Consumer Portfolio Services, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. CPS purchases and services automobile installment contracts, primarily for subprime borrowers, and funds purchases through securitizations and warehouse credit facilities. Unless stated otherwise, amounts are in millions.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $47.9 | $33.8 | $136.6 | $97.4 |
| Interest income | $45.1 | $30.2 | $127.2 | $86.6 |
| Interest expense | $19.6 | $19.0 | $61.7 | $57.4 |
| Credit-loss provision | $9.5 | $4.0 | $22.0 | $12.0 |
| Income (loss) before tax and net income (loss) | $2.7 | $(4.0) | $4.6 | $(14.7) |
| Basic / diluted earnings (loss) per share | $0.14 / $0.11 | $(0.20) / $(0.20) | $0.24 / $0.19 | $(0.78) / $(0.78) |
- Revenue less operating expenses was $2.7 million for Q3 2012 versus a $4.0 million loss in Q3 2011; the corresponding net margin was approximately 5.7% versus a loss. Nine-month net margin was approximately 3.4%, compared with a loss in the prior-year period. These margins are calculated from reported figures.
- At September 30, 2012, total assets were $922.9 million, including $10.5 million cash and $107.2 million restricted cash. Finance receivables, net of allowance, were $670.2 million, plus $77.5 million measured at fair value. Shareholders’ deficit was $7.5 million.
- Reported debt was approximately $908.2 million: $721.4 million securitization trust debt, $76.6 million Fireside-related debt, $54.5 million senior secured related-party debt, $21.5 million subordinated notes, $20.4 million warehouse borrowings and $13.8 million residual-interest financing. Debt was approximately $876.2 million at December 31, 2011.
- Nine-month cash flow: $16.4 million provided by operations, $31.2 million used in investing and $15.2 million provided by financing. Cash and cash equivalents increased $0.4 million to $10.5 million.
Changes versus comparable periods
- Q3 revenue rose 41.7% and nine-month revenue rose 40.3%, mainly from higher interest income as the owned portfolio expanded. Management cited the 2011 Fireside Bank portfolio acquisition and increased CPS-originated receivables as key contributors.
- Net income turned positive in both the quarter and year-to-date period. Expenses increased more slowly than revenue overall, but the credit-loss provision rose 137.7% in Q3 and 82.9% year to date, reflecting portfolio growth and higher contract purchases.
- Nine-month contract purchases were $400.1 million, versus $192.0 million in 2011. The managed portfolio was $844.9 million at September 30, 2012, compared with $827.8 million a year earlier.
- Annualized net charge-offs for the total owned portfolio, including Fireside, were 3.5% for the nine months ended September 30, 2012, versus 6.6% for the comparable 2011 period. The allowance for credit losses rose to $16.9 million from $10.4 million at year-end 2011.
- Debt composition shifted substantially toward securitization trust debt, which increased to $721.4 million from $583.1 million; Fireside-related debt fell to $76.6 million from $166.8 million.
Outlook, risks and notable items
- Management said it had returned to profitability and was increasing contract purchases, with purchases intended to match available capital. It expected to complete one additional term securitization in 2012; this is an expectation, not formal earnings guidance.
- Liquidity remains dependent on securitizations, warehouse funding, collections and releases from securitization trusts. The company reported $100.0 million available under Page Six and $79.6 million under Page Eight, subject to eligible collateral. Restricted cash is not generally available for unrestricted use.
- Management reported covenant compliance at September 30, 2012. It cautioned that funding-market deterioration, inability to refinance or securitize, rising interest rates, weaker borrower payments, higher credit losses or insufficient cash generation could constrain purchases and debt repayment. Certain agreements have cross-default provisions.
- The September 2012 securitization included $41.7 million of proceeds held as restricted cash pending delivery of receivables. CPS stated that the receivables were delivered in October 2012 and most related cash was used to repay warehouse borrowings. A $5 million related-party note due October 2012 was also reported as repaid in October.
- The $15.0 million net deferred tax asset depends in part on management’s estimates and possible tax-planning asset sales; it is net of a $59.9 million valuation allowance. CPS cited a three-year cumulative pretax loss position and estimated that approximately $37.5 million of taxable income would be needed to realize the relevant tax benefits.
- The Griffith class action settlement was fully paid and settled by September 30, 2012. The separate Stanwich-related Rhode Island litigation remained pending; CPS expected a trial date in spring 2013 and warned an adverse judgment materially exceeding recorded liabilities could affect its financial position. Other routine litigation also remains possible.
- Receivables and related Fireside debt are Level 3 fair-value measurements using significant unobservable assumptions; actual realizable values may differ materially. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track credit performance, including delinquency, repossession, charge-offs, allowance adequacy and the effect of rapid portfolio growth.
- Confirm access to warehouse facilities and securitization markets, collateral availability, cash releases from trusts and upcoming debt maturities.
- Assess whether earnings and operating cash flows can support debt service, growth and the planned recovery of the shareholders’ deficit.
- Review the assumptions supporting the Fireside fair values and deferred tax asset, including the feasibility of proposed tax-planning strategies.
- Monitor the Stanwich litigation, covenant compliance and any changes in funding costs, interest rates or consumer payment performance.