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CPSS > SEC Filings for CPSS > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for CONSUMER PORTFOLIO SERVICES INC


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a specialty finance company focused on consumers who have limited credit histories, low incomes or past credit problems, whom we refer to as sub-prime customers. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to sub-prime customers of dealers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also
(i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of vehicle purchase money loans. In this report, we refer to all of such contracts and loans as "automobile contracts."

We were incorporated and began our operations in March 1991. From inception through March 31, 2013, we have purchased a total of approximately $9.8 billion of automobile contracts from dealers. In addition, we obtained a total of approximately $842.0 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and owned by non-affiliated entities. Beginning in 2008 through the third quarter of 2011, our managed portfolio decreased each year due to our strategy of limiting contract purchases in 2008 and 2009 to conserve our liquidity, as discussed further below. However, since October 2009 we have gradually increased contract purchases, which, in turn has resulted in recent increases to our managed portfolio. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

              Contract Purchases and Outstanding Managed Portfolio



                                               $ in thousands
                                        Contracts            Managed
                                      Purchased in        Portfolio at
                     Period              Period            Period End
                      2008           $       296,817     $     1,664,122
                      2009                     8,599           1,194,722
                      2010                   113,023             756,203
                      2011                   284,236             794,649
                      2012                   551,743             897,575
              Quarter ended March
              31, 2013                       180,124             968,539

We are headquartered in Irvine, California, where most operational and administrative functions are centralized. Credit and underwriting functions are performed in our California headquarters with certain of these functions also performed in our Florida branch. We service our automobile contracts from our California headquarters and our branches in Virginia, Florida and Illinois.

We purchase contracts in our own name ("CPS") and, until July 2008, also in the name of our wholly-owned subsidiary, TFC. Programs marketed under the CPS name are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. Our TFC program served vehicle purchasers enlisted in the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we suspended contract purchases under our TFC program. We purchase automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose entity of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

Securitization and Warehouse Credit Facilities

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities or loans to fund the transactions. Depending on the structure, these transactions may properly be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record as expense a provision for credit losses on the contracts.

Since the third quarter of 2003, we have conducted 31 term securitizations. Of these 31, 25 were periodic (generally quarterly) securitizations of automobile contracts that we purchased from automobile dealers under our regular programs. In addition, in March 2004 and November 2005, we completed securitizations of our retained interests in other securitizations that we and our affiliates previously sponsored. The debt from the March 2004 transaction was repaid in August 2005, and the debt from the November 2005 transaction was repaid in May 2007. Also, in June 2004, we completed a securitization of automobile contracts purchased under our TFC program and acquired in a bulk purchase. Further, in December 2005 and May 2007 we completed securitizations that included automobile contracts purchased under the TFC programs, automobile contracts purchased under the CPS programs and automobile contracts we repurchased upon termination of prior securitizations. Since July 2003 all such securitizations have been structured as secured financings, except our September 2008 and September 2010 securitizations. These transactions were in substance sales of the underlying receivables and were treated as sales for financial accounting purposes. The September 2010 securitization was our first securitization since 1993 that did not utilize a financial guaranty for the senior asset-backed notes. Since then we have completed eight senior subordinate securitizations and none have utilized financial guarantees.

Our March 2013 securitization included a pre-funding feature in which a portion of the receivables to be pledged to the trust were not delivered to the trust until after the initial closing. As a result, our restricted cash balance at March 31, 2013 included $68.7 million from the proceeds of the sale of the asset-backed notes that were held by the trustee pending delivery of the remaining receivables. In April 2013, the requisite additional receivables were delivered to the trust and we received the related restricted cash, most of which was used to repay amounts owed under our warehouse credit facilities.

Portfolio Acquisitions

As stated above, we have acquired approximately $822.8 million in finance receivables through four acquisitions. These transactions took place in 2002, 2003, 2004 and September 2011. The September 2011 acquisition consisted of approximately $217.8 million of finance receivables that we purchased from Fireside Bank of Pleasanton, California.

