Company Quick10K Filing
Consumer Portfolio Services
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 24 $86
10-Q 2019-11-12 Quarter: 2019-09-30
10-Q 2019-08-07 Quarter: 2019-06-30
10-Q 2019-05-08 Quarter: 2019-03-31
10-K 2019-03-13 Annual: 2018-12-31
10-Q 2018-11-06 Quarter: 2018-09-30
10-Q 2018-08-08 Quarter: 2018-06-30
10-Q 2018-05-08 Quarter: 2018-03-31
10-K 2018-03-07 Annual: 2017-12-31
10-Q 2017-11-03 Quarter: 2017-09-30
10-Q 2017-07-31 Quarter: 2017-06-30
10-Q 2017-05-03 Quarter: 2017-03-31
10-K 2017-03-07 Annual: 2016-12-31
10-Q 2016-10-31 Quarter: 2016-09-30
10-Q 2016-08-08 Quarter: 2016-06-30
10-Q 2016-05-02 Quarter: 2016-03-31
10-K 2016-03-09 Annual: 2015-12-31
10-Q 2015-10-27 Quarter: 2015-09-30
10-Q 2015-07-24 Quarter: 2015-06-30
10-Q 2015-04-24 Quarter: 2015-03-31
10-K 2015-02-25 Annual: 2014-12-31
10-Q 2014-10-28 Quarter: 2014-09-30
10-Q 2014-07-28 Quarter: 2014-06-30
10-Q 2014-04-30 Quarter: 2014-03-31
10-K 2014-03-10 Annual: 2013-12-31
10-Q 2013-10-30 Quarter: 2013-09-30
10-Q 2013-08-09 Quarter: 2013-06-30
10-K 2013-02-15 Annual: 2012-12-31
10-Q 2012-11-06 Quarter: 2012-10-29
10-Q 2012-07-31 Quarter: 2012-06-30
10-Q 2012-04-24 Quarter: 2012-04-20
10-K 2012-03-06 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-11-09
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-23 Quarter: 2011-03-31
10-K 2011-03-31 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-16 Quarter: 2010-06-30
10-Q 2010-05-14 Quarter: 2010-03-31
10-K 2010-04-01 Annual: 2009-12-31
8-K 2020-01-15 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-11-14 Regulation FD, Exhibits
8-K 2019-10-29 Earnings, Other Events, Exhibits
8-K 2019-10-22 Shareholder Vote
8-K 2019-10-16
8-K 2019-08-19 Regulation FD, Exhibits
8-K 2019-07-24 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2019-05-31 Regulation FD, Exhibits
8-K 2019-04-17 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2019-03-19 Regulation FD, Exhibits
8-K 2019-02-25 Officers
8-K 2019-02-12 Earnings, Exhibits
8-K 2019-01-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-17 Earnings, Exhibits
8-K 2018-10-17 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-09-21 Enter Agreement, Off-BS Arrangement
8-K 2018-09-07 Regulation FD, Exhibits
8-K 2018-07-24 Earnings, Shareholder Vote, Exhibits
8-K 2018-07-17 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-06 Regulation FD, Exhibits
8-K 2018-05-16 Other Events, Exhibits
8-K 2018-04-16 Enter Agreement, Earnings, Off-BS Arrangement, Exhibits
8-K 2018-03-13 Regulation FD, Exhibits
8-K 2018-02-14 Earnings, Exhibits
8-K 2018-01-16 Enter Agreement, Off-BS Arrangement, Exhibits
CPSS 2019-09-30
Part II. Other Information Item 1. Legal Proceedings 45 Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47 Item 6. Exhibits 47 Signatures 48
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II &Mdash; Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 cps_ex3101.htm
EX-31.2 cps_ex3102.htm
EX-32 cps_ex3200.htm

Consumer Portfolio Services Earnings 2019-09-30

CPSS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
HX 155 173 47 0 0 0 0 117 0%
MFIN 154 1,482 1,196 0 0 1 44 263 0% 5.9 0%
ATLC 144 710 719 8 -33 18 68 -1 -410% -0.0 3%
CPSS 86 2,525 2,324 361 0 12 117 -50 0% -0.4 0%
SNFCA 84 1,106 929 259 256 7 21 -44 99% -2.1 1%
DNJR 82 12 0 0 0 0 0 79 0%
AIHS 76 18 9 8 2 -4 -4 70 26% -19.1 -23%
LMFA 2 10 5 3 0 -2 -1 -1 0% 0.6 -19%
IPB 0 572,908 507,598 8,067 0 1,554 5,937 71,001 0% 12.0 0%
PIY

10-Q 1 cps_10q-20190930.htm FORM 10-Q

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

 

Commission file number: 1-14116

 

CONSUMER PORTFOLIO SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

California 33-0459135
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   

3800 Howard Hughes Parkway, Suite 1400,

Las Vegas, Nevada

89169
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including Area Code: (949) 753-6800

 

Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, no par value

CPSS The Nasdaq Stock Market LLC (Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]    No  [_]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  [X]    No  [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_] Accelerated filer [X]
 
Non-accelerated filer [_] Smaller reporting company [X]
 
Emerging growth company [_]  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [_]    No  [X]

As of November 6, 2019 the registrant had 22,530,918 common shares outstanding.

 

 

 

 

   

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarterly Period Ended September 30, 2019

 

    Page
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
  Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 3
  Unaudited Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019 and 2018 4
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2019 and 2018 5
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2019 and 2018 6
  Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three-month and nine-month periods ended September 30, 2019 and 2018 7
  Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 4. Controls and Procedures 44
   
 
 
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 6. Exhibits 47
  Signatures

48

 

 

 

 

 

 

 

 

 

 

 

 2 

 

 

Item 1. Financial Statements

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

   September 30,   December 31, 
   2019   2018 
         
ASSETS          
Cash and cash equivalents  $8,799   $12,787 
Restricted cash and equivalents   128,556    117,323 
           
Finance receivables   1,022,391    1,522,085 
Less: Allowance for finance credit losses   (12,740)   (67,376)
Finance receivables, net   1,009,651    1,454,709 
           
Finance receivables measured at fair value   1,313,205    821,066 
Furniture and equipment, net   1,702    1,837 
Deferred tax assets, net   16,125    19,188 
Accrued interest receivable   12,729    31,969 
Other assets   46,695    26,801 
   $2,537,462   $2,485,680 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Accounts payable and accrued expenses  $55,431   $31,692 
Warehouse lines of credit   157,761    136,847 
Residual interest financing   39,385    39,106 
Securitization trust debt   2,066,458    2,063,627 
Subordinated renewable notes   15,529    17,290 
    2,334,564    2,288,562 
COMMITMENTS AND CONTINGENCIES          
Shareholders’ Equity          
Preferred stock, $1 par value; authorized 4,998,130 shares; none issued        
Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued        
Series B preferred stock, $1 par value; authorized 1,870 shares; none issued        
Common stock, no par value; authorized 75,000,000 shares; 22,525,718 and 22,421,688 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   70,676    70,273 
Retained earnings   139,776    134,399 
Accumulated other comprehensive loss   (7,554)   (7,554)
    202,898    197,118 
           
   $2,537,462   $2,485,680 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 3 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
                 
Revenues:                
Interest income  $83,528   $93,617   $253,822   $291,535 
Other income   1,994    2,014    6,255    7,022 
    85,522    95,631    260,077    298,557 
                     
Expenses:                    
Employee costs   20,251    18,806    59,030    59,288 
General and administrative   8,185    7,784    25,109    22,730 
Interest   27,940    25,808    82,933    75,057 
Provision for credit losses   19,874    31,959    64,319    107,997 
Sales   4,407    4,377    13,877    13,176 
Occupancy   1,760    1,935    5,745    5,644 
Depreciation and amortization   276    256    789    746 
    82,693    90,925    251,802    284,638 
Income before income tax expense   2,829    4,706    8,275    13,919 
Income tax expense   991    1,508    2,898    4,409 
Net income  $1,838   $3,198   $5,377   $9,510 
                     
Earnings per share:                    
Basic  $0.08   $0.14   $0.24   $0.44 
Diluted  $0.08   $0.13   $0.22   $0.38 
                     
                     
Number of shares used in computing earnings per share:                    
Basic   22,526    22,636    22,378    21,800 
Diluted   24,066    24,735    24,102    25,178 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 4 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
                 
Net income  $1,838   $3,198   $5,377   $9,510 
                     
Other comprehensive income/(loss); change in funded status of pension plan                
Comprehensive income  $1,838   $3,198   $5,377   $9,510 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 5 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2019   2018 
         
Cash flows from operating activities:          
Net income  $5,377   $9,510 
Adjustments to reconcile net income to net cash provided by operating activities:          
Accretion of deferred acquisition fees and origination costs   1,374    2,119 
Net interest income accretion on fair value receivables   64,131    13,010 
Depreciation and amortization   789    746 
Amortization of deferred financing costs   6,226    6,430 
Mark to fair value of finance receivables measured at fair value   (604)    
Provision for credit losses   64,319    107,997 
Stock-based compensation expense   1,496    2,816 
Changes in assets and liabilities:          
Accrued interest receivable   19,240    10,521 
Deferred tax assets, net   3,063    3,760 
Other assets   2,708    (2,892)
Accounts payable and accrued expenses   1,870    4,609 
Net cash provided by operating activities   169,989    158,626 
           
