CPS(CPSS) - 2023 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Consumer Portfolio Services, Inc. as of September 30, 2023, and for the three and nine-month periods then ended, along with detailed notes on accounting policies Unaudited Condensed Consolidated Balance Sheets As of September 30, 2023, total assets increased to $2.88 billion from $2.75 billion at year-end 2022, primarily driven by a rise in Finance receivables measured at fair value, while total liabilities grew to $2.61 billion from $2.52 billion, and shareholders' equity increased to $265.9 million from $228.4 million Condensed Consolidated Balance Sheet Data (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,880,848 | $2,752,768 | | Finance receivables measured at fair value | $2,671,540 | $2,476,617 | | Finance receivables, net | $34,265 | $70,551 | | Total Liabilities | $2,614,952 | $2,524,379 | | Warehouse lines of credit | $240,384 | $285,328 | | Securitization trust debt | $2,243,284 | $2,108,744 | | Total Shareholders' Equity | $265,896 | $228,389 | Unaudited Condensed Consolidated Statements of Operations For the three months ended September 30, 2023, net income was $10.4 million, a decrease from $25.4 million in the prior-year period, with the nine-month net income at $38.2 million, down from $71.8 million year-over-year, primarily due to a significant increase in interest expense Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $92,079 | $90,305 | $260,037 | $246,689 | | Interest Expense | $37,889 | $23,483 | $106,354 | $58,654 | | Total Expenses | $77,861 | $55,961 | $208,784 | $148,801 | | Net Income | $10,379 | $25,413 | $38,156 | $71,848 | | Diluted EPS | $0.41 | $0.95 | $1.51 | $2.61 | Unaudited Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash provided by operating activities was $181.9 million, net cash used in investing activities was $275.8 million primarily for finance receivables, and net cash provided by financing activities was $73.1 million, reflecting debt proceeds offset by repayments and stock purchases Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $181,918 | $164,744 | | Net cash used in investing activities | ($275,752) | ($566,524) | | Net cash provided by financing activities | $73,138 | $397,938 | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide critical details on accounting policies, including the use of fair value for finance receivables acquired since 2018, debt structures, legal proceedings, and fair value measurement methodologies, with a key subsequent event being a $286.1 million securitization in October 2023 - The company specializes in purchasing and servicing sub-prime retail automobile contracts, which it finances through securitizations and warehouse credit facilities[107] - Finance receivables acquired since January 1, 2018, are accounted for at fair value, with interest income recognized on a level yield basis, meaning no separate provision for credit losses is made for this portfolio[130][131] - Subsequent to the quarter end, on October 24, 2023, the company executed a securitization, selling $286.1 million of asset-backed notes secured by $306.7 million in automobile receivables[70] - The company is involved in various legal proceedings, including a wage and hour claim settled by agreement in August 2023 (pending court approval), and a civil investigative demand from Massachusetts, for which a probable loss contingency of $3.8 million has been recorded[190][226][210] Debt Outstanding (in thousands) | Debt Type | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Securitization trust debt | $2,257,832 | $2,122,918 | | Warehouse lines of credit | $241,471 | $287,878 | | Residual interest financing | $50,000 | $50,000 | | Subordinated renewable notes | $19,163 | $25,263 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, including business overview, financing strategies, and a comparative analysis of operating results for the three and nine-month periods ended September 30, 2023 and 2022 Overview The company is a specialty finance firm that purchases and services sub-prime auto contracts, primarily from franchised dealers, having originated approximately $21.0 billion in contracts since 1991, with its business model relying on warehouse facilities and securitizations, and a managed portfolio growing to $3.18 billion as of September 30, 2023 Contract Purchases and Managed Portfolio (in thousands) | Period | Contracts Purchased in Period | Managed Portfolio at Period End | | :--- | :--- | :--- | | 2022 | $1,845,385 | $3,001,308 | | Nine months ended Sep 30, 2023 | $1,055,957 | $3,181,758 | - The company also originates and services contracts for a third-party, originating $92.0 million under this program in the first nine months of 2023[75] Results of Operations - Three Months Ended Sep 30, 2023 For Q3 2023, revenues increased 2.0% to $92.1 million, driven by a 10.8% increase in the average loan portfolio balance, but total operating expenses surged 39.1% to $77.9 million, primarily due to a $14.4 million increase in interest expense, leading to a significant drop in pre-tax income to $14.2 million from $34.3 million in Q3 2022, despite a $2.0 million reduction to the provision for credit losses Q3 2023 vs Q3 2022 Performance (in millions) | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $92.1 | $90.3 | +2.0% | | Interest Expense | $37.9 | $23.5 | +61.3% | | Total Operating Expenses | $77.9 | $56.0 | +39.1% | | Income Before Tax | $14.2 | $34.3 | -58.6% | - The annualized average rate on securitization trust debt rose to 5.4% from 3.6% YoY, and the rate on warehouse debt increased to 10.9% from 7.7% YoY, driving the surge in interest expense[219][3] - Contract purchases decreased to $322.4 million in Q3 2023 from $468.2 million in Q3 2022[7] Results of Operations - Nine Months Ended Sep 30, 2023 For the nine months ended September 30, 2023, revenues