Consumer Portfolio Services, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts below are in millions of dollars unless stated otherwise. The company buys and services auto installment contracts, primarily for subprime borrowers; interim results are unaudited and not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $64.1 | $47.9 | $189.1 | $136.6 |
| Interest income | $60.5 | $45.1 | $167.4 | $127.2 |
| Interest expense | $13.9 | $19.6 | $44.8 | $61.7 |
| Provision for credit losses | $20.2 | $9.5 | $52.7 | $22.0 |
| Income before tax | $10.6 | $2.7 | $25.6 | $4.6 |
| Net income | $5.9 | $2.7 | $14.5 | $4.6 |
| Diluted EPS | $0.19 | $0.11 | $0.46 | $0.19 |
- For the nine-month period, revenue included a $10.9 million gain on cancellation of debt. Excluding that gain, revenue was $178.2 million.
- Net interest yield was 16.9% in Q3 versus 13.1% a year earlier, and 16.3% for the nine months versus 11.8%. These are company-reported annualized yields.
- Operating cash flow was $71.2 million for nine months, compared with $16.4 million. Investing used $325.0 million, primarily reflecting receivable purchases; financing provided $265.0 million. Cash and equivalents ended at $24.1 million, versus $13.0 million at December 31, 2012.
- At September 30, total assets were $1.334 billion, net finance receivables were $1.047 billion, and shareholders’ equity was $81.7 million. Debt was approximately $1.218 billion, including $1.095 billion of securitization trust debt. Restricted cash was $129.5 million and was not generally available for operations.
- Management reported $84 million and $89 million available under two warehouse facilities, subject to sufficient eligible collateral. It reported compliance with financial covenants.
Material changes and credit performance
- Contract purchases rose to $592.3 million for the first nine months, from $400.9 million; the managed portfolio grew to $1.167 billion from $844.9 million year over year.
- Higher portfolio volume drove interest income and revenue growth, but also increased credit-loss provisioning. Nine-month provision rose 139.6% to $52.7 million; charge-offs were $47.2 million, compared with $26.2 million.
- Delinquency and repossession indicators worsened: total owned portfolio delinquencies were 4.6% at September 30, 2013 versus 3.3% a year earlier; delinquencies plus repossessions were 6.4% versus 4.6%. Annualized net charge-offs for the owned portfolio including Fireside were 4.2%, versus 3.5%.
- Interest expense declined despite higher securitization debt, reflecting lower-cost newer securitizations and reductions in Fireside and related-party debt. In April, the company repaid $15 million of related-party senior secured debt, reduced the rate on remaining debt from 16% to 13%, and extended its maturity to June 2014.
- Nine-month operating expenses included $9.65 million for contingent liabilities. Excluding that item, expenses were $153.9 million, up 16.6% year over year.
Outlook, commentary, and risks
- The company intended to complete one additional securitization in 2013; it cautioned there was no assurance it could do so. No specific earnings or revenue guidance was provided.
- Management said receivable-purchase growth depends on available capital, securitization access, warehouse financing, trust cash releases, and dealer supply. The company planned to match purchase volumes to available capital and reduce costs as appropriate.
- The FTC had informally proposed restrictions on certain alleged trade practices and restitution payments. Management expected settlement discussions could lead to a consent decree but said no agreement was assured; it recorded a liability. The filing also describes two consumer class actions and the continuing Stanwich-related litigation. The company recorded $9.7 million of contingent-liability expense for the nine months and cautioned outcomes could exceed reserves.
- The company carried a $66.2 million net deferred tax asset, whose realization depends on forecast future taxable income; management stated realization was more likely than not but not assured.
- Key risks include substantial indebtedness, financing-market access, interest-rate exposure during warehousing and securitization, credit losses, economic and used-vehicle conditions, regulation, and cross-default provisions. The company cautioned that failure to generate sufficient cash flow could impair debt payments.
Most important facts for investors to verify
- Whether delinquency, repossession, and net charge-off trends stabilize as the rapidly expanded portfolio seasons.
- Whether securitization and warehouse funding remain available on acceptable terms, and how much reported restricted cash is actually accessible.
- The final cost and terms of any FTC resolution and the outcomes of pending litigation relative to the recorded reserve.
- Whether future taxable income supports realization of the $66.2 million deferred tax asset.
- How much of reported earnings growth is recurring: nine-month results included the $10.9 million debt-cancellation gain, while credit provisioning and contingent-liability costs also materially affected results.