Consumer Portfolio Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company purchases and services auto finance contracts, primarily for subprime borrowers. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $68.6 | $70.7 | $198.4 | $208.7 |
| Net income | $13.7 | $3.8 | $28.6 | $17.5 |
| Diluted EPS | $0.52 | $0.16 | $1.12 | $0.74 |
| Operating expenses | $49.0 | $64.8 | $157.1 | $195.1 |
| Interest expense | $18.3 | $24.9 | $58.3 | $78.4 |
| Provision for credit losses | $(1.6) | $7.4 | $(1.6) | $14.1 |
Net margin was approximately 20.0% in Q3 2021 versus 5.3% in Q3 2020, and 14.4% for the first nine months versus 8.4% a year earlier. Nine-month operating cash flow was $163.1 million, compared with $190.6 million; investing cash flow was a use of $50.2 million versus a source of $45.4 million; financing cash flow was a use of $83.3 million versus $164.6 million.
At September 30, 2021, cash and cash equivalents were $28.8 million and restricted cash was $145.0 million. Total assets were $2.107 billion; total liabilities were $1.945 billion; shareholders’ equity was $161.4 million. Debt was approximately $1.893 billion, including $1.703 billion of securitization trust debt, $97.8 million of warehouse borrowings, $64.6 million of residual-interest financing and $27.5 million of subordinated notes. The company reported $102.2 million of available warehouse borrowings, subject to sufficient eligible collateral, and approximately $95.6 million of eligible collateral. It reported compliance with debt covenants.
Changes and operating trends
- Q3 revenue declined 3.0%; nine-month revenue declined 4.9%. Management attributed the decrease mainly to runoff of the legacy portfolio originated before 2018. Its average balance fell 51.0% year over year in Q3 and 44.4% over nine months. Growth in fair-value receivables partly offset the decline.
- Lower interest expense and credit-loss provisions drove operating expense declines of 24.3% in Q3 and 19.5% for the nine-month period. Securitization debt interest costs declined with lower average balances and funding rates.
- Contract purchases increased to $326.8 million in Q3 from $174.0 million, and to $818.3 million for nine months from $575.9 million. The managed portfolio was $2.184 billion at quarter-end, compared with $2.250 billion a year earlier.
- Credit indicators improved: total managed-portfolio annualized net charge-offs were 2.8% in Q3 2021 versus 6.4% in Q3 2020; delinquencies were 8.9% versus 8.8% of the servicing portfolio, while delinquencies plus repossessions were 10.1% versus 10.6%.
- The legacy portfolio allowance decreased to $68.7 million from $80.8 million at year-end 2020. The company recorded a $1.6 million provision credit for the nine months, citing improved credit performance. Fair-value receivables had no Q3 mark-down; the nine-month mark-down was $4.4 million, versus $23.1 million in 2020.
Outlook, risks and unusual items
- No numerical earnings or business guidance was provided. Management said credit performance could come under pressure from the absence of further government stimulus, expiration of the eviction moratorium and used-vehicle prices reverting toward historical levels. It had not yet observed pandemic-related deterioration in credit performance.
- Liquidity depends on securitization proceeds, warehouse funding, customer collections and releases of excess cash from securitization trusts. Trusts may retain cash or require added credit enhancement if delinquencies or losses exceed specified levels. Management cautioned that internally generated cash may not meet all cash needs.
- Fair-value receivables are Level 3 measurements relying on unobservable estimates, including discount rates and expected cumulative net losses. Significant changes in assumptions could materially affect reported values and earnings.
- Two consumer cases could potentially result in material liability if resolved adversely and on a class basis; a separate wage-and-hour matter remains pending. No liability was recorded for the wage claim. The company estimated probable legal losses as immaterial and reasonably possible losses not exceeding $5.8 million.
- On October 20, 2021, after quarter-end, the company bought and retired 1,999,995 shares for $12.5 million, approximately 8.7% of shares outstanding before the transaction. During Q3 it also repurchased 433,612 shares under its existing program.
- The nine-month 2020 comparison included an $8.8 million tax benefit from CARES Act NOL carryback revaluation; 2021 recorded $12.8 million of income tax expense.
Key facts for investors to verify
- Whether portfolio growth and third-party origination fees can offset continued runoff of legacy receivables and declining interest income.
- Whether recent lower credit losses persist as pandemic-related support fades and used-vehicle values change; review delinquency, extensions, repossessions and charge-offs by portfolio vintage.
- Available warehouse funding and eligible collateral, securitization cash-release requirements, and compliance with liquidity and leverage covenants.
- Sensitivity of Level 3 fair values and expected credit losses to discount rates, loss assumptions and economic conditions.
- Potential outcomes and financial exposure from the consumer and wage-and-hour litigation, and the impact of the post-quarter $12.5 million share repurchase on liquidity and share count.