Consumer Portfolio Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The company purchases and services auto installment contracts, primarily for subprime borrowers. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $86.0 | $68.1 |
| Interest income | $82.4 | $65.0 |
| Interest expense | $13.2 | $13.4 |
| Provision for credit losses | $33.4 | $23.9 |
| Income before taxes | $14.7 | $11.8 |
| Income tax expense | $6.4 | $5.1 |
| Net income | $8.3 | $6.7 |
| Basic / diluted EPS | $0.33 / $0.26 | $0.28 / $0.21 |
| Net cash from operations | $49.8 | $36.2 |
| Net cash used in investing | $108.5 | $97.0 |
| Net cash from financing | $61.0 | $53.3 |
| Cash and cash equivalents | $20.2 | $17.9 at Dec. 31, 2014 |
| Restricted cash | $173.5 | $175.4 at Dec. 31, 2014 |
| Finance receivables, net of allowance | $1,615.8 | $1,534.5 at Dec. 31, 2014 |
| Total debt disclosed by company | $1,746.8 | Not provided here for comparison |
Revenue increased 26.2% year over year, largely as the owned portfolio expanded. Net income rose 24.3%. The reported annualized net interest yield was 16.5%, versus 16.7%; the average yield on gross finance receivables declined to 19.6% from 20.9%. The effective tax rate was approximately 43.5%.
Finance contracts purchased were $233.9 million, up from $189.9 million, and the managed portfolio reached $1,725.5 million, versus $1,295.2 million a year earlier. Total liabilities were $1,768.4 million and shareholders’ equity was $137.0 million at quarter-end. The company reported compliance with applicable debt covenants.
Material changes and credit performance
- Operating expenses increased 26.4% to $71.2 million. Employee costs rose 33.0% to $14.5 million as staffing expanded; general and administrative costs also increased.
- Credit-loss provision rose 40.0% to $33.4 million, reflecting portfolio growth and the company’s practice of provisioning more heavily during the early life of new contracts. The allowance for credit losses increased to $68.1 million from $61.5 million at year-end.
- Annualized net charge-offs on the owned portfolio, including Fireside, increased to 6.6% from 5.5% a year earlier. For the originated portfolio excluding Fireside, the rate was 6.7%, versus 5.5%.
- Delinquencies of 31 days or more were 5.8% of the originated portfolio, compared with 4.1% a year earlier. Receivables over 90 days delinquent were $31.9 million, versus $6.7 million; the company places accounts over 90 days delinquent on non-accrual.
- Debt shifted with portfolio funding: securitization trust debt rose to $1,697.6 million from $1,598.5 million at year-end, while warehouse borrowings fell to $22.0 million from $56.8 million.
Liquidity, outlook, risks and contingencies
Operating cash flow was $49.8 million, while investing cash use included $233.9 million of finance-receivable purchases. Financing included $245.0 million of new securitization debt, $145.9 million of securitization repayments, and $34.9 million of net warehouse repayments. Restricted cash included $72.0 million of securitization pre-funding proceeds; those funds were released after additional receivables were delivered in April 2015, with most used to repay warehouse borrowings.
At March 31, the company reported $20.2 million of unrestricted cash and warehouse availability of $78.0 million and $100.0 million, subject to sufficient eligible collateral. It reported approximately $39.1 million of eligible collateral. In April 2015, it entered a new $100 million warehouse facility with a revolving period through April 2017 and an amortization period through April 2019, replacing a prior facility.
Management intended to complete additional securitizations in 2015, but gave no specific earnings or purchase-volume guidance and cautioned that completion was not assured. Liquidity and growth depend on securitization access, warehouse capacity, eligible collateral, collections and releases from securitization trusts, and the pace of contract purchases. Management warned that insufficient cash generation could impair debt service and that substantial indebtedness limits flexibility.
In January 2015, the company received a Department of Justice subpoena concerning auto-contract origination and securitization practices dating back to 2005. It was investigating and cooperating; the inquiry could lead to damages, fines, or civil or criminal claims, and its outcome was uncertain. The company reported a best-estimate reserve for legal contingencies; reasonably possible losses above reserves were estimated at $0 to $0.25 million, though larger outcomes could not be ruled out. The prior FTC matter had been settled under a 2014 consent decree, including restitution, account adjustments, a $2 million penalty, and procedural changes.
Other risks include economic and unemployment conditions, interest rates, competition, used-vehicle recovery values, regulatory changes, credit losses, funding availability, and the realization of the $40.3 million net deferred tax asset, which depends on future taxable income. Management said the quarter’s results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether credit losses, delinquency rates, and repossessions develop as the recently expanded portfolio seasons.
- Availability and terms of future securitizations and warehouse funding, including collateral requirements and cash releases from trusts.
- Progress and potential financial consequences of the DOJ investigation, and adequacy of legal reserves.
- Whether operating cash generation and portfolio performance support debt service and planned contract purchases.
- Assumptions supporting the deferred tax asset and the company’s ability to generate sufficient taxable income.