Uncertainty of Capital Markets and General Economic Conditions

We depend upon the availability of warehouse credit facilities and access to long-term financing through the issuance of asset-backed securities collateralized by our automobile contracts. Since 1994, we have completed 58 term securitizations of approximately $7.9 billion in contracts. From the fourth quarter of 2007 through the end of 2009, we observed unprecedented adverse changes in the market for securitized pools of automobile contracts. These changes included reduced liquidity, and reduced demand for asset-backed securities, particularly for securities carrying a financial guaranty and for securities backed by sub-prime automobile receivables. Moreover, during that period many of the firms that previously provided financial guarantees, which were an integral part of our securitizations, suspended offering such guarantees. These adverse changes caused us to conserve liquidity by significantly reducing our purchases of automobile contracts. However, since October 2009 we have established new funding facilities and gradually increased our contract purchases and the frequency and amount of our term securitizations. Our recent history of term securitizations is summarized in the table below:

                    Recent Asset-Backed Term Securitizations

                                                $ in thousands
                                    Number of Term      Amount of Term
                   Period           Securitizations     Securitizations
                    2006                   4          $             957.7
                    2007                   3                      1,118.1
                    2008                   2                        509.0
                    2009                   0                            -
                    2010                   1                        103.8
                    2011                   3                        335.6
                    2012                   4                        603.5
           Quarter ended March
           31, 2013                        1                        185.0

Our 2012 securitizations included $58.2 million in contracts that were repurchased from 2006 and 2007 securitizations during 2012. Since 2011 all of our securitizations have been structured as secured financings and none utilized financial guarantees.

Our current short-term funding capacity is $200 million, comprising two credit facilities. The first $100 million credit facility was established in December 2010. This facility was renewed in March 2013, extending the revolving period to March 2015, and adding an amortization period through March 2017. Our second $100 million credit facility was established in May 2012 and matures in May 2013.

Financial Covenants

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of March 31, 2013 we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.

Results of Operations

Comparison of Operating Results for the three months ended March 31, 2013 with the three months ended March 31, 2012

Revenues. During the three months ended March 31, 2013, revenues were $54.6 million, an increase of $10.1 million, or 22.6%, from the prior year revenue of $44.5 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended March 31, 2013 increased $10.6 million, or 26.0%, to $51.2 million from $40.6 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries, which increased from $721.6 million at March 31, 2012 to $948.0 million at March 31, 2013. The table below shows the average balances of our portfolio held by consolidated subsidiaries for the three months ended March 31, 2013 and 2012:

                                     Average Balances for the Three Months Ended
                                   March 31, 2013                  March 31, 2012
                                       Amount                          Amount
 Finance Receivables Owned by                      ($ in millions)
  Consolidated Subsidiaries
 CPS Originated Receivables     $               871.8           $               570.9
 Fireside                                        49.0                           146.6
 Total                          $               920.8           $               717.5

Servicing fees totaling $909,000 in the three months ended March 31, 2013 increased $108,000, or 13.5%, from $801,000 in the prior year. We earn base servicing fees on two portfolios that are amortizing and provide us with less base servicing fees each period. On one of such portfolios, however, we recently began earning an incentive servicing fee. Such incentive servicing fee was $463,000 for the three months ended March 31, 2013 and more than offset the decrease of $356,000 in base servicing fees. We did not earn any incentive servicing fee in the prior year's period. As of March 31, 2013 and 2012, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

                                    March 31, 2013                     March 31, 2012
                             Amount (1)           %(2)          Amount (1)           %(2)
 Total Managed Portfolio                             ($ in millions)
Owned by Consolidated
Subsidiaries
CPS Originated
Receivables                 $       904.7            93.4%     $       588.4            75.3%
Fireside                             43.3             4.5%             133.2            17.0%
Owned by Non-Consolidated
Subsidiaries                         12.3             1.3%              34.4             4.4%
Third-Party Servicing
Portfolios                            8.2             0.8%              25.8             3.3%
Total                       $       968.5           100.0%     $       781.8           100.0%

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.

