Consumer Portfolio Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; filed August 12, 2021. Unless otherwise noted, amounts are in U.S. dollars and millions. The company purchases and services auto installment contracts, primarily for subprime borrowers.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $66.8 | $67.3 | $129.9 | $138.1 |
| Operating expenses | $52.9 | $62.6 | $108.1 | $130.3 |
| Income before tax | $13.9 | $4.6 | $21.8 | $7.8 |
| Net income | $9.7 | $3.0 | $14.9 | $13.8 |
| Diluted EPS | $0.39 | $0.13 | $0.59 | $0.58 |
| Operating cash flow | — | $112.4 | $129.4 |
Net margin was approximately 14.5% for Q2 and 11.5% for the first half, compared with approximately 4.4% and 10.0%, respectively, in the prior-year periods. Net interest income was $46.5 million in Q2 and $91.6 million in the first half, down from $49.1 million and $101.2 million.
- Interest income was $65.4 million in Q2 and $131.5 million for the first half. The legacy portfolio’s runoff contributed to the decline; its average balance was down 49.7% year over year. Growth in fair-value receivables partly offset the reduction.
- Fair-value receivable marks reduced revenue by $4.4 million in the first half of 2021, versus $19.9 million in the first half of 2020. There was no Q2 2021 mark, compared with a $9.5 million Q2 2020 mark.
- Interest expense fell to $19.0 million in Q2 and $39.9 million in the first half, primarily reflecting lower average securitization and warehouse debt balances and lower securitization funding costs.
- No credit-loss provision was recorded in 2021; provisions were $3.1 million for Q2 2020 and $6.7 million for the first half of 2020. The legacy-portfolio allowance was $72.2 million at June 30, 2021, down from $80.8 million at year-end.
Balance sheet, debt and liquidity
At June 30, 2021, total assets were $2.104 billion, total liabilities $1.955 billion, and shareholders’ equity $148.5 million. Finance receivables measured at fair value were $1.582 billion; legacy receivables, net of allowance, were $268.2 million. Cash and cash equivalents were $43.1 million, with a further $155.8 million in restricted cash. Restricted cash is subject to financing arrangements and should not be treated as freely available liquidity.
Total debt was approximately $1.903 billion: $1.733 billion of securitization trust debt, $77.0 million of warehouse lines, $67.2 million of residual-interest financing, and $26.0 million of subordinated renewable notes. The company reported $123 million of available warehouse borrowings, subject to sufficient eligible collateral; it had approximately $100 million of eligible collateral. Short-term funding capacity was $200 million after repayment and nonrenewal of one facility. The company reported compliance with debt covenants.
First-half investing cash flow was $12.7 million and financing cash flow was negative $70.4 million. Cash and restricted cash together increased $54.8 million to $198.9 million. The company purchased $485.1 million of fair-value receivables and issued $470.5 million of securitization debt during the period.
Changes, outlook and risks
- Contract purchases increased to $491.5 million in the first half from $401.9 million a year earlier; Q2 purchases rose to $286.0 million from $135.9 million. Management said purchasing had recovered toward pre-pandemic levels. The managed portfolio was $2.121 billion at June 30, down from $2.326 billion a year earlier.
- Annualized net charge-offs for the total managed portfolio were 2.8% in Q2, compared with 7.4% in Q2 2020. Delinquencies were 7.7% of the gross servicing portfolio, compared with 7.7% a year earlier and 10.5% at December 31, 2020. Management cautioned that pandemic-related effects may not yet be fully reflected in these measures.
- Management identified the possible end of government stimulus, expiration of eviction protections, and a reversion in used-car prices as factors that could weaken future credit performance. Fair-value receivable estimates rely on significant unobservable inputs, including expected net losses and discount rates.
- The company provided no specific financial guidance. It said future liquidity depends partly on securitized-pool performance and releases of excess cash, access to financing, contract purchase volumes, and the terms and availability of securitizations. It warned that deteriorating pool performance could restrict cash releases and harm liquidity and results.
- A July 28, 2021 securitization, after quarter-end, issued $291 million of notes backed by $300 million of auto receivables; the notes’ weighted-average yield was approximately 1.55%.
- The first-half 2020 tax comparison includes an $8.8 million benefit from CARES Act-related net operating loss revaluation. Excluding that benefit, the company reported 2020 first-half tax expense of $2.8 million; 2021 first-half tax expense was $6.9 million.
- Legal proceedings include a wage-and-hour putative class action for which no liability was recorded. Management estimated probable legal losses as immaterial and reasonably possible losses not exceeding $3 million, while noting outcomes remain uncertain.
Key facts for investors to verify
- Whether lower charge-offs and delinquencies persist as pandemic support measures end and used-car values change.
- Whether fair-value receivable assumptions and the $72.2 million legacy credit allowance adequately reflect expected losses.
- How much of the $198.9 million cash-and-restricted-cash balance is available for general use, and whether eligible collateral supports stated warehouse availability.
- Whether securitization cash releases, funding access, and debt-service capacity remain sufficient given the company’s substantial indebtedness.
- Developments in the wage-and-hour litigation and any other legal contingencies.