Consumer Portfolio Services, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unless noted, figures are in millions of dollars. The company purchases and services retail auto contracts, primarily for subprime borrowers.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $70.5 | $44.2 | $125.1 | $88.7 |
| Interest income | $55.8 | $41.5 | $107.0 | $82.2 |
| Income before tax | $8.5 | $1.3 | $15.1 | $1.9 |
| Net income | $4.8 | $1.3 | $8.6 | $1.9 |
| Diluted EPS | $0.15 | $0.05 | $0.27 | $0.08 |
| Interest expense | $14.6 | $19.8 | $30.9 | $42.1 |
| Provision for credit losses | $17.4 | $7.7 | $32.5 | $12.5 |
Reported revenue and earnings include a $10.9 million gain on cancellation of debt from the termination of a 2008 securitization. Excluding that gain, revenue was $59.5 million in Q2 and $114.1 million for the first half; management attributed the increase mainly to portfolio growth. The filing does not separately present a margin measure.
- Cash flow, first half: Operating activities provided $40.4 million, versus $8.9 million in 2012; investing activities used $204.1 million, versus $3.9 million; financing activities provided $169.3 million, versus $4.8 million used. Cash and cash equivalents ended at $18.6 million.
- Balance sheet at June 30: Total assets were $1,225.0 million, finance receivables net were $939.8 million, and shareholders’ equity was $73.0 million. Total debt was approximately $1,122.4 million, up from $958.5 million at December 31, 2012. Restricted cash was $122.9 million and is subject to financing arrangements.
- Funding availability: Management reported $18.6 million unrestricted cash and warehouse capacity of $100 million and $82.9 million, subject to eligible collateral. The company completed two securitizations totaling $390 million in the first half.
Changes, outlook, and risks
- Contract purchases rose to $383.9 million in the first half from $257.8 million a year earlier; the managed portfolio grew to $1,067.4 million from $806.1 million. CPS-originated receivables drove most of the growth.
- Credit costs rose materially as the portfolio expanded: first-half provision for credit losses was $32.5 million, compared with $12.5 million. For the owned portfolio including Fireside, annualized net charge-offs were 4.1%, versus 3.5% a year earlier. Total owned-portfolio delinquencies were 5.5% of the portfolio, versus 3.8% at June 30, 2012.
- Management said lower funding costs helped offset higher credit and operating expenses. First-half interest expense declined despite higher securitization debt, reflecting lower-cost newer securitizations and reduced Fireside and related-party debt costs.
- In April, the company obtained a new $20 million residual financing facility, repaid $15 million of senior secured debt, and reduced the rate on remaining senior secured debt from 16% to 13%. Warehouse facilities totaling $200 million were renewed, with revolving periods extended into 2015.
- The company recorded $9.7 million of contingent-liability expense for litigation and regulatory matters. The FTC staff advised on July 17, 2013 that it was prepared to recommend a lawsuit over alleged unfair practices; the company expected a possible settlement involving restitution and procedural changes, but stated there was no assurance of agreement. The amount of reasonably possible losses above accrued amounts could not be estimated.
- Other material risks include substantial indebtedness, dependence on warehouse funding and securitization markets, interest-rate exposure while receivables are warehoused, credit performance and collateral recovery risks, and the possibility that cash generation or securitization access will not support planned purchases. The company reported compliance with financial covenants at June 30. No specific earnings or purchase-volume guidance was provided.
- The company reported a $70.0 million net deferred tax asset, relying on forecast future taxable income; realization is not assured. It had reversed a $62.8 million valuation allowance in Q4 2012.
Important facts for investors to verify
- Whether delinquency, charge-off and recovery trends remain manageable as the rapidly growing portfolio seasons.
- Whether the $9.7 million legal and regulatory accrual adequately reflects the Stanwich matter, class actions and FTC inquiry, and the eventual cost or terms of any FTC resolution.
- Continued access to securitization and warehouse funding, available eligible collateral, and cash releases from restricted securitization accounts.
- Debt service capacity and compliance with covenants, particularly given approximately $1.12 billion of debt and cross-default provisions.
- Assumptions supporting the $70.0 million deferred tax asset and the company’s ability to generate sufficient taxable income to realize it.
- The effects of stock-option dilution: diluted weighted-average shares were 31.8 million for the first half versus 23.3 million in 2012.