of average owned portfolio were 6.6% annualized, versus 5.0% for the first half of 2014.
- Delinquencies worsened. For the originated portfolio excluding Fireside, 31-or-more-day delinquencies were 6.1% of the servicing portfolio at June 30, 2015, versus 4.1% a year earlier; balances over 90 days delinquent rose to $31.7 from $7.3. Management places receivables over 90 days past due on non-accrual.
- Employee costs increased to $27.6 for the first half from $22.7, and total employees rose to 897 from 729. Servicing fees declined as older third-party portfolios continued to run off.
- First-half securitization issuance was $495.0, versus $382.5 in 2014. A new $100 million warehouse facility was entered into in April 2015. The company reported compliance with debt covenants at June 30.
Outlook, risks and unusual items
No quantified earnings or purchase-volume guidance is provided. Management intended to complete additional securitizations during 2015, but cautioned that completion was not assured. It said contract-purchase levels would be matched to available capital and that inability to securitize could constrain purchases and reduce portfolio-related income. Liquidity also depends on receivable collections, securitization cash releases, financing terms and credit performance.
Key exposures include substantial indebtedness, access to financing, interest rates, unemployment and other economic conditions, used-vehicle recovery values, consumer-finance regulation, and actual credit losses. The Department of Justice served a subpoena in January 2015 concerning subprime contract origination and securitization since 2005; the company said it was cooperating and that the investigation could lead to claims, penalties or material adverse effects. Two purported consumer class actions were described: one settlement awaited court approval, and another was pending further review by the California Supreme Court. The company estimated reasonably possible legal losses beyond recorded reserves at $0 to $2.0, while warning outcomes could exceed reserves. The FTC matter had been settled in 2014, including restitution, account adjustments, a penalty and procedural changes.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Track delinquency, non-accrual balances, recoveries and net charge-offs as the rapidly growing portfolio seasons; provisions are based on estimates and losses may differ.
- Assess the availability and cost of warehouse and securitization funding, collateral requirements, restricted cash and cash releases from securitization trusts.
- Follow the DOJ investigation and consumer litigation, including any developments beyond the recorded legal reserves.
- Reconcile the filing’s warehouse-debt disclosures: the balance sheet and liquidity discussion report $61.8 outstanding, while the risk-factor discussion lists $22.4. The filing text does not explain this difference clearly.
- Consider dilution from options and warrants: diluted weighted-average shares were 31.9 million versus 26.2 million basic shares in the second quarter.