Consumer Portfolio Services, Inc. — Q3 2017 Form 10-Q
Business context and period. The company purchases and services U.S. retail auto contracts, primarily for subprime borrowers, and funds receivables mainly through asset-backed securitizations and warehouse facilities. This unaudited report covers the quarter and nine months ended September 30, 2017; amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $109.5 | $108.5 | $327.2 | $314.1 |
| Interest income | $107.0 | $105.4 | $319.1 | $303.7 |
| Operating expenses | $101.4 | $96.1 | $303.3 | $277.1 |
| Provision for credit losses | $47.3 | $46.3 | $143.1 | $134.9 |
| Interest expense | $23.3 | $20.9 | $68.6 | $58.4 |
| Income before taxes | $8.1 | $12.5 | $23.9 | $37.0 |
| Net income | $4.7 | $7.3 | $13.7 | $21.8 |
| Diluted EPS | $0.17 | $0.26 | $0.50 | $0.75 |
- Revenue rose 0.9% in Q3 and 4.2% year to date, as higher interest income from a larger receivables portfolio offset lower other income. Net income fell 36.5% in Q3 and 37.2% for the nine months.
- Net interest yield was 14.4% in both 2017 periods, versus 15.2% in Q3 2016 and 15.1% year to date 2016. Management attributed the decline partly to lower acquisition fees and contract rates offered on some purchases, while securitization funding costs increased.
- Operating cash flow was $168.3, investing cash outflow $181.3, and financing cash inflow $11.2 for the nine months. Cash and equivalents ended at $12.0, versus $13.9 at December 31, 2016; restricted cash was $115.0.
- At September 30, total debt was approximately $2,226.4: $2,103.6 securitization trust debt, $106.6 warehouse borrowings and $16.2 subordinated notes. The company reported $193.4 of aggregate available warehouse borrowings, subject to sufficient eligible collateral; eligible collateral was approximately $20.4.
- Finance receivables, net, were $2,209.1, with an allowance for credit losses of $108.6, compared with $2,172.4 and $95.6, respectively, at year-end 2016. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Expenses grew faster than revenue: nine-month operating expenses increased 9.5%, including higher employee costs, interest expense and credit-loss provision. Net charge-offs were $152.4 for the first nine months, versus $134.7 in 2016; annualized net charge-offs rose to 7.8% from 7.1%.
- Purchases slowed: nine-month contract purchases were $668.3, down from $873.5, while the managed portfolio grew to $2,346.0 from $2,291.9 at September 30, 2016.
- Delinquencies of 31 days or more were 9.0% of the servicing portfolio, versus 8.9% a year earlier and 9.5% at December 31, 2016. Receivables over 90 days delinquent declined to $26.5 from $36.3 a year earlier. Monthly extensions averaged 6.3% of outstanding accounts for the nine months, versus 3.6% in 2016.
- Other income declined 21.9% year to date, primarily due to lower direct-mail and related product revenue. The company repurchased 2.34 million shares during the nine months for $10.5 in total cash outflow, at an average price of $4.51 per share.
Outlook, risks and unusual items
- No specific earnings or operating guidance is provided. Management said purchase volumes will be managed to available capital and highlighted dependence on securitizations, warehouse funding, portfolio collections and releases of cash from securitization trusts.
- Key exposures include subprime borrower credit performance, used-vehicle recovery values, interest rates and securitization pricing, financing availability, regulatory changes, and economic conditions including unemployment. Deteriorating trust performance could restrict cash releases and adversely affect liquidity.
- A Department of Justice investigation into subprime auto-contract origination and securitization remains ongoing, with civil discovery. The company is cooperating; it says reasonably possible losses for legal matters do not exceed $1.0, but warns the DOJ matter could ultimately materially affect results for a particular period.
- The company reported substantial indebtedness and cautioned that insufficient operating cash flow could impair debt service. It expected no material impact on operations from adopting revenue recognition guidance in 2018, though the classification and timing of some contract costs remained under evaluation.
Investor verification points
- Track delinquency, extensions, charge-offs and allowance adequacy, particularly as purchases and portfolio composition change.
- Verify access to securitization and warehouse funding, collateral eligibility, covenant compliance and cash releases from trusts.
- Assess whether lower portfolio yields and higher funding costs continue to pressure net interest yield and earnings.
- Follow developments in the DOJ investigation and any changes to estimated legal exposure.
- Confirm the effect of share repurchases and stock-option dilution on future per-share results; diluted weighted-average shares exceeded basic shares materially.