Consumer Portfolio Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Amounts below are in U.S. dollars. The company purchases and services auto loan contracts, primarily for subprime borrowers, and funds its portfolio largely through securitizations and warehouse facilities.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $70.7m | $85.5m | $208.7m | $260.1m |
| Interest income | $72.6m | $83.5m | $227.3m | $253.8m |
| Operating expenses | $64.8m | $82.7m | $195.1m | $251.8m |
| Income before taxes | $5.9m | $2.8m | $13.6m | $8.3m |
| Net income | $3.8m | $1.8m | $17.5m | $5.4m |
| Diluted EPS | $0.16 | $0.08 | $0.74 | $0.22 |
| Net interest yield | 8.1% | 9.1% | 8.2% | 9.5% |
Revenue fell 17.4% in Q3 and 19.7% year to date, principally as legacy receivables ran off and fair-value receivables generated lower yields. The Q3 revenue included a $3.2m fair-value markdown; the nine-month period included $23.1m of markdowns. Lower credit-loss provision helped reduce operating expenses: $7.4m in Q3 versus $19.9m, and $14.1m year to date versus $64.3m.
Cash flow, balance sheet and funding
- Cash flows, nine months: Operating cash flow was $190.6m, compared with $170.0m in 2019; investing activities provided $45.4m versus using $177.7m; financing activities used $164.6m versus providing $14.9m.
- Cash and liquidity at September 30: Cash and cash equivalents were $11.3m and restricted cash was $200.9m. The company reported $268.8m of aggregate warehouse borrowing availability, assuming sufficient eligible collateral; it reported $37.2m of eligible collateral.
- Debt: Balance-sheet debt totaled approximately $2,131.5m, primarily $2,048.1m securitization trust debt. Warehouse lines were $31.2m, residual-interest financing $32.0m, and subordinated renewable notes $20.2m. Debt levels exclude certain presentation adjustments and are reported net of financing costs where applicable.
- Equity and assets: Total assets were $2,309.2m and shareholders’ equity was $128.6m, down from $2,539.2m and $202.6m at December 31, 2019. The decline in equity principally reflects the $92.5m after-tax retained-earnings adjustment on CECL adoption.
- The company completed three securitizations in the first nine months, issuing $714.5m of notes. It said it was in compliance with applicable financial covenants at quarter-end.
Material changes and credit quality
- Contract purchases were $174.0m in Q3 versus $262.1m a year earlier; nine-month purchases were $575.9m versus $755.3m. The managed portfolio was $2,250.4m, down from $2,412.6m a year earlier.
- Q3 total delinquencies were 9.0% of the owned servicing portfolio, compared with 13.5% at September 30, 2019. Annualized Q3 net charge-offs were 14.1% for legacy finance receivables, 3.5% for fair-value receivables, and 6.4% for the total managed portfolio; the total was 8.1% a year earlier.
- Extensions increased during the pandemic-related disruption: average monthly extensions were 4.2% of average outstanding accounts for the first nine months, compared with 2.9% in 2019. Management said extensions returned to pre-pandemic levels in Q3.
- The company adopted CECL on January 1, 2020, recording a $127.0m allowance addition against legacy receivables with a tax-affected reduction to retained earnings, rather than current-period expense. It also recorded $14.1m of additional credit-loss provision year to date for pandemic-related expected losses.
Outlook, risks and unusual items
- Management provided no numerical earnings or revenue guidance. It expected somewhat lower employee costs if contract-purchase volumes remained at current levels and said Q3 purchase volumes had improved from Q2 but remained below pre-pandemic levels.
- COVID-19, economic shutdowns, borrower income pressure, payment deferrals and restrictions on repossessions could worsen collections, credit losses and fair-value assumptions. Management said the effects were uncertain and potentially material.
- Asset-backed funding markets were disrupted in April 2020. The company delayed a planned securitization, then completed transactions in June and September; management cautioned that a return to unfavorable market terms could impair liquidity and require lower contract purchases.
- The company recorded an $8.8m tax benefit from CARES Act net operating loss carryback revaluation. Excluding that benefit, nine-month income tax expense would have been $4.9m, according to the filing.
- Management estimated probable legal-contingency losses were immaterial and reasonably possible losses did not exceed $3m. A former employee wage-and-hour class-action claim remained pending; no class certification had been filed or granted, and no liability was recorded for that claim.
- The company repurchased 219,134 shares in Q3 for an average $3.47 per share. As of September 30, approximately $5.3m remained available under its repurchase authorization.
Important facts for investors to verify
- How borrower payment performance, repossession restrictions and extensions evolve, and whether the credit-loss and fair-value estimates adequately reflect pandemic effects.
- Whether securitization markets and warehouse borrowing remain available on acceptable terms, including the actual usable borrowing capacity given eligible collateral requirements.
- Whether contract purchases recover and portfolio runoff, yields and funding costs support future revenue and net interest margins.
- Whether deferred tax assets are realizable and whether the CARES Act tax benefit and CECL transition materially affect comparisons with prior periods.
- Updates on the pending wage-and-hour litigation, other legal contingencies and compliance with financing covenants.