Consumer Portfolio Services, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing was signed March 15, 2023. CPS is a specialty finance company that purchases and services U.S. retail auto contracts, primarily for subprime borrowers.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Total revenues | $329.7 million | $267.8 million in FY2021; up 23.1% |
| Interest income | $305.2 million | $266.3 million in FY2021; up 14.6% |
| Net income | $86.0 million | $47.5 million in FY2021 |
| Diluted earnings per share | $3.23 | $1.84 in FY2021 |
| Net interest margin | 8.6% | 8.9% in FY2021 |
| Net cash from operating activities | $215.9 million | $198.2 million in FY2021 |
| Net cash used in investing activities | $713.9 million | $115.4 million used in FY2021 |
| Net cash from (used in) financing activities | $484.2 million | $50.4 million used in FY2021 |
| Total debt | Approximately $2.469 billion | Approximately $1.946 billion at Dec. 31, 2021 |
| Cash and cash equivalents | $162.8 million, including $149.3 million restricted; unrestricted cash was $13.5 million | $176.5 million total at Dec. 31, 2021 |
| Shareholders’ equity | $228.4 million | $170.2 million at Dec. 31, 2021 |
Operating expenses were $213.5 million, versus $202.1 million in FY2021. Interest expense rose 16.3% to $87.5 million. The company recorded a $28.1 million reduction in provision for credit losses in 2022, compared with a $14.6 million reduction in 2021. The income tax expense was $30.2 million, at a 26% effective rate.
Material changes and credit performance
- Contracts purchased increased to $1.854 billion from $1.146 billion in 2021; the managed portfolio reached $3.001 billion, versus $2.249 billion.
- Interest income growth reflected a 32.5% increase in average fair-value receivables. The 2022 results included a positive $15.3 million fair-value mark, compared with a negative $4.4 million mark in 2021. No net fair-value mark was taken in the fourth quarter of 2022.
- Total owned-portfolio net charge-offs rose to 4.5% of average portfolio from 3.5% in 2021. Delinquencies were 12.3% of the gross servicing portfolio, compared with 11.2%; delinquencies plus repossessions were 14.0%, versus 12.7%.
- The average balance of warehouse debt increased to $130.1 million from $51.3 million, and related interest expense increased to $10.3 million from $4.4 million. The average securitization trust debt balance also increased.
- Warehouse capacity was expanded to $400 million across two facilities. At year-end, $114.7 million of aggregate borrowing capacity was available, subject to sufficient eligible collateral; CPS reported approximately $22.1 million of eligible collateral at that date.
Outlook, risks, and unusual items
- Management expected quarterly profits during 2023, while cautioning that profitability was not assured. No specific earnings or origination guidance was provided.
- CPS depends on warehouse facilities, securitization markets, cash releases from securitization trusts, and residual cash flows to fund purchases and operations. Deteriorating collateral performance can restrict cash releases and increase credit-enhancement requirements.
- Rising interest rates and higher securitization costs may compress excess spread. The blended cost of funds for the October 2022 securitization was 8.48%; CPS also identified interest-rate, credit, used-vehicle-value, liquidity, competition, regulatory, litigation, and cybersecurity risks.
- In January 2023, CPS completed a securitization with $324.8 million of notes backed by $362.9 million of receivables; the notes had an approximately 6.82% weighted-average yield. Proceeds were used to reduce warehouse borrowings.
- Legal proceedings included a Connecticut consumer matter with a class-certification motion pending, a California wage-and-hour lawsuit, and a Massachusetts Attorney General inquiry. CPS recorded $4.9 million of probable legal losses and estimated reasonably possible losses would not exceed $11.2 million.
- The company repurchased 4.14 million shares during 2022 for an average $11.11 per share. It does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether rising delinquencies and charge-offs persist, and how they affect collections, repossession recoveries, fair-value estimates, and securitization cash releases.
- Whether warehouse collateral availability and future securitizations can support the pace of contract purchases while managing the substantial debt burden and low unrestricted cash balance.
- How funding costs and net interest margin evolve as higher-cost 2022 securitizations enter the funding mix.
- Whether management’s expectation of quarterly profits in 2023 is met, and how much reported earnings depend on fair-value marks and credit-loss reserve releases.
- Developments in the disclosed consumer litigation and regulatory inquiry, including any class certification, settlement, or change in estimated losses.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2022. The auditor identified fair-value receivable valuation and CECL allowance assumptions as critical audit matters.