Consumer Portfolio Services, Inc. — Q2 2014 Form 10-Q
Business context and period. The company buys and services retail auto contracts, primarily for subprime borrowers. This unaudited filing covers the three and six months ended June 30, 2014; comparisons are with the same 2013 periods unless noted. Dollar amounts are in millions except per-share data.
Financial performance
- Q2 revenue: $71.6, versus $70.5 reported in 2013. The prior-year amount included a $10.9 debt-cancellation gain; excluding that gain, comparative revenue was $59.5 and 2014 revenue increased 20.3%. Interest income rose 22.3% to $68.2, mainly as the portfolio grew.
- Q2 earnings: Net income was $7.0, up from $4.8; diluted EPS was $0.22 versus $0.15. Income before tax was $12.3 versus $8.5. Comparisons are affected by prior-year unusual items, including a $9.7 contingent-liability provision.
- First-half revenue and earnings: Revenue was $139.7 versus $125.1 reported in 2013; excluding the prior-year debt-cancellation gain, revenue increased 22.4%. Net income was $13.7 versus $8.6; diluted EPS was $0.43 versus $0.27. Six-month interest income increased 24.5% to $133.2.
- Costs and credit: Q2 provision for credit losses increased 47.5% to $25.6; first-half provision increased 52.2% to $49.5. Q2 interest expense declined 18.2% to $11.9; first-half interest expense declined 18.2% to $25.3. Annualized net interest yield was 17.2% in Q2 and 16.9% for the first half, compared with 16.4% and 15.9%, respectively, in 2013.
- Portfolio trends: Managed portfolio was $1,373.6 at June 30, up from $1,067.4 a year earlier. For the originated portfolio excluding Fireside, delinquency was 4.7% of the servicing portfolio versus 3.8% a year earlier; delinquency plus repossessions was 7.8% versus 5.1%. Annualized net charge-offs were 5.0% versus 4.1%.
- Cash flow: First-half operating cash flow was $67.3, investing cash outflow $200.3, and financing cash inflow $125.3. Cash and cash equivalents declined $7.7 to $14.4; restricted cash was $154.9.
- Balance sheet and funding: Finance receivables, net, were $1,259.4, with an allowance for credit losses of $53.3. Total debt was approximately $1,405.1, including $1,326.3 of securitization trust debt. Shareholders’ equity was $111.7. Management reported $14.4 of unrestricted cash and warehouse availability of $76.8 and $81.9, subject to sufficient eligible collateral.
Changes, outlook and material matters
- Contract purchases were $401.3 in the first half, versus $383.9 a year earlier. Growth in receivables drove higher interest income and credit-loss provisions. The company reported 11 consecutive quarters of increasing profitability through June 2014.
- The company repaid $39.2 of related-party senior secured debt in the first half; none remained outstanding at June 30. Securitization trust debt increased from $1,177.6 at year-end 2013 to $1,326.3.
- Management intended to complete additional securitizations during 2014, but gave no quantified earnings or purchase-volume guidance and cautioned that execution was not assured. It said contract purchases would be managed to available capital.
- In July 2014, the company delivered additional receivables to the CPS 2014-B trust and received related restricted cash, most of which was to repay warehouse borrowings.
- FTC settlement: A consent decree required approximately $1.9 of restitution, $1.6 of customer account adjustments, a $2.0 federal penalty, and procedural changes. The penalty was paid in June; the company said the settlement costs were within reserves recorded in 2013.
- Other legal exposure: A Stanwich-related indemnity matter was set for trial beginning September 9, 2014. The company estimated reasonably possible losses beyond recorded reserves at $0 to $1.2, while warning outcomes could differ. Two purported consumer class actions were also noted, one settled subject to court approval.
- Key risks: Substantial debt and reliance on securitization and warehouse funding; credit losses, delinquencies and repossessions; interest-rate and spread risk; regulatory and consumer-protection compliance; and the uncertainty of cash releases from securitization trusts. The company reported compliance with financial covenants at June 30.
- The company identified estimates for credit-loss allowances, fair values, contingent liabilities and deferred tax assets as significant judgment areas. Its $51.6 net deferred tax asset depended on forecast taxable income; management estimated approximately $120 of taxable income would be needed to realize it fully. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether rising delinquencies, repossessions and charge-offs continue as the portfolio expands, and whether credit-loss reserves remain adequate.
- Whether additional securitizations can be completed on acceptable terms and warehouse availability remains sufficient for planned contract purchases.
- How the FTC consent decree and remaining litigation affect costs, procedures and future regulatory exposure.
- Whether cash generation, restricted-cash releases and debt servicing support growth; note that most reported cash was restricted.
- Whether forecast taxable income supports realization of the $51.6 deferred tax asset, and how sensitive fair-value estimates and credit provisions are to changed assumptions.
- How reported earnings compare after accounting for the 2013 debt-cancellation gain and contingent-liability provision.