Consumer Portfolio Services, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company purchases and services U.S. automobile installment contracts, primarily for subprime borrowers, and funds its portfolio through securitizations and warehouse facilities. Financial figures below are in U.S. dollars; amounts are rounded to millions unless stated otherwise.
Financial performance and position
- Revenue: $103.6 million, down 3.8% from $107.6 million in Q1 2017. Interest income was $100.9 million versus $104.6 million; other income was $2.7 million versus $3.0 million.
- Earnings: Income before tax was $4.6 million versus $7.8 million; net income was $3.1 million versus $4.5 million. Diluted EPS was $0.12 versus $0.16; basic EPS was $0.15 versus $0.19.
- Expenses and spread: Total expenses were $99.0 million, down 0.8%. Interest expense rose to $24.1 million from $22.1 million, while provision for credit losses declined to $40.5 million from $47.2 million. Net interest income fell to $76.8 million from $82.5 million, and net interest yield to 13.4% from 14.5%.
- Cash flow: Operating activities provided $63.2 million, compared with $62.2 million. Investing activities used $67.2 million versus $77.9 million; financing activities provided $2.8 million versus $13.8 million. Cash and cash equivalents ended the quarter at $11.6 million, down from $12.7 million at year-end.
- Balance sheet and liquidity: Total assets were $2.439 billion and shareholders’ equity was $187.3 million at March 31, 2018. Debt was approximately $2.218 billion, primarily $2.080 billion of securitization trust debt, $121.7 million of warehouse lines and $16.3 million of subordinated notes. Restricted cash was $130.8 million. Management reported $178.3 million of available warehouse borrowings, subject to sufficient eligible collateral; it also reported approximately $16.6 million of eligible collateral.
- Portfolio and credit: Managed portfolio was $2.332 billion. Annualized net charge-offs were 8.2%, up from 7.9% a year earlier. Delinquencies were 7.2% of the servicing portfolio versus 8.1% a year earlier; delinquencies plus repossessions were 8.9% versus 9.7%.
Changes versus Q1 2017 and year-end 2017
- Lower interest income and a lower average yield contributed to the revenue and earnings decline. Management cited lower acquisition fees and contract rates on some purchases, as well as the lower yield on newly fair-valued receivables.
- Employee costs rose 16.1% to $20.6 million, partly reflecting that direct origination and acquisition costs for new fair-value receivables are expensed when incurred rather than deferred. Interest expense increased 8.9%, including higher securitization funding costs.
- Contracts purchased totaled $210.6 million, down from $229.6 million; purchases declined from 14,304 to 13,067 contracts. The managed portfolio remained broadly stable year over year.
- Finance receivables acquired on or after January 1, 2018 are measured at fair value. At quarter-end, $209.8 million was reported in this category; the company acquired $212.6 million during the quarter. These receivables incorporate expected credit losses in the estimated yield, so no separate continuing credit-loss provision is recorded on them.
- Compared with December 31, 2017, total assets increased modestly, while net finance receivables declined and restricted cash increased. The allowance for credit losses decreased to $100.8 million from $109.2 million.
Outlook, risks and notable items
- Outlook: The filing provides no specific earnings or revenue guidance. Management says purchases will be managed to available capital and identifies securitization access, trust cash releases, portfolio performance, dealer supply and financing terms as important to future results.
- Funding and leverage: The business requires substantial capital and depends on warehouse facilities, securitizations and collections. Deteriorating pool performance can restrict cash releases and require more credit enhancement. Management cautions that internally generated cash may not meet future needs and that debt repayment is not assured.
- Credit and market risks: Results are exposed to borrower payment capacity, unemployment and economic conditions, used-vehicle recovery values, interest rates, regulatory changes and competition. Net charge-offs increased year over year despite lower delinquency measures.
- Contingencies: The company reported compliance with its financial covenants. It said probable legal losses were immaterial and reasonably possible losses did not exceed $1 million, while noting outcomes remain uncertain. In February 2018, the DOJ advised that it required no further information and recommended no enforcement action in its inquiry; the company cautioned that other inquiries or a renewed DOJ investigation remain possible.
- Subsequent event: On April 16, 2018, the company completed a securitization with $201.8 million of notes backed by $205.0 million of receivables; the notes’ weighted-average yield was approximately 3.98%.
- Other items: The 2018 adoption of ASC 606 and ASC 825 had no material effect on the financial statements. The company repurchased 321,181 shares during the quarter for an average $3.96 per share.
Most important facts for investors to verify
- Whether lower portfolio yields and higher funding costs continue to pressure net interest income and earnings.
- How charge-offs, delinquency trends, extensions and repossession recoveries develop, especially for newer originations.
- Whether warehouse availability and securitization proceeds remain sufficient, including the amount of eligible collateral and cash released by existing trusts.
- The assumptions used to value fair-value receivables, particularly the 10.2%–10.7% discount rates and 16.0% cumulative net-loss estimate.
- Whether the reported covenant compliance, liquidity position and legal-risk assessments change in subsequent filings.