Consumer Portfolio Services, Inc. (CPSS) is a specialty finance company that has carved out a niche in the subprime auto lending market. Founded in 1991 and headquartered in Las Vegas, Nevada, CPS has steadily grown its business over the past three decades, weathering economic cycles and industry challenges to become a leading player in its segment.
CPS's Business Model and History
CPS primarily purchases and services retail automobile installment contracts, also known as automobile loans or finance receivables, originated by licensed motor vehicle dealers throughout the United States. By providing indirect financing to these dealers, CPS serves as an alternative source of funding for customers with limited credit histories or past credit problems - the subprime consumer segment.
The company was formed in California on March 8, 1991, and has since originated approximately $22.6 billion of automobile contracts. While the majority of these contracts were purchased from dealers, CPS has also originated loans secured by automobiles directly with consumers to a lesser degree. In addition to organic growth, the company has expanded through strategic acquisitions, completing four merger and acquisition transactions in 2002, 2003, 2004, and 2011, which added approximately $822.3 million in automobile contracts to its portfolio.
A significant milestone in CPS's history came in 1994 when the company began conducting term securitizations of its originated automobile contracts. As of September 30, 2024, 18 of these securitizations remain active, all structured as secured financings. CPS typically conducts securitizations on a quarterly basis, resulting in four securitizations per calendar year. Since 1994, the company has completed 103 term securitizations of automobile contracts.
The company has faced and overcome various challenges throughout its history. Notably, in 2020, CPS had to postpone its planned April securitization due to the COVID-19 pandemic and the subsequent closure of the capital markets. However, the company demonstrated resilience by successfully completing securitizations in June and September of the same year. CPS has also navigated legal proceedings resulting from its consumer finance activities, including a class action lawsuit filed in 2018 by a former employee alleging incorrect classification of sales representatives. This claim was settled in 2024 for $1.1 million, showcasing the company's ability to resolve legal challenges.
CPS's portfolio of finance receivables has grown significantly, reaching $3.33 billion as of September 30, 2024, up from $2.94 billion a year earlier. This represents a 12% year-over-year increase in the size of the company's managed portfolio. The growth has been driven by CPS's ability to originate new automobile contracts, which totaled $1.22 billion for the first nine months of 2024, a 16% increase compared to the same period in 2023.
Financial Performance and Liquidity
CPS's financial performance has been steady, with the company reporting revenue of $288.2 million for the first nine months of 2024, up 10.8% from the $260.0 million generated in the prior-year period. Net income for the nine-month period was $14.1 million, compared to $38.2 million in the same period of 2023.
For the most recent quarter (Q3 2024), CPS reported revenue of $100.58 million, representing a 9.2% increase year-over-year. This growth was primarily driven by an 11.7% increase in the average balance of the loan portfolio compared to the prior year period. The interest yield on the total loan portfolio increased slightly from 11.3% to 11.4%. Net income for the quarter was $4.80 million.
In terms of cash flow, CPS generated operating cash flow (OCF) of $69.76 million and free cash flow (FCF) of $70.02 million in Q3 2024. For the full year 2023, the company reported revenue of $205.38 million, net income of $45.34 million, OCF of $237.98 million, and FCF of $237.42 million.
The company's liquidity position remains robust, with $8.1 million in unrestricted cash and $294.2 million in aggregate available borrowings under its two warehouse credit facilities as of September 30, 2024. CPS has demonstrated its ability to access the capital markets through securitization transactions, having completed four such deals in the first nine months of 2024 totaling $1.45 billion in notes sold.
CPS's debt profile as of September 30, 2024, included approximately $3.10 billion in outstanding debt, consisting primarily of $2.88 billion in securitization trust debt and $105.8 million in warehouse line of credit debt. The company has also issued $24.3 million in subordinated renewable notes and completed a $100 million residual interest financing transaction.
Key financial ratios highlight the company's leveraged position and liquidity profile: - Debt/Equity Ratio: 10.89 - Current Ratio: 0.076 - Quick Ratio: 0.076
These ratios reflect the capital-intensive nature of CPS's business model and its reliance on debt financing to fund its operations and portfolio growth.
