Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: CPS is a specialty finance company that purchases and services retail automobile installment sale contracts, primarily for sub-prime customers. The company funds these purchases through warehouse credit facilities and long-term securitizations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Total Revenues | $52,821 | $177,192 | - |
| Net Income (Loss) | $(4,307) | $(10,769) | - |
| Interest Income | $49,320 | $165,459 | - |
| Provision for Credit Losses | $15,258 | $49,836 | - |
| Net Cash from Operating Activities | - | $77,998 | - |
| Cash and Cash Equivalents | - | - | $20,396 |
| Restricted Cash | - | - | $132,236 |
| Finance Receivables, Net | - | - | $976,013 |
| Total Debt (Securitization + Other) | - | - | $1,119,882 |
| Shareholders' Equity | - | - | $80,487 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues for the nine months ended September 30, 2009, decreased by $116.6 million (39.7%) compared to the prior year, primarily driven by a $116.5 million drop in interest income due to a shrinking portfolio of finance receivables.
- Expense Reduction: Total operating expenses decreased by $112.0 million (37.3%) year-over-year. This was largely due to reduced employee costs ($12.4 million decrease) and lower marketing expenses ($5.7 million decrease) as the company curtailed new contract purchases.
- Portfolio Contraction: The managed portfolio decreased to $1,197.3 million at September 30, 2009, from $1,829.5 million at September 30, 2008. The company purchased only 191 contracts totaling $2.5 million in the first nine months of 2009, compared to 19,278 contracts totaling $289.6 million in the prior year.
- Credit Quality: Annualized net charge-offs increased to 10.4% of the average servicing portfolio for the nine months ended September 30, 2009, compared to 7.1% in the prior year period, reflecting broader economic weakness and higher unemployment.
- Loss on Sale Elimination: The prior year included a $14.0 million loss on the sale of receivables in September 2008; no such loss occurred in the current period.
Guidance, Outlook, Risks, and Contingencies
- Liquidity and Financing: From December 2008 until September 25, 2009, the company had no available warehouse credit facilities. On September 25, 2009, CPS secured a new $50 million two-year revolving credit facility with Fortress Credit Corp. The company has no immediate plans to complete term securitizations.
- Covenant Waivers: Without temporary waivers from note insurers, CPS would have been in violation of financial covenants (minimum net worth and active warehouse facilities) regarding eight of its 17 outstanding securitization transactions. While waivers were granted, they are temporary, and the company is paying default insurance premiums on approximately $593.6 million of insured notes.
- Capital Market Risks: The company faces significant risk from the continued adverse conditions in the asset-backed securities market, including reduced liquidity and the unavailability of financial guaranty insurance. If these conditions persist, CPS may be forced to cease purchasing new contracts entirely.
- Legal Proceedings: The company is involved in the "Stanwich Litigation," a class action and related indemnity claims. While a settlement was reached in principle, the bankruptcy court rejected it, and the appeal was denied. An adverse judgment could materially affect financial position.
- Deferred Tax Assets: The company maintains a net deferred tax asset of $52.7 million (net of a $4.5 million valuation allowance). Realization depends on future taxable income, which is uncertain given the current economic downturn and cumulative loss position.
Investor Verification Checklist
- Financing Sustainability: Verify the terms and utilization of the new $50 million Fortress credit facility and the company's ability to secure additional long-term funding.
- Covenant Compliance: Monitor the status of temporary waivers from note insurers and the potential impact of default premiums on future interest expenses.
- Portfolio Performance: Track delinquency rates and net charge-off trends, which have risen significantly (10.4% annualized) and could accelerate if economic conditions worsen.
- Liquidity Position: Assess the adequacy of unrestricted cash ($20.4 million) and restricted cash ($132.2 million) against upcoming debt maturities and operating expenses.
- Legal Exposure: Review updates on the Stanwich Litigation and the potential for material adverse judgments.