Consumer Portfolio Services, Inc. — Q1 2022 Form 10-Q
Business and period: Specialty finance company that purchases and services U.S. subprime auto contracts. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $74.4 | $63.1; up 17.8% |
| Net income | $21.1 | $5.2 |
| Net margin | 28.4% | 8.2% |
| Basic / diluted EPS | $0.99 / $0.75 | $0.23 / $0.21 |
| Net interest income / yield | $53.7 / 8.9% | $45.1 / 8.2% |
| Operating cash flow | $68.3 | $65.4 |
| Investing cash flow | $(139.5) | $23.9 |
| Financing cash flow | $80.9 | $(64.8) |
Revenue included a $2.4 fair-value mark-up on receivables, versus a $4.4 mark-down in Q1 2021. The $9.4 reduction in the legacy portfolio credit-loss provision also boosted earnings; it was primarily attributed to improved credit performance, a better macroeconomic outlook, and higher used-car prices. These items and the portfolio’s fair-value estimates make reported earnings sensitive to assumptions about future collections and losses.
Interest expense declined to $16.4 from $20.9, with lower securitization funding costs a key factor. Employee costs rose to $22.2 from $20.2, and sales expense rose to $5.4 from $4.0, alongside increased contract purchases. The reported figures do not provide a company-defined operating margin.
Balance sheet, liquidity, and portfolio
- At March 31, assets were $2,277.6 and total liabilities were $2,093.7; shareholders’ equity was $183.9, up from $170.2 at year-end 2021.
- Debt was approximately $2,036.7, primarily securitization trust debt of $1,813.5 and warehouse borrowings of $147.0. Warehouse and securitization debt increased from year-end. The company reported compliance with its financial covenants.
- Cash and cash equivalents were $21.7, with restricted cash of $164.6. Management reported $53.0 of aggregate available warehouse borrowings, subject to sufficient eligible collateral; eligible collateral was approximately $93.9.
- Operating cash flow was $68.3, while purchases of fair-value receivables were $393.4. The company’s cash and restricted cash together increased to $186.3 from $176.5 at the start of the quarter.
- Contracts purchased totaled $410.0, approximately double the $205.5 in Q1 2021. The managed portfolio was $2,381.6 at quarter-end, up from $2,119.1 a year earlier. The portfolio includes $57.2 of third-party-owned receivables serviced by CPS.
- Total portfolio annualized net charge-offs were 3.3%, down from 6.3% in Q1 2021. Total delinquencies were 8.3% of the gross servicing portfolio, versus 7.5% a year earlier; delinquencies plus repossessions were 9.6%, versus 8.6%. These credit indicators improved from December 2021, when the corresponding rates were 10.4% and 11.6%.
- Most receivables acquired since 2017 are measured at fair value using significant unobservable inputs. Their reported fair value was $1,903.9, against contractual balances of $2,134.0; key disclosed inputs included discount rates of 9.9%–11.3% and cumulative net losses of 10.0%–18.4%.
Material changes, outlook, and risks
- Management attributed revenue growth to a larger average fair-value receivables balance and the change from a prior-year mark-down to a current-quarter mark-up. Average fair-value receivables rose 22.5% year over year.
- Management said prior estimates of pandemic-related future losses had not materialized and reduced expected losses. It cautioned that reduced government stimulus, the end of the eviction moratorium, and a possible reversion in used-car prices could weaken future credit performance.
- No specific earnings, purchase-volume, or other numerical guidance is provided. Management said purchase levels would be managed to available capital and highlighted dependence on securitization funding, warehouse facilities, and cash releases from securitized pools.
- Liquidity risk includes the possibility that weaker pool performance limits cash releases or requires greater credit enhancement. The company warns that debt service could be impaired if future operations do not generate sufficient cash flows and earnings. Interest rates, financing access, used-vehicle values, unemployment, regulation, and consumer payment behavior are identified as risk factors.
- Subsequent to quarter-end, CPS completed a $395.6 securitization backed by $430.0 of auto receivables, with a disclosed weighted-average yield of approximately 4.83%. It planned to sell about $144.2 of additional receivables into the transaction in May 2022.
- Legal matters include two consumer actions that could result in material liability if resolved adversely on a class basis, a wage-and-hour case, and a Massachusetts attorney general inquiry. Accrued probable legal losses were $3.4; reasonably possible losses were estimated not to exceed $11.3. Management said ultimate outcomes remain uncertain.
- The company repurchased 922,363 shares in open-market purchases during the quarter for an average $11.19 per share, spending approximately $10.3. Separately, total stock purchases including shares redeemed upon option exercises were $14.1.
Most important facts for investors to verify
- Whether the $9.4 credit-loss reserve release and $2.4 fair-value mark-up are sustainable, and how actual losses compare with the estimates underpinning fair-value receivables.
- Whether delinquency and charge-off trends continue to improve, especially if used-car prices decline or household conditions weaken.
- Available warehouse capacity and collateral, future securitization terms, and cash-release performance from existing trusts.
- The company’s ability to fund portfolio growth and meet debt obligations given its high leverage and relatively modest unrestricted cash balance.
- Developments in the class-action matters and Massachusetts inquiry, including any changes to the estimated potential losses.