Consumer Portfolio Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019. The company purchases and services U.S. subprime auto installment contracts. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $67.3 | $86.3 | $138.1 | $174.6 |
| Operating expenses | $62.6 | $83.6 | $130.3 | $169.1 |
| Income before tax | $4.6 | $2.8 | $7.8 | $5.4 |
| Net income | $3.0 | $1.8 | $13.8 | $3.5 |
| Diluted EPS | $0.13 | $0.08 | $0.58 | $0.15 |
| Net interest yield | 8.3% | 9.6% | 8.5% | 9.6% |
- Q2 revenue fell 22.0%; six-month revenue fell 20.9%. Interest income declined, and fair-value receivables were marked down $9.5 million in Q2 and $19.9 million year to date for estimated pandemic-related credit effects.
- Q2 operating expenses declined 25.0%, chiefly because credit-loss provision fell to $3.1 million from $20.5 million. The six-month provision was $6.7 million versus $44.4 million. These comparisons reflect a change in credit-loss accounting as well as different estimates: CECL adoption added $127.0 million to the allowance on January 1, 2020, with the after-tax transition adjustment charged to retained earnings, not current-period expense.
- Six-month net income included an $8.8 million tax benefit from CARES Act NOL carryback revaluation. Excluding that benefit, the company reported $2.8 million of income tax expense for the period.
- Operating cash flow was $129.4 million for the six months, versus $112.4 million. Investing activities provided $4.9 million versus using $115.4 million; financing activities used $128.4 million versus providing $8.1 million. Cash and restricted cash totaled $146.7 million at period end, including $139.2 million of restricted cash.
Financial position and operating changes
- Total assets were $2.34 billion, down from $2.54 billion at year-end; shareholders’ equity was $125.1 million, down from $202.6 million. The CECL transition adjustment was a major factor in the equity decline.
- Debt was approximately $2.17 billion, principally $2.05 billion of securitization trust debt. Warehouse lines were $56.7 million; residual-interest financing was $37.5 million; subordinated renewable notes were $19.6 million. The filing reports covenant compliance at June 30.
- Unrestricted cash was $7.5 million. The company reported $243.3 million of aggregate available warehouse borrowings, subject to sufficient eligible collateral; eligible collateral was approximately $20.3 million.
- Six-month contract purchases were $401.9 million, down from $493.2 million; Q2 purchases were $135.9 million, down from $250.1 million. The managed portfolio was $2.33 billion, down from $2.40 billion a year earlier. The company attributed lower purchases to pandemic-related economic disruption.
- Reported owned-portfolio delinquencies were 7.8% at June 30, versus 13.0% a year earlier. Management cautioned that the pandemic’s future effect was not yet reflected in these figures. Average monthly extensions rose to 9,448 in the first half from 4,994; Q2 extensions peaked at 14,227 in April.
- Annualized net charge-offs were 12.8% for the legacy portfolio and 5.0% for fair-value receivables, compared with 12.2% and 2.9%, respectively, in Q2 2019. Total managed-portfolio charge-offs were 7.4%, versus 7.8%.
Outlook, risks and notable items
- Management provided no quantified earnings or purchase-volume guidance. It said it intends to monitor asset-backed securities markets and complete securitizations when terms are acceptable; there is no assurance that financing will be available on acceptable terms.
- The April 2020 securitization was delayed until June because of market disruption. The June transaction had less leverage than recent transactions and a 4.09% blended cost of funds, versus 3.08% for January 2020. Management linked the change to pandemic-related market uncertainty.
- COVID-19 risks include borrower income disruption and payment defaults, restrictions on repossessions or other enforcement, increased extensions, uncertain future credit losses and fair values, reduced contract availability, and potential constraints on liquidity and financing. The company said the pandemic may materially affect results and that the extent cannot be estimated.
- Management laid off 114 employees during Q2 in response to lower business volumes and expects lower employee costs in future periods. Total employees were 834 at June 30, compared with 1,045 a year earlier.
- Legal matters include consumer claims and a putative wage-and-hour class action by a former employee; no class-certification motion had been filed or granted. The company recorded $250,000 of probable legal losses and estimated reasonably possible losses would not exceed $3 million, while noting outcomes remain uncertain.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How borrower performance, extensions, repossessions and charge-offs develop as pandemic-related payment relief and restrictions change.
- Whether fair-value assumptions and the $19.9 million first-half markdown adequately reflect expected losses and portfolio cash flows.
- Access to securitization and warehouse funding, collateral eligibility, financing costs, and potential effects on contract purchases and liquidity.
- The drivers and sustainability of reported six-month earnings, including the $8.8 million tax benefit and the CECL transition’s effect on equity and allowance balances.
- Debt service capacity, covenant headroom, and the availability of cash releases from securitization trusts as pool performance evolves.