At March 31, 2013, we were generating income and fees on a managed portfolio with an outstanding principal balance of $968.5 million (this amount includes $12.3 million of automobile contracts on which we earn servicing fees and own a residual interest and also includes another $8.2 million of automobile contracts on which we earn base and incentive servicing fees), compared to a managed portfolio with an outstanding principal balance of $781.8 million as of March 31, 2012. At March 31, 2013 and 2012, the managed portfolio composition was as follows:

                                    March 31, 2013                March 31, 2012
                                Amount (1)        %(2)        Amount (1)        %(2)
       Originating Entity                          ($ in millions)
       CPS                     $      917.0        94.7%     $      621.7        79.5%
       Fireside                        43.3         4.5%            133.2        25.5%
       TFC                                -         0.0%              1.1         0.2%
       Third Party Portfolio            8.2         0.8%             25.8         3.3%
       Total                   $      968.5       100.0%     $      781.8       108.5%

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.

Other income decreased by $589,000, or 19.0%, to $2.5 million in the three months ended March 31, 2013 from $3.1 million during the prior year. This decrease is the combination of a $475,000 mark down of the fair value of the receivables and debt associated with the Fireside Bank portfolio acquisition, decreases of $46,000 in recoveries on receivables from the 2002 acquisition of MFN Financial Corporation, and a decrease of $145,000 in remittances from third-party providers of convenience fees paid by our customers for web based and other electronic payments. These decreases in other income were partially offset by an increase of $78,000 in income from direct mail and other related products and services that we offer to our dealers.

Expenses. Our operating expenses consist largely of provision for credit losses, interest expense, employee costs and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during the 12-month trailing period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

Total operating expenses were $48.1 million for the three months ended March 31, 2013, compared to $44.0 million for the prior year, an increase of $4.1 million, or 9.2%. The increase is primarily due to the increase in the amount of new contracts we purchased, the resulting increase in our consolidated portfolio and the related increase in our provision for credit losses. Increases in provision for credit losses were somewhat offset by decreases in interest expense.

Employee costs increased by $78,000 or 0.9%, to $8.9 million during the three months ended March 31, 2013, representing 18.6% of total operating expenses, from $8.8 million for the prior year, or 20.2% of total operating expenses. Since 2010, we have added employees in our Originations and Marketing departments to accommodate the increase in contract purchases. These additions have offset reductions in our Servicing department staff that have resulted from decreases in the number of accounts in our managed portfolio. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods, ended March 31, 2013 and 2012:

                                              March 31, 2013       March 31, 2012
                                                  Amount               Amount
                                                        ($ in millions)
    Contracts purchased (dollars)             $         180.1     $          119.9
    Contracts purchased (units)                        11,691                7,942
    Managed portfolio outstanding (dollars)   $         968.5     $          781.8
    Managed portfolio outstanding (units)              91,044              100,345

    Number of Originations staff                          138                  111
    Number of Marketing staff                              89                   65
    Number of Servicing staff                             286                  316
    Number of other staff                                  60                   56
    Total number of employees                             573                  548

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $3.8 million, a decrease of 16.5%, compared to the previous year and represented 7.8% of total operating expenses.

Interest expense for the three months ended March 31, 2013 decreased by $5.9 million to $16.3 million, or 26.7%, compared to $22.3 million in the previous year. Interest expense on the Fireside portfolio credit facility decreased by $4.0 million compared to the prior period as the Fireside portfolio and the related debt have paid down to significantly lower levels over the last year.

Interest on securitization trust debt decreased by $1.1 million in the three months ended March 31, 2013 compared to the prior year. Although the outstanding amount of securitization trust debt increased to $901.7 million at March 31, 2013 compared to $792.5 million at March 31, 2012, the blended interest rates on our 2012 term securitizations are significantly less than the blended interest rates on securitization trust debt incurred prior to 2012.

Interest expense on senior secured and subordinated debt increased by $502,000. Interest expense on residual interest financing decreased $256,000 in the three months ended March 31, 2013 compared to the prior year as a result of principal amortization.

Interest expense on warehouse debt decreased by $114,000 for the three months ended March 31, 2013 compared to the prior year. Although we increased our contract purchases to $180.1 million in the three months ended March 31, 2013 compared to $119.9 million in the prior period, recently we have relied less on warehouse credit facilities and instead have used more of our unrestricted cash balances to hold receivables prior to securitization.

