Consumer Portfolio Services, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; standalone fourth-quarter results are not clearly provided. CPS is a specialty finance company that purchases and services U.S. indirect auto-loan contracts, primarily for subprime borrowers.
Financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $255.8 million | $187.2 million |
| Interest income | $231.3 million | $175.3 million |
| Pre-tax income | $37.2 million | $9.2 million |
| Net income | $21.0 million | $69.4 million |
| Diluted EPS | $0.67 | $2.72 |
| Net cash from operating activities | $99.4 million | $35.0 million |
| Net cash used in investing activities | $409.6 million | $91.5 million |
| Net cash from financing activities | $319.3 million | $59.4 million |
| Net interest margin | 16.5% | 12.5% |
| Net charge-offs / average owned servicing portfolio | 4.7% | 3.6% |
At year-end, total assets were $1.396 billion, unrestricted cash was $22.1 million, and restricted cash was $132.3 million. Total debt was approximately $1.277 billion, primarily $1.178 billion of securitization trust debt. Shareholders’ equity was $94.6 million. The company reported $200 million of revolving warehouse capacity, subject to eligible collateral, with $9.5 million drawn.
Material changes versus FY 2012
- Contract purchases rose 38.5% to $764.1 million; the managed portfolio grew 37.2% to $1.231 billion.
- Revenue excluding a $10.9 million debt-cancellation gain increased 30.8%. Higher receivables drove interest income growth, while interest expense fell $21.2 million to $58.2 million, aided by lower-cost securitization funding and debt paydowns.
- Credit-loss provision increased to $76.9 million from $33.5 million as the portfolio expanded. Total owned-portfolio delinquencies and repossessions rose to 6.8% from 5.5%; net charge-offs increased to 4.7% from 3.6%.
- FY 2012 net income included a $60.2 million income-tax benefit from reversal of a deferred-tax valuation allowance. FY 2013 instead recorded $16.2 million of tax expense; therefore, the net-income comparison does not reflect the improvement in pre-tax earnings alone.
- Debt rose overall as securitization trust debt increased to $1.178 billion from $792.5 million. The company completed four securitizations totaling $778 million in 2013.
Outlook, risks, contingencies and unusual items
- Management expected quarterly profits during 2014 and intended to continue regular securitizations. These are expectations, not guaranteed results; no detailed earnings or origination guidance is provided.
- Liquidity and growth depend on warehouse facilities, securitization-market access, cash releases from securitization trusts, and portfolio credit performance. Restricted cash is not freely available for general use, and deterioration in delinquencies or losses could constrain cash releases.
- The FTC advised in July 2013 that staff was prepared to recommend a lawsuit over alleged unfair trade practices. CPS anticipated a possible consent decree involving restitution and procedural changes, recorded a liability, and stated costs could be material. Additional reasonably possible legal losses above recorded reserves were estimated at $0 to $1.6 million; outcomes remain uncertain.
- Other principal risks include high leverage, subprime borrower defaults, rising funding rates, competition, consumer-protection regulation, litigation, and operational-system disruption. Debt covenants restrict certain actions, including dividends; CPS reported compliance with covenants at year-end and did not expect to pay common dividends in the foreseeable future.
- Unusual FY 2013 items included the $10.9 million gain from repurchasing and cancelling securitization debt and $7.8 million of provision for contingent liabilities. The $63.4 million pre-funding proceeds from the December securitization were included in restricted cash at year-end; receivables were delivered and related cash received in January 2014.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2013.
Important facts for investors to verify
- Whether portfolio growth can be sustained without further deterioration in delinquencies, charge-offs, repossessions, and allowance adequacy.
- How much of reported earnings and operating cash flow is repeatable after excluding the debt-cancellation gain, the prior-year tax benefit, and noncash credit-loss provisions.
- Availability, cost, and collateral requirements of warehouse funding and securitizations, including the timing and amount of cash released from trusts.
- Final terms, cost, and potential restitution or operational requirements of the FTC matter, plus developments in pending consumer and Stanwich litigation.
- Realizability of the $59.2 million net deferred tax asset, given forecast dependence and state net operating losses beginning to expire in 2014.