Consumer Portfolio Services, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. The company purchases and services retail auto contracts, primarily for subprime borrowers, and funds its portfolio mainly through securitizations and warehouse facilities.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $108.5 million | $94.0 million | $314.1 million | $268.3 million |
| Interest income | $105.4 million | $90.6 million | $303.7 million | $257.8 million |
| Operating expenses | $96.1 million | $78.3 million | $277.1 million | $222.7 million |
| Provision for credit losses | $46.3 million | $37.4 million | $134.9 million | $106.5 million |
| Interest expense | $20.9 million | $14.8 million | $58.4 million | $41.7 million |
| Net income | $7.3 million | $8.8 million | $21.8 million | $25.7 million |
| Diluted EPS | $0.26 | $0.28 | $0.75 | $0.81 |
Q3 revenue rose 15.5% year over year, but expenses increased 22.6% and net income fell 16.9%. For the nine-month period, revenue increased 17.1%, expenses rose 24.4%, and net income declined 15.1%. The annualized net interest yield fell to 15.0% in Q3 from 16.1%; for the nine months it was 15.1%, versus 16.3%.
Portfolio, cash flow and balance sheet
- Finance receivables, net of allowance, were $2.160 billion at September 30, up from $1.909 billion at year-end 2015. The allowance was $96.8 million, compared with $75.6 million.
- The managed portfolio was $2.292 billion, up from $1.941 billion a year earlier. Nine-month contract purchases were $873.5 million, versus $791.3 million.
- Q3 delinquencies were 9.2% of the gross servicing portfolio, versus 7.3% a year earlier; delinquencies plus repossessions were 10.8%, versus 8.8%. Annualized net charge-offs were 7.1%, versus 6.5%.
- For the first nine months, operating cash flow was $159.1 million, investing cash outflow was $390.9 million, and financing cash inflow was $224.0 million. Cash and cash equivalents declined $7.8 million to $11.5 million; restricted cash was $116.4 million.
- Total debt was approximately $2.176 billion, principally $2.073 billion of securitization trust debt and $81.7 million of warehouse borrowings. Warehouse borrowings fell from $194.1 million at December 31, 2015; securitization debt increased from $1.720 billion.
- The company reported $216.3 million of available warehouse borrowings, subject to sufficient eligible collateral; eligible collateral at period-end was approximately $25.4 million. It reported compliance with debt covenants.
Management commentary, outlook and risks
- Management attributed higher interest income mainly to portfolio growth. Higher funding costs and credit-loss provisions, along with higher delinquency and charge-off rates, weighed on results. Management also cited slightly lower yields on receivables following reduced acquisition fees and contract rates offered on some purchases.
- Management said securitization funding costs had generally risen since 2014, though the trend had eased somewhat. The blended cost was 4.48% for July 2016 and 3.66% for October 2016. No formal earnings or operating guidance is provided.
- Liquidity and growth depend on continued access to securitizations and warehouse funding, eligible collateral, trust cash releases and portfolio performance. Management cautioned that internally generated cash may not meet all cash demands and that inability to securitize could constrain purchases and related income.
- Key operating risks include borrower payment performance, economic and unemployment conditions, used-vehicle recovery values, interest rates, funding availability, competition and regulation. Management said FTC consent-decree servicing changes may have contributed to higher delinquencies and extensions.
- The company faces a Department of Justice investigation regarding subprime auto-contract origination and securitization practices. It provided additional documents on September 30, 2016 and reported no subsequent material developments beyond the investigation’s initiation. The filing warns that damages, fines or claims could materially affect results; the outcome is uncertain.
- A consumer class-action settlement had court approval, and an appeal was denied October 18, 2016; the company expected the settlement to proceed. The filing estimates reasonably possible legal losses in excess of recorded liabilities at $0–$250,000, while cautioning that outcomes could exceed reserves.
- During the nine months, the company repurchased 2.0 million shares for an average $4.05 per share. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether rising delinquencies, net charge-offs and credit-loss provisions continue to pressure earnings and portfolio returns.
- Whether securitization funding remains available at acceptable costs, and how much reported warehouse availability is usable given eligible-collateral limits.
- Whether cash releases from securitization trusts and operating cash generation support planned contract purchases and debt service.
- Developments in the DOJ investigation, the consumer settlement and any resulting legal exposure beyond recorded reserves.
- Whether the lower October 2016 securitization cost persists and offsets the reported decline in net interest yield.