The interest expense related to the value of outstanding derivative warrants resulted in an increase of $25,000 in interest expense. In February 2013, the remaining derivative warrant was exercised, which should result in no future interest expense related to derivative warrants.

Provision for credit losses was $15.1 million for the three months ended March 31, 2013, an increase of $10.3 million, or 213.2% compared to the prior year and represented 31.5% of total operating expenses. The provision for credit losses maintains the allowance for loan losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance incorporates greater amounts of provision for credit losses early in the terms of our finance receivables. Consequently, the increase in provision expense is the result of the increase in our contract purchases during the last year and the increase size of the portfolio owned by our consolidated subsidiaries compared to the prior year.

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs, internet lead sales, and direct mail products. Marketing expenses increased by $562,000, or 21.4%, to $3.2 million during the three months ended March 31, 2013, compared to $2.6 million in the prior year period, and represented 6.6% of total operating expenses. For the three months ended March 31, 2013, we purchased 11,691 contracts representing $180.1 million in receivables in the current period compared to 7,942 contracts representing $119.9 million in receivables in the prior year.

Occupancy expenses decreased by $177,000 or 24.6%, to $544,000 compared to $721,000 in the previous year and represented 1.1% of total operating expenses.

Depreciation and amortization expenses decreased by $9,000 or 5.6%, to $143,000 compared to $152,000 in the previous year and represented 0.2% of total operating expenses.

For the three months ended March 31, 2013, we recorded tax expense of $2.7 million. In the prior year period, we recorded no net tax expense and reduced our valuation allowance for our deferred tax assets by $195,000.

Credit Experience

Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. Our internal credit performance data consistently show that new receivables have lower levels of delinquency and losses early in their lives, with delinquencies increasing throughout their lives and monthly losses as a percentage of the balance outstanding gradually increasing to a peak between 36 and 42 months, after which they gradually decrease. The weighted average seasoning of our portfolio represented in the tables below (excluding the Fireside portfolio) was 14 months, 36 months and 18 months as of March 31, 2013, March 31, 2012, and December 31, 2012, respectively. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we were servicing and owned as of the respective dates shown. The tables do not include the experience of third party servicing portfolios.

                           Delinquency Experience (1)

                    Total Owned Portfolio Excluding Fireside



                          March 31, 2013                 March 31, 2012               December 31, 2012
                     Number of                      Number of                      Number of
                     Contracts        Amount        Contracts        Amount        Contracts        Amount
                                                     (Dollars in thousands)
Delinquency
Experience
Gross servicing
portfolio (1)             77,868     $ 917,025           68,975     $ 622,807           74,124     $ 825,186
Period of
delinquency (2)
31-60 days                 1,719        13,121            1,081         5,962            2,545        18,034
61-90 days                   907         6,692              567         3,823            1,179         9,360
91+ days                     433         3,103              515         3,377              773         5,297
Total
delinquencies (2)          3,059        22,916            2,163        13,162            4,497        32,691
Amount in
repossession (3)           1,933        14,551            1,932         9,204            1,932        12,506
Total
delinquencies and
amount in
repossession (2)           4,992     $  37,467            4,095     $  22,366            6,429     $  45,197
Delinquencies as
a percentage of
gross servicing
portfolio                   3.9%          2.5%             3.1%          2.1%             6.1%          4.0%
Total
delinquencies and
amount in
repossession as a
percentage of
gross servicing
portfolio                   6.4%          4.1%             5.9%          3.6%             8.7%          5.5%

Extension
Experience
Contracts with
one extension,
accruing                   9,475     $  89,931           11,093     $  65,260            9,094     $  73,632
Contracts with
two or more
extensions,
accruing                   6,902        38,547           10,701        62,170            7,795        37,761
                          16,377       128,478           21,794       127,430           16,889       111,393

Contracts with
one extension,
non-accrual                  507         4,090              640         2,982              632         4,401
Contracts with
two or more
extensions,
non-accrual                  644         2,576              996         5,382            1,044         4,344
                           1,151         6,666            1,636         8,364            1,676         8,745

Total contracts
with extensions           17,528     $ 135,144           23,430     $ 135,794           18,565     $ 120,138

. . .

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