Consumer Portfolio Services, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise stated.
Business context
CPS purchases and services auto installment contracts, primarily for subprime borrowers. Its funding depends on warehouse facilities and securitizations. The quarter included the September acquisition of approximately $217.8 million of Fireside Bank receivables.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $33.8m | $36.8m | $97.4m | $119.9m |
| Interest income | $30.2m | $32.9m | $86.6m | $107.1m |
| Interest expense | $19.0m | $19.0m | $57.4m | $62.2m |
| Credit-loss provision | $4.0m | $7.0m | $12.0m | $25.7m |
| Loss before tax | $4.0m | $2.4m | $14.7m | $13.5m |
| Net loss | $4.0m | $3.4m | $14.7m | $18.1m |
| Loss per diluted share | $0.20 | $0.20 | $0.78 | $1.04 |
Q3 revenue fell 8.1% year over year, chiefly because of lower interest income as the consolidated receivables portfolio declined. Nine-month revenue declined 18.8%. Nine-month net loss narrowed primarily because 2010 included $4.6 million of income-tax expense; pretax loss increased. Net loss as a share of revenue was approximately 12.0% in Q3 2011 and 15.1% for the first nine months, calculated from reported figures.
At September 30, cash and cash equivalents were $9.4 million, while restricted cash was $128.9 million. Net finance receivables were $487.3 million, plus $192.6 million of Fireside receivables measured at fair value. Total debt was approximately $858.0 million, compared with $717.9 million at December 31, 2010. Shareholders’ equity was negative $11.2 million, versus positive $2.4 million at year-end 2010.
For the first nine months, operating cash flow was $4.2 million, down from $40.6 million. Investing used $137.8 million, including the Fireside acquisition and higher contract purchases; financing provided $126.7 million. Ending unrestricted cash was $9.4 million.
Material changes and portfolio performance
- Fireside added approximately $217.8 million of receivables, acquired for $201.3 million and financed with approximately $197.3 million of debt. The portfolio and related debt are recorded at fair value using significant unobservable inputs.
- CPS completed April and September 2011 securitizations, issuing $220.1 million of securitization debt in the first nine months. Management expected one additional securitization in 2011.
- Contract purchases rose to 12,270 contracts totaling $192.0 million in the first nine months, from 5,324 contracts totaling $79.4 million in the prior-year period.
- Total managed portfolio was $827.8 million, down from $843.0 million a year earlier. The company reported 6.5% delinquency for its total owned portfolio; the Fireside portfolio separately showed 7.0% delinquency. Annualized net charge-offs were 6.6% for the owned portfolio excluding Fireside, versus 9.7% a year earlier.
Outlook, risks, and unusual items
- Management’s plan was to return to profitability by gradually increasing contract purchases, subject to available capital and financing. The filing provides no quantified earnings or revenue guidance.
- Liquidity depends on continued access to warehouse funding and asset-backed securitization markets. CPS warned that reduced access could force it to curtail or stop purchases, adversely affecting operations. It reported $82.4 million available under the Goldman facility and $100.0 million under the UBS facility, subject to eligible collateral.
- Covenant waivers are a significant dependency. Without waivers, CPS would have breached minimum adjusted-net-worth and maximum-leverage covenants for four securitizations. Adjusted net worth was reported as negative $11.2 million against covenant minimums of $87.6 million and $95.3 million; leverage was 11.0:1 against a maximum of 4.5:1. Waivers are temporary, and insurer remedies could include extra premiums, cash diversion, or servicer termination.
- The filing gives differing counts of securitization transactions with cash diverted to spread accounts: four in the notes and six in MD&A. It also reports default premiums, or their equivalent, on $192.4 million of securitization debt.
- Potential rescission liability on certain subordinated notes was approximately $885,000. A related Rhode Island litigation matter had a trial scheduled for November 2012; CPS stated an adverse judgment materially above recorded liabilities could harm its financial position.
- Deferred tax assets were $15.0 million net of a $61.4 million valuation allowance. Their realization depends in part on estimated future taxable income from possible asset sales; those estimates are uncertain.
- Management cited substantial indebtedness, interest-rate and funding-market exposure, credit losses, economic conditions, regulation, and the ability to refinance debt as risks. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether covenant waivers and servicing extensions were renewed, and the actual number of pools subject to cash diversion or default premiums.
- Cash availability after accounting for restricted balances, collateral eligibility, and securitization cash-flow restrictions.
- Fireside portfolio performance and the sensitivity of its Level 3 fair-value estimates to loss, payment-timing, and discount assumptions.
- Progress on the expected additional 2011 securitization and the company’s ability to fund planned contract purchases.
- Changes in delinquency, charge-offs, and recoveries, including performance of the recently acquired Fireside receivables.
- Resolution of potential note rescission claims and litigation, plus support for the deferred-tax-asset realization assumptions.