Consumer Portfolio Services, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly pre-tax results are noted below where relevant. CPS purchases and services U.S. retail auto contracts, primarily for subprime borrowers, and relies on warehouse funding and asset-backed securitizations.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $187.2 million | $143.1 million |
| Interest income | $175.3 million | $127.9 million |
| Interest expense | $79.4 million | $83.1 million |
| Provision for credit losses | $33.5 million | $15.5 million |
| Pre-tax income (loss) | $9.2 million | $(14.5) million |
| Income tax benefit | $60.2 million | — |
| Net income (loss) | $69.4 million | $(14.5) million |
| Net cash from operating activities | $35.0 million | $10.8 million |
| Net cash used in investing activities | $(91.5) million | $(155.0) million |
| Net cash from financing activities | $59.4 million | $138.0 million |
- Revenue rose 30.8%, principally as interest income increased with the larger owned receivables balance and higher average portfolio yield. The weighted-average rate on finance receivables held by consolidated subsidiaries was 19.6%, versus 18.5% in 2011.
- Reported net income included a $62.8 million reversal of the deferred-tax valuation allowance. Pre-tax income was $9.2 million; the tax benefit was not operating income and realization of the remaining deferred tax asset depends on future taxable earnings.
- Operating expenses increased 13.0%, mainly because credit-loss provision rose 116.0% as contract purchases and receivables grew. Interest expense declined 4.4%, helped by lower costs on newer securitizations.
- Operating cash flow improved, but investing cash use remained substantial as contract purchases increased. Cash and cash equivalents were $13.0 million; restricted cash was $104.4 million and is not generally available for corporate use.
- Total assets were $1.04 billion and shareholders’ equity was $61.3 million at year-end, compared with a $14.2 million shareholders’ deficit a year earlier.
Portfolio, credit and funding
- Contract purchases nearly doubled to $551.7 million from $284.2 million. The managed portfolio grew 13.0% to $897.6 million. Four 2012 securitizations funded approximately $603.5 million of contracts; these were secured financings and had no financial-guaranty insurance.
- Net charge-offs as a percentage of the average owned portfolio improved to 3.6% from 4.8% in 2011 and 9.0% in 2010. At year-end, total delinquencies were 4.0% of the managed portfolio and delinquencies plus repossessions were 5.5%, compared with 4.4% and 6.2%, respectively, in 2011.
- Credit-loss provision rose to $33.5 million from $15.5 million; the allowance for finance credit losses increased to $19.6 million from $10.4 million. The allowance was 2.4% of contracts held by consolidated subsidiaries, versus 1.9% in 2011.
- Debt was approximately $958.5 million, primarily $792.5 million of securitization trust debt. Other disclosed debt included $57.1 million of Fireside acquisition financing, $21.7 million of warehouse lines, $13.8 million of residual-interest financing, $50.1 million of senior secured related-party debt, and $23.3 million of subordinated notes.
- Warehouse capacity was $200 million; the company reported $82.6 million and $95.7 million available under its two facilities, subject to eligible collateral. A facility extension was due to February 2013, making continued refinancing or replacement funding material.
- Cash from securitizations and residual interests may be trapped if collateral performance fails specified triggers. Management reported compliance with financial covenants at December 31, 2012.
Outlook, risks and unusual items
- Management expected quarterly profits during 2013 and planned to continue regular securitizations. It cautioned that profitability and growth depend on funding availability, securitization terms, portfolio performance, dealer supply, and cash releases from trusts; no quantified earnings guidance was provided.
- The main financial risks are high leverage and refinancing needs, limited unrestricted liquidity, dependence on securitization and warehouse markets, subprime borrower defaults, interest-rate exposure during warehouse periods, and restrictions under debt agreements. A deterioration in collateral performance could reduce trust cash releases and available liquidity.
- The $62.8 million tax valuation-allowance reversal produced the dominant unusual earnings item. CPS recognized a $75.6 million net deferred tax asset and estimated approximately $189 million of future taxable income would be needed to realize it fully. State net operating loss carryforwards began expiring in 2013.
- Litigation remained a contingency. The Stanwich-related Rhode Island indemnity case was pending after summary-judgment motions were heard; the company said an adverse judgment materially above recorded amounts could affect financial condition. A separate class-action settlement was paid and completed in 2012. Additional reasonably possible legal losses above accruals could not be estimated.
- The filing identifies consumer-finance regulation, CFPB oversight, potential regulatory changes, and class-action litigation as risks. Management said it believed the company was in material compliance but could not determine the eventual effects of new rules.
Most important facts for investors to verify
- Whether 2013 warehouse funding was renewed or replaced, and whether securitizations continued on acceptable terms.
- Whether the $75.6 million deferred tax asset is supported by actual taxable earnings, particularly given state loss carryforward expirations.
- Subsequent delinquency, repossession, charge-off and allowance trends as the rapidly expanded 2012 loan vintages season.
- Availability of unrestricted cash and releases from securitization trusts, including the impact of collateral performance triggers.
- Repayment or refinancing of 2013 maturities, including related-party senior debt and residual-interest financing, and any material litigation developments.