Consumer Portfolio Services, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing was signed March 15, 2022. CPS is a specialty finance company that purchases and services U.S. retail auto contracts, primarily for subprime borrowers, and funds much of its portfolio through asset-backed securitizations.
Financial and operating performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $267.8 million | $271.2 million |
| Income before tax | $65.7 million | $20.1 million |
| Net income | $47.5 million | $21.7 million |
| Basic / diluted EPS | $2.11 / $1.84 | $0.96 / $0.90 |
| Net cash from operating activities | $198.2 million | $238.8 million |
| Net cash used in investing activities | $115.4 million | Net cash provided: $93.0 million |
| Net cash used in financing activities | $50.4 million | $328.5 million |
| Total assets | $2.16 billion | $2.15 billion |
| Total debt outstanding | $1.95 billion | $1.97 billion |
| Shareholders’ equity | $170.2 million | $133.4 million |
- Revenue declined 1.2%, while total operating expenses fell 19.5% to $202.1 million. The reduction reflected lower interest expense and a credit-loss provision benefit.
- Interest income was $266.3 million, down 9.7%, principally because the higher-yielding pre-2018 legacy portfolio continued to run off. Revenue also included a $4.4 million fair-value markdown, versus $29.5 million in 2020, and $6.0 million of other income.
- Net interest income was $191.0 million versus $193.6 million; net interest margin increased to 8.9% from 8.4%. The reported net income margin was approximately 17.7%, compared with 8.0% in 2020.
- Interest expense decreased 25.8% to $75.2 million. Average securitization debt cost was 3.5%, down from 4.4%; warehouse-line interest expense also declined as average borrowings fell.
- The credit-loss provision was a benefit of $14.6 million, compared with an expense of $14.1 million in 2020. Management attributed the improvement to better credit performance and lower expected lifetime losses. FY 2021 net charge-offs were 4.7% of the average owned portfolio, down from 6.5%.
- Operating cash flow declined by $40.6 million. The company ended the year with $29.9 million of unrestricted cash and $146.6 million of restricted cash. It reported $94.0 million of available warehouse borrowings, subject to eligible collateral.
- Debt consisted primarily of $1.76 billion of securitization trust debt, $105.6 million of warehouse lines, $53.7 million of residual-interest financing, and $26.5 million of subordinated renewable notes. Debt covenants were reported in compliance at year-end.
Material changes versus the prior year
- Contract purchases rose 54.4% to $1.146 billion (54,317 contracts), returning to pre-pandemic levels; managed portfolio balances increased 3.4% to $2.249 billion.
- Delinquencies declined to 9.5% of the servicing portfolio from 10.4%; delinquencies plus repossessions declined to 10.5% from 12.1%.
- Net charge-offs improved in both portfolio categories: 7.7% versus 11.7% for pre-2018 finance receivables and 3.1% versus 4.3% for fair-value receivables.
- The average original amount financed increased to $21,104 from $17,933, and the weighted-average contract term increased to 70 months from 68 months. The weighted-average APR on contracts purchased for CPS’s own portfolio decreased to 17.8% from 19.3%.
- CPS completed four term securitizations in 2021 totaling approximately $1.145 billion of receivables, compared with three totaling $741.9 million in 2020. It also completed a $50 million residual-interest financing in June 2021.
- CPS repurchased 3.885 million shares during 2021 for $25.7 million in total cash-flow statement purchases; the filing reports $7.2 million of remaining repurchase authorization at year-end. Shares outstanding were 21.1 million at December 31, versus 22.7 million a year earlier.
Outlook, risks, contingencies and unusual items
- Management said it expected quarterly profits during 2022, but gave no quantified earnings, revenue, originations or margin guidance and cautioned that profitability was not assured.
- After year-end, CPS completed a February 2022 securitization issuing $316.8 million of notes backed by $330.0 million of receivables, at a reported weighted-average yield of approximately 2.54%. A warehouse facility was also renewed in February 2022, extending its revolving period to January 2024.
- Liquidity and results depend on continued access to warehouse financing and securitization markets, portfolio performance, and releases of excess cash from securitization trusts. Weak performance can trap cash, increase credit enhancement needs, or reduce funding capacity.
- Key risks include the company’s substantial debt and refinancing needs, rising interest rates and funding spreads, competition, subprime borrower defaults, economic and employment conditions, COVID-19 effects and the possible expiration of government support, and regulatory, litigation, cyber and operational risks.
- Two matters could potentially result in material liability if resolved adversely on a class basis: a Connecticut deficiency-notice case and a California wage-and-hour case. CPS recorded $3.4 million of probable legal losses and estimated reasonably possible losses not exceeding $11.3 million; outcomes remain uncertain.
- The company adopted CECL in 2020, recording a $127.0 million increase to the legacy-portfolio allowance through retained earnings. FY 2021 results also included the $14.6 million provision benefit and $4.4 million fair-value markdown. Fair-value receivables are Level 3 and depend on management assumptions, including loss timing and severity.
- The auditor issued an unqualified opinion on the financial statements and identified fair-value receivables and CECL forecast-related qualitative factors as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal controls.
Most important facts for investors to verify
- Whether lower delinquencies and charge-offs persist as the portfolio seasons and economic support measures fade.
- Whether securitization and warehouse funding remain available on terms that preserve liquidity and margins, including access to cash held in restricted accounts.
- Whether fair-value estimates and legacy-portfolio credit-loss assumptions remain supportable; these materially affect reported earnings and asset values.
- The status and potential exposure from the Connecticut and California litigation, including any class-certification developments.
- Actual 2022 profitability and origination trends versus management’s expectation of quarterly profits; the filing provides no numerical guidance.