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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2022

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ______________

 

Commission file number: 1-11416

 

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 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) 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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ 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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated Filer ☐ Accelerated Filer 
Non-accelerated Filer ☒ Smaller reporting company 
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 Exchange Act). Yes ☐ No ☒

 

As of November 7, 2022 the registrant had 20,438,986 common shares outstanding.

 

 

   

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

 

For the Quarterly Period Ended September 30, 2022

 

    Page
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
  Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 3
  Unaudited Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2022 and 2021 4
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2022 and 2021 5
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2022 and 2021 6
  Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three-month and nine-month periods ended September 30, 2022 and 2021 7
  Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 4. Controls and Procedures 42
 
 
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 6. Exhibits 45
  Signatures

46

 

 

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

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, 
   2022   2021 
ASSETS          
Cash and cash equivalents  $12,944   $29,928 
Restricted cash and equivalents   159,762    146,620 
Finance receivables measured at fair value   2,343,253    1,749,098 
           
Finance receivables   117,686    232,390 
Less: Allowance for finance credit losses   (27,996)   (56,206)
Finance receivables, net   89,690    176,184 
           
Furniture and equipment, net   1,700    1,129 
Deferred tax assets, net   14,570    19,575 
Accrued interest receivable   776    2,269 
Other assets   27,829    34,775 
Total Assets  $2,650,524   $2,159,578 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Accounts payable and accrued expenses  $55,982   $43,648 
Warehouse lines of credit   242,449    105,610 
Residual interest financing   49,560    53,682 
Securitization trust debt   2,057,100    1,759,972 
Subordinated renewable notes   27,249    26,459 
Total liabilities   2,432,340    1,989,371 
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; 20,607,286 and 21,143,764 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively   31,427    55,298 
Retained earnings   188,379    116,531 
Accumulated other comprehensive loss   (1,622)   (1,622)
Total stockholders’ equity   218,184    170,207 
           
Total liability and stockholder’ equity  $2,650,524   $2,159,578 

 

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, 
   2022   2021   2022   2021 
Revenues:                
Interest income  $79,817   $67,018   $225,547   $198,551 
Mark to finance receivables measured at fair value   8,183        15,283    (4,417)
Other income   2,305    1,547    5,859    4,312 
Total revenues   90,305    68,565    246,689    198,446 
                     
Expenses:                    
Employee costs   20,671    18,170    63,414    57,777 
General and administrative   9,408    7,455    25,920    23,034 
Interest   23,483    18,334    58,654    58,260 
Provision for credit losses   (6,000)   (1,590)   (23,400)   (1,590)
Sales   5,962    4,288    17,186    12,475 
Occupancy   2,031    1,952    5,820    5,870 
Depreciation and amortization   406    409    1,207    1,254 
Total operating expenses   55,961    49,018    148,801    157,080 
Income before income tax expense   34,344    19,547    97,888    41,366 
Income tax expense   8,931    5,864    26,040    12,807 
Net income  $25,413   $13,683   $71,848   $28,559 
                     
Earnings per share:                    
Basic  $1.22   $0.59   $3.39   $1.25 
Diluted   0.95    0.52    2.61    1.12 
                     
Number of shares used in computing earnings per share:                    
Basic   20,911    23,011    21,166    22,866 
Diluted   26,654    26,218    27,512    25,439 

 

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, 
   2022   2021   2022   2021 
                 
Net income  $25,413   $13,683   $71,848   $28,559 
                     
Other comprehensive income/(loss); change in funded status of pension plan                
Comprehensive income  $25,413   $13,683   $71,848   $28,559 

 

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, 
   2022   2021 
Cash flows from operating activities:          
Net income  $71,848   $28,559 
Adjustments to reconcile net income to net cash provided by operating activities:          
Accretion of deferred acquisition fees and origination costs       651 
Net interest income accretion on fair value receivables   97,462    100,676 
Depreciation and amortization   1,207    1,254 
Amortization of deferred financing costs   5,860    5,360 
Mark to finance receivables measured at fair value   (15,283)   4,417 
Provision for credit losses   (23,400)   (1,590)
Stock-based compensation expense   2,966    1,265 
Purchases of finance receivables held-for-sale       (23,700)
Sale of finance receivables held-for-sale       23,513 
Changes in assets and liabilities:          
Accrued interest receivable   1,493    2,087 
Deferred tax assets, net   5,005    3,146 
Other assets   5,252    8,629 
Accounts payable and accrued expenses   12,334    8,809 
Net cash provided by operating activities   164,744    163,076 
           
Cash flows from investing activities:          
Payments received on finance receivables held for investment   109,894    198,366 
Purchases of finance receivables measured at fair value   (1,311,735)   (795,457)
Payments received on finance receivables at fair value   635,401    546,897 
Change in repossessions held in inventory   1,694    1,567 
Purchase of furniture and equipment   (1,778)   (1,547)
Net cash used in investing activities   (566,524)   (50,174)
           
Cash flows from financing activities:          
Proceeds from issuance of securitization trust debt   1,104,000    761,545 
Proceeds from issuance of subordinated