Consumer Portfolio Services, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. Amounts below are in millions of dollars, except per-share data and percentages. The company purchases and services auto installment contracts, principally for subprime borrowers.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $104.9 | $88.4 | $205.6 | $174.4 |
| Interest income | $101.7 | $84.9 | $198.4 | $167.3 |
| Interest expense | $19.7 | $13.7 | $37.5 | $26.9 |
| Provision for credit losses | $44.4 | $35.7 | $88.6 | $69.1 |
| Operating expenses | $92.6 | $73.2 | $181.0 | $144.4 |
| Income before tax | $12.3 | $15.2 | $24.6 | $29.9 |
| Net income | $7.3 | $8.5 | $14.5 | $16.9 |
| Diluted EPS | $0.25 | $0.27 | $0.49 | $0.53 |
- Revenue rose 18.8% in Q2 and 17.9% for the half, primarily as the finance receivables portfolio expanded. Net income fell 14.8% in Q2 and 14.1% for the half as expenses—especially credit-loss provisions and funding costs—increased faster than revenue.
- Net interest income was $82.0 million in Q2 and $160.8 million for the half. Net interest yield declined to 15.0% from 16.3% in Q2 and to 15.2% from 16.4% for the half. Management attributed lower receivables yields to offering dealers slightly lower acquisition fees and requiring slightly lower contract rates on some purchases. Net income was approximately 6.9% of revenue in Q2 and 7.0% for the half, versus approximately 9.7% in each prior-year period.
- Six-month operating cash flow was $113.3 million, compared with $88.9 million. Investing activities used $312.7 million, principally reflecting $631.4 million of contract purchases; financing activities provided $195.8 million. Cash and cash equivalents decreased $3.6 million to $15.8 million during the half.
Balance sheet, portfolio and funding
- At June 30, 2016, finance receivables, net, were $2,128.2 million, up from $1,909.5 million at December 31, 2015. The allowance for credit losses was $90.2 million, versus $75.6 million at year-end.
- Cash was $15.8 million and restricted cash was $115.3 million. Management reported $134.9 million of available warehouse borrowings, subject to sufficient eligible collateral; it reported approximately $24.4 million of such collateral.
- Total debt was approximately $2,144.4 million: securitization trust debt of $1,956.6 million, warehouse lines of $165.1 million, residual interest financing of $7.5 million and subordinated renewable notes of $15.3 million. Debt increased materially year over year; the filing identifies substantial indebtedness as a risk. The company reported compliance with debt covenants at June 30.
- For the six months, receivables purchases increased to $631.4 million from $503.8 million, and the managed portfolio grew to $2,253.7 million from $1,822.2 million year over year.
- Credit indicators were mixed: total delinquencies were 7.1% of the gross servicing portfolio, compared with 6.1% a year earlier; annualized net charge-offs were 7.2%, versus 6.6%. Delinquencies plus accounts in repossession were 8.6%, versus 7.5%. More than 90-day delinquent receivables were on non-accrual.
Material changes, outlook and risks
- Credit-loss provisions increased 24.5% in Q2 and 28.2% for the half. Management cited portfolio growth and somewhat higher delinquency and charge-off rates. Charge-offs for the first half were $87.8 million, compared with $66.7 million; recoveries were $13.8 million, compared with $10.6 million.
- Funding costs rose: the six-month average cost of securitization debt was 3.2%, versus 2.8%. Blended costs on recent securitizations rose from 3.18% in June 2015 to 4.65% in April 2016, then were 4.48% in July 2016. Higher funding costs and credit performance may pressure earnings.
- The company completed two securitizations totaling $662.2 million in the first half and completed another in July 2016. Management said purchase volumes would be managed to available capital; inability to complete securitizations could constrain purchases and reduce portfolio-related income. The filing gives no specific earnings or revenue guidance.
- Management noted that the FTC consent decree entered in June 2014 required servicing-process changes that it believes contributed to somewhat higher delinquencies and extensions. Extensions affected $715.2 million of contracts at June 30, 2016, compared with $471.9 million a year earlier.
- Legal matters include a consumer class-action settlement subject to an appeal and a Department of Justice investigation into subprime auto origination and securitization practices. The company had recorded reserves for probable losses; it estimated reasonably possible additional losses above reserves at $0 to $250,000, while cautioning outcomes could exceed reserves.
- The company repurchased 853,241 shares during Q2 at an average $3.95 per share. It bought approximately 1.6 million shares in the first half at an average $4.06 per share; the board increased its repurchase authorization by $10 million to $54.5 million in May.
- Management was evaluating the newly issued credit-loss accounting standard, effective for periods beginning after December 15, 2019. It had not determined the potential impact.
Important facts for investors to verify
- Whether delinquency, extension and charge-off trends stabilize, and whether credit-loss reserves remain adequate as the portfolio grows.
- Whether securitization markets remain available on acceptable terms, and how rising funding costs affect net interest yield and profitability.
- How much of reported cash and warehouse availability is practically usable, given restricted cash and collateral requirements.
- Developments in the DOJ investigation and the appealed class-action settlement, including any effects beyond recorded reserves.
- How the company’s repurchases and continued portfolio expansion affect liquidity, leverage and capacity to meet debt obligations.