Consumer Portfolio Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. The company purchases and services auto installment contracts, primarily for subprime borrowers. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Revenue | $88.2 | Down 14.8% from $103.6 |
| Interest income | $85.8 | Down 14.9% from $100.9 |
| Operating expenses | $85.6 | Down 13.6% from $99.0 |
| Interest expense | $27.3 | Up 13.4% from $24.1 |
| Provision for credit losses | $24.0 | Down 40.9% from $40.5 |
| Income before tax / net income | $2.7 / $1.7 | Down from $4.6 / $3.1 |
| Basic / diluted EPS | $0.08 / $0.07 | Compared with $0.15 / $0.12 |
| Net interest income / net interest yield | $58.6 / 9.9% | Compared with $73.3 / 13.3% |
| Operating cash flow | $58.5 | Compared with $63.2 |
| Investing / financing cash flow | $(62.2) / $18.0 | Compared with $(48.3) / $2.8 |
At quarter-end, total assets were $2,531.2 and shareholders’ equity was $198.1. Cash and cash equivalents were $8.9; restricted cash was $135.5. Debt was approximately $2,278.3, including $2,109.0 of securitization trust debt, $117.1 of warehouse credit lines, $39.2 of residual-interest financing (net of issuance costs), and $13.0 of subordinated notes. The company reported $182.9 of available warehouse borrowing, subject to eligible collateral; eligible collateral was approximately $15.3. It reported compliance with debt covenants.
Finance receivables measured at fair value totaled $997.6. This accounting method incorporates estimated lifetime credit losses into the yield and does not record a periodic credit-loss provision for those receivables. The increase in this portfolio materially affects year-over-year interest-income and yield comparisons.
Material changes and credit performance
- Revenue declined mainly because interest income fell as the lower-yield fair-value portfolio grew. Its average balance rose to $955.6 from $133.5, while its yield was 9.6%, versus 10.5% a year earlier. The yield on other finance receivables was 18.0% in both periods.
- Interest expense increased, including higher securitization costs: the reported cost on securitization debt rose to 4.4% from 4.0%. Net interest yield fell to 9.9% from 13.3%.
- Contract purchases increased to $243.0 from $210.6; the managed portfolio reached $2,393.2, up from $2,332.3 a year earlier.
- Managed-portfolio delinquencies were 10.3% at March 31, 2019, compared with 7.2% a year earlier and 12.3% at December 31, 2018. Annualized net charge-offs were 8.0%, versus 8.2% a year earlier.
- Allowance for credit losses on receivables accounted for under the allowance method was $48.2, down from $67.4 at year-end 2018. Q1 charge-offs were $52.5 and recoveries were $9.4.
Liquidity, outlook, risks, and unusual items
- Management said contract-purchase activity would be matched to available capital and that operating costs could be minimized as appropriate. No specific earnings or revenue guidance was provided.
- Liquidity depends on securitizations, warehouse funding, customer collections, and cash releases from securitization trusts. Trust cash releases can be restricted if delinquency or loss tests are not met. The filing cautions that internally generated cash may not meet all cash needs.
- On April 17, 2019, the company completed a $228.3 securitization backed by $230.0 of auto receivables; the notes’ weighted-average yield was approximately 3.95%.
- The company identified economic conditions, unemployment, used-vehicle values, interest rates, funding availability, securitization terms, competition, regulation, and credit losses as risks. It also highlighted substantial indebtedness and the possibility that insufficient operating cash flow could impair debt service.
- A former employee’s wage-and-hour lawsuit alleges misclassification of sales and marketing representatives and purports to represent a class; no class-certification motion had been filed or granted. The company recorded no liability for the claim. It estimated reasonably possible losses across legal matters did not exceed $3.0, while noting outcomes are uncertain.
- Adoption of lease accounting effective January 1, 2019 added a $21.9 net operating-lease asset and a $23.3 lease liability; management said the adoption had no material income-statement impact. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether portfolio credit trends—especially delinquencies, charge-offs, recoveries, and extensions—remain consistent with management’s estimates and allowance.
- How the expanding fair-value receivables portfolio affects reported interest income, yields, and comparability with prior periods.
- Whether warehouse availability is practically usable given eligible-collateral limits, and whether securitizations and trust cash releases remain accessible.
- Debt-service capacity, covenant compliance, and the effect of rising funding costs on net interest spread and profitability.
- Developments in the wage-and-hour litigation and any other legal contingencies or regulatory matters.