Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2011
Business Overview: CPS is a specialty finance company purchasing and servicing retail automobile installment sale contracts for sub-prime customers. The company funds these purchases through warehouse credit facilities and long-term securitizations. As of March 31, 2011, the total managed portfolio was approximately $679.7 million, a decrease from $1.044 billion in the prior year, reflecting a strategy to conserve liquidity during market disruptions followed by a gradual increase in purchases.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $32,395 | $44,588 |
| Net Loss | $(4,206) | $(7,936) |
| Loss Per Share (Basic/Diluted) | $(0.23) | $(0.44) |
| Net Cash Provided by Operating Activities | $3,480 | $20,542 |
| Finance Receivables, Net | $506,966 | $552,453 |
| Total Debt Outstanding | $675,500 | $717,900 |
| Cash and Cash Equivalents | $9,227 | $22,788 |
| Restricted Cash | $131,122 | $123,958 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 27.3% to $32.4 million, primarily driven by a 26.6% drop in interest income due to a smaller consolidated portfolio of finance receivables.
- Improved Profitability: Net loss narrowed significantly by 47% to $4.2 million, compared to $7.9 million in Q1 2010. This improvement was driven by a 68.5% reduction in the provision for credit losses ($3.7 million vs. $11.7 million) and a 22% decrease in interest expense.
- Expense Reduction: Total operating expenses fell 30.3% to $36.6 million. Employee costs decreased 13.2% as headcount dropped from 519 to 435. General and administrative expenses fell 38.1%.
- Portfolio Composition: The managed portfolio decreased to $679.7 million. However, contract purchases increased in Q1 2011 ($50.0 million) compared to Q1 2010 ($17.4 million) due to new credit facilities.
- Credit Quality: Annualized net charge-offs as a percentage of the average servicing portfolio decreased to 9.3% from 12.2% in the prior year. Delinquencies (31+ days) represented 3.8% of the gross servicing portfolio.
Guidance, Outlook, Risks, and Unusual Items
- Capital Markets & Liquidity: The company has secured new funding sources, including a $100 million facility with Goldman Sachs/Fortress (Dec 2010) and a $100 million facility with UBS (Feb 2011). On April 27, 2011 (post-period), CPS completed a $100.4 million term securitization. Management expects to complete additional securitizations in 2011.
- Covenant Waivers: CPS is currently in violation of adjusted net worth and leverage covenants for four of its 11 outstanding securitization transactions. The company has obtained temporary waivers from note insurers. Without these waivers, the company would face default premiums and potential termination as servicer. Cash is currently being diverted to spread accounts in six transactions.
- Rescission Liability: Due to a lapse in a registration statement between July 2010 and December 2010, the company faces potential rescission liability for approximately $5.3 million of subordinated notes. Investors may have the right to rescind purchases made during this period.
- Legal Proceedings: The company settled an adversary action in the Stanwich bankruptcy case in April 2011 for $800,000. Other routine litigation related to consumer finance activities is ongoing.
- Accounting Correction: The company corrected immaterial prior year errors related to derivative liabilities and interest expense, which decreased previously reported net income for Q1 2010 by $2.1 million.
Investor Verification Checklist
- Covenant Status: Verify the duration and terms of the waivers received from note insurers regarding net worth and leverage covenants, and the risk of future termination as servicer.
- Rescission Liability: Assess the potential cash outflow impact if investors exercise their right to rescind the $5.3 million in subordinated notes.
- Debt Maturity: Review the maturity schedule of the residual interest financing facility (maturing May 2011) and the status of extension or restructuring discussions.
- Derivative Liabilities: Monitor the fair value of warrant liabilities, which are subject to volatility and can impact interest expense significantly.
- Portfolio Growth: Confirm the company's ability to execute planned term securitizations to fund continued contract purchases and expand the managed portfolio.