In three years, Irvine-based Consumer Portfolio Services Inc. has grown its revenue nearly 300% arranging auto loans for subprime borrowers.
The company posted sales of $450 million for the 12 months ended June. Three years ago it did about $114 million in revenue.
The company ranks No. 12 on the Business Journal’s list of the fastest-growing private companies.
Consumer Portfolio swung to a profit of $42 million for the year through June, versus a $10 million loss three years earlier.
The company said it expects sales to grow 25% to 40% next year.
The subprime mortgage downturn has soured many investors on riskier loans. But Consumer Portfolio remains focused on auto loans to borrowers with imperfect credit, spokeswoman Erica Waldow said.
Despite record foreclosures in subprime home loans, Consumer Portfolio says it has only seen a slight uptick in defaults this year.
Consumer Portfolio lived through the last subprime downturn in the late 1990s.
By 1998, the company’s sales of loans packaged as bonds for Wall Street dried up. So did profits and revenue.
Blame the currency crisis in Russia and Asia, which put off investors on all types of risky investments.
Consumer Portfolio survived by making loans or acquiring them from dealers and turning them over to other finance firms for a fee.
The business didn’t provide the big cash infusion of selling loans as securities. But it afforded Consumer Portfolio a small, albeit steady, revenue stream.
In 2000, the company staved off possible bankruptcy when Beverly Hills-based Levine Leichtman Capital Partners LP provided financing.
By 2001, Consumer Portfolio secured a new credit line and started selling loans to Wall Street again. The credit allowed it to make and hold auto loans again, rather than turn them over to another finance company.
Today, the lender manages a portfolio of $2 billion in loans.
“2005 and 2006 were the best markets we’ve ever seen,” Waldow said.
Consumer Portfolio has some 120 representatives who work with auto dealers around the country. Three years ago it had just 40 representatives.
By the end of this year it wants to have 140 people, Waldow said. The company employs 950 employees in all, with more than half based in Orange County.
About 90% of its business is through dealers that franchise from automakers, with the rest from independent dealers and rental car agencies.
Consumer Portfolio’s loans target people with poor credit histories.
Many of its customers have experienced a bankruptcy, or a similar event to damage their credit, such as divorce or high medical bills. Consumer Portfolio says it looks past such problems.
“We look at the stability of the borrower,” Waldow said.
The average profile of a Consumer Portfolio borrower is someone in their 40s who has been at the same job and address for five years.
About 17% of its customers are homeowners, according to Waldow.
Competitors include Newport Beach-based United PanAm Financial Corp., Texas-based AmeriCredit Corp. and Huntington Beach-based Triad Financial Corp.
Consumer Portfolio was founded in 1991. Solid financial growth for the company began in 2003 when it changed its accounting methods.
The company’s old method would book interest as it was earned, while guessing on how much money it would have to set aside to handle bad loans.
The value of the portfolio was based on the interest as well as the guesswork, or “gain on sale revenue.”
But wild swings in cash flow hindered the company.
The new accounting method books interest earned as well as money it borrows.
When Consumer Portfolio buys a pool of auto loans, reserves are made for potential losses expected. As a borrower pays off the loan, the income gets booked.
This more conservative approach, called secured financing, pushes profits to the future, requiring more time for them to show up as results.
The company took a $16 million charge for the first year after converting. The following year it made about $3 million. Last year it made $7.5 million.
In July, the company paid off about $15 million of a $40 million debt to Levine Leichtman Capital Partners.
Leichtman received a 15% stake in the company,some 3 million shares,in exchange for the financing. In August, Consumer Portfolio bought back 1.5 million shares from Leichtman at $5 per share.
Consumer Portfolio hasn’t been very active on the acquisition front during the past year and the company doesn’t see any buys in the near future.
The last acquisition it made was in 2004 with SeaWest Financial Corp. for $75 million.
Three-year growth: 291%
Yearly sales through June 30: $449 million
Yearly profit: $42 million
Market value: $130 million
Employees: 950, 460 in OC
Company: Subprime auto lender