Consumer Portfolio Services, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. CPS is a specialty finance company that purchases and services subprime retail auto contracts, funding purchases principally through asset-backed securitizations and warehouse credit facilities.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $300.3 million | $255.8 million, including a $10.9 million debt-cancellation gain; $244.8 million excluding that gain |
| Interest income | $286.7 million | $231.3 million |
| Pre-tax income | $52.2 million | $37.2 million |
| Net income | $29.5 million | $21.0 million |
| Diluted EPS | $0.92 | $0.67 |
| Net interest margin | 17.0% | 16.5% |
| Net cash from operating activities | $135.8 million | $99.4 million |
| Net cash used in investing activities | $541.2 million | $409.6 million |
| Net cash from financing activities | $401.1 million | $319.3 million |
- Fourth-quarter 2014 revenue was $83.5 million, pre-tax income $14.3 million, net income $8.0 million, and diluted EPS $0.25.
- Contract purchases grew 23.7% to $944.9 million; the managed portfolio rose to $1.644 billion from $1.231 billion. Four 2014 securitizations funded $923.0 million of receivables.
- Provision for credit losses increased to $108.2 million from $76.9 million. Net charge-offs were 5.8% of average servicing portfolio, up from 4.7%; total delinquencies were 5.5% versus 4.8%, and delinquencies plus repossessions were 7.2% versus 6.8%.
- At year-end, total debt was approximately $1.684 billion, including $1.598 billion of securitization trust debt. Shareholders’ equity was $127.3 million. Unrestricted cash was $17.9 million; restricted cash was $175.4 million and was not freely available for general use.
- Warehouse capacity totaled $200 million. Reported undrawn availability was $76.4 million and $66.7 million under the two facilities, subject to eligible collateral. The company was in compliance with its financial covenants at year-end.
Material changes and management commentary
- Higher portfolio balances drove interest income and revenue growth. Net interest margin improved despite the average yield on interest-earning assets declining to 20.6% from 22.1%; lower funding costs helped, including a decline in the average securitization debt rate to 3.0% from 3.7%.
- Credit costs rose alongside portfolio expansion. The allowance for finance credit losses increased to $61.5 million from $39.6 million, or 3.7% of contracts held by consolidated subsidiaries versus 3.3%.
- Employee and general and administrative costs increased as CPS expanded origination, marketing and servicing capacity. Headcount rose to 869 from 705.
- Cash and cash equivalents decreased by $4.3 million during 2014. Year-end restricted cash included $85.3 million of securitization pre-funding proceeds; the remaining receivables were delivered in January 2015, and most of the released cash was used to repay warehouse borrowings.
- Management expected quarterly profits during 2015 and planned to continue regular securitizations and align contract purchases with available capital. These are expectations, not guaranteed results; the filing provides no numerical 2015 earnings or purchase-volume guidance.
- The 2012 net income of $69.4 million included a $60.2 million income-tax benefit from reversing a deferred-tax valuation allowance; this benefit was not recurring. The 2014 net deferred tax asset was $42.8 million, dependent on future taxable income, and state NOLs began expiring in 2015.
Risks, contingencies and unusual items
- Funding and liquidity: CPS depends on warehouse credit and recurring securitizations. Adverse capital-market conditions, weaker collateral performance or restricted releases of trust cash could constrain purchases, liquidity and earnings. Much of its reported cash is restricted.
- Credit performance: The subprime portfolio is exposed to borrower defaults, repossession losses, economic weakness and used-vehicle values. Delinquencies, charge-offs and provisions increased in 2014; deterioration can also trap cash in securitization structures.
- Regulatory and legal matters: The FTC consent decree required approximately $1.9 million in restitution, $1.6 million in customer account adjustments, a $2.0 million federal penalty and procedural changes. In January 2015, the Department of Justice subpoenaed documents concerning origination and securitization practices since 2005; CPS said it was cooperating. The outcome is uncertain.
- Other legal exposure: CPS was defending two purported class actions, one settled subject to court approval. It estimated additional reasonably possible legal losses above recorded reserves at $0–$1.5 million, while cautioning that actual outcomes could exceed reserves.
- Regulatory change: New securitization risk-retention requirements were scheduled to take effect in October 2015; whether CPS qualifies for the auto-loan underwriting exception could affect future securitizations. CFPB oversight and potential rule changes may increase costs.
- Capital structure and shareholder returns: Debt agreements impose financial and operating restrictions, including limits relevant to dividends. CPS had never paid common-stock dividends and did not expect to do so in the foreseeable future.
Important facts for investors to verify
- Whether rising delinquencies, charge-offs and credit-loss provisions reflect portfolio seasoning, underwriting changes or worsening borrower performance—and how subsequent vintages perform.
- Whether 2015 securitizations and warehouse renewals proceed on acceptable terms, including the status of the facility whose revolving period was scheduled to end in March 2015.
- How much cash is unrestricted and available after collateral, covenant and securitization requirements, and whether trust cash releases remain adequate to support growth.
- The status and potential financial or operational consequences of the DOJ investigation, class actions and FTC consent-decree compliance.
- The assumptions supporting the $42.8 million deferred tax asset and the company’s forecast of future profitability.
- Share dilution and equity compensation: year-end options and warrants included 10.8 million potential shares, and 2014 weighted-average diluted shares were 32.0 million versus 25.0 million basic shares.