Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: CPS is a specialty finance company that purchases and services retail automobile contracts from franchised and independent dealers, primarily targeting sub-prime customers. The company funds these purchases through warehouse credit facilities and long-term securitizations. Due to adverse economic conditions and capital market disruptions from 2008 through 2009, the company significantly reduced contract purchases to conserve liquidity. However, beginning in October 2009, the company gradually increased purchases, acquiring $113.0 million in contracts in 2010 compared to $8.6 million in 2009.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total Revenues | $155.2 million | $223.9 million | (30.7%) |
| Net Loss | $(33.8) million | $(57.2) million | Improvement |
| Net Loss Per Share (Basic) | $(1.94) | $(3.07) | Improvement |
| Managed Portfolio (Total) | $756.2 million | $1,194.7 million | (36.7%) |
| Finance Receivables (Net) | $552.5 million | $840.1 million | (34.5%) |
| Total Debt Outstanding | $717.9 million | $1,032.7 million | (30.5%) |
| Cash and Cash Equivalents | $16.3 million | $12.4 million | 31.5% |
| Net Charge-offs (% of Avg Portfolio) | 9.0% | 11.0% | Improvement |
| Shareholders' Equity | $4.6 million | $35.6 million | (87.1%) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $68.7 million (30.7%) primarily due to a $71.1 million decrease in interest income, driven by the reduction in the size of the finance receivables portfolio held by consolidated subsidiaries.
- Expense Reduction: Total operating expenses decreased by $101.3 million (37.1%). This was largely due to a $62.1 million decrease in the provision for credit losses and a $29.5 million decrease in interest expense.
- Portfolio Contraction: The total managed portfolio decreased to $756.2 million from $1.19 billion in 2009. However, contract purchases increased significantly to $113.0 million in 2010 from $8.6 million in 2009.
- Credit Quality: Net charge-offs as a percentage of the average servicing portfolio improved to 9.0% in 2010 from 11.0% in 2009. Total delinquencies (including repossessions) as a percentage of the gross servicing portfolio increased slightly to 10.5% from 9.2%.
- Equity Erosion: Shareholders' equity dropped significantly to $4.6 million due to the net loss for the year and the issuance of preferred stock and common stock in connection with debt financing.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to return to profitability in 2011. The company plans to gradually increase contract purchases and finance them with lower-cost credit facilities and term securitizations. In September 2010, the company completed its first rated term securitization since 1993 without a financial guaranty, achieving a weighted average coupon of 3.21%.
- Liquidity and Financing: The company has secured $200 million in new short-term warehouse credit facilities (one in December 2010 and one in February 2011) with significantly lower interest rates than previous facilities. However, the company remains dependent on the ability to securitize its portfolio to fund operations.
- Financial Covenants: The company is currently in compliance with debt covenants only after obtaining temporary waivers from note insurers regarding minimum net worth, maximum financial losses, and leverage ratios. Without these waivers, the company would be in default. These waivers are temporary and must be renewed.
- Regulatory Risk (Subordinated Notes): In July 2010, the company discovered it was no longer permitted to sell subordinated renewable notes under its former registration statement. Purchasers of notes sold between January 1, 2010, and December 13, 2010, may have a statutory right to rescind their purchases. The company sold $11.3 million of notes during this period.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of December 31, 2010, primarily due to an insufficient valuation allowance for deferred taxes, which was subsequently increased following the external audit.
Investor Verification Checklist
- Covenant Waivers: Verify the status of the temporary waivers for financial covenants (net worth, leverage, loss limits) and the likelihood of their renewal in 2011.
- Rescission Liability: Assess the potential financial impact if holders of the $11.3 million in subordinated notes sold under the expired registration statement exercise their right to rescind.
- Securitization Pipeline: Confirm the company's ability to execute planned term securitizations in 2011 to refinance warehouse debt and fund new originations.
- Deferred Tax Assets: Review the realizability of the $15.0 million net deferred tax asset, which is net of a $56.6 million valuation allowance, and the assumptions used to justify the allowance.
- Portfolio Performance: Monitor the trend of net charge-offs and delinquency rates, particularly given the company's focus on sub-prime borrowers and the aging of the portfolio.