Consumer Portfolio Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. CPS purchases and services auto contracts, primarily for subprime borrowers. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Total revenue | $63.1 | $70.8; down 10.8% |
| Pre-tax income | $7.9 | $3.1 |
| Net income | $5.2; diluted EPS $0.21 | $10.8; diluted EPS $0.45 |
| Operating expenses | $55.2 | $67.7; down 18.5% |
| Interest expense | $20.9 | $27.0 |
| Net interest income / yield | $45.1 / 8.2% | $52.1 / 8.3% |
| Cash flows | Operating +$65.4; investing +$23.9; financing −$64.8 | Operating +$64.1; investing −$61.1; financing −$1.7 |
| Cash and restricted cash | $168.6, including $9.2 unrestricted and $159.4 restricted | $144.2 combined at year-end 2020 |
| Total assets / shareholders’ equity | $2,095.8 / $138.5 | $2,145.9 / $133.4 at year-end 2020 |
| Debt | Approximately $1,907.0 total; $1,791.6 securitization, $71.1 warehouse, $23.7 subordinated notes, and about $20.6 residual-interest financing | Debt decreased during the quarter; warehouse debt fell about $47.9 net of financing costs |
Changes and portfolio performance
- Interest income declined 16.5% to $66.1, primarily as the legacy portfolio’s average balance fell 46.6%; growth in fair-value receivables partly offset the decline. Total revenue also reflects a $4.4 fair-value markdown, compared with $10.4 in Q1 2020.
- The reported net-income comparison is affected by Q1 2020’s $8.8 tax benefit from CARES Act NOL carrybacks. Q1 2021 tax expense was $2.8 (35% effective rate); Q1 2020 recorded a $7.7 tax benefit.
- Contract purchases were $205.5, down from $266.0; the managed portfolio was $2,119.1 versus $2,435.1 a year earlier. Management said purchase volumes remained below pre-pandemic levels.
- Delinquencies were 6.6% of the owned servicing portfolio at March 31, 2021, versus 10.2% a year earlier. Total delinquencies plus repossessions were 8.1%, versus 12.4%. Annualized net charge-offs were 6.3% for the total managed portfolio, versus 7.0%; the legacy portfolio rate rose to 12.6% from 10.3%.
- The allowance for legacy finance-receivable credit losses was $73.5 at quarter-end, down from $80.8 at December 31, 2020; no provision was recorded in Q1 2021. Receivables originated since January 2018 are accounted for at fair value, with expected losses reflected in yield and valuation.
Liquidity, outlook, risks, and unusual items
- At March 31, CPS reported $128.9 of available warehouse borrowings, subject to sufficient eligible collateral; it had approximately $61.3 of eligible collateral. Warehouse capacity was $200, down from $300 after CPS repaid and did not renew one facility at its February 2021 maturity.
- CPS completed one securitization in Q1, issuing $230.5 of notes. After quarter-end, on April 28, it completed another securitization of $240.0, with a weighted-average yield of approximately 1.65%.
- Management gave no formal earnings or revenue guidance. It expected somewhat lower employee costs if contract purchases remain at current levels and said it would manage purchases to available capital and, as appropriate, minimize operating costs.
- Management warned that pandemic-related economic effects, customer payment extensions, restrictions on repossessions, used-vehicle values, credit losses, and fair-value assumptions could adversely affect collections, liquidity, and results. Fair-value receivables rely on significant unobservable inputs.
- Liquidity depends in part on securitization-trust performance and cash releases; weaker performance may trap cash or require additional credit enhancement. CPS cautioned that internally generated cash may not meet future needs and that substantial debt could impair flexibility and debt-service capacity. It was in compliance with debt covenants at March 31.
- Legal proceedings include a wage-and-hour class-action allegation; no class-certification motion had been filed or granted, and CPS had not recorded a liability for that claim. The company estimated reasonably possible losses across legal matters did not exceed $3.0, while noting outcomes are uncertain.
- CPS repurchased 138,004 shares in open-market purchases during the quarter. The cash-flow statement reports $0.8 of common-stock purchases, including shares redeemed upon net option exercise.
Important facts for investors to verify
- Whether contract purchases and portfolio growth recover, and how this affects revenue, staffing costs, and access to financing.
- Whether pandemic effects change delinquency, extensions, repossessions, charge-offs, and fair-value estimates; monitor legacy and fair-value portfolios separately.
- Available warehouse capacity and eligible collateral, securitization execution and pricing, restricted cash, and cash releases from existing trusts.
- Debt maturities, covenant compliance, and the company’s ability to service substantial indebtedness under weaker cash-flow conditions.
- The effect of the prior-year CARES Act tax benefit on comparisons of net income and EPS, and the assumptions supporting the $27.5 net deferred tax asset.