Cash flows from investing activities:          
Payments received on finance receivables held for investment   379,365    470,312 
Purchases of finance receivables measured at fair value   (756,555)   (659,641)
Payments received on finance receivables at fair value   200,889    31,824 
Change in repossessions held in inventory   (733)   624 
Purchase of furniture and equipment   (654)   (795)
Net cash used in investing activities   (177,688)   (157,676)
           
Cash flows from financing activities:          
Proceeds from issuance of securitization trust debt   726,188    622,098 
Proceeds from issuance of subordinated renewable notes   1,452    2,226 
Payments on subordinated renewable notes   (3,213)   (1,844)
Net advances of warehouse lines of credit   20,914    15,005 
Net advances of residual interest financing debt       40,000 
Repayment of securitization trust debt   (723,205)   (671,700)
Payment of financing costs   (6,099)   (6,467)
Purchase of common stock   (1,440)   (4,437)
Exercise of options and warrants   347    483 
Net cash provided by (used in) financing activities   14,944    (4,636)
Increase in cash and cash equivalents   7,245    (3,686)
Cash and restricted cash  at beginning of period   130,110    124,696 
Cash and restricted cash at end of period  $137,355   $121,010 
           
Supplemental disclosure of cash flow information:          
Cash paid (received) during the period for:          
Interest  $76,269   $68,042 
Income taxes  $(3,231)  $7,256 
Non-cash financing activities:          
Right-of-use asset, net  $(21,869)  $ 
Lease liability  $23,327   $ 
Deferred office rent  $(1,458)  $ 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 6 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
                 
Common Stock (Shares Outstanding)                    
Balance, beginning of period   22,526    20,963    22,422    21,489 
Common stock issued upon exercise of options and warrants       2,003    483    2,316 
Repurchase of common stock       (310)   (379)   (1,149)
Balance, end of period   22,526    22,656    22,526    22,656 
                     
Common Stock                    
Balance, beginning of period  $70,299   $70,955   $70,273   $71,582 
Common stock issued upon exercise of options and warrants       3    347    483 
Repurchase of common stock       (1,177)   (1,440)   (4,437)
Stock-based compensation   377    663    1,496    2,816 
Balance, end of period  $70,676   $70,444   $70,676   $70,444 
                     
Retained Earnings                    
Balance, beginning of period  $137,938   $125,849   $134,399   $119,537 
Net income   1,838    3,198    5,377    9,510 
Balance, end of period  $139,776   $129,047   $139,776   $129,047 
                     
Accumulated Other Comprehensive Loss                    
Balance, beginning of period  $(7,554)  $(7,182)  $(7,554)  $(7,182)
Pension benefit obligation                
Balance, end of period  $(7,554)  $(7,182)  $(7,554)  $(7,182)
                     
Total Shareholders' Equity  $202,898   $192,309   $202,898   $192,309 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 7 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Summary of Significant Accounting Policies

 

Description of Business

 

We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer to all of such contracts and loans as "automobile contracts."

 

Basis of Presentation

 

Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the nine month period ended September 30, 2019 are not necessarily indicative of the operating results to be expected for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.

 

Finance Receivables Measured at Fair Value

 

Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the carrying value of the receivables.

 

 

 

 8 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the carrying value, an adjustment would be required. In the three-month period ended September 30, 2019, the net present value of the forecasted cash flows for the receivables acquired in the first quarter of 2018 exceeded the carrying value of that pool by $604,000, which we have recorded as a mark to market value of that pool of receivables.

 

Anticipated credit losses are included in our estimation of cash to be received with respect to receivables.  Because such credit losses are included in our computation of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also because we include anticipated credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial carrying value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.

 

Other Income

 

The following table presents the primary components of Other Income for the three-month and nine-month periods ending September 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019   2018    2019    2018 
    (In thousands)    (In thousands) 
Direct mail revenues  $1,121  $1,328   $3,508   $4,833 
Convenience fee revenue   600   360    1,870    1,200 
Recoveries on previously charged-off contracts   30   44    132    198 
Sales tax refunds   200   220    631    658 
Other   43   62    114    133 
Other income for the period  $1,994  $2,014   $6,255   $7,022 

 

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The majority of the Company’s revenues come from interest income which is outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include revenue associated with direct mail and other related products and services that we offer to our dealers.

 

Leases

 

Effective January 1, 2019, the Company adopted guidance Accounting Standards Update (“ASU 2016-02”) Topic 842, “Leases” using the modified retrospective transition method. Prior comparable periods are presented accordance with previous guidance under Accounting Standards Codification (“ASC”) Topic 840, “Leases.” The Company also elected the package of practical expedients, ASU 2018-11. This election allowed the Company to not reassess if expired or existing contracts contain leases, to not reassess lease classifications for any expired or existing leases and to not reassess existing leases initial direct costs.

 

 

 

 9 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We determine if a contract contains a lease at contract inception. Right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the Company’s incremental borrowing rate. Right-of-use assets are included in other assets and lease liabilities are included in accounts payable and accrued expenses in our Unaudited Condensed Consolidated Balance Sheet at September 30, 2019.

 

The Company has operating leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

 

The following table presents the supplemental balance sheet information related to leases:

 

   Nine Months Ended,     
   September 30, 2019     
    (In thousands)      
           
Operating Leases          
Operating lease right-of-use assets  $23,555      
Less: Accumulated amortization right-of-use assets   (4,986)     
Operating lease right-of-use assets, net  $18,569      
           
Operating lease liabilities  $(20,005)     
           
Finance Leases          
Property and equipment, at cost  $545      
Less: Accumulated depreciation   (84)     
Property and equipment, net  $461      
           
Finance lease liabilities  $(447)     
           
Weighted Average Discount Rate          
Operating lease   5.0%      
Finance lease   6.7%      
           
Maturities of lease liabilities were as follows:          
(In thousands)   Operating    Finance 
Year Ending December 31,                  Lease    Lease 
2019 (excluding the nine months ended September 30, 2019)  $1,908   $46 
2020   7,500    183 
2021   7,391    183 
2022   6,125    60 
2023   1,389    18 
Thereafter   689    6 
Total undiscounted lease payments   25,002    496 
Less amounts representing interest   (4,997)   (49)
Lease Liability  $20,005   $447 

 

 

 

 10 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the leases expense included in Occupancy, General and administrative on our Unaudited Condensed Consolidated Statement of Operations:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019   2018    2019    2018 
    (In thousands)    (In thousands) 
Operating lease cost  $1,884  $1,785   $5,659   $5,290 
Finance lease cost   46       90     
Total lease cost  $1,930  $1,785   $5,749   $5,290 

 

The following table presents the supplemental cash flow information related to leases:

 

   Three Months Ended  Nine Months Ended 
   September 30, 2019  September 30, 2019 
   (In thousands) 
Cash paid for amounts included in the measurement of lease liabilities:  $    
Operating cash flows from operating leases  $1,901  $5,678 
Operating cash flows from finance leases   37   73 
Financing cash flows from finance leases   9   17 

 

Stock-based Compensation

 

We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”.

 

For the three and nine months ended September 30, 2019, we recorded stock-based compensation costs in the amount of $377,000 and $1.5 million, respectively. These stock-based compensation costs were $663,000 and $2.8 million for the three and nine months ended September 30, 2018. As of September 30, 2019, unrecognized stock-based compensation costs to be recognized over future periods equaled $2.1 million. This amount will be recognized as expense over a weighted-average period of 2.3 years.

 

 

 

 11 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following represents stock option activity for the nine months ended September 30, 2019:

 

   Number of Shares   Weighted Average Exercise   Weighted Average Remaining Contractual 
   (in thousands)   Price   Term 
             
Options outstanding at the beginning of period   14,421   $4.57    N/A 
Granted   1,490    3.53    N/A 
Exercised   (483)   0.86    N/A 
Forfeited   (75)   4.00    N/A 
Options outstanding at the end of period   15,353   $4.58    3.59 years 
                
Options exercisable at the end of period   11,722   $4.87    2.94 years 

 

At September 30, 2019, the aggregate intrinsic value of options outstanding and exercisable was $5.8 million and $5.5 million, respectively. There were 482,500 options exercised for the nine months ended September 30, 2019 compared to 315,500 for the comparable period in 2018. The total intrinsic value of options exercised was $1.4 million and $869,000 for the nine-month periods ended September 30, 2019 and 2018. There were 1,458,000 shares available for future stock option grants under existing plans as of September 30, 2019.

 

Purchases of Company Stock

 

The table below describes the purchase of our common stock for the nine-month ended September 30, 2019 and 2018:

 

   Nine Months Ended 
   September 30, 2019   September 30, 2018 
    Shares    Avg. Price    Shares    Avg. Price 
                     
Open market purchases   335,546   $3.95    714,898   $3.81 
Shares redeemed upon net exercise of stock options   18,424    3.76    33,599    4.37 
Other purchases   24,500    4.20    90,000    4.13 
Total stock purchases   378,470   $3.97    838,497   $3.87 

 

 

 

 12 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Reclassifications

 

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or shareholders’ equity.

 

Financial Covenants

 

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of September 30, 2019, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness.

 

Provision for Contingent Liabilities

 

We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.

 

We record at each measurement date, most recently as of September 30, 2019, our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.

 

Adoption of New Accounting Standards

 

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised accounting guidance changes the criteria under which credit losses are measured. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to establish credit loss estimates. ASU 2016-13 was initially scheduled to become effective for interim and annual reporting periods beginning after December 15, 2019, however on October 16, 2019, the FASB changed the effective date for smaller reporting companies to interim and annual reporting periods beginning after December 15, 2022. Early adoption would still be permitted for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU 2016-13, however, it is expected that the new CECL model will alter the assumptions used in calculating the Company's credit losses, given the change to estimated losses for the estimated life of the financial asset, and will likely result in a material effect on the Company’s financial position and results of operations.

