Consumer Portfolio Services, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The company purchases and services automobile contracts, primarily for subprime borrowers. Financial amounts below are in millions unless noted.
Financial results and position
- Revenue: $54.6, up 22.6% from $44.5 in Q1 2012. Interest income rose 26.0% to $51.2, principally as the average consolidated receivables portfolio grew to $920.8 from $717.5. Servicing fees were $0.9; other income declined to $2.5 from $3.1.
- Earnings: Pretax income was $6.5 versus $0.5; net income was $3.8 versus $0.5. Pretax margin was approximately 12.0% of revenue, compared with 1.1%; net margin was approximately 6.9%, compared with 1.1%. Basic/diluted EPS was $0.19/$0.12, versus $0.03/$0.02. Diluted weighted-average shares increased to 31.6 million from 22.6 million.
- Expenses and credit costs: Total expenses increased 9.2% to $48.1. Interest expense fell 26.7% to $16.3, while provision for credit losses more than tripled to $15.1 from $4.8. The allowance for credit losses increased to $24.9 from $19.6; Q1 charge-offs were $12.9 and recoveries $3.1.
- Cash flow: Operating cash flow was $21.0, versus $4.5. Investing used $115.4, including $180.1 of finance-receivable purchases; financing provided $95.2, including $185.0 of new securitization debt. Cash and equivalents ended at $13.9, up from $13.0.
- Assets and liquidity: Total assets were $1,145.3 versus $1,037.6. Net finance receivables were $832.5; receivables measured at fair value were $43.0. Restricted cash was $139.4, including $68.7 held pending delivery of collateral for the March securitization. Management reported $100.0 available under one warehouse facility and $73.3 under another, subject to eligible collateral.
- Debt and equity: Debt outstanding was approximately $1,056.9, up from $958.5 at year-end; securitization trust debt was $901.7. Shareholders’ equity was $67.0 versus $61.3. The company was in compliance with its financial covenants at March 31.
Material changes versus Q1 2012 and year-end
- Contract purchases rose to $180.1 from $119.9; the managed portfolio grew to $968.5 from $781.8 year over year. The company completed one $185.0 securitization during the quarter.
- Credit indicators were mixed: total-owned-portfolio delinquencies were 4.0% of the gross servicing portfolio, versus 3.0% a year earlier; delinquencies plus repossessions were 6.3%, versus 5.3%. Annualized net charge-offs for the total owned portfolio were 4.2%, versus 3.9%.
- Interest costs declined, in part because Fireside portfolio debt paid down and newer securitizations carried lower blended rates. Credit-loss provision rose substantially with portfolio growth and the company’s policy of provisioning more heavily earlier in receivable terms.
- From December 31 to March 31, finance receivables, net, rose to $832.5 from $744.7; securitization debt rose to $901.7 from $792.5; and restricted cash increased to $139.4 from $104.4.
Outlook, risks, contingencies and unusual items
- Outlook: Management intended to continue regular securitizations during 2013 and to align contract purchases with available capital, but gave no specific financial guidance and cautioned that financing transactions may not be available on acceptable terms. Results for the quarter are not necessarily indicative of full-year results.
- Funding and interest-rate exposure: The business depends on warehouse credit and securitization markets, cash releases from securitized pools, and access to capital. The company disclosed substantial indebtedness, cross-default provisions and risks that higher rates or weaker securitization access could reduce excess spread, earnings and liquidity. A warehouse facility of $100 million was due to mature in May 2013.
- Subsequent financing actions: On April 11, 2013, the company entered a new $20 million, five-year residual financing facility. On April 12, it prepaid $15 million of related-party senior secured debt; the rate on the remaining balance was reduced from 16% to 13% and maturity extended from December 2013 to June 2014. In April, additional receivables were delivered to the March securitization and related restricted cash was released, mostly to repay warehouse borrowings.
- Tax asset: The company reported a $75.6 net deferred tax asset, including $62.5 of net operating loss carryforwards and built-in losses. Management considered realization more likely than not based on forecast earnings, but noted realization is not assured and estimated about $189 million of taxable income would be required to realize the federal and state assets fully. A $62.8 valuation allowance had been reversed in Q4 2012.
- Litigation: In the Stanwich-related Rhode Island case, the court denied the company’s summary-judgment motion and granted the opposing party’s motion as to liability; the amount of any indemnification obligation remained for trial. The company warned that an adverse judgment materially exceeding amounts recorded could affect financial condition. Other legal proceedings are routine; reasonably possible losses above accruals could not be estimated.
- Valuation and credit risks: Fireside receivables and related debt, and a residual securitization interest, use Level 3 fair-value assumptions with significant unobservable inputs. Actual realizable values may differ materially. Credit performance is sensitive to economic conditions, unemployment, used-vehicle values, customer payment behavior and portfolio seasoning.
- Other items: The final outstanding price-reset warrant was exercised in February, eliminating the related quarterly fair-value liability. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent securitizations and warehouse-facility renewal or replacement provided sufficient funding for the planned purchase pace.
- Trends in delinquency, repossessions, charge-offs, recoveries and the adequacy of the allowance as the rapidly expanding portfolio seasons.
- Debt service capacity, covenant headroom, restricted-cash availability and exposure to cross-default provisions.
- Progress and potential financial exposure in the Rhode Island indemnification litigation.
- Whether forecast taxable income supports realization of the $75.6 deferred tax asset, and whether Level 3 valuation assumptions remain supportable.