Consumer Portfolio Services, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual report, not a quarterly filing. CPS is a specialty finance company that purchases and services U.S. subprime auto contracts, largely funded through asset-backed securitizations and warehouse facilities.
Financial and operating results
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $434.4 million | $422.3 million | +2.9% |
| Interest income | $424.2 million | $409.0 million | +3.7% |
| Interest expense | $92.3 million | $79.9 million | +15.5% |
| Provision for credit losses | $186.7 million | $178.5 million | +4.6% |
| Income before tax | $32.1 million | $49.7 million | -35.4% |
| Net income | $3.8 million | $29.3 million | -87.2% |
| Diluted EPS | $0.14 | $1.01 | Lower |
| Net interest margin | 14.4% | 15.0% | -0.6 percentage points |
Net cash provided by operating activities was $215.6 million, versus $196.3 million in 2016. Investing activities used $209.8 million and financing activities used $7.0 million. Year-end cash and cash equivalents were $12.7 million; restricted cash was $112.0 million.
At year-end, total assets were $2.425 billion, net finance receivables were $2.196 billion, and shareholders’ equity was $183.9 million. Debt was approximately $2.212 billion: $2.083 billion of securitization trust debt, $112.4 million of warehouse borrowings, and $16.6 million of subordinated notes. The company reported $187.6 million of availability across its three warehouse facilities, subject to eligible collateral and its capital. It was in compliance with financial covenants.
Contract purchases fell to $859.1 million from $1.089 billion, while the year-end managed portfolio edged up to $2.334 billion from $2.308 billion. CPS completed four 2017 securitizations totaling $870 million. The 2017 average contract interest yield was 18.4%, compared with 18.7% in 2016; the average securitization debt rate rose to 3.8% from 3.3%.
Material changes and notable items
- Credit performance weakened: net charge-offs rose to 7.7% of the average servicing portfolio from 7.0%; total delinquencies were 9.8% versus 9.2%. The allowance for finance credit losses increased to $109.2 million from $95.6 million.
- The effective tax rate was 88.3%, including a $15.1 million charge to remeasure deferred taxes following the Tax Cuts and Jobs Act. Excluding that charge, management reported a 41.1% effective rate. The lower federal tax rate is expected to reduce tax expense from 2018 onward.
- Other income declined to $10.2 million from $13.3 million, mainly reflecting lower direct-mail revenue and related services.
- Common shares outstanding declined during 2017 amid repurchases; the company reported repurchasing approximately 2.7 million shares for the year. It does not expect to pay common dividends in the foreseeable future.
Outlook, risks and contingencies
Management expected quarterly profits in 2018 and intended to continue regular securitizations, while cautioning that neither profitability nor access to securitization funding was assured. A January 2018 securitization issued $190 million of notes backed by $193.6 million of receivables, at a reported weighted-average yield of approximately 3.46%.
Key risks include subprime borrower defaults and vehicle recovery values; rising funding costs and interest rates; reliance on warehouse funding, securitizations and cash releases from securitization trusts; substantial leverage; competition; and consumer-finance regulation, litigation, and operational or cybersecurity disruption. Deteriorating pool performance could restrict cash distributions and weaken liquidity. The company noted that new U.S. risk-retention requirements apply to post-December 2016 securitizations.
The DOJ advised CPS in February 2018 that it required no further information and recommended no enforcement action in its industry inquiry. CPS said probable legal losses were immaterial and reasonably possible losses did not exceed $1 million, while noting outcomes remain uncertain. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. CPS adopted fair-value accounting for finance receivables acquired after 2017; it expected the forthcoming CECL standard to have a potentially material effect.
Important facts for investors to verify
- Whether 2018 securitizations and trust cash releases provide enough funding to support originations and operating liquidity.
- Subsequent trends in delinquencies, extensions, charge-offs, recoveries, and allowance adequacy, especially as the portfolio seasons.
- Whether funding costs continue to rise and further compress net interest margin and residual cash flows.
- The assumptions and earnings effects of the 2018 fair-value accounting change, and the eventual impact of CECL.
- Whether the 2018 profitability expectation is achieved, considering the unusually low 2017 net income and the $15.1 million tax-law remeasurement charge.