Consumer Portfolio Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in millions unless noted. CPS purchases and services U.S. automobile contracts, primarily for subprime borrowers. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $85.5 | $95.6 | $260.1 | $298.6 |
| Interest income | $83.5 | $93.6 | $253.8 | $291.5 |
| Operating expenses | $82.7 | $90.9 | $251.8 | $284.6 |
| Income before tax | $2.8 | $4.7 | $8.3 | $13.9 |
| Net income | $1.8 | $3.2 | $5.4 | $9.5 |
| Diluted EPS | $0.08 | $0.13 | $0.22 | $0.38 |
- Net margin was approximately 2.1% in Q3 2019 versus 3.3% in Q3 2018, and approximately 2.1% for the first nine months versus 3.2% a year earlier.
- Net interest yield declined to 9.1% from 11.4% for Q3 and to 9.5% from 12.2% for the nine-month period. CPS attributed the decline primarily to a larger share of receivables accounted for at fair value, which recognize expected credit losses through a lower yield.
- Credit-loss provision fell to $19.9 million in Q3 from $32.0 million and to $64.3 million for nine months from $108.0 million. The allowance for finance credit losses was $12.7 million at September 30, 2019, compared with $67.4 million at December 31, 2018; CPS said the legacy portfolio has run off and seasoned. Receivables acquired since 2017 are measured at fair value and do not receive a separate periodic credit-loss provision.
- Operating cash flow was $170.0 million for nine months, versus $158.6 million. Investing cash use was $177.7 million; financing cash provided was $14.9 million. Cash and restricted cash ended at $137.4 million, including $8.8 million unrestricted and $128.6 million restricted.
- At September 30, total assets were $2.54 billion, shareholders’ equity $202.9 million, and debt approximately $2.28 billion. Debt included $2.07 billion of securitization trust debt and $157.8 million of warehouse borrowings. The company reported $142.8 million of available warehouse borrowings, subject to sufficient eligible collateral; eligible collateral was approximately $19.7 million.
Changes versus prior periods
- Q3 revenue declined 10.6% year over year; nine-month revenue declined 12.9%. Net income fell 42.5% in Q3 and 43.4% for nine months.
- Interest expense increased 8.3% in Q3 and 10.5% for nine months, reflecting higher average debt balances and securitization funding costs. Nine-month general and administrative expense rose 10.5% to $25.1 million.
- Purchases increased: CPS acquired $755.3 million of contracts in the first nine months, compared with $650.6 million in 2018. The managed portfolio reached $2.41 billion, up from $2.34 billion at September 30, 2018.
- Credit indicators weakened year over year: managed-portfolio delinquencies were 13.5% versus 10.2%; delinquencies plus repossessions were 15.8% versus 11.7%. Annualized net charge-offs were 8.0% versus 7.9%.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. CPS said contract purchases depend on available capital, securitization access, warehouse funding, dealer supply and cash releases from existing trusts. Management may limit purchases to match available capital and reduce operating costs if appropriate.
- Management warned that weaker securitized-portfolio performance could restrict cash releases and harm liquidity. Other stated risks include substantial indebtedness, refinancing and funding availability, interest rates, economic conditions, unemployment, used-vehicle values, credit losses, competition and regulation. CPS reported compliance with debt covenants at September 30.
- On October 16, 2019, after quarter-end, CPS completed a securitization of $274.3 million of notes backed by $275 million of automobile receivables; the notes’ weighted-average yield was approximately 2.95%.
- Fair-value receivables totaled $1.31 billion and rely on Level 3, unobservable assumptions, including loss estimates and discount rates. A $604,000 upward fair-value adjustment was recorded for a pool acquired in early 2018.
- CPS adopted the new lease standard in 2019, recording $20.0 million of operating lease liabilities at September 30. The company said the expected-credit-loss standard (CECL) was expected to affect its financial position and results materially; the revised effective date for smaller reporting companies was after December 15, 2022.
- A former employee wage-and-hour lawsuit seeks class treatment; no class-certification motion had been filed or granted, and CPS recorded no liability for the claim. The company estimated the range of reasonably possible losses for legal matters did not exceed $3 million, while noting outcomes remain uncertain.
Most important facts for investors to verify
- Whether delinquency and net charge-off trends continue to worsen, and how they affect cash releases, credit enhancement and loss estimates.
- The sustainability of earnings as interest income and net interest yield decline while funding costs and debt remain high.
- Availability and terms of warehouse funding and securitizations, including the collateral limits on stated borrowing availability.
- The assumptions underlying Level 3 fair-value receivables and the eventual impact of CECL adoption.
- Developments in the wage-and-hour case and other legal contingencies, as well as the company’s capacity to service its substantial debt.