Consumer Portfolio Services, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. CPS is a specialty finance company that buys and services auto contracts, primarily for subprime borrowers. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $31.2 | $38.5 | $63.5 | $83.1 |
| Interest income | $27.8 | $35.2 | $56.4 | $74.1 |
| Interest expense | $19.2 | $18.8 | $38.4 | $43.2 |
| Credit-loss provision | $4.4 | $7.0 | $8.1 | $18.7 |
| Loss before tax | $(6.4) | $(3.2) | $(10.6) | $(11.1) |
| Net loss | $(6.4) | $(6.8) | $(10.6) | $(14.7) |
| Basic and diluted loss per share | $(0.35) | $(0.39) | $(0.58) | $(0.83) |
At June 30, 2011, cash and cash equivalents were $16.5 million and restricted cash was $128.4 million. Finance receivables, net, were $486.7 million, down from $552.5 million at year-end 2010. Total debt was approximately $664.7 million, versus $717.9 million at year-end; it included $516.3 million of securitization debt and $43.8 million of warehouse borrowings. Shareholders’ equity was negative $7.5 million.
For the six months, operating cash flow was $1.3 million, investing cash flow was $58.1 million, and financing cash flow was negative $59.2 million. Cash increased $0.2 million to $16.5 million. CPS reported $38.6 million, $71.4 million, and $96.1 million of unused capacity, respectively, under its Fortress, Goldman and UBS facilities; advances depend on eligible collateral.
Changes versus prior periods
- Q2 revenue declined 19.1% year over year and first-half revenue declined 23.5%, mainly as the consolidated receivables portfolio contracted. The managed portfolio was $635.0 million, down from $931.6 million a year earlier.
- First-half operating expenses fell 21.3% to $74.2 million, including a 57.0% decrease in credit-loss provision. Lower expenses narrowed the six-month net loss, although CPS remained loss-making.
- Contract purchases increased: 7,198 contracts totaling $110.8 million in principal in the first half of 2011, compared with 2,965 totaling $44.1 million a year earlier. Marketing expense rose as the company expanded originations.
- Annualized net charge-offs were 7.7% of the average servicing portfolio, versus 10.9% a year earlier. Delinquencies were 5.1% of the gross servicing portfolio, versus 4.0% a year earlier; delinquencies plus repossessions were 8.0%, versus 5.9%.
Outlook, risks and unusual items
- Management planned to increase contract purchases in line with available funding, seek lower-cost financing, and expected one or more additional term securitizations in 2011. These are plans, not quantified earnings guidance.
- Funding and covenant risks are significant. Four of 11 outstanding securitizations required waivers for net-worth and leverage covenants; the company reported adjusted net worth of negative $7.5 million against stated minimums and leverage of 17.1:1 against a maximum of 4.5:1. Waivers are temporary, and insurers may impose premiums, divert cash, or seek to replace CPS as servicer. Default premiums applied to insured notes totaling $236.3 million.
- Continued access to warehouse facilities and asset-backed securitization markets is important to originations and liquidity. A market reversal or inability to obtain financing could force CPS to curtail purchases. Higher interest rates, credit losses, unemployment and used-vehicle values also affect results and cash flows.
- Approximately $3.1 million of subordinated notes may be subject to investor rescission claims related to an offering-registration issue. In the Stanwich matter, CPS paid $0.8 million under an agreement; related Rhode Island litigation could resume, and other routine legal proceedings remain.
- CPS reported a $15.0 million net deferred tax asset, net of a substantial valuation allowance, and added to that allowance during the first half. Realization depends partly on estimated taxable income from potential asset sales. The filing also describes correction of prior-period immaterial errors related chiefly to warrant liabilities and interest expense.
- The filing’s MD&A gives Q2 2010 interest expense and total operating expenses that differ from the accompanying financial statements. The statement values are $18.8 million and $41.7 million, respectively; the MD&A narrative cites different amounts. The filing text does not clearly reconcile this discrepancy.
Investor verification priorities
- Confirm continued covenant waivers, servicing extensions, cash diversion and default-premium obligations.
- Assess available eligible collateral, facility maturities and the company’s ability to complete planned securitizations.
- Track portfolio growth alongside delinquency, charge-off and repossession trends, and test management’s assumptions for credit-loss reserves.
- Review potential rescission exposure, outstanding litigation, tax-asset realizability, and the reported financial-statement/MD&A expense discrepancies.