Consumer Portfolio Services, Inc. — Q1 2014 Form 10-Q
Business and period: The company purchases and services retail auto contracts, primarily for subprime borrowers. This unaudited report covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $68.1 | $54.6 |
| Interest income | $65.0 | $51.2 |
| Interest expense | $13.4 | $16.3 |
| Net interest income | $51.6; reported annualized net interest yield 16.7% | $34.8; 15.4% |
| Provision for credit losses | $23.9 | $15.1 |
| Income before tax | $11.8 | $6.5 |
| Net income | $6.7 | $3.8 |
| Basic / diluted EPS | $0.28 / $0.21 | $0.19 / $0.12 |
| Operating cash flow | $36.2 | $21.0 |
| Investing / financing cash flow | $(97.0) / $53.3 | $(115.4) / $95.2 |
Revenue grew 24.8%; net income rose about 77%. Calculated net margin was approximately 9.8% versus 6.9% in Q1 2013; the filing does not present this as a reported margin measure. Cash and cash equivalents declined to $14.6 from $22.1 at December 31, 2013, and total cash decreased $7.5 during the quarter.
At March 31, finance receivables, net, were $1,182.1; total assets were $1,459.9 and shareholders’ equity was $103.4. Restricted cash was $147.6, including $68.8 of securitization pre-funding proceeds. The company reported approximately $1,331.7 of debt, principally $1,247.4 of securitization trust debt. Debt was approximately $1,276.9 at year-end 2013. It prepaid $39.2 of related-party senior secured debt during the quarter, eliminating that balance.
Material changes and credit trends
- The managed portfolio increased to $1,295.2 from $968.5 a year earlier; Q1 contract purchases rose to $189.9 from $180.1.
- Growth in the owned portfolio drove interest income higher, while the reported average yield on interest-earning assets declined to 21.0% from 22.6%. Lower interest expense—down 18.1%—partly offset higher credit-loss provision and operating costs.
- Provision for credit losses increased 57.7% to $23.9. The allowance rose to $44.7 from $39.6 at year-end; quarterly charge-offs were $23.5 and recoveries $4.7.
- For the originated and Fireside portfolio, delinquencies were 4.7% of gross servicing portfolio versus 4.2% a year earlier; delinquencies plus repossessions were 8.2% versus 6.3%. Annualized net charge-offs were 5.5% versus 4.2%.
- The company completed one $180.0 securitization in Q1. In April, it delivered additional receivables to the trust and received related restricted cash, most of which it said was used to repay warehouse borrowings.
Outlook, risks and contingencies
- Liquidity and funding: Management intended to complete more securitizations during 2014 but gave no quantitative earnings or purchase-volume guidance and cautioned that execution was not assured. At quarter-end, it reported $14.6 of unrestricted cash and $74.3 and $84.2 available on two warehouse facilities, subject to sufficient eligible collateral.
- Funding and leverage risks: Continued contract purchases depend on warehouse capacity, securitization access, cash releases from trusts and portfolio performance. Substantial debt, cross-default provisions, covenant requirements and potential interest-rate increases could constrain liquidity or reduce excess spread. The company was in compliance with financial covenants at quarter-end.
- Credit and valuation risks: Loss estimates depend on borrower performance, unemployment, used-vehicle values and recoveries. Certain Fireside receivables and related debt use Level 3, unobservable valuation inputs; actual realizable values could differ materially from estimates.
- Legal matters: The FTC had indicated it was prepared to recommend an action over alleged unfair practices. Management expected a possible consent decree involving restitution and procedural changes, but said no agreement was assured and costs could be material; a liability was recorded. For legal contingencies overall, reasonably possible losses in excess of recorded reserves were estimated at $0–$1.6. A separate indemnity matter was scheduled for trial beginning September 9, 2014.
- Taxes and controls: The company reported a $54.2 net deferred tax asset, whose realization depends on forecast taxable income. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track delinquency, repossession and charge-off trends as the rapidly growing portfolio seasons, and compare actual losses with the allowance and provision.
- Confirm the completion and economics of planned securitizations, warehouse availability and the effect of April’s pre-funding release on unrestricted liquidity.
- Review the FTC matter, recorded reserve, potential restitution and procedural obligations, as well as developments in the September 2014 trial.
- Assess debt-service capacity, covenant headroom, cross-default exposure and sensitivity of funding costs and excess spread to interest rates.
- Evaluate the assumptions supporting the $54.2 deferred tax asset and Level 3 fair-value estimates.