Consumer Portfolio Services, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 13, 2019. This is an annual report, not a standalone fourth-quarter results release.
Business context
CPS buys and services retail auto-loan contracts, primarily from franchised dealers, for U.S. subprime borrowers. It funds purchases mainly through warehouse facilities and asset-backed securitizations. At year-end, its managed portfolio was $2.381 billion, up 2.0% from $2.334 billion. 2018 contract purchases were $902.4 million, up 5.0%; 80% of new acquisitions by amount were in the Alpha and higher-credit programs, versus 73% in 2017.
Financial and operating metrics
| Metric | FY2018 / Dec. 31, 2018 | FY2017 / Dec. 31, 2017 |
|---|---|---|
| Total revenue | $389.8 million | $434.4 million |
| Net income | $14.9 million | $3.8 million |
| Diluted EPS | $0.59 | $0.14 |
| Net interest income / net interest margin | $278.8 million / 12.1% | $331.8 million / 14.4% |
| Provision for credit losses | $133.1 million | $186.7 million |
| Net cash from operating activities | $216.2 million | $215.6 million |
| Net cash used in investing activities | $242.2 million | $210.6 million |
| Net cash from (used in) financing activities | $31.4 million | $(7.0) million |
| Unrestricted cash / restricted cash | $12.8 million / $117.3 million | $12.7 million / $112.0 million |
| Total assets / shareholders’ equity | $2.486 billion / $197.1 million | $2.425 billion / $183.9 million |
| Total debt | Approximately $2.257 billion | Approximately $2.212 billion |
Debt at year-end comprised $2.064 billion of securitization trust debt, $136.8 million of warehouse borrowings, $39.1 million of residual-interest financing, and $17.3 million of subordinated renewable notes. Three warehouse facilities provided $300 million of total capacity; $161.9 million was available at year-end, subject to eligible collateral and CPS’s own capital. CPS reported compliance with debt covenants.
Material changes versus 2017
- Revenue declined 10.3%, principally because interest income fell 10.3% to $380.3 million. The average yield on the portfolio was 16.5%, down from 18.4%, reflecting the introduction of fair-value accounting for post-2017 receivables, which recognizes expected credit losses through a lower yield.
- Net income rose despite lower revenue, mainly as the reported credit-loss provision fell 28.7% and income-tax expense fell to $3.8 million from $28.3 million. The 2017 tax expense included $15.1 million related to the Tax Act; 2018 included a $2.1 million tax benefit from tax planning and other adjustments.
- Interest expense rose 9.9% to $101.5 million. The average securitization-debt rate increased to 4.2% from 3.8%; 2018 securitizations’ blended funding costs ranged from 3.46% to 4.22%.
- Credit indicators weakened: year-end delinquencies were 12.3% of the owned servicing portfolio versus 9.8% in 2017; delinquencies plus repossessions rose to 13.9% from 11.3%. Net charge-offs remained 7.7% of the average servicing portfolio, versus 7.7% in 2017. The portfolio’s weighted-average seasoning increased to 23 months from 21 months.
- Average original contract term increased to 69 months from 68 months, while average down payment declined to 9.1% from 10.6%. The weighted-average contract APR eased to 18.3% from 19.1%; average net acquisition fees shifted to $238 paid to dealers per contract from $34 paid to dealers in 2017.
Outlook, risks and unusual items
- Management expected quarterly profits during 2019, while cautioning that this forward-looking expectation was not assured. CPS intended to continue regular securitizations and align contract purchases with available capital.
- Effective January 1, 2018, CPS adopted fair-value accounting for receivables acquired thereafter. At year-end, those receivables had a $821.1 million carrying value against $829.0 million in contractual balances. Valuation uses Level 3 assumptions, including estimated cumulative net losses of 15%–16% and discount rates of 8.9%–9.9%; actual results or market assumptions could require changes to yield, carrying value, and income.
- In May 2018, CPS raised $40 million through financing secured by residual interests, with an 8.595% coupon. The 2018-1 Notes had $40 million outstanding at year-end.
- Cash releases from securitization trusts depend on credit performance and required credit enhancement. Higher delinquencies, defaults, or losses can trap cash, constrain liquidity, or trigger servicing-transfer provisions. CPS also faces refinancing, warehouse-funding, interest-rate, competition, and subprime-credit risks.
- The 2014 FTC consent decree required changes to servicing practices; management said these may have contributed to higher delinquencies, extensions, and losses. A DOJ inquiry was completed as to CPS in February 2018, with no further information requested and no enforcement action recommended.
- A former employee’s September 2018 wage-and-hour complaint purports to seek class treatment; no class-certification motion had been filed or granted as of the report. CPS recorded no liability for this claim. The company estimated reasonably possible losses on legal matters in excess of reserves would not exceed $3 million, while noting outcomes remain uncertain.
- CPS expected adoption of the CECL credit-loss standard to likely materially affect financial position and results. It also anticipated recording approximately $24.2 million of lease assets and liabilities upon adopting the new lease standard in 2019, with no material income-statement impact.
Important facts for investors to verify
- Whether worsening delinquency and repossession trends translate into higher future charge-offs, and whether allowance estimates adequately reflect portfolio seasoning and performance.
- How the fair-value portfolio’s actual losses, prepayments, and cash collections compare with management’s Level 3 assumptions and recognized yield.
- Availability and cost of securitizations and warehouse funding, covenant headroom, and the amount of cash trapped in securitization structures.
- The effect of CECL adoption and the 2019 lease-accounting adoption on reported earnings, capital, and balance-sheet measures.
- Developments in the wage-and-hour litigation and any regulatory or consumer-protection matters; review the full filing and financial-statement notes for contingencies and restrictions on cash or distributions.