Operational Initiatives and Competitive Positioning
To support its growth, CPS has been focused on enhancing its operational capabilities. The company has made investments in technology, including the migration of its omnichannel collection system to the cloud, which has improved its communication with customers and enabled the launch of an AI-powered voice bot. Additionally, CPS has tightened its collection model, hired more collectors, and leveraged its small and near-shore team to address delinquency challenges.
CPS has also improved various operational metrics, such as reducing funding times and increasing same-day funding for dealers, which is expected to drive more business. These improvements, combined with the company's disciplined underwriting approach, have allowed CPS to grow its portfolio and originations without loosening credit standards.
In the competitive landscape, CPS has managed to outperform its peers, with market analysis indicating that the company is consistently outperforming its competitors by up to 5% in terms of net charge-offs starting from 2022 to the present. This performance is attributed to the company's disciplined underwriting, proactive risk management, and the implementation of its latest Gen 8 credit decisioning model.
The subprime auto finance industry has seen a compound annual growth rate (CAGR) of approximately 5-7% in recent years as the market has matured and stronger players have remained. CPS's performance within this context demonstrates its ability to capitalize on industry trends and maintain a strong competitive position.
Historical Performance and Future Outlook
CPS's contract purchase volumes and managed portfolio levels have shown growth over the years:
- 2018: $902.42 million in contracts purchased, $2.38 billion managed portfolio - 2019: $1.00 billion in contracts purchased, $2.42 billion managed portfolio - 2020: $742.58 million in contracts purchased, $2.17 billion managed portfolio - 2021: $1.15 billion in contracts purchased, $2.25 billion managed portfolio - 2022: $1.85 billion in contracts purchased, $3.00 billion managed portfolio - 2023: $1.36 billion in contracts purchased, $3.19 billion managed portfolio - Nine months ended September 30, 2024: $1.22 billion in contracts purchased, $3.52 billion managed portfolio
Looking ahead, CPS is well-positioned to continue its growth trajectory, with the economy and employment conditions remaining favorable. The recent interest rate cuts by the Federal Reserve are also expected to provide a tailwind for the company's securitization activities and funding costs.
In recent communications, CPS management expressed optimism about future performance, citing several factors:
- The "problematic paper" from 2022 and the first half of 2023 now accounts for less than 33% of the portfolio, with expectations for improvement as this paper runs off and new paper is added. - The company is comfortable with its current credit quality and positioned to resume growth. - The strong economic backdrop, including low unemployment and anticipated further rate cuts by the Federal Reserve, provides a favorable environment for CPS's business. - Continued investment in technology and operational improvements are expected to enhance collection efficiency and reduce losses.
While CPS has not provided specific numerical guidance for upcoming quarters, the company's management has expressed confidence in its ability to grow the business and improve performance based on these factors.
Risks and Challenges
Despite its strong positioning, CPS is not without risks. The subprime auto lending industry is inherently cyclical, and the company's performance is closely tied to macroeconomic factors such as unemployment levels and consumer spending patterns. Additionally, CPS faces regulatory scrutiny and the potential for litigation related to its lending practices and servicing of automobile contracts.
The company's reliance on debt financing, particularly securitizations and warehouse credit facilities, exposes it to interest rate risks and potential disruptions in the capital markets. CPS must maintain access to these funding sources to continue purchasing new contracts and growing its portfolio.
Conclusion
Consumer Portfolio Services has demonstrated its ability to navigate the challenges of the subprime auto lending industry, leveraging its operational expertise and disciplined risk management to grow its business and maintain a strong competitive position. The company's consistent financial performance, liquidity management, and strategic initiatives position it well for continued success in the years ahead. While facing ongoing industry risks and challenges, CPS's focus on technology investment, operational efficiency, and maintaining credit quality should support its efforts to capitalize on market opportunities and drive sustainable growth in the subprime auto finance sector.