 

 

 

 13 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(2) Finance Receivables

 

Our portfolio of finance receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first applied to accrued interest and then to principal reduction.

 

In January 2018 the Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote.

 

The following table presents the components of Finance Receivables, net of unearned interest:

 

   September 30,   December 31, 
   2019   2018 
   (In thousands) 
Finance receivables        
         
Automobile finance receivables, net of unearned interest  $1,020,044   $1,518,395 
Unearned acquisition fees and originations costs   2,347    3,690 
Finance receivables  $1,022,391   $1,522,085 

 

We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings. The following table summarizes the delinquency status of finance receivables as of September 30, 2019 and December 31, 2018:

 

   September 30,   December 31, 
   2019   2018 
   (In thousands) 
Delinquency Status          
Current   $804,537   $1,262,730 
31 - 60 days   124,214    157,688 
61 - 90 days   65,046    66,134 
91 + days   26,247    31,843 
   $1,020,044   $1,518,395 

 

 

 

 14 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Finance receivables totaling $26.2 million and $31.8 million at September 30, 2019 and December 31, 2018, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.

 

We use a loss allowance methodology commonly referred to as "static pooling," which stratifies our finance receivable portfolio into separately identified pools based on the period of origination. Using analytical and formula driven techniques, we estimate an allowance for finance credit losses, which we believe is adequate for probable incurred credit losses that can be reasonably estimated in our portfolio of automobile contracts. The estimate for probable incurred credit losses is reduced by our estimate for future recoveries on previously incurred losses. Provision for credit losses is charged to our consolidated statement of operations. Net losses incurred on finance receivables are charged to the allowance.

 

The following table presents a summary of the activity for the allowance for finance credit losses for the three-months and nine-month periods ended September 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019   2018    2019    2018 
    (In thousands)    (In thousands) 
Balance at beginning of period  $32,664  $94,376   $67,376   $109,187 
Provision for credit losses on finance receivables   19,874   31,959    64,319    107,997 
Charge-offs   (46,118)  (54,033)   (149,038)   (163,628)
Recoveries   6,320   10,170    30,083    28,916 
Balance at end of period  $12,740  $82,472   $12,740   $82,472 

 

Excluded from finance receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses:

 

   September 30,   December 31, 
   2019   2018 
   (In thousands) 
Gross balance of repossessions in inventory  $37,481   $33,462 
Allowance for losses on repossessed inventory   (27,851)   (24,564)
Net repossessed inventory included in other assets  $9,630   $8,898 

 

 

 

 15 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(3) Securitization Trust Debt

 

We have completed many securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table:

 

   Final
Scheduled
Payment
  Receivables Pledged at September 30,   Initial   Outstanding Principal at September 30,   Outstanding Principal at December 31,   Weighted
Average Contractual Interest Rate at September 30,
 
Series  Date (1)  2019 (2)   Principal   2019   2018   2019 
   (Dollars in thousands)    
 CPS 2014-A  June 2021       180,000        15,328     
 CPS 2014-B   September 2021       202,500        24,051     
 CPS 2014-C  December 2021   24,989    273,000    23,997    40,896    5.04% 
 CPS 2014-D  March 2022   28,979    267,500    28,550    46,489    5.33% 
 CPS 2015-A  June 2022   34,107    245,000    32,069    52,448    5.09% 
 CPS 2015-B  September 2022   41,879    250,000    42,412    64,591    4.97% 
 CPS 2015-C  December 2022   61,129    300,000    61,648    90,639    5.59% 
 CPS 2016-A  March 2023   80,790    329,460    81,833    119,444    5.82% 
 CPS 2016-B  June 2023   96,470    332,690    94,181    135,688    6.13% 
 CPS 2016-C  September 2023   96,780    318,500    94,589    136,114    6.06% 
 CPS 2016-D  April 2024   75,637    206,325    74,176    104,645    4.51% 
 CPS 2017-A  April 2024   83,017    206,320    80,887    113,527    4.61% 
 CPS 2017-B  December 2023   100,865    225,170    87,633    127,726    3.96% 
 CPS 2017-C  September 2024   102,834    224,825    91,654    131,845    3.88% 
 CPS 2017-D  June 2024   104,368    196,300    95,003    132,919    3.55% 
 CPS 2018-A  March 2025   112,179    190,000    103,008    142,643    3.50% 
 CPS 2018-B  December  2024   131,373    201,823    124,822    167,809    3.87% 
 CPS 2018-C  September 2025   157,848    230,275    148,605    204,418    3.94% 
 CPS 2018-D  June 2025   183,774    233,730    169,869    224,189    3.95% 
 CPS 2019-A  March 2026   222,685    254,400    206,977        3.87% 
 CPS 2019-B  June 2026   209,982    228,275    202,163        3.52% 
 CPS 2019-C  December 2026   237,068    243,513    234,315        2.98% 
       $2,186,753   $5,339,606   $2,078,391   $2,075,409      

_________________________

(1)The Final Scheduled Payment Date represents final legal maturity of the securitization trust debt. Securitization trust debt is expected to become due and to be paid prior to those dates, based on amortization of the finance receivables pledged to the trusts. Expected payments, which will depend on the performance of such receivables, as to which there can be no assurance, are $214.6 million in 2019, $743.3 million in 2020, $523.0 million in 2021, $312.6 million in 2022, $216.5 million in 2023, $43.6 million in 2024, $13.0 million in 2025.
(2)Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.

 

 

 

 16 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Debt issuance costs of $11.9 million and $11.8 million as of September 30, 2019 and December 31, 2018, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the securitization trust debt on our Unaudited Condensed Consolidated Balance Sheets.

 

All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets.

 

The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. As of September 30, 2019, we were in compliance with all such covenants.

 

We are responsible for the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of September 30, 2019, restricted cash under the various agreements totaled approximately $128.6 million. Interest expense on the securitization trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost of the securitization trust debt is greater than the contractual rate of interest disclosed above.

 

Our wholly-owned bankruptcy remote subsidiaries were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our credit facilities. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors.

 

On October 16, 2019 we completed our fourth securitization transaction of 2019. In the transaction, qualified institutional buyers purchased $274.3 million of asset-backed notes secured by $275 million in automobile receivables purchased by us. The sold notes, issued by CPS Auto Receivables Trust 2019-D, consist of six classes. Ratings of the notes were provided by Standard & Poor’s and Kroll Bond Rating Agency, and were based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer. The weighted average yield on the notes is approximately 2.95%.

 

 

 

 

 

 

 17 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(4) Debt

 

The terms and amounts of our other debt outstanding at September 30, 2019 and December 31, 2018 are summarized below:

 

          Amount Outstanding at 
          September 30,   December 31, 
          2019   2018 
          (In thousands) 
Description  Interest Rate  Maturity         
                
Warehouse lines of credit 

5.50% over one month Libor

(Minimum 6.50%)

   February 2021   $35,264   $38,198 
                   
  

3.00% over one month Libor

(Minimum 3.75%)

   September 2020    96,154    99,885 
                   
   6.75% over a commercial paper rate (Minimum 7.75%)   November 2019    27,578     
                   
Residual interest financing  8.60%   January 2026    40,000    40,000 
                   
Subordinated renewable notes  Weighted average rate of 9.22% and 8.53% at September 30, 2019 and December 31, 2018, respectively   Weighted average maturity of December 2021 and January 2021 at September 30, 2019 and December 31, 2018, respectively    15,529    17,290 
                   
           $214,525   $195,373 

 

Unamortized debt issuance costs of $615,000 and $894,000 as of September 30, 2019 and December 31, 2018, respectively, have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of $1.2 million and $1.2 million as of September 30, 2019 and December 31, 2018, respectively, have been excluded from the Warehouse lines of credit amounts in the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the debt on our Unaudited Condensed Consolidated Balance Sheets.

 

 

 

 18 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(5) Interest Income and Interest Expense

 

The following table presents the components of interest income:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019    2018    2019    2018 
                     
Interest on finance receivables  $49,912   $79,573   $167,862   $264,545 
Interest on finance receivables at fair value   32,903    13,482    83,696    25,822 
Other interest income   713    562    2,264    1,168 
Interest income  $83,528   $93,617   $253,822   $291,535 

 

The following table presents the components of interest expense:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019    2018    2019    2018 
                     
Securitization trust debt  $24,208   $22,678   $72,662   $66,762 
Warehouse lines of credit   2,407    1,827    6,387    5,850 
Residual interest financing   956    936    2,867    1,387 
Subordinated renewable notes   369    367    1,017    1,058 
Interest expense  $27,940   $25,808   $82,933   $75,057 

 

 

 

 19 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(6) Earnings Per Share

 

Earnings per share for the three-months and nine-month periods ended September 30, 2019 and 2018 were calculated using the weighted average number of shares outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted earnings per share for the three-months and nine-month periods ended September 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
   (In thousands)   (In thousands) 
Weighted average number of common shares outstanding during the period used to compute basic earnings per share   22,526    22,636    22,378    21,800 
                     
Incremental common shares attributable to exercise of outstanding options and warrants   1,540    2,099    1,724    3,378 
                     
Weighted average number of common shares used to compute diluted earnings per share   24,066    24,735    24,102    25,178 

 

If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month and nine-month periods ended September 30, 2019 would have included an additional 10.6 million and 10.6 million shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30, 2018, an additional 11.0 million and 10.1 million shares, respectively, would be included in the diluted earnings per share calculation.

