Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2012
Business Overview: CPS is a specialty finance company that purchases and services retail automobile installment sale contracts ("finance receivables") originated by licensed motor vehicle dealers. The company focuses on providing indirect financing to sub-prime customers (those with limited credit histories, low incomes, or past credit problems). As of June 30, 2012, the total managed portfolio was $806.1 million, an increase from $635.0 million at June 30, 2011, driven by new contract purchases and a $217.8 million portfolio acquisition from Fireside Bank in September 2011.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2012 |
Six Months Ended June 30, 2011 |
|---|---|---|---|
| Total Revenues | $44,151 | $88,669 | $63,549 |
| Net Income (Loss) | $1,341 | $1,852 | $(10,649) |
| Net Cash Provided by Operating Activities | N/A | $8,920 | $1,281 |
| Finance Receivables, Net | $604,709 | $604,709 | $506,279 (Dec 31, 2011) |
| Total Debt Outstanding | $889,400 (Approx.) | $889,400 (Approx.) | N/A |
| Cash and Cash Equivalents | $10,240 | $10,240 | $16,468 (End of Period 2011) |
| Shareholders' Equity | $(10,714) | $(10,714) | $(14,207) (Dec 31, 2011) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 41.7% year-over-year for the three months ended June 30, 2012, and 39.5% for the six-month period. This was primarily driven by a 49.4% increase in interest income due to a larger portfolio of finance receivables held by consolidated subsidiaries.
- Profitability Turnaround: The company returned to profitability, reporting net income of $1.3 million for the quarter and $1.9 million for the six months ended June 30, 2012, compared to net losses of $6.4 million and $10.6 million, respectively, in the prior year periods.
- Expense Increases: Total operating expenses increased 13.9% for the quarter and 17.0% for the six-month period. The provision for credit losses rose significantly (76.8% for the quarter) due to increased contract purchase volumes and portfolio size. Interest expense also increased due to the Fireside portfolio acquisition debt.
- Portfolio Expansion: The managed portfolio grew to $806.1 million from $635.0 million year-over-year. Purchases of finance receivables held for investment totaled $257.8 million in the first six months of 2012, compared to $110.8 million in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Outlook and Strategy: Management plans to continue increasing contract purchases to eliminate the shareholders' deficit and return to sustained profitability. The company aims to finance future purchases with credit facilities and term securitizations offering lower costs of funds compared to 2009-2010 levels. Recent term securitizations have achieved weighted average effective coupons between 3.15% and 4.93% without financial guaranty policies.
- Liquidity: As of June 30, 2012, unrestricted cash was $10.2 million. The company had approximately $171.5 million in available capacity under its Page Six and Page Eight warehouse funding facilities. Management notes that liquidity depends on the performance of securitized pools and the ability to complete new securitizations.
- Risks:
- Substantial Indebtedness: The company carries approximately $889.4 million in debt. Failure to generate sufficient cash flow could impair the ability to service this debt.
- Interest Rate Risk: Profitability depends on the "spread" between interest earned on receivables and interest paid on financing. Rising interest rates could compress this spread, particularly during the warehousing period.
- Credit Quality: Economic conditions and unemployment levels directly impact delinquency and charge-off rates. The company utilizes a "static pooling" methodology to estimate allowances for credit losses.
- Unusual Items:
- Fireside Acquisition: In September 2011, CPS acquired a $217.8 million portfolio from Fireside Bank. These receivables and related debt are measured at fair value, with changes in fair value reflected in earnings.
- Warrant Reclassification: During the period, certain derivative warrant liabilities were amended to remove "down round" features and reclassified from liabilities to equity, totaling approximately $1.35 million.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial covenants (liquidity, net worth, leverage) across securitization trusts and warehouse facilities.
- Allowance Adequacy: Review the "static pooling" assumptions and the adequacy of the $14.1 million allowance for finance credit losses given the sub-prime nature of the portfolio.
- Fair Value Volatility: Monitor the impact of fair value adjustments on the Fireside portfolio receivables and related debt, which can cause earnings volatility.
- Securitization Pipeline: Assess the company's ability to execute planned term securitizations to refinance warehouse debt and maintain liquidity.
- Shareholders' Deficit: Track the reduction of the $10.7 million accumulated deficit through future profitability.