Consumer Portfolio Services, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. CPS is a specialty finance company that purchases and services U.S. auto contracts, primarily for subprime borrowers, and funds acquisitions largely through warehouse facilities and securitizations. Amounts below are U.S. dollars.
Financial performance and position
| Metric | FY 2019 / year-end | Prior comparable period |
|---|---|---|
| Total revenue | $345.8 million | $389.8 million in 2018; down 11.3% |
| Interest income | $337.1 million | $380.3 million in 2018; down 11.4% |
| Income before tax | $9.2 million | $18.7 million in 2018 |
| Net income / diluted EPS | $5.4 million / $0.22 | $14.9 million / $0.59 in 2018 |
| Total expenses | $336.6 million | $371.1 million in 2018; down 9.3% |
| Net interest margin | 9.6% | 12.1% in 2018, per the 2019 comparison table |
| Operating cash flow | $216.8 million | $216.2 million in 2018 |
| Investing / financing cash flow | $(229.4) million / $23.3 million | $(242.2) million / $31.4 million in 2018 |
| Cash and cash equivalents | $140.8 million, including $135.5 million restricted; unrestricted cash was $5.3 million | $130.1 million total, including $117.3 million restricted |
| Debt outstanding | Approximately $2.29 billion | Approximately $2.26 billion in 2018 |
| Shareholders’ equity | $202.6 million | $197.1 million in 2018 |
Debt consisted primarily of $2.10 billion of securitization trust debt, plus $134.8 million in warehouse borrowings, $39.5 million net carrying value of residual-interest financing, and $17.5 million of subordinated renewable notes. Three warehouse facilities provided $300 million of total capacity; reported available borrowings were $163.2 million, subject to eligible collateral. CPS reported compliance with debt covenants at year-end.
Portfolio, credit and material changes
- Contracts purchased rose 11.1% to $1.003 billion; the year-end managed portfolio grew 1.5% to $2.416 billion. CPS completed four securitizations totaling approximately $1.014 billion of receivables.
- The weighted-average contract APR increased to 19.2% from 18.3%. Upper-tier programs were 76% of acquisitions by amount, versus 79% in 2018; the Bravo program had been discontinued in November 2018.
- Credit performance weakened on reported delinquency measures: delinquencies were 13.5% of the gross servicing portfolio at year-end, compared with 12.3% in 2018; delinquencies plus repossessions were 15.5%, versus 13.9%.
- Net charge-offs as a percentage of average total managed portfolio were 8.0%, versus 7.7% in 2018. The legacy finance-receivables portfolio measure rose to 12.2% from 9.3%; the fair-value portfolio measure was 3.8% versus 1.3%. These portfolios use different accounting methods and should not be treated as directly comparable.
- Provision for credit losses fell 35.5% to $85.8 million, largely reflecting a shrinking, seasoned legacy portfolio and the fair-value accounting applied to receivables acquired since January 2018. The allowance for legacy finance receivables fell to $11.6 million from $67.4 million; it does not cover fair-value receivables.
- Interest expense increased 8.9% to $110.5 million. Average securitization debt cost increased to 4.4% from 4.2%, while the blended cost on 2019 securitizations declined during the year, ending at 2.95% for October.
Outlook, risks and unusual items
- Management expected quarterly profits during 2020, but cautioned that this forward-looking expectation was not assured. No numerical earnings or origination guidance was provided.
- Liquidity and growth depend on securitizations, warehouse funding and cash releases from securitization trusts. Higher delinquencies or losses can trap cash, increase credit-enhancement needs and constrain new contract purchases. Warehouse availability also depends on qualifying collateral.
- Substantial leverage, funding costs, interest-rate exposure, subprime borrower credit risk, competition, regulatory oversight, litigation, and cyber or operational disruptions are key disclosed risks. Securitization and other debt include covenants and certain cross-default provisions.
- Fair-value receivables rely on management estimates of losses, prepayments and cash-flow timing. CPS recorded a $2.1 million positive fair-value adjustment on a pool originated in early 2018. Management warned that materially different actual performance or market assumptions could reduce income and carrying values.
- Possible legal losses beyond recorded reserves were estimated not to exceed $3 million. A California wage-and-hour case alleging misclassification of sales representatives had not been certified as a class; CPS recorded no liability for that claim.
- As a subsequent event, CPS completed a $260 million securitization on January 15, 2020, with a weighted-average note yield of approximately 3.08%.
- The filing says the expected adoption of CECL, scheduled for smaller reporting companies after December 15, 2022, will likely materially affect financial position and results; the company was evaluating early adoption.
Most important facts for investors to verify
- Whether rising delinquencies and charge-offs persist, and how credit performance varies by origination vintage and fair-value versus legacy receivables.
- How much unrestricted liquidity and eligible collateral are available in practice, and whether securitization cash releases support planned originations.
- Whether portfolio yields and funding costs stabilize sufficiently to recover the decline in net interest margin and earnings.
- The assumptions behind fair-value receivable cash flows and credit-loss estimates, including sensitivity to changes in loss and prepayment forecasts.
- Developments in the wage-and-hour litigation, regulatory matters, debt covenants and the expected CECL impact.