 

(7) Income Taxes

 

We file numerous consolidated and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2013.

 

As of September 30, 2019 and December 31, 2018, we had no unrecognized tax benefits for uncertain tax positions. We do not anticipate that total unrecognized tax benefits will significantly change due to any settlements of audits or expirations of statutes of limitations over the next 12 months.

 

 

 

 20 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $16.1 million as of September 30, 2019 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $16.1 million consists of approximately $11.5 million of net U.S. federal deferred tax assets and $4.6 million of net state deferred tax assets.

 

Income tax expense was $991,000 and $2.9 million for the three months and nine months ended September 30, 2019 and represents an effective income tax rate of 35%, compared to income tax expense of $1.5 million and $4.4 million for the three and nine months ended September 30, 2018, and represents an effective income tax rate of 32%.

 

(8) Legal Proceedings

 

Consumer Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of receivables, and such lawsuits sometimes allege that resolution as a class action is appropriate.

 

For the most part, we have legal and factual defenses to consumer claims, which we routinely contest or settle (for immaterial amounts) depending on the particular circumstances of each case.

 

Wage and Hour Claim. On September 24, 2018, a former employee filed a lawsuit against us in the Superior Court of Orange County, California, alleging that we incorrectly classified our sales representatives as outside salespersons exempt from overtime wages, mandatory break periods and certain other employee protective provisions of California and federal law. The complaint seeks injunctive relief, an award of unpaid wages, liquidated damages, and attorney fees and interest. The plaintiff purports to act on behalf of a class of similarly situated employees and ex-employees. As of the date of this report, no motion for class certification has been filed or granted.

 

We believe that our compensation practices with respect to our sales representatives are compliant with applicable law. Accordingly, we have defended and intend to continue to defend this lawsuit. We have not recorded a liability with respect to this claim on the accompanying consolidated financial statements.

 

 

 

 21 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In General. There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently as of September 30, 2019, our best estimate of probable incurred losses for legal contingencies, including each of the matters described or referenced above. The amount of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available to us, we believe that the total of probable incurred losses for legal contingencies as of September 30, 2019 is immaterial, and that the range of reasonably possible losses for the legal proceedings and contingencies we face, including those described or referenced above, as of September 30, 2019 does not exceed $3 million.

 

Accordingly, we believe that the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the uncertainties inherent in contested proceedings there can be no assurance that the ultimate resolution of these matters will not be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our income for that period.

 

(9) Fair Value Measurements

 

ASC 820, "Fair Value Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.

 

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

Effective January 2018 we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter.

 

Our valuation policies and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available third-party information such as broker quotes or pricing services available to assist us in our valuation process.

 

Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs and the rate of amortization of the portfolio of finance receivable. Significant changes in any of those inputs in isolation would have a significant impact on our fair value measurement.

 

 

 

 22 

 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
    2019    2018    2019    2018 
                     
Balance at beginning of period  $1,158,365   $412,895   $821,066   $ 
Finance receivables at fair value acquired during period   261,929    229,030    756,555    659,641 
Payments received on finance receivables at fair value   (83,384)   (18,851)   (200,889)   (31,824)
Net interest income accretion on fair value receivables   (24,309)   (8,267)   (64,131)   (13,010)
Mark to fair value   604        604     
Balance at end of period  $1,313,205   $614,807   $1,313,205   $614,807 

 

The table below compares the fair values of these finance receivables to their contractual balances for the periods shown:

 

   September 30, 2019   December 31, 2018 
   Contractual   Fair   Contractual   Fair 
   Balance   Value   Balance   Value 
   (In thousands) 
Finance receivables measured at fair value  $1,356,157   $1,313,205   $829,039   $821,066 

 

The following table provides certain qualitative information about our level 3 fair value measurements:

 

Financial Instrument  Fair Values as of      Inputs as of 
   September 30,   December 31,      September 30,   December 31, 
   2019   2018   Unobservable Inputs  2019   2018 
   (In thousands)            
Assets:                   
Finance receivables measured at fair value  $1,313,205   $821,066  

Discount rate

Cumulative net losses

   

8.9% - 11.1%

15.0% - 16.1%

    

8.9% - 9.9%

15.0% - 16.0%

 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2019 and December 31, 2018:

 

   September 30,   December 31, 
   2019   2018 
   (In thousands) 
Delinquency Status          
Current  $1,242,569   $790,727 
31 - 60 days   70,802    26,285 
61 - 90 days   29,557    8,350 
91 + days   13,229    3,677 
   $1,356,157   $829,039 

 

Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At September 30, 2019 the finance receivables related to the repossessed vehicles in inventory totaled $37.5 million. We have applied a valuation adjustment, or loss allowance, of $27.9 million, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount of $9.6 million. The fair value and carrying amount of the repossessed inventory at December 31, 2018 was $8.9 million after applying a valuation adjustment of $24.6 million.

 

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended September 30, 2019 and 2018.

 

The estimated fair values of financial assets and liabilities at September 30, 2019 and December 31, 2018, were as follows:

 

   As of September 30, 2019 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                    
Cash and cash equivalents  $8,799   $8,799   $   $   $8,799 
Restricted cash and equivalents   128,556    128,556            128,556 
Finance receivables, net   1,009,651            964,540    964,540 
Accrued interest receivable   12,729            12,729    12,729 
Liabilities:                         
Warehouse lines of credit  $157,761   $   $   $157,761   $157,761 
Accrued interest payable   5,257            5,257    5,257 
Residual interest financing  39,385           39,385   39,385 
Securitization trust debt   2,066,458            2,095,487   2,095,487 
Subordinated renewable notes   15,529            15,529    15,529 

 

 

 

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   As of December 31, 2018 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                    
Cash and cash equivalents  $12,787   $12,787   $   $   $12,787 
Restricted cash and equivalents   117,323    117,323            117,323 
Finance receivables, net   1,454,709            1,434,631    1,434,631 
Accrued interest receivable   31,969            31,969    31,969 
Liabilities:                         
Warehouse lines of credit  $136,847   $   $   $136,847   $136,847 
Accrued interest payable   4,819            4,819    4,819 
Residual interest financing   39,106           39,106   39,106 
Securitization trust debt  2,063,627           2,051,920    2,051,920 
Subordinated renewable notes   17,290            17,290    17,290 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a specialty finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we also originate vehicle purchase money loans by lending directly to consumers and have (i) acquired installment purchase contracts in four merger and acquisition transactions, and (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders. In this report, we refer to all of such contracts and loans as "automobile contracts."

 

We were incorporated and began our operations in March 1991. From inception through September 30, 2019, we have originated a total of approximately $16.0 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

 

Contract Purchases and Outstanding Managed Portfolio
   $ in thousands 
Period  Contracts
Purchased in
Period
   Managed
Portfolio at
Period End
 
         
2013  $764,087   $1,231,422 
2014   944,944    1,643,920 
2015   1,060,538    2,031,136 
2016   1,088,785   2,308,070 
2017  859,069    2,333,530 
2018   902,416    2,380,847 
Nine months ended September 30, 2019   755,285    2,412,638 

 

Our principal executive offices are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and underwriting functions are performed primarily in that California branch with certain of these functions also performed in our Florida and Nevada branches. We service our automobile contracts from our California, Nevada, Virginia, Florida and Illinois branches.

 

The programs we offer to dealers and consumers are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. We originate automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

 

 

 

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Securitization and Warehouse Credit Facilities

 

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to be purchased by institutional investors. Depending on the structure, these transactions may be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings. All of our active securitizations are structured as secured financings.

 

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, and (ii) recognize interest expense on the securities issued in the transaction. For automobile contracts acquired before 2018, we also periodically record as expense a provision for credit losses on the contracts; for automobile contracts acquired after 2017 we take account of estimated credit losses in our computation of a level yield used to determine recognition of interest on the contracts.

 

Since 1994 we have conducted 83 term securitizations of automobile contracts that we originated. As of September 30, 2019, 20 of those securitizations are active and all are structured as secured financings. Since September 2010 we have utilized senior subordinated structures without any financial guarantees. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter, resulting in four securitizations per calendar year. However, in 2015, we elected to defer what would have been our December securitization in favor of a securitization in January 2016, and since that time have generally conducted our securitizations near the beginning of each calendar quarter.

 

Our recent history of term securitizations is summarized in the table below:

 

Recent Asset-Backed Term Securitizations
   $ in thousands 
Period  Number of Term Securitizations   Receivables Pledged in Term Securitizations 
         
2013   4   $778,000 
2014   4    923,000 
2015   3    795,000 
2016   4    1,214,997 
2017   4    870,000 
2018   4    883,452 
Nine months ended September 30, 2019   3    739,124 

 

Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. Our current short-term funding capacity is $300 million, comprising three credit facilities. The first $100 million credit facility was established in May 2012. This facility was most recently renewed in September 2018, extending the revolving period to September 2020, with an optional amortization period through September 2021. In April 2015, we entered into a second $100 million facility. This facility was renewed in April 2017 and again in February 2019, extending the revolving period to February 2021, followed by an amortization period to February 2023. In November 2015, we entered into a third $100 million facility. This facility was renewed in November 2017, extending the revolving period to November 2019, followed by an amortization period to November 2021.

 

 

 

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In a securitization and in our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar to the representations and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach any of our representations or warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid interest. We may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract at a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts that we repurchase.

