Consumer Portfolio Services, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparative periods ended September 30, 2021. Dollar amounts below are in millions unless stated otherwise. CPS purchases and services U.S. retail auto contracts, primarily for subprime borrowers.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $90.3 | $68.6 | $246.7 | $198.4 |
| Income before tax | $34.3 | $19.5 | $97.9 | $41.4 |
| Net income | $25.4 | $13.7 | $71.8 | $28.6 |
| Diluted EPS | $0.95 | $0.52 | $2.61 | $1.12 |
| Operating expenses | $56.0 | $49.0 | $148.8 | $157.1 |
| Interest expense | $23.5 | $18.3 | $58.7 | $58.3 |
- Revenue increased 31.7% in Q3 and 24.3% year to date; net income rose 85.7% and 151.5%, respectively. Approximate net margins were 28.1% versus 20.0% in Q3 and 29.1% versus 14.4% year to date.
- Net interest yield was 8.0% in Q3, down from 8.7%; for the nine months it was 8.6%, up from 8.4%. The filing attributes higher revenue mainly to growth in fair-value receivables.
- Fair-value receivables generated mark-up gains of $8.2 million in Q3 and $15.3 million year to date, compared with no Q3 mark and a $4.4 million mark-down in the prior-year nine-month period. CPS said it lowered estimated future losses because pandemic-related loss increases had not materialized.
- The legacy-portfolio credit-loss provision was a reversal of $6.0 million in Q3 and $23.4 million year to date, versus a $1.6 million reversal in each 2021 comparison period. These reversals and fair-value marks materially benefited reported earnings.
- At September 30, total assets were $2.651 billion, total liabilities $2.432 billion and shareholders’ equity $218.2 million. Fair-value receivables were $2.343 billion; amortized-cost receivables, net of allowance, were $89.7 million.
- Debt was approximately $2.376 billion: $2.057 billion securitization trust debt, $242.4 million warehouse borrowings, $49.6 million residual-interest financing and $27.2 million subordinated renewable notes. Debt increased from year-end 2021. Q3 interest expense rose 28.1%, including higher warehouse utilization and securitization costs.
- Cash and cash equivalents were $12.9 million, with a further $159.8 million restricted. CPS reported $157.6 million of available warehouse borrowing capacity, subject to sufficient eligible collateral; it had approximately $40.3 million of such collateral.
- For the first nine months, operating cash flow was $164.7 million (prior year $163.1 million), investing cash outflow $566.5 million (prior-year outflow $50.2 million), and financing cash inflow $397.9 million (prior-year outflow $83.3 million). Cash plus restricted cash decreased $3.8 million to $172.7 million.
Business developments and changes
- Contract purchases totaled $1.426 billion for the first nine months, up from $818.3 million; the managed portfolio grew to $2.839 billion from $2.184 billion a year earlier. CPS reported 61,947 contracts purchased year to date, versus 39,929.
- Delinquencies and repossessions worsened: total delinquencies plus repossessions were 12.3% of the owned portfolio at September 30, 2022, versus 10.1% a year earlier. Annualized net charge-offs were 4.9%, compared with 2.8% a year earlier.
- CPS completed three securitizations in the first nine months, issuing $1.104 billion of notes. The July 2022 securitization’s blended cost of funds was 6.02%, compared with 2.09% for the October 2021 transaction. Warehouse facility capacity was doubled to $200 million each for the Ares and Citibank facilities, for $400 million total.
- Year-to-date share repurchases were $41.5 million, covering 3.511 million shares. Outstanding shares were 20.607 million at September 30, down from 21.144 million at December 31, 2021.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or purchase-volume guidance. Management says contract purchases must be matched to available capital and notes that internally generated cash may not meet all cash demands.
- Key risks include worsening economic conditions, inflation, higher interest rates and funding costs, weaker borrower payment performance, lower used-vehicle prices and reduced recoveries on repossessed vehicles. Management said it had not yet seen meaningful deterioration in credit performance, but warned these factors could adversely affect it.
- Liquidity depends partly on securitization collections and releases of excess trust cash; weaker pool performance can restrict releases or require greater credit enhancement. CPS reported compliance with its financial covenants at September 30, 2022, but cautioned that it may not generate enough cash to service debt.
- Fair-value receivables use Level 3 unobservable assumptions, including discount rates of 8.9%–11.3% and cumulative net losses of 10.0%–18.4%; changes in assumptions can significantly affect valuation and earnings.
- Legal contingencies included two consumer matters that could be material if resolved adversely on a class basis, a wage-and-hour claim, and a Massachusetts attorney general inquiry. CPS recorded $3.4 million of probable legal losses and estimated reasonably possible losses would not exceed $11.3 million; it said outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth is sustainable apart from the $15.3 million year-to-date fair-value mark-up and $23.4 million legacy credit-loss reversal.
- Whether delinquency, repossession and charge-off trends continue to worsen, and how actual losses compare with the assumptions used to value the portfolio.
- Whether funding costs—particularly new securitization and warehouse rates—pressure interest spread and profitability.
- Whether eligible collateral and cash releases from securitization trusts are sufficient to support contract purchases, liquidity and debt service.
- Developments in the class-action matters and Massachusetts inquiry, including any change in the estimated loss range.
- Potential dilution from outstanding options and warrants; diluted weighted-average shares exceeded basic shares substantially during the reported periods.