grew 5.4% to $260.0 million, while operating expenses increased 40.3% to $208.8 million, primarily due to interest expense nearly doubling to $106.4 million from $58.7 million, resulting in pre-tax income falling to $51.3 million from $97.9 million, despite a $20.7 million reduction in the provision for credit losses Nine Months 2023 vs 2022 Performance (in millions) | Metric | 9M 2023 | 9M 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $260.0 | $246.7 | +5.4% | | Interest Expense | $106.4 | $58.7 | +81.3% | | Total Operating Expenses | $208.8 | $148.8 | +40.3% | | Income Before Tax | $51.3 | $97.9 | -47.6% | - Interest expense on securitization trust debt increased by $39.5 million, and on warehouse credit lines by $8.6 million, due to higher average balances and significantly higher interest rates[13][242] - A reduction to the provision for credit losses of $20.7 million was recorded, as previous estimates for future losses exceeded actual incurred losses[245] Credit Experience The company's credit performance is detailed through delinquency, repossession, and net charge-off data, with total delinquencies at 11.7% as of September 30, 2023, and an annualized net charge-off rate of 6.9% for Q3 2023, emphasizing payment extensions as a key loss mitigation tool Delinquency Experience (% of gross servicing portfolio amount) | Metric | Sep 30, 2023 | Sep 30, 2022 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Total Delinquencies | 11.7% | 9.7% | 11.2% | | Total Delinquencies & Repossessions | 13.3% | 10.9% | 12.7% | - The annualized net charge-off rate for the total owned portfolio was 6.9% for Q3 2023, compared to 4.9% for Q3 2022[268][290] - The company views its extension program as effective, with 69.1% of accounts granted extensions in 2019 either paid in full or active and performing as of September 30, 2023[270] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations, securitization proceeds, and warehouse credit facilities, with $8.3 million in unrestricted cash and $159.6 million available under warehouse facilities as of September 30, 2023, and total debt outstanding of approximately $2.55 billion - Primary sources of cash are securitizations, warehouse credit facilities, and customer payments, with primary uses being purchasing auto contracts and servicing debt[297] - As of September 30, 2023, the company had $8.3 million in unrestricted cash and $159.6 million available under warehouse credit facilities, though available borrowings are limited by eligible collateral of approximately $19.6 million[25] - Total debt outstanding was approximately $2.55 billion at September 30, 2023, primarily composed of securitization trust debt[26] - Net cash from financing activities decreased to $73.1 million for the nine months ended Sep 30, 2023, from $397.9 million in the prior year, mainly due to lower new securitization debt issuance and net repayments on warehouse lines versus net advances in 2022[42] Controls and Procedures The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures are effective, with no material changes to internal controls over financial reporting during the most recently completed fiscal quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures are effective for timely recording, processing, and reporting of material information[28] - No material changes were made to internal controls over financial reporting during the most recent fiscal quarter[28] PART II — OTHER INFORMATION Legal Proceedings This section incorporates by reference the information on legal proceedings detailed in Note 8 to the Unaudited Condensed Consolidated Financial Statements - Information regarding legal proceedings is provided in Note 8 to the financial statements and is incorporated here by reference[280] Risk Factors This section highlights material risks to the company, including substantial indebtedness of $2.55 billion as of September 30, 2023, which could limit financial flexibility, and a potential rescission liability of up to $5.3 million related to past sales of subordinated renewable notes - The company has substantial indebtedness of approximately $2.55 billion as of September 30, 2023, which poses risks such as limiting financial flexibility and increasing vulnerability to adverse economic conditions[302][30] - The company faces potential rescission liability for certain subordinated renewable notes sold after its registration statement expired, with approximately $5.3 million of such notes outstanding as of October 31, 2023, which could require repurchase[304][31] Issuer Purchases of Equity Securities During the third quarter of 2023, the company repurchased a total of 61,685 shares of its common stock at an average price of $9.59 per share under a publicly announced program, with approximately $1.9 million remaining for future purchases as of September 30, 2023 Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 2023 | 10,257 | $11.31 | | Aug 2023 | – | $– | | Sep 2023 | 51,428 | $9.25 | | Total | 61,685 | $9.59 | - As of September 30, 2023, approximately $1.9 million remained available for share repurchases under the authorized program[308][34] Exhibits This section lists the exhibits filed with the Form 10-Q, which include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 1350, as well as Inline XBRL documents - The exhibits filed with the report include Rule 13a-14(a) certifications for the CEO and CFO, Section 1350 certifications, and various Inline XBRL documents[309][52][36] Signatures The report is duly signed and authorized by the company's Chief Executive Officer, Charles E. Bradley, Jr., and its Executive Vice President and Chief Financial Officer, Denesh Bharwani, on November 9, 2023 - The report was signed on November 9, 2023, by Charles E. Bradley, Jr. (Principal Executive Officer) and Denesh Bharwani (Principal Financial Officer)[289][48][37]