Business context and reporting period
Consumer Portfolio Services, Inc. purchases and services retail automobile installment contracts, primarily for subprime borrowers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; amounts are in millions except per-share data. Comparisons are with the corresponding 2013 periods unless noted.
Financial performance and position
| Metric | Third quarter 2014 | Nine months 2014 |
|---|---|---|
| Revenue | $77.1; up 20.3% | $216.8, including no debt-cancellation gain; up 21.7% excluding the $10.9 gain recorded in 2013 |
| Net income | $7.8 vs. $5.9 | $21.5 vs. $14.5 |
| Basic / diluted EPS | $0.31 / $0.24 | $0.86 / $0.67 |
| Interest income | $73.9 vs. $60.5 | $207.1 vs. $167.4 |
| Interest expense | $12.2 vs. $13.9 | $37.6 vs. $44.8 |
| Provision for credit losses | $27.3 vs. $20.2 | $76.8 vs. $52.7 |
| Net interest yield | 17.2% vs. 16.9% | 17.0% vs. 16.3% |
Third-quarter net margin was approximately 10.1%, compared with 9.2% in 2013. Nine-month net margin was approximately 9.9%; comparison with 2013 is affected by the prior-year debt-cancellation gain. The company attributed higher interest income and revenue primarily to portfolio expansion. Lower interest expense partly offset higher credit-loss provisions and operating costs.
For the nine months, operating cash flow was $101.0 vs. $71.2; investing cash outflow was $388.7 vs. $325.0; and financing cash inflow was $278.8 vs. $265.0. Cash and equivalents ended at $13.1, down from $22.1 at December 31, 2013. Restricted cash was $174.6, including $87.8 of securitization prefunding proceeds.
At September 30, finance receivables, net, were $1,407.8, with an allowance of $54.6 (up from $39.6 at year-end 2013). Total debt was approximately $1,560.5, primarily securitization trust debt of $1,469.7; total liabilities were $1,583.4. Shareholders’ equity was $121.5. The company reported $13.1 of unrestricted cash and $140.6 of available warehouse capacity, subject to sufficient eligible collateral. It reported compliance with applicable financial covenants.
Material changes versus prior comparable periods
- The managed portfolio grew to $1,518.6 from $1,166.9 year over year; nine-month contract purchases rose to $680.6 from $592.3.
- Credit costs rose with portfolio growth: nine-month provision increased 45.6%, and annualized net charge-offs on the owned portfolio increased to 5.6% from 4.2%.
- For originated contracts, delinquencies were 4.7% of the servicing portfolio, versus 4.5% a year earlier; delinquency plus repossession was 7.5% versus 6.4%. The allowance increased to $54.6 from $39.6 at year-end.
- Interest expense declined as related-party senior debt was repaid in full in March 2014 and certain other financing balances paid down. Securitization debt grew, while its reported average cost fell year over year.
- The 2013 nine-month comparison includes a $10.9 debt-cancellation gain and $9.7 of contingent-liability expense; neither item recurred in the 2014 period.
Outlook, commentary, risks and unusual items
Management intended to complete one additional securitization in 2014 but stated there was no assurance it could do so. The company said contract-purchase growth depends on available capital, securitization access, warehouse financing and cash releases from existing trusts; it may limit purchases or reduce operating costs to manage liquidity. The filing provides no earnings or revenue guidance.
The FTC matter was resolved through a court-entered consent decree in June 2014: the company paid a $2.0 penalty, made approximately $1.9 in restitution and $1.6 in customer account adjustments, and implemented procedural changes. In September, it paid $5.99 to settle the Pardee litigation. Management estimated reasonably possible legal losses beyond recorded reserves at $0–$1.3, while cautioning actual outcomes could differ.
Key risks include subprime borrower credit performance, used-vehicle recovery values, access to securitization and warehouse funding, interest-rate movements and consumer-finance regulation. Substantial indebtedness and cross-default provisions could constrain liquidity. Management’s $46.6 net deferred tax asset depends on forecast taxable income; it estimated about $108 of taxable income would be needed to realize the asset fully. The filing also notes that significant Level 3 fair-value estimates rely on unobservable assumptions. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether portfolio growth produces returns sufficient to offset rising provisions and charge-offs; monitor delinquencies, repossessions, extensions and allowance adequacy.
- Whether securitizations and warehouse facilities remain available on acceptable terms, and whether restricted cash is released and usable as expected.
- Debt service capacity, covenant compliance, collateral requirements and refinancing or cross-default exposure.
- Compliance with the FTC consent decree and developments in remaining consumer litigation and other contingencies.
- Whether future taxable income supports realization of the $46.6 deferred tax asset, and whether Level 3 valuation assumptions remain reasonable.