Consumer Portfolio Services, Inc. — Q1 2016 Form 10-Q
Business and period. The company purchases and services auto finance contracts, primarily for subprime borrowers. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Revenue | $100.6 | $86.0; up 17.0% |
| Interest income | $96.7 | $82.4; up 17.4% |
| Operating expenses | $88.4 | $71.2; up 24.1% |
| Provision for credit losses | $44.2 | $33.4; up 32.2% |
| Interest expense | $17.8 | $13.2 |
| Pre-tax income | $12.2 | $14.7 |
| Net income | $7.2 | $8.3 |
| Basic / diluted EPS | $0.29 / $0.24 | $0.33 / $0.26 |
| Net interest yield | 15.3% | 16.5% |
| Operating cash flow | $60.5 | $49.8 |
| Investing / financing cash flow | $(170.8) / $107.2 | $(108.5) / $61.0 |
Finance receivables, net, were $2,018.4, up from $1,909.5 at year-end 2015. Total assets were $2,250.0 and shareholders’ equity was $166.7. Cash and cash equivalents were $16.2; restricted cash was $126.0 and is subject to securitization arrangements.
Debt was approximately $2,064.4 on the company’s stated basis, principally securitization trust debt of $1,868.5, warehouse lines of $172.3, residual-interest financing of $8.3, and subordinated notes of $15.3. The balance sheet presents certain debt net of issuance costs. The company reported $127.7 of available warehouse borrowings, subject to sufficient eligible collateral, and approximately $29.4 of eligible collateral.
Material changes and credit trends
- Contract purchases rose to $312.3 from $233.9; the managed portfolio increased to $2,141.6 from $1,684.4 year over year. Management attributed higher interest income and higher servicing and funding costs largely to portfolio growth.
- Net income declined despite revenue growth, as expenses increased faster than revenue. Management cited portfolio-related credit provisions and interest costs as key drivers. Net interest yield narrowed to 15.3% from 16.5%, including a lower receivables yield and higher funding costs.
- Annualized net charge-offs were 7.6% of the average servicing portfolio, versus 6.6%. At March 31, delinquencies were 7.2% of the gross servicing portfolio versus 5.5% a year earlier; delinquencies plus repossessions were 9.0% versus 6.8%.
- The allowance for credit losses increased to $79.9 from $75.6 at year-end 2015. Q1 provision of $44.2 exceeded charge-offs of $45.9 less recoveries of $6.0.
- Cash decreased by $3.1 during the quarter. Purchases of finance receivables totaled $312.3, funded in part by $329.5 of securitization debt issuance. The company repurchased 703,745 shares for $2.9 at an average $4.19 per share.
Outlook, risks, and unusual items
- No specific earnings or purchase-volume guidance is provided. Management said it intends to align contract purchases with available capital and may limit purchases if funding or securitization capacity is constrained. Results for the quarter are not necessarily indicative of full-year results.
- Management noted that securitization funding costs have risen: the April 2016 securitization’s weighted-average coupon was 4.65%, compared with 4.34% for the January 2016 transaction. The April transaction occurred after quarter-end.
- Liquidity depends on access to warehouse facilities and securitizations, cash releases from securitized pools, portfolio performance, and dealer contract supply. Management cautioned that internally generated cash may not meet all cash demands and that substantial debt creates repayment and refinancing risk. All stated financial covenants were met at March 31.
- Credit performance is exposed to economic conditions, unemployment, used-vehicle values, consumer-finance regulation, and collection outcomes. Management said FTC-required servicing changes under a 2014 consent decree have contributed to somewhat higher delinquencies and extensions.
- The company disclosed a DOJ investigation following a 2015 subpoena concerning subprime auto-contract originations and securitizations. It reported no subsequent material developments; possible future claims, penalties, or damages could materially affect results. A consumer class-action settlement was approved but is under appeal. The company recorded legal reserves; reasonably possible losses beyond reserves were estimated at $0–$0.25.
- Management considered realization of its $37.5 net deferred tax asset more likely than not, based on forecast future earnings. Unrecognized tax benefits were zero. The filing also identifies new lease and share-based compensation accounting standards under evaluation.
Important facts for investors to verify
- Whether higher delinquencies, extensions, and charge-offs persist, and how they affect future provisions and recoveries.
- Whether funding remains available on acceptable terms, including warehouse collateral availability, securitization pricing, and cash releases from existing trusts.
- Whether the April securitization and subsequent portfolio performance affect liquidity, funding costs, or purchase capacity.
- Developments in the DOJ investigation and class-action appeal, and whether legal losses exceed recorded reserves.
- Whether forecast earnings support realization of the deferred tax asset and the company’s ability to service substantial debt.