Business context and reporting period
Consumer Portfolio Services, Inc. is a specialty finance company that purchases and services U.S. automobile installment contracts, primarily for subprime borrowers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted. Amounts below are in millions except per-share data.
Financial and operating highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue per financial statements | $94.0 | $77.1 | $268.3 | $216.8 |
| Net income | $8.8 | $7.8 | $25.7 | $21.5 |
| Diluted earnings per share | $0.28 | $0.24 | $0.81 | $0.67 |
| Provision for credit losses | $37.4 | $27.3 | $106.5 | $76.8 |
| Interest expense | $14.8 | $12.2 | $41.7 | $37.6 |
For the first nine months, operating cash flow was $138.0 (2014: $101.0), investing cash flow was negative $418.5 (negative $388.7), and financing cash flow was $283.6 ($278.8). Cash and cash equivalents increased $3.1 to $20.9. Restricted cash was $206.6, including $102.1 of securitization prefunding proceeds.
At September 30, total assets were $2,160.4, net finance receivables were $1,823.4, and shareholders’ equity was $155.3. Debt was approximately $1,976.3, primarily securitization trust debt of $1,903.6; other debt included $46.9 of warehouse lines, $10.6 of residual-interest financing, and $15.2 of subordinated renewable notes. The company reported $79.2 and $73.9 available under two warehouse facilities, subject to sufficient eligible collateral; it reported approximately $41.6 of eligible collateral.
The net interest yield was 16.0% in Q3, down from 17.2%, and 16.2% for the nine months, down from 16.9%. Finance-receivable yields declined as the company offered dealers lower acquisition fees and required slightly lower contract interest rates on some purchases. Total delinquencies and repossessions were 9.4% of the originated and Fireside servicing portfolio, versus 8.8% a year earlier; annualized net charge-offs were 6.5%, versus 5.6%.
Material changes versus prior periods
- Q3 revenue increased 22.0% and net income increased 13.7%; nine-month net income increased 19.6%. Growth was primarily driven by a larger receivables portfolio and higher interest income.
- Managed portfolio balances reached approximately $1,940.5, up from $1,518.6 a year earlier. The company purchased $791.3 of contracts during the first nine months, versus $680.6.
- Credit-loss provision rose 37.1% in Q3 and 38.7% for the nine months. Management attributed the increase to portfolio growth and somewhat higher delinquency and charge-off rates. The allowance for finance credit losses was $78.8, compared with $61.5 at year-end 2014.
- Debt grew with securitization activity: the company issued $795.0 of securitization debt and repaid $490.0 during the first nine months. Warehouse-line net repayments were $9.9, compared with $50.0 of net proceeds in the prior-year period.
- Employee costs rose as staffing expanded to support originations and servicing. Headcount was 903, compared with 804 a year earlier.
Outlook, risks, contingencies and unusual items
The filing provides no quantified earnings or purchase-volume guidance. Management said contract purchases are intended to match available capital and that growth depends on access to securitizations and warehouse funding, portfolio performance, cash releases from securitization trusts, dealer activity and financing terms. Management cautioned that results for the interim periods are not necessarily indicative of full-year results.
- Funding and leverage: The business requires substantial capital, carries substantial indebtedness and depends on continued operating cash flow and access to financing. Management warned that insufficient cash generation could impair debt service. The company reported compliance with financial covenants at September 30, 2015; certain agreements contain cross-default provisions.
- Credit and market risks: Results are sensitive to borrower payment performance, unemployment and broader economic conditions, used-vehicle recovery values, interest rates, consumer-finance regulation and securitization-market access. Management said FTC-required servicing changes may have contributed to higher delinquencies and extensions.
- Legal matters: The company disclosed two purported consumer class actions, one settled subject to court approval and another returned to the California court of appeals. A Department of Justice subpoena seeks records concerning subprime contract origination and securitization since 2005; the company said it is cooperating. The investigation could lead to claims, damages, fines or penalties, with no assured outcome. The filing estimates reasonably possible legal losses in excess of recorded reserves at $0–$250,000, while noting actual outcomes could exceed reserves.
- Other notable items: The 2014 FTC consent decree required approximately $1.9 of customer restitution, $1.6 of account adjustments, a $2.0 government penalty and procedural changes. In October 2015, the company delivered additional receivables to the 2015-C trust and received related restricted cash, most of which was used to repay warehouse borrowings. The company repurchased 183,475 shares during Q3.
Most important facts for investors to verify
- Reconcile the nine-month revenue inconsistency: the financial statements report $268.3, but MD&A states $286.3 in one passage. The statement components total $268.3.
- Track delinquency, extensions, charge-offs and recoveries against the growing portfolio, including the adequacy of the credit-loss allowance.
- Confirm continued securitization and warehouse-funding capacity, eligible collateral availability, restricted-cash requirements and covenant compliance.
- Monitor the DOJ investigation and consumer litigation, including whether liabilities exceed recorded reserves.
- Assess the extent to which lower asset yields, higher credit costs and debt funding costs affect future earnings and liquidity.