 

In a securitization, the related special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized automobile contracts falls short of pre-determined standards. Such releases represent a material portion of the cash that we use to fund our operations. An unexpected deterioration in the performance of securitized automobile contracts could therefore have a material adverse effect on both our liquidity and results of operations.

 

Financial Covenants

 

Certain of our securitization transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of September 30, 2019, we were in compliance with all such covenants.

 

Results of Operations

 

Comparison of Operating Results for the three months ended September 30, 2019 with the three months ended September 30, 2018

 

Revenues. During the three months ended September 30, 2019, our revenues were $85.5 million, a decrease of $10.1 million, or 10.6%, from the prior year revenue of $95.6 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the three months ended September 30, 2019 decreased $10.1 million, or 10.8%, to $83.5 million from $93.6 million in the prior year. The primary reason for the decrease in interest income is the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balances and interest yields of our loan portfolio for the three months ended September 30, 2019 and 2018:

 

   Three Months Ended September 30, 
   2019   2018 
   (Dollars in thousands) 
    Average        Interest    Average         Interest 
    Balance   Interest    Yield    Balance    Interest    Yield 
Interest Earning Assets                             
Finance receivables  $1,105,087  $50,625    18.3%   $1,787,428   $80,135    17.9% 
Finance receivables measured at fair value   1,304,012   32,903    10.1%    547,468    13,482    9.9% 
Total  $2,409,099  $83,528    13.9%   $2,334,896   $93,617    16.0% 

 

 

 

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In the three months ended September 30, 2019, other income of $1.9 million decreased by $20,000, or 1.0% compared to the prior year. The three-month period ended September 30, 2019 includes a decrease of $207,000 in revenues associated with direct mail and other related products and services that we offer to our dealers and decreases in other income categories. These were partially offset by an increase of $240,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments.

 

Expenses. Our operating expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of reducing the interest rate applicable to such receivables). Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

 

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

 

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, sales and advertising expenses, and depreciation and amortization.

 

Total operating expenses were $82.7 million for the three months ended September 30, 2019, compared to $90.9 million for the prior period, a decrease of $8.2 million, or 9.1%. The decrease is primarily due to a decrease in provision for credit losses, offsetting increases in interest expense, employee costs and general and administrative expenses.

 

Employee costs increased by $1.4 million or 7.7%, to $20.3 million during the three months ended September 30, 2019, representing 24.5% of total operating expenses, from $18.8 million for the prior year, or 20.7% of total operating expenses. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, September 30, 2019 and 2018:

 

   September 30, 2019   September 30, 2018 
   Amount   Amount 
   ($ in millions) 
Contracts purchased (dollars)  $262.1   $225.3 
Contracts purchased (units)   14,353    12,853 
Managed portfolio outstanding (dollars)  $2,412.6   $2,342.9 
Managed portfolio outstanding (units)   177,575    174,584 
           
Number of Originations staff   203    211 
Number of Sales staff   118    132 
Number of Servicing staff   622    567 
Number of other staff   75    101 
Total number of employees   1,018    1,011 

 

 

 

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General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $8.2 million, an increase from $7.8 million in the previous year and represented 9.9% of total operating expenses.

 

Interest expense for the three months ended September 30, 2019 increased by $2.1 million to $27.9 million, or 8.3% and represented 33.8% of total operating expenses, compared to $25.8 million in the previous year, when it was 28.4% of total operating expenses.

 

Interest on securitization trust debt increased by $1.5 million, or 6.8%, for the three months ended September 30, 2019 compared to the prior period. The average balance of securitization trust debt increased 1.8% to $2,165.9 million for the three months ended September 30, 2019 compared to $2,128.1 million for the three months ended September 30, 2018. The blended interest rates on new term securitizations have generally increased in 2017 and 2018 before declining in 2019. As a result, the cost of securitization debt during the three-month period ended September 30, 2019 was 4.5%, compared to 4.3% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table below:

 

Blended Cost of Funds on Recent Asset-Backed
Term Securitizations
Period   Blended Cost of
Funds
 
      
January 2017   3.91% 
April 2017   3.45% 
July 2017   3.52% 
October 2017   3.39% 
January 2018   3.46% 
April 2018   3.98% 
July 2018   4.18% 
October 2018   4.25% 
January 2019   4.22% 
April 2019   3.95% 
July 2019   3.36% 

 

Interest expense on subordinated renewable notes increased by $2,000. The average balance of the outstanding subordinated debt decreased 9.1% to $15.1 million for the three months ended September 30, 2019 compared to $16.7 million for the three months ended September 30, 2018. However, the average yield of subordinated notes increased to 9.8% in the three-month period ended September 30, 2019 compared to 8.8% in the prior period.

 

Interest expense on warehouse debt increased by $580,000, or 31.8%, for the three months ended September 30, 2019 compared to the prior period. The average rate on the debt decreased to 9.8% in the three-month period ended September 30, 2019 compared to 12.4% in the prior period. However, the decrease was offset by higher outstanding warehouse debt balance in the current period.

 

On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. Interest expense on this residual interest financing was $956,000 for the three months ended September 30, 2019 compared to $936,000 in the prior year period.

 

 

 

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The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended September 30, 2019 and 2018:

 

   Three Months Ended September 30, 
   2019   2018 
   (Dollars in thousands) 
             Annualized              Annualized 
    Average        Average    Average         Average 
    Balance (1)   Interest    Yield/Rate    Balance (1)    Interest    Yield/Rate 
Interest Earning Assets                             
Finance receivables gross (2)  $1,105,087  $50,625    18.3%   $1,787,427   $80,135    17.9% 
Finance receivables at fair value   1,304,012   32,903    10.1%    547,468    13,482    9.9% 
    2,409,099   83,528    13.9%    2,334,895    93,617    16.0% 
                            $ 
Interest Bearing Liabilities   $                         
Warehouse lines of credit  $98,520   2,407    9.8%   $58,806    1,827    12.6% 
Residual interest financing   40,000   956    9.6%    40,000    936    9.4% 
Securitization trust debt   2,165,927   24,208    4.5%    2,128,142    22,678    4.3% 
Subordinated renewable notes   15,133   369    9.8%    16,655    367    8.8% 
   $2,319,580   27,940    4.8%   $2,243,603    25,808    4.6% 
                            $ 
Net interest income/spread   $  $55,588             $67,809      
Net interest yield (3)   $        9.1%              11.4% 
                              
Ratio of average interest earning assets to average interest bearing liabilities   $        104%              104% 

_________________________

(1)Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2)Net of deferred fees and direct costs.
(3)Annualized net interest income divided by average interest earning assets.

 

   Three Months Ended September 30, 2019 
   Compared to September 30, 2018 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
   (In thousands) 
Interest Earning Assets   $           
Finance receivables gross  $(29,510)  $(32,184)  $2,674 
Finance receivables at fair value   19,421    18,769    652 
    (10,089)   (13,415)   3,326 
Interest Bearing Liabilities   $           
Warehouse lines of credit   580    1,220    (640)
Residual interest financing   20    20     
Securitization trust debt   1,530    447    1,083 
Subordinated renewable notes   2    (36)   38 
    2,132    1,651    481 
Net interest income/spread  $(12,221)  $(15,066)  $2,845 

 

 

 

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The reduction in the annualized yield on our finance receivables for the three months ended September 30, 2019 compared to the prior year period is the result of the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The average balance of these receivables was $1,304.0 million for the three months ended September 30, 2019 compared to $547.5 million in the prior year period.

 

In the three-month period ended September 30, 2019, the net present value of the forecasted cash flows for the receivables acquired in the first quarter of 2018 exceeded the carrying value by $604,000, which we have recorded as a mark to market value of that pool of receivables.

 

Provision for credit losses was $19.9 million for the three months ended September 30, 2019, a decrease of $12.1 million, or 37.8% compared to the prior year and represented 24.0% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance credit losses. The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio.  Since no receivables have been added to the legacy portfolio since December 2017, it has seasoned to the point where its weighted age is 39 months at September 30, 2019.  The age of the legacy portfolio, its continuously declining balance and the significant variance of the relative credit performance of the vintage pools that make up the legacy portfolio have contributed to lower provisions for credit losses and lower levels of the allowance for finance credit losses. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

 

Sales expense consists primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs, internet lead sales, and direct mail products. Sales expense increased by $30,000 to $4.4 million during the three months ended September 30, 2019 and represented 5.3% of total operating expenses. Although our sales staff was slightly lower as of September 30, 2019 compared September 30, 2018, we have gradually shifted to more field sales representatives as compared to in-house sales representatives. Field sales representatives are somewhat more costly than in-house sales representatives, but we feel will ultimately be more effective. The increase in sales expense can also be attributed to the increase in the volume of contact purchases. We purchased 14,353 contracts representing $262.1 million in receivables during the three-month period ending September 30, 2019 compared to 12,853 contracts representing $225.3 million in receivables in the prior period.

 

Occupancy expenses decreased by $175,000 or 9.0%, to $1.8 million compared to $1.9 million in the previous year and represented 2.1% of total operating expenses.

 

Depreciation and amortization expenses increased by $20,000 or 7.8%, to $276,000 compared to $256,000 in the previous year and represented 0.3% of total operating expenses.

 

For the three months ended September 30, 2019 we recorded income tax expense of $991,000, representing a 35.0% effective income tax rate. In the prior year period, we recorded $1.5 million in income tax expense, representing a 32.0% effective income tax rate.

 

 

 

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Comparison of Operating Results for the nine months ended September 30, 2019 with the nine months ended September 30, 2018

 

Revenues. During the nine months ended September 30, 2019, our revenues were $260.1 million, a decrease of $38.5 million, or 12.9%, from the prior year revenue of $298.6 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the nine months ended September 30, 2019 decreased $37.7 million, or 12.9%, to $253.8 million from $291.5 million in the prior year. The primary reason for the decrease in interest income is the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the nine months ended September 30, 2019 and 2018:

 

   Nine Months Ended September 30, 
   2019   2018 
   (Dollars in thousands) 
    Average         Interest    Average         Interest 
    Balance    Interest    Yield    Balance    Interest    Yield 
Interest Earning Assets                              
Finance receivables  $1,268,190   $170,126    17.9%   $1,990,289   $265,713    17.8% 
Finance receivables measured at fair value   1,131,888    83,696    9.9%    341,967    25,822    10.1% 
Total  $2,400,078   $253,822    14.1%   $2,332,256   $291,535    16.7% 

 

In the nine months ended September 30, 2019, other income of $6.3 million decreased by $767,000, or 10.9% compared to the prior year. The nine-month period ended September 30, 2019 includes a decrease of $1.3 million in revenue associated with direct mail and other related products and services that we offer to our dealers. This decrease was partially offset by an increase of $670,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments.

 

Expenses. Our operating expenses consist largely of provision for credit losses, interest expense, employee costs, sales and general and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of reducing the interest rate applicable to such receivables). Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

 

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

 

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, sales and advertising expenses, and depreciation and amortization.

 

 

 

 33 

 

 

Total operating expenses were $251.8 million for the nine months ended September 30, 2019, compared to $284.6 million for the prior period, a decrease of $32.8 million, or 11.5%. The decrease is primarily due to a decrease in provision for credit losses, offsetting increases in interest expense and general and administrative expenses.

 

Employee costs decreased by $258,000 or 0.4%, to $59.0 million during the nine months ended September 30, 2019, representing 23.4% of total operating expenses, from $59.3 million for the prior year, or 20.8% of total operating expenses. The decrease in employee costs were primarily a result of a decrease of $1.3 million in stock compensation expense offset by other increases in employee costs related to higher headcounts in 2019. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the nine-month periods ended, September 30, 2019 and 2018:

 

   September 30, 2019   September 30, 2018 
   Amount   Amount 
($ in millions)        
Contracts purchased (dollars)  $755.3   $650.6 
Contracts purchased (units)   42,534    38,749 
Managed portfolio outstanding (dollars)  $2,412.6   $2,342.9 
Managed portfolio outstanding (units)   177,575    174,584 
           
Number of Originations staff   203    211 
Number of Sales staff   118    132 
Number of Servicing staff   622    567 
Number of other staff   75    101 
Total number of employees   1,018    1,011 

 

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $25.1 million, an increase of $2.4 million, or 10.5% compared to the previous year and represented 10.0% of total operating expenses.

 

Interest expense for the nine months ended September 30, 2019 increased by $7.9 million to $82.9 million, or 10.5% and represented 32.9% of total operating expenses, compared to $75.1 million in the previous year, when it was 26.4% of total operating expenses.

 

 

 

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Interest on securitization trust debt increased by $5.9 million, or 8.8%, for the nine months ended September 30, 2019 compared to the prior period. The average balance of securitization trust debt increased to $2,178.4 million for the nine months ended September 30, 2019 compared to $2,137.5 million for the nine months ended September 30, 2018. In addition, the blended interest rates on new term securitizations have generally increased since 2017. As a result, the cost of securitization debt during the nine-month period ended September 30, 2019 was 4.4%, compared to 4.2% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for risk-free securities (against which our bonds are priced), and the margin over those benchmarks that investors are willing to accept, which in turn is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward higher securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table below:

 

Blended Cost of Funds on Recent Asset-Backed
Term Securitizations
 
Period   Blended Cost of
Funds
 
      
January 2017   3.91% 
April 2017   3.45% 
July 2017   3.52% 
October 2017   3.39% 
January 2018   3.46% 
April 2018   3.98% 
July 2018   4.18% 
October 2018   4.25% 
January 2019   4.22% 
April 2019   3.95% 
July 2019   3.36% 

 

Interest expense on subordinated renewable notes decreased by $41,000, or 3.9%. The decrease is primarily due to a decrease in the average outstanding balance on our subordinated renewable notes from $16.4 million in the prior year period to $14.5 million in the current period. The average yield on these notes increased to 9.3% from 8.6% in the prior year.

 

On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. Interest expense on this residual interest financing was $2.9 million for the nine months ended September 30, 2019 compared to $1.4 million in the prior year period.

 

Interest expense on warehouse lines of credit debt increased by $537,000, or 9.2%, for the nine months ended September 30, 2019 compared to the prior period. The average outstanding balance was $85.3 million compared to $64.6 million in the prior year period.

 

 

 

 35 

 

 

The following table presents the components of interest income and interest expense and a net interest yield analysis for the nine-month periods ended September 30, 2019 and 2018:

 

   Nine Months Ended September 30, 
   2019   2018 
   (Dollars in thousands) 
             Annualized              Annualized 
    Average        Average    Average         Average 
    Balance (1)   Interest    Yield/Rate    Balance (1)    Interest    Yield/Rate 
Interest Earning Assets                             
Finance receivables gross (2)  $1,233,413  $170,125    18.4%   $1,990,289   $265,713    17.8% 
Finance receivables at fair value   1,131,888   83,696    9.9%    341,967    25,822    10.1% 
    2,365,301   253,821    14.3%    2,332,256    291,535    16.7% 
                            $ 
Interest Bearing Liabilities   $                         
Warehouse lines of credit  $85,289   6,387    10.0%   $64,555    5,850    12.1% 
Residual interest financing   40,000   2,867    9.6%    20,220    1,387    9.1% 
Securitization trust debt   2,178,437   72,662    4.4%    2,137,549    66,762    4.2% 
Subordinated renewable notes   14,513   1,017    9.3%    16,357    1,058    8.6% 
   $2,318,239   82,933    4.8%   $2,238,681    75,057    4.5% 
                            $ 
Net interest income/spread   $  $170,888             $216,478      
Net interest yield (3)   $        9.5%              12.2% 
Ratio of average interest earning assets to average interest bearing liabilities   $        102%              104% 

_________________________

(1)Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2)Net of deferred fees and direct costs.
(3)Annualized net interest income divided by average interest earning assets.

 

   Nine Months Ended September 30, 2019 
   Compared to September 30, 2018 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
   (In thousands) 
Interest Earning Assets   $           
Finance receivables gross  $(95,588)  $(99,227)   3,639 
Finance receivables at fair value   57,874    59,647    (1,773)
    (37,714)   (39,580)   1,866 
Interest Bearing Liabilities   $           
Warehouse lines of credit   537    1,879    (1,342)
Residual interest financing   1,480    1,357    123 
Securitization trust debt   5,900    1,277    4,623 
Subordinated renewable notes   (41)   (119)   78 
    7,876    4,394    3,482 
Net interest income/spread  $(45,590)  $(43,974)  $(1,616)

 

 

 

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The reduction in the annualized yield on our finance receivables for the nine months ended September 30, 2019 compared to the prior year period is a result of the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables.

 

In the nine-month period ended September 30, 2019, the net present value of the forecasted cash flows for the receivables acquired in the first quarter of 2018 exceeded the carrying value by $604,000, which we have recorded as a mark to market value of that pool of receivables.

 

Provision for credit losses was $64.3 million for the nine months ended September 30, 2019, a decrease of $43.7 million, or 40.4% compared to the prior year and represented 25.5% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance credit losses. The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio.  Since no receivables have been added to the legacy portfolio since December 2017, it has seasoned to the point where its weighted age is 39 months at September 30, 2019.  The age of the legacy portfolio, its continuously declining balance and the significant variance of the relative credit performance of the vintage pools that make up the legacy portfolio have contributed to lower provisions for credit losses and lower levels of the allowance for finance credit losses. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

 

Sales expense consists primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs, internet lead sales, and direct mail products. Sales expense increased by $701,000, or 5.3%, to $13.9 million during the nine months ended September 30, 2019, compared to $13.2 million in the prior year period, and represented 5.5% of total operating expenses. For the nine months ended September 30, 2019, we purchased 42,534 contracts representing $755.3 million in receivables compared to 38,749 contracts representing $650.6 million in receivables in the prior period. In addition, in recent months, we have gradually shifted to more field sales representatives as compared to in-house sales representatives. Field sales representatives are somewhat more costly than in-house sales representatives, but we feel will ultimately be more effective.

 

Occupancy expenses increased by $101,000 or 1.8%, to $5.7 million compared to $5.6 million in the previous year and represented 2.3% of total operating expenses.

 

Depreciation and amortization expenses increased by $43,000 or 5.8%, to $789,000 compared to $746,000 in the previous year and represented 0.2% of total operating expenses.

 

For the nine months ended September 30, 2019, we recorded income tax expense of $2.9 million, representing a 35.0% effective income tax rate. In the prior year period, we recorded $4.4 million in income tax expense, representing a 31.7% effective income tax rate.

 

Credit Experience

 

Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we originated or own an interest in as of the respective dates shown. The tables do not include the experience of third party originated and owned portfolios.

 

 

 

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Delinquency, Repossession and Extension Experience (1)

Total Owned Portfolio

 

    September 30, 2019   September 30, 2018   December 31, 2018 
    Number of       Number of       Number of     
    Contracts   Amount   Contracts   Amount   Contracts   Amount 
    (Dollars in thousands) 
Delinquency Experience                               
Gross servicing portfolio (1)    177,575   $2,412,638    174,584   $2,342,889    176,042   $2,380,847 
Period of delinquency (2)                               
31-60 days    14,071   $195,016    10,509   $144,842    13,182   $183,974 
61-90 days    6,909    94,603    4,750    62,642    5,577    74,485 
91+ days    3,059    39,476    2,462    29,729    2,858    35,520 
Total delinquencies (2)    24,039    329,095    17,721    237,213    21,617    293,979 
Amount in repossession (3)    4,047    50,779    2,636    33,989    2,840    36,480 
Total delinquencies and amount in repossession (2)    28,086   $379,874    20,357   $271,202    24,457   $330,459 
Delinquencies as a percentage of gross servicing portfolio    13.5%    13.6%    10.2%    10.1%    12.3%    12.3% 
                              . 
                              . 
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio    15.8%    15.7%    11.7%    11.6%    13.9%    13.9% 
Extension Experience                               
Contracts with one extension, accruing    25,036   $337,383    27,476   $366,400    27,192   $364,575 
Contracts with two or more extensions, accruing    54,182    681,939    61,692    833,005    61,977    828,573 
     79,218    1,019,322    89,168    1,199,405    89,169    1,193,148 
Contracts with one extension, non-accrual (4)    1,084    13,636    700    8,311    798    9,518 
Contracts with two or more extensions, non-accrual (4)    4,435    56,347    3,498    45,238    3,946    51,912 
     5,519    69,983    4,198    53,549    4,744    61,430 
                                
Total contracts with extensions    84,737   $1,089,305    93,366   $1,252,954    93,913   $1,254,578 

_________________________

(1)All amounts and percentages are based on the amount remaining to be repaid on each automobile contract, including, for pre-computed automobile contracts, any unearned interest. The information in the table represents the gross principal amount of all automobile contracts we have purchased, including automobile contracts subsequently sold in securitization transactions that we continue to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees only and have no credit risk.
(2)We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the Servicing Agreements. The period of delinquency is based on the number of days payments are contractually past due. Automobile contracts less than 31 days delinquent are not included. The delinquency aging categories shown in the tables reflect the effect of extensions.
(3)Amount in repossession represents financed vehicles that have been repossessed but not yet liquidated.
(4)Amount in repossession and accounts past due more than 90 days are on non-accrual.

 

 

 

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Net Charge-Off Experience (1)

Total Owned Portfolio

 

   September 30,   September 30,   December 31, 
   2019   2018   2018 
   (Dollars in thousands) 
Average servicing portfolio outstanding  $2,400,078   $2,332,256   $2,341,954 
                
Annualized net charge-offs as a percentage of average servicing portfolio (2)   8.0%    7.9%    7.7% 

_________________________

(1)All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts.
(2)Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying interim consolidated financial statements. September 30, 2019 and September 30, 2018 percentages represent nine months ended September 30, 2019 and September 30, 2018 annualized. December 31, 2018 represents 12 months ended December 31, 2018.

 

Extensions

 

In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor would not be entitled to more than two such extensions in any 12-month period and no more than six over the life of the contract. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In some cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings.

 

The basic question in deciding to grant an extension is whether or not we will (a) be delaying the inevitable repossession and liquidation or (b) risk losing the vehicle as a result of not being able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been repossessed without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime losses, getting the obligor’s account current (or close to it) and building goodwill with the obligor so that he might prioritize us over other creditors on future payments. Our servicing staff are trained to identify when a past due obligor is facing a temporary problem that may be resolved with an extension. In most cases, the extension will be granted in conjunction with our receiving a past due payment (and where allowed by law, a nominal fee, applied to the loan as a partial payment) from the obligor, thereby indicating an additional monetary and psychological commitment to the contract on the obligor’s part.

 

The credit assessment for granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history, including past extensions if applicable; and (4) the obligor’s willingness to communicate and cooperate on resolving the delinquency. If the collector believes the obligor is a good candidate for an extension, he must obtain approval from his supervisor, who will review the same factors stated above prior to offering the extension to the obligor. After receiving an extension, an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.

 

 

 

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We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table below summarizes the status, as of September 30, 2019, for accounts that received extensions from 2008 through 2018 (2019 extension data are not included at this time due to insufficient passage of time for meaningful evaluation of results):

 

 

Period of Extension  #
Extensions Granted
  Active or
Paid Off at September 30, 2019
  % Active or Paid Off at September 30, 2019  Charged Off
> 6 Months After Extension
  % Charged
Off > 6
Months After Extension
  Charged Off
<= 6 Months After Extension
  % Charged
Off <= 6 Months After Extension
  Avg Months
to Charge
Off Post Extension
 
                          
 2008   35,588   10,710   30.1%   20,059   56.4%   4,819   13.5%   19 
 2009   32,226   10,274   31.9%   16,168   50.2%   5,783   17.9%   17 
 2010   26,167   12,165   46.5%   12,003   45.9%   1,999   7.6%   19 
 2011   18,786   10,975   58.4%   6,879   36.6%   932   5.0%   19 
 2012   18,783   11,332   60.3%   6,655   35.4%   796   4.2%   18 
 2013   23,398   11,314   48.4%   11,108   47.5%   976   4.2%   22 
 2014   25,773   11,105   43.1%   13,842   53.7%   826   3.2%   23 
 2015   53,319   25,404   47.6%   26,833   50.3%   1,082   2.0%   22 
 2016   80,897   45,756   56.6%   33,208   41.0%   1,933   2.4%   19 
 2017   133,881   84,120   62.8%   42,801   32.0%   6,926   5.2%   14 
 2018   121,531   95,240   78.4%   20,284   16.7%   6,007   4.9%   9 

_________________________

Note: Table excludes extensions on portfolios serviced for third parties

 

We view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2012, 60.3% were either paid in full or active and performing at September 30, 2019. Each of these successful accounts represent continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred a substantial loss and no interest revenue subsequent to the extension.

 

For the extension accounts that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on average, 18 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account with additional payments of principal and interest.

 

Additional information about our extensions is provided in the tables below:

 

   Nine Months Ended September 30,   Year Ended December 31, 
   2019   2018   2018 
             
Average number of extensions granted per month   5,152    10,460    10,128 
                
Average number of outstanding accounts   177,094    174,425    174,738 
                
Average monthly extensions as % of average outstandings   2.9%    6.0%    5.8% 

_________________________

Note: Table excludes portfolios originated and owned by third parties

 

 

 

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   September 30, 2019   September 30, 2018   December 31, 2018 
   Number of Contracts   Amount   Number of Contracts   Amount   Number of Contracts   Amount 
           (Dollars in thousands)         
Contracts with one extension   26,120   $351,019    28,176   $374,711    27,991   $374,116 
Contracts with two extensions   17,816    228,337    21,294    285,741    20,789    277,497 
Contracts with three extensions   14,611    187,088    17,435    237,743    17,210    231,905 
Contracts with four extensions   12,372    157,264    13,152    180,657    13,583    185,114 
Contracts with five extensions   8,507    104,396    8,544    114,061    9,189    121,836 
Contracts with six extensions   5,311    61,201    4,765    60,041    5,152    64,134 
    84,737   $1,089,305    93,366   $1,252,954    93,914   $1,254,602 
                               
Managed portfolio (excluding originated and owned by 3rd parties)   177,575   $2,412,638    174,584   $2,342,889    176,042   $2,380,847 

 

 

_________________________

Note: Table excludes portfolios originated and owned by third parties

 

In recent years, we have experienced an increase in the number of extensions that we grant to our customers. We attribute this to a number of factors. First, in June 2014 we entered into a consent decree with the FTC that required us to make certain procedural changes in our servicing practices, which we believe have contributed to somewhat higher delinquencies and extensions compared to prior periods. Secondly, in recent years we have found it more difficult to communicate with our customers via outbound voice telephone calls, which have historically been our primary means of communicating with our customers. Consequently, we have recently developed text messaging platforms to supplement our outbound voice calling efforts. In addition, in 2016 we added features to the customer portal of our website to facilitate the process whereby the customer may request an extension. Since January of 2019, we have attempted to reduce extensions by working with our servicing staff to be more selective in granting extensions including, where appropriate, to exhaust all possibilities of payment by the customer before granting an extension.

 

Non-Accrual Receivables

 

It is not uncommon for our obligors to fall behind in their payments. However, with the diligent efforts of our Servicing staff and systems for managing our collection efforts, we regularly work with our customers to resolve delinquencies. Our staff are trained to employ a counseling approach to assist our customers with their cash flow management skills and help them to prioritize their payment obligations in order to avoid losing their vehicle to repossession. Through our experience, we have learned that once a customer becomes greater than 90 days past due, it is not likely that the delinquency will be resolved and will ultimately result in a charge-off. As a result, we do not recognize any interest income for contracts that are greater than 90 days past due.

 

If a contract exceeds the 90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes less than or equal to 90 days delinquent at the end of a subsequent period, it would be restored to full accrual status for our financial reporting purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance that full repayment of interest and principal will ultimately be made. However, we monitor each obligor’s payment performance and are aware of the severity of his delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold is a positive indicator. Should the contract again exceed the 90-day delinquency level at the end of any reporting period, it would again be reflected as a non-accrual account.

 

 

 

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Our policy for placing a contract on non-accrual status is independent of our policy to grant an extension. In practice, it would be an uncommon circumstance where an extension was granted and the account remained in a non-accrual status, since the goal of the extension is to bring the contract current (or nearly current).

 

Liquidity and Capital Resources

 

Our business requires substantial cash to support our purchases of automobile contracts and other operating activities. Our primary sources of cash have been cash flows from the proceeds from term securitization transactions and other sales of automobile contracts, amounts borrowed under various revolving credit facilities (also sometimes known as warehouse credit facilities), customer payments of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash from securitization transactions and their related spread accounts. Our primary uses of cash have been the purchases of automobile contracts, repayment of amounts borrowed under lines of credit, securitization transactions and otherwise, operating expenses such as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of spread accounts and initial overcollateralization, if any, the increase of credit enhancement to required levels in securitization transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of securitized pools (which determines the level of releases from those pools and their related spread accounts), the rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to acquire and borrow against automobile contracts.

 

Net cash provided by operating activities for the nine-month period ended September 30, 2019 was $170.0 million, an increase of $11.4 million, compared to net cash provided by operating activities for the nine-month period ended September 30, 2018 of $158.6 million. Net cash from operating activities is generally provided by net income from operations adjusted for significant non-cash items such as our provision for credit losses and interest accretion on fair value receivables.

 

Net cash used in investing activities for the nine-month period ended September 30, 2019 was $177.7 million compared to net cash used in investing activities of $157.7 million in the prior year period. Cash provided by investing activities primarily results from principal payments and other proceeds received on finance receivables. Cash used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables excluding acquisition fees were $755.3 million and $650.6 million during the first nine months of 2019 and 2018, respectively.

 

Net cash provided by financing activities for the nine months ended September 30, 2019 was $14.9 million compared to net cash used in financing activities of $4.6 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first nine months of 2019, we issued $726.2 million in new securitization trust debt compared to $622.1 million in the same period of 2018. We repaid $723.2 million in securitization trust debt in the nine months ended September 30, 2019 compared to repayments of securitization trust debt of $671.7 million in the prior year period. In the nine months ended September 30, 2019, we had net advances on warehouse lines of credit of $20.9 million, compared to net advances of $15.0 million in the prior year’s period. On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations.

 

We purchase automobile contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over a period of years. We have been dependent on warehouse credit facilities to purchase automobile contracts and our securitization transactions for long term financing of our contracts. In addition, we have accessed other sources, such as residual financings and subordinated debt in order to finance our continuing operations.

 

 

 

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The acquisition of automobile contracts for subsequent financing in securitization transactions, and the need to fund spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in securitizations, and the extent to which the previously established trusts and their related spread accounts either release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most subject to our control is the rate at which we purchase automobile contracts.

 

We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of September 30, 2019, we had unrestricted cash of $8.8 million and $142.8 million aggregate available borrowings under our three warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of September 30, 2019, we had approximately $19.7 million of such eligible collateral. During the nine-month period ended September 30, 2019, we completed three securitizations aggregating $726.2 million of notes sold. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available capital, and, as appropriate, minimizing our operating costs. If we are unable to complete such securitizations, we may be unable to increase our rate of automobile contract purchases, in which case our interest income and other portfolio related income could decrease.

 

Our liquidity will also be affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics of each spread account vary among transactions, our securitization agreements generally provide that we will receive excess cash flows, if any, only if the amount of credit enhancement has reached specified levels and the delinquency or net losses related to the automobile contracts in the pool are below certain predetermined levels. In the event delinquencies or net losses on the automobile contracts exceed such levels, the terms of the securitization may require increased credit enhancement to be accumulated for the particular pool. There can be no assurance that collections from the related trusts will continue to generate sufficient cash.

 

Our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of September 30, 2019, we were in compliance with all such financial covenants.

 

We have and will continue to have a substantial amount of indebtedness. At September 30, 2019, we had approximately $2,279.1 million of debt outstanding. Such debt consisted primarily of $2,066.5 million of securitization trust debt and $157.8 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $32.2 million while our warehouse lines of credit debt has increased by $30.1 million since September 30, 2018 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $15.5 million and $16.9 million in subordinated renewable notes outstanding at September 30, 2019 and 2018, respectively. On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. At September 30, 2019, $40.0 million of this residual interest financing debt remains outstanding ($39.4 million net of deferred financing costs).

 

Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt or equity securities.

 

 

 

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Forward Looking Statements

 

This report on Form 10-Q includes certain “forward-looking statements.” Forward-looking statements may be identified by the use of words such as “anticipates,” “expects,” “plans,” “estimates,” or words of like meaning. Our provision for credit losses is a forward-looking statement, as it is dependent on our estimates as to future chargeoffs and recovery rates. Factors that could affect charge-offs and recovery rates include changes in the general economic climate, which could affect the willingness or ability of obligors to pay pursuant to the terms of automobile contracts, changes in laws respecting consumer finance, which could affect our ability to enforce rights under automobile contracts, and changes in the market for used vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current year include the levels of cash releases from existing pools of automobile contracts, which would affect our ability to purchase automobile contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell automobile contracts to us on the terms that we offer, and the terms on which and whether we are able to complete term securitizations once automobile contracts are acquired. Factors that could affect our expenses in the current year include competitive conditions in the market for qualified personnel and interest rates (which affect the rates that we pay on notes issued in our securitizations).

 

Item 4. Controls and Procedures

 

We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of such disclosure controls and procedures. Based upon that evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the principal financial officer (Jeffrey P. Fritz) concluded that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, material information relating to us that is required to be included in our reports filed under the Securities Exchange Act of 1934. There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The information provided under the caption “Legal Proceedings,” Note 8 to the Unaudited Condensed Consolidated Financial Statements, included in Part I of this report, is incorporated herein by reference.

 

Item 1A. Risk Factors

 

We remind the reader that risk factors are set forth in Item 1A of our report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 13, 2019. Where we are aware of material changes to such risk factors as previously disclosed, we set forth below an updated discussion of such risks. The reader should note that the other risks identified in our report on Form 10-K remain applicable.

 

We have substantial indebtedness.

 

We have and will continue to have a substantial amount of indebtedness. At September 30, 2019, we had approximately $2,279.1 million of debt outstanding. Such debt consisted primarily of $2,066.5 million of securitization trust debt and $157.8 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $32.2 million while our warehouse lines of credit debt has increased by $30.1 million since September 30, 2018 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $15.5 million and $16.9 million in subordinated renewable notes outstanding at September 30, 2019 and 2018, respectively. On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. At September 30, 2019, $40.0 million of this residual interest financing debt remains outstanding ($39.4 million net of deferred financing costs). Our substantial indebtedness could adversely affect our financial condition by, among other things:

 

·increasing our vulnerability to general adverse economic and industry conditions;
·requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing amounts available for working capital, capital expenditures and other general corporate purposes;
·limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
·placing us at a competitive disadvantage compared to our competitors that have less debt; and
·limiting our ability to borrow additional funds.

 

Although we believe we are able to service and repay such debt, there is no assurance that we will be able to do so. If we do not generate sufficient operating profits, our ability to make required payments on our debt would be impaired. Failure to pay our indebtedness when due could have a material adverse effect.

 

 

 

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Forward-Looking Statements

 

Discussions of certain matters contained in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. You can generally identify forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such a difference, including the following:

 

·changes in general economic conditions;
·our ability or inability to obtain necessary financing, and the terms of any such financing;
·changes in interest rates, especially as applicable to securitization trust debt;
·our ability to generate sufficient operating and financing cash flows;
·competition;
·level of future provisioning for receivables losses;
·the levels of actual losses on receivables; and
·regulatory requirements.

 

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Actual results may differ from expectations due to many factors beyond our ability to control or predict, including those described herein, and in documents incorporated by reference in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

We undertake no obligation to publicly update any forward-looking information. You are advised to consult any additional disclosure we make in our periodic reports filed with the SEC.

 

 

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended September 30, 2019, we did not repurchase shares in the open market.

 

Issuer Purchases of Equity Securities

 

            Total Number of   Approximate Dollar 
    Total       Shares Purchased as   Value of Shares that 
    Number of   Average   Part of Publicly   May Yet be Purchased 
    Shares   Price Paid   Announced Plans or   Under the Plans or 
Period(1)   Purchased   per Share   Programs   Programs (2) 
                  
July 2019       $       $6,144,520 
August 2019       $       $6,144,520 
September 2019       $       $6,144,520 
Total       $          

_________________________

(1)Each monthly period is the calendar month.
(2)Through September 30, 2019, our board of directors had authorized the purchase of up to $74.5 million of our outstanding securities, under a program first announced in our annual report for the year 2002, filed on June 26, 2003. All purchases described in the table above were under the program announced in June 2003, which has no fixed expiration date.

 

Item 6. Exhibits

 

The Exhibits listed below are filed with this report.

 

4.14 Instruments defining the rights of holders of long-term debt of certain consolidated subsidiaries of the registrant are omitted pursuant to the exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation S-K (17 CFR 229.601).  The registrant agrees to provide copies of such instruments to the United States Securities and Exchange Commission upon request.
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer of the registrant.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer of the registrant.
32 Section 1350 Certifications.*

 

* These Certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These Certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registration statement specifically states that such Certifications are incorporated therein.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CONSUMER PORTFOLIO SERVICES, INC.
  (Registrant)
Date: November 12, 2019  
  By: /s/   CHARLES E. BRADLEY, JR.           
  Charles E. Bradley, Jr.
  President and Chief Executive Officer
  (Principal Executive Officer)
Date: November 12, 2019  
  By: /s/   JEFFREY P. FRITZ                            
  Jeffrey P. Fritz
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)

 

 

 

 

 

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