Consumer Portfolio Services, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. The company is a specialty lender and servicer focused on subprime auto contracts.
Business and operating context
CPS purchases and services retail auto contracts, primarily from U.S. dealers, and funds purchases chiefly through warehouse facilities followed by asset-backed securitizations. Contracts purchased in 2016 totaled $1.089 billion, up 2.7%; the managed portfolio reached $2.308 billion, up 13.6%. CPS completed four securitizations totaling approximately $1.215 billion of receivables.
Financial and portfolio metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $422.3 million | $363.7 million |
| Interest income | $409.0 million | $349.9 million |
| Income before tax | $49.7 million | $61.4 million |
| Net income | $29.3 million | $34.7 million |
| Diluted earnings per share | $1.01 | $1.10 |
| Net cash from operating activities | $196.3 million | $187.6 million |
| Net cash used in investing activities | $444.5 million | $441.3 million |
| Net cash from financing activities | $242.8 million | $255.2 million |
| Net interest margin | 15.0% | 16.1% |
| Net charge-offs as % of average servicing portfolio | 7.0% | 6.4% |
| Delinquencies as % of gross servicing portfolio | 9.2% | 7.6% |
Fourth-quarter 2016 revenue was $108.2 million and net income was $7.5 million; diluted EPS was $0.26. At year-end, total assets were $2.410 billion, shareholders’ equity was $186.2 million, unrestricted cash was $13.9 million, and restricted cash was $112.8 million. Debt was approximately $2.199 billion, primarily securitization trust debt of $2.081 billion, warehouse lines of $103.4 million, and subordinated notes of $14.9 million. CPS reported $196.6 million available under warehouse facilities, subject to eligible collateral, and compliance with applicable financial covenants.
Changes versus prior year
- Revenue rose 16.1%, mainly as the consolidated receivables portfolio expanded. Net income fell 15.5%, as expenses increased 23.3% to $372.6 million.
- Provision for credit losses increased 25.2% to $178.5 million. CPS cited portfolio growth and adverse performance trends, which it said were consistent with portfolio aging and may also have been affected by servicing changes required under the 2014 FTC consent decree.
- Interest expense rose 38.4% to $79.9 million. Average securitization debt grew, and its average cost increased to 3.3% from 2.9%; the company said securitization funding costs had eased somewhat after July 2016.
- Delinquencies, repossessions and net charge-offs increased. Total delinquencies plus repossessions were 11.0% of the servicing portfolio at year-end, versus 9.5% a year earlier. Allowance for finance credit losses rose to $95.6 million from $75.6 million.
- Cash from operations increased, but cash and cash equivalents declined to $13.9 million from $19.3 million. Warehouse borrowings fell, while securitization trust debt increased to $2.081 billion from $1.720 billion.
Outlook, risks and unusual items
- Management expected quarterly profits during 2017 and intended to continue regular securitizations, while stating there was no assurance of profitability or financing availability. It planned to align contract purchases with available capital.
- Liquidity and earnings depend on continued access to warehouse financing and securitization markets, as well as cash releases from securitization trusts. Weaker credit performance can restrict those releases and increase required credit enhancement.
- Key risks include subprime borrower defaults, rising funding costs and interest rates, competition, substantial indebtedness, covenant and cross-default provisions, regulatory changes, litigation, and operational or cybersecurity disruptions.
- The FTC consent decree required restitution, a $2 million government penalty, servicing and reporting changes, independent monitoring, and periodic reports. Customer restitution payments totaling approximately $3.5 million were completed.
- A Department of Justice investigation followed a January 2015 subpoena concerning subprime auto origination and securitization practices. CPS reported no subsequent material developments; potential outcomes remain uncertain. The company estimated reasonably possible legal losses above recorded reserves at no more than $1 million, while cautioning that outcomes could exceed reserves.
- After year-end, CPS completed its first 2017 securitization on January 18: $206.3 million of notes backed by $210.0 million of receivables, with a reported weighted-average note yield of approximately 3.91%.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether rising delinquency and charge-off trends persist, and whether allowance levels adequately reflect losses as the portfolio seasons.
- Availability, pricing and renewal terms for warehouse facilities, and CPS’s ability to complete securitizations on acceptable terms.
- Actual cash releases from securitization trusts and the impact of credit-performance triggers on liquidity and contract-purchase capacity.
- Developments in the DOJ inquiry, FTC monitoring, and consumer litigation, including any liabilities beyond recorded reserves.
- Whether management’s 2017 profitability expectation is achieved given lower 2016 earnings, higher funding costs and increased credit provisions.