Consumer Portfolio Services, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 6, 2018. Amounts below are in U.S. dollars. The company purchases and services automobile contracts, principally for subprime borrowers, and funds purchases mainly through securitizations and warehouse facilities.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $95.6m | $109.5m | $298.6m | $327.2m |
| Interest income | $93.6m | $107.0m | $291.5m | $319.1m |
| Operating expenses | $90.9m | $101.4m | $284.6m | $303.3m |
| Provision for credit losses | $32.0m | $47.3m | $108.0m | $143.1m |
| Net income | $3.2m | $4.7m | $9.5m | $13.7m |
| Diluted EPS | $0.13 | $0.17 | $0.38 | $0.50 |
- Q3 revenue fell 12.7% and net income fell 31.4% year over year. For the nine months, revenue declined 8.7% and net income declined 30.7%.
- Net interest yield declined to 11.4% from 14.4% in Q3 and to 12.2% from 14.5% for the nine-month period. Management cited lower yields on newly acquired fair-value receivables and lower contract rates and acquisition fees on some purchases.
- Credit-loss provision decreased, but net charge-offs rose: annualized net charge-offs were 7.9% of average servicing portfolio versus 7.8% in the comparable nine-month period. Delinquencies were 10.2% of the gross servicing portfolio, versus 9.0% a year earlier.
- For contracts acquired beginning in 2018, the company adopted fair-value accounting: expected credit losses are reflected in the estimated yield, rather than subsequent credit-loss provisions. Fair-value receivables totaled $614.8m at September 30 and are Level 3 measurements using significant unobservable assumptions.
- Nine-month operating cash flow was $158.6m, investing cash outflow $157.7m, and financing cash outflow $4.6m. Cash and restricted cash totaled $121.0m, including $10.5m unrestricted cash and $110.5m restricted cash.
- At quarter-end, the balance sheet reported $2.034bn securitization trust debt, $127.7m warehouse lines, $39.0m residual-interest financing (net of financing costs), and $16.9m subordinated notes. Management stated total debt was approximately $2.218bn. Shareholders’ equity was $192.3m.
Material changes and notable events
- Revenue and earnings declined year over year despite lower credit-loss provisions; interest expense increased 10.7% in Q3 and 9.3% for the nine months, with securitization borrowing costs higher than a year earlier.
- Contract purchases totaled $650.6m in the first nine months, down from $668.3m; managed portfolio balance was $2.343bn, broadly unchanged from a year earlier.
- On May 16, 2018, the company completed $40m of residual-interest financing at a coupon of 8.595%. It renewed a $100m warehouse facility in September, extending its revolving period to September 2020.
- On October 17, after quarter-end, the company completed a $233.7m asset-backed note issuance secured by $245m of automobile receivables; the notes’ weighted-average yield was approximately 4.25%.
- Warrants to purchase 2 million shares were exercised in July, with 1,999,995 net shares issued. The company repurchased 309,512 shares during Q3 for an average $3.76 per share.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management said it intends to align contract purchases with available capital and may reduce operating costs as appropriate.
- Liquidity depends on securitization access, warehouse financing, collections, and cash released from securitization trusts. At September 30, management reported $172.3m of available warehouse borrowing capacity assuming sufficient eligible collateral, while identifying approximately $21.1m of eligible collateral.
- The company warns that higher interest rates, weaker borrower payment performance, used-vehicle values, regulatory changes, and inability to complete securitizations could pressure earnings, liquidity, and debt service. It was compliant with applicable financial covenants at quarter-end.
- Management estimated reasonably possible legal losses did not exceed $3m and stated probable incurred losses were immaterial. The DOJ advised in February 2018 that it required no further information and recommended no enforcement action in its industry inquiry; future or renewed government action cannot be ruled out.
- Management considered the disclosure controls effective and reported no material quarterly change in internal control over financial reporting. Adoption of the new lease standard was planned for January 1, 2019; its impact was still being evaluated.
Key facts for investors to verify
- Whether portfolio delinquency and charge-off trends continue to worsen, and how extensions affect eventual collections and losses.
- Fair-value receivable performance and the sensitivity of Level 3 valuations to assumed discount rates, cumulative losses, and cash-flow timing.
- Actual warehouse capacity available after eligible-collateral limits, future securitization pricing, and the amount of cash released by existing trusts.
- Whether lower net interest yield and higher funding costs continue to compress profitability, and how purchase volume responds to available capital.
- Developments in consumer litigation and potential government inquiries, notwithstanding the DOJ’s stated closure of its inquiry as to the company.