Consumer Portfolio Services, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Dollar amounts are in millions unless otherwise noted. The company purchases and services auto finance contracts, primarily for subprime borrowers. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $107.6 | $100.6 | +6.9% |
| Interest income | $104.6 | $96.7 | +8.2% |
| Operating expenses | $99.8 | $88.4 | +12.9% |
| Provision for credit losses | $47.2 | $44.2 | +6.7% |
| Interest expense | $22.1 | $17.8 | +23.9% |
| Pre-tax income | $7.8 | $12.2 | Down 36.3% |
| Net income | $4.5 | $7.2 | Down 37.9% |
| Diluted EPS | $0.16 | $0.24 | Down 33.3% |
Revenue growth reflected a larger receivables portfolio; average finance receivables were $2,311.8 versus $2,098.0. Expense growth outpaced revenue, reducing net income. Net interest income rose to $82.5 from $78.8, while annualized net interest yield declined to 14.5% from 15.3%. The effective tax rate was 42.5% (41.0% in the prior-year period).
Balance sheet, cash flow and credit
- Total assets were $2,431.0 at March 31, compared with $2,410.4 at year-end 2016. Net finance receivables were $2,186.9; the allowance for credit losses was $99.3, up from $95.6.
- Debt totaled approximately $2,217.6: $2,082.0 securitization trust debt, $120.3 warehouse lines and $15.3 subordinated notes. Total shareholders’ equity was $189.7.
- Cash and cash equivalents were $12.1, while restricted cash was $129.2. Management reported $178.6 of aggregate available warehouse borrowings, assuming sufficient eligible collateral; eligible collateral was approximately $20.6.
- Operating cash flow was $62.2 versus $60.5. Investing cash use was $77.9 versus $170.8, including $229.6 of finance receivables purchases versus $312.3. Financing cash inflow was $13.8 versus $107.2. Cash declined by $1.9 during the quarter to $12.1.
- Portfolio delinquency was 8.2% at March 31, 2017, versus 7.3% at December 31, 2016 and 7.2% at March 31, 2016. Annualized net charge-offs were 7.9%, compared with 7.6% a year earlier and 7.0% for full-year 2016. Receivables over 90 days delinquent were $33.5, down from $44.4 at year-end.
- Contracts with extensions totaled $992.1, versus $662.6 a year earlier. Management described extensions as a loss-mitigation practice; the filing also notes the FTC consent decree’s servicing changes have contributed to somewhat higher delinquencies and extensions.
Material changes, outlook and risks
- Interest expense increased mainly because average securitization debt grew and its average cost rose to 3.7% from 3.0%. The company reported a 3.90% blended cost for its January 2017 securitization; April 2017 financing was reported at 3.45%.
- Contract purchases fell to $229.6 from $312.3, while the managed portfolio increased to $2,323.2 from $2,141.7 a year earlier. Other income declined 24.2%, primarily due to lower direct-mail revenue.
- In April 2017, the company renewed a $100 million warehouse facility, extending its revolving period to April 2019, followed by amortization through April 2021. It completed one securitization during Q1, issuing $206.3 of notes.
- No specific earnings or revenue guidance is provided. Management said it intends to align contract purchases with available capital and, as appropriate, manage operating costs. Future results and liquidity depend on securitization access, warehouse funding, cash releases from securitized pools, portfolio performance, interest rates, dealer supply and financing terms.
- The company was in compliance with financial covenants at March 31. It nevertheless has substantial indebtedness and warns that insufficient cash flow or inability to refinance could impair debt service and operations.
- Legal matters include consumer litigation and a Department of Justice investigation begun after a 2015 subpoena concerning subprime auto contract originations and securitizations. The company said it was unaware of subsequent material developments; estimated reasonably possible losses did not exceed $1.0, but outcomes remain uncertain and could materially affect a particular period.
- The company repurchased 561,617 shares in the open market during the quarter at an average $4.94 per share. The filing also reports 25,193 shares acquired through net exercises of options and warrants.
Important facts for investors to verify
- Whether delinquency, extension and charge-off trends stabilize or worsen, and how they affect provisions, recoveries and the allowance.
- Whether stated warehouse availability is practically accessible given the comparatively limited $20.6 of eligible collateral, and whether securitization capacity and cash releases remain sufficient.
- How rising funding costs and portfolio growth affect net interest yield and profitability.
- Any material developments in the DOJ investigation, consumer litigation, or compliance with debt covenants.
- The company’s ability to sustain liquidity and meet debt obligations while financing future contract purchases.