Business context and reporting period
Consumer Portfolio Services, Inc. (CPS) filed this Form 10-K for the fiscal year ended December 31, 2011. CPS purchases and services automobile installment contracts, primarily for sub-prime borrowers, and funds receivables mainly through warehouse facilities and asset-backed securitizations.
Contract purchases increased to $284.2 million in 2011 from $113.0 million in 2010. The managed portfolio grew to $794.6 million from $756.2 million, including the September 2011 acquisition of Fireside Bank receivables. CPS completed three securitizations totaling $335.6 million; these were secured financings and did not use financial guaranties.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $143.1 million | $155.2 million |
| Interest income | $127.9 million | $137.1 million |
| Interest expense | $83.1 million | $81.6 million |
| Net loss | $14.5 million | $33.2 million |
| Loss per diluted share | $0.76 | $1.90 |
| Net cash from operating activities | $10.8 million | $42.9 million |
| Cash and cash equivalents | $10.1 million | $16.3 million |
| Restricted cash | $159.2 million | $124.0 million |
| Shareholders’ equity (deficit) | $(14.2) million | $2.4 million |
Revenue declined 7.8%, chiefly from lower interest income and servicing fees. Total expenses fell 8.0% to $157.6 million, primarily as credit-loss provision expense decreased to $15.5 million from $29.9 million. Interest expense rose despite lower securitization costs, partly because of financing for the Fireside acquisition and higher warehouse and subordinated debt costs. Interest income less interest expense—a simple spread proxy, not a reported margin—was $44.8 million, down from $55.5 million.
Net cash used in investing activities was $155.0 million, versus $272.9 million provided in 2010, reflecting increased receivable purchases and the Fireside acquisition. Financing activities provided $138.0 million, compared with $312.0 million used in 2010. The company reported approximately $876.3 million of debt at year-end, including $583.1 million of securitization trust debt, $166.8 million of Fireside-related debt, $58.3 million of senior secured related-party debt, and warehouse, residual-interest and subordinated borrowings.
Credit indicators improved on some reported measures: net charge-offs were 5.2% of average servicing portfolio in 2011 versus 9.0% in 2010. The year-end owned-portfolio table reports delinquencies plus repossessions at 8.6% for 2011, compared with 9.2% for the 2010 portfolio excluding Fireside; the comparison is affected by the 2011 acquisition and portfolio definitions.
Material changes versus the prior year
- Annual net loss narrowed to $14.5 million from $33.2 million; the filing says CPS returned to quarterly profitability in the fourth quarter of 2011 but does not provide a clear standalone fourth-quarter profit figure in the supplied text.
- Receivable purchases more than doubled, and the portfolio expanded following the Fireside acquisition. Fireside receivables and related debt are measured at estimated fair value using significant unobservable inputs.
- Credit-loss provision expense fell substantially as the portfolio shifted toward post-2008 originations and the balance of older receivables declined.
- Debt increased, and shareholders’ equity moved from positive to a deficit. Unrestricted cash declined even as restricted cash rose.
- Servicing-fee revenue fell 43.2% to $4.3 million, primarily due to the runoff of a third-party servicing portfolio.
Outlook, risks and unusual items
Management expected quarterly profits during 2012 and planned to increase contract purchases gradually, complete additional securitizations, and align purchases with available funding. It also expected regular securitizations in 2012, but gave no quantified earnings or purchase-volume guidance and cautioned that financing availability is not assured.
Liquidity and refinancing are central risks. At December 31, CPS reported $10.1 million of unrestricted cash and warehouse availability subject to eligible collateral. In February 2012, the $100 million UBS facility’s maximum advance was reduced to $35 million, with its revolving period extended to May 2012. A December 2011 securitization’s $36.1 million prefunding cash was released after additional receivables were delivered in January 2012, with a significant portion used to repay warehouse borrowings.
Cash releases from securitization trusts depend on collateral performance and required credit enhancement; adverse delinquencies or losses can restrict cash distributions. CPS received covenant waivers during 2011, including waivers relevant to potential servicer termination; the related remaining securitization notes were paid off in February 2012. The company said it was compliant with financial covenants at year-end, in one case as a result of an amendment.
Other material risks include substantial debt, negative equity, dependence on securitization and warehouse markets, rising interest rates, sub-prime borrower defaults, regulatory changes, and consumer litigation. Nasdaq advised CPS in February 2012 that its shares were subject to delisting for failure to meet the $15 million public-market-value standard; CPS requested a hearing. The Rhode Island indemnification case had a November 2012 trial scheduled, and a tentative Telephone Consumer Protection Act class settlement remained subject to court approval. CPS reported that reasonably possible legal losses beyond amounts accrued could not be estimated.
The auditor issued an unqualified opinion on the financial statements and highlighted significant losses over the prior three years and negative shareholders’ equity at year-end. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal control effectiveness.
Key facts investors should verify
- Whether CPS achieved and sustained profitability and adequate operating cash flow after 2011.
- Current warehouse capacity, borrowing-base availability, maturities, covenant compliance, and ability to refinance debt.
- Performance and valuation assumptions for the Fireside portfolio and the remaining securitization residual interest.
- Trends in delinquencies, charge-offs, recoveries, and cash trapped in securitization trusts, using consistent portfolio definitions.
- Outcome of the Nasdaq hearing and status of the Rhode Island litigation and proposed TCPA settlement.
- Whether the $15.0 million net deferred tax asset is realizable, given the reported cumulative pretax losses and reliance on prospective asset-sale tax strategies.