Consumer Portfolio Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Consumer Portfolio Services purchases and services automobile contracts, primarily for subprime borrowers. Unless otherwise stated, financial amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $70.8 million | $88.2 million |
| Income before taxes | $3.1 million | $2.7 million |
| Net income | $10.8 million | $1.7 million |
| Diluted earnings per share | $0.45 | $0.07 |
| Operating cash flow | $64.1 million | $58.5 million |
| Cash and cash equivalents | $4.5 million | $5.3 million at Dec. 31, 2019 |
| Restricted cash | $137.5 million | $135.5 million at Dec. 31, 2019 |
| Total debt | Approximately $2.29 billion | |
| Shareholders’ equity | $121.5 million | $202.6 million at Dec. 31, 2019 |
Revenue fell 19.8%, including a $10.4 million reduction in fair-value receivables revenue associated with COVID-19 uncertainty. Interest income was $79.1 million, down 7.8%; net interest income declined to $52.1 million from $58.6 million, and annualized net interest yield fell to 8.6% from 9.9%. Total operating expenses decreased 20.9% to $67.7 million, principally because credit-loss provision expense fell to $3.6 million from $24.0 million. Employee costs increased 14.5% to $21.8 million.
Net income included an $8.8 million tax benefit from revaluing net operating loss carrybacks under the CARES Act. Excluding that benefit, the company reported $1.1 million of income tax expense; therefore, the reported net-income increase does not reflect operating performance alone.
Operating cash flow exceeded net income, while investing activities used $61.1 million and financing activities used $1.7 million. The company purchased $266.0 million of finance receivables and issued $260.0 million of securitization debt during the quarter. Its managed portfolio was $2.44 billion at March 31, 2020.
Material changes and accounting
- Effective January 1, 2020, the company adopted CECL for its legacy receivables. It recorded a $127.0 million increase in the credit-loss allowance, with the after-tax transition adjustment reducing retained earnings by $92.5 million—not current-period expense. The allowance was $114.1 million at quarter-end after charge-offs, recoveries, and the quarter’s provision.
- The company also recorded a $10.4 million fair-value markdown for receivables acquired since 2017 and a $3.6 million legacy-portfolio provision, both reflecting estimated pandemic effects.
- Annualized net charge-offs were 7.0% of the total managed portfolio, versus 8.0% in Q1 2019. Within the fair-value portfolio, the rate increased to 5.2% from 2.6%.
- Reported delinquency and loss data largely precede the pandemic’s expected effects. Total delinquencies were 10.3% of the servicing portfolio at March 31, 2020, compared with 10.4% a year earlier.
Outlook, liquidity, and risks
- Management reported that contract purchases had declined roughly 50% since April 1, 2020. It deferred its planned April securitization amid disrupted asset-backed securities markets and intended to resume when terms were acceptable; there is no assurance a transaction can be completed on acceptable terms.
- At March 31, the company reported $156.4 million of aggregate available warehouse borrowings, assuming sufficient eligible collateral, but only approximately $21.3 million of such collateral. It reported $4.5 million of unrestricted cash. Restricted cash is not equivalent to freely available liquidity.
- Management warned that pandemic-related borrower payment stress, servicing and repossession restrictions, increased extensions, weaker collateral recoveries, and fair-value estimate changes could materially affect collections, credit losses, liquidity, and results. Continued difficulty securitizing could limit purchases and reduce future revenue. No quantitative earnings guidance was provided.
- Debt covenants were in compliance at March 31, 2020. Management nevertheless cautioned that substantial debt and dependence on securitizations, warehouse facilities, and cash releases from securitized pools create material liquidity and refinancing risks.
- Legal proceedings include a wage-and-hour class-action claim for which no class certification motion had been filed or granted. The company recorded no liability for that claim; it estimated total reasonably possible losses across legal matters did not exceed $3 million.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether borrower payment performance, delinquencies, extensions, repossessions, and net losses worsened after quarter-end as pandemic effects developed.
- Whether the $127.0 million CECL allowance and $10.4 million fair-value markdown adequately reflect expected lifetime losses and updated fair-value assumptions.
- Actual unrestricted liquidity, eligible collateral, warehouse availability, securitization access, and cash releases from existing trusts.
- How much reported net income depends on the CARES Act tax benefit and whether deferred tax assets are realizable.
- Any subsequent developments in the wage-and-hour litigation, regulatory restrictions, or debt covenant compliance.