Consumer Portfolio Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company purchases and services automobile contracts, primarily for subprime borrowers. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $92.1 | $90.3 | $260.0 | $246.7 |
| Operating expenses | $77.9 | $56.0 | $208.8 | $148.8 |
| Income before tax | $14.2 | $34.3 | $51.3 | $97.9 |
| Net income | $10.4 | $25.4 | $38.2 | $71.8 |
| Diluted EPS | $0.41 | $0.95 | $1.51 | $2.61 |
- Revenue rose 2.0% in Q3 and 5.4% year to date, largely reflecting growth in interest income as the loan portfolio expanded. Other income also increased, primarily from third-party origination and servicing fees.
- Profit declined substantially: Q3 net income fell about 59% year over year, and nine-month net income fell about 47%. Operating expenses increased 39.1% in Q3 and 40.3% year to date, driven mainly by higher interest and general and administrative expenses.
- Interest expense increased to $37.9 million in Q3 from $23.5 million, and to $106.4 million for nine months from $58.7 million. The nine-month net interest yield declined to 5.8% from 8.6%; Q3 yield declined to 5.4% from 8.0%.
- The company recorded a $6.0 million fair-value mark-up in both the Q3 and nine-month 2023 periods, versus $8.2 million and $15.3 million, respectively, in the comparable 2022 periods. Management said marks reflected gains on some older receivables partly offset by marks down on newer receivables.
- The legacy-portfolio credit-loss provision was a benefit of $2.0 million in Q3 and $20.7 million for nine months, compared with benefits of $6.0 million and $23.4 million in 2022. Management attributed the releases to improved observed credit performance relative to prior loss estimates. Fair-value receivables incorporate expected losses in their yield and do not receive a separate provision.
Cash flow, balance sheet and funding
- Nine-month operating cash flow was $181.9 million, versus $164.7 million in 2022. Investing cash outflow was $275.8 million, compared with $566.5 million; financing cash inflow was $73.1 million, versus $397.9 million.
- Purchases of fair-value receivables were $958.6 million, down from $1,311.7 million. The company issued $949.4 million of securitization debt and repaid $814.5 million; warehouse lines had net repayments of $46.4 million.
- At September 30, total assets were $2.88 billion, total liabilities $2.61 billion and shareholders’ equity $265.9 million. Fair-value finance receivables were $2.67 billion. Cash and cash equivalents were $8.3 million and restricted cash was $133.8 million.
- Debt was approximately $2.55 billion, including $2.24 billion of securitization trust debt, $240.4 million of warehouse debt, $49.8 million of residual-interest financing and $19.2 million of subordinated notes. Compared with December 31, 2022, securitization debt increased and warehouse debt decreased.
- Management reported $159.6 million of aggregate available warehouse borrowings, subject to sufficient eligible collateral; it had approximately $19.6 million of eligible collateral. Management said it manages liquidity by aligning contract purchases with available capital. All reported financial covenants were met.
Credit performance and material changes
- For the owned servicing portfolio, delinquencies were 12.5% of the gross servicing portfolio at September 30, 2023, compared with 11.7% a year earlier; delinquency plus repossessions was 14.4%, versus 13.3%.
- Annualized net charge-offs as a percentage of average servicing portfolio were 6.9% in Q3 2023, compared with 4.9% in Q3 2022 and 5.8% for full-year 2022. The filing identifies economic conditions, unemployment, used-vehicle values and portfolio age as factors affecting credit performance.
- Average monthly extensions rose to 6,649 for the first nine months of 2023 from 4,433 in 2022; extensions averaged 3.8% of outstanding accounts, versus 2.8%. Management said extensions can help mitigate losses but noted extensions have risen as delinquencies increased.
- Contract purchases were $1.06 billion for the first nine months, down from $1.43 billion. The managed portfolio grew to $3.18 billion from $2.84 billion a year earlier. The third-party program originated $92.0 million year to date; its receivables are serviced by CPS but are not included in its credit-risk portfolio.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management says future liquidity and results depend on securitization funding, warehouse financing, trust cash releases, contract-purchase levels and credit performance; it plans to match purchases to available capital and, as appropriate, control operating costs.
- Funding costs rose materially: the average securitization-debt rate was 5.0% for the first nine months versus 3.3% in 2022; the warehouse rate was 10.4% versus 7.2%. Recent 2023 securitizations had blended costs of 6.48% to 7.17%.
- Management warns that deteriorating delinquencies or losses could restrict cash releases from securitization trusts and impair liquidity. The company also cites substantial indebtedness, financing availability and cost, interest rates, consumer-credit regulation, unemployment, repossession recoveries and used-car prices as risks.
- Legal contingencies included a Connecticut consumer class-action matter, a Massachusetts attorney general inquiry and a California wage-and-hour case whose settlement remained subject to final court approval. The company estimated probable legal losses of $3.8 million and a reasonably possible loss range not exceeding $7.3 million.
- The company disclosed potential rescission liability relating to certain renewable subordinated-note sales. Approximately $5.3 million of such notes were outstanding and sold or renewed within the preceding 12 months as of October 31, 2023; successful rescission claims or penalties could materially affect liquidity.
- Subsequent to quarter end, CPS completed a fourth 2023 securitization on October 24, issuing $286.1 million of notes backed by $306.7 million of receivables, at an approximately 7.89% weighted-average yield.
Investor verification points
- Track delinquency, repossession and net charge-off trends, and assess whether the legacy credit-reserve releases remain justified.
- Monitor net interest yield and funding costs as higher-rate securitizations and warehouse borrowings flow through earnings.
- Verify available warehouse capacity against eligible collateral and the timing and conditions for cash releases from securitization trusts.
- Review fair-value assumptions for the $2.67 billion receivables portfolio, including discount rates and expected cumulative losses; valuations rely on significant unobservable inputs.
- Follow the legal matters, including possible note rescission claims, and the final approval and financial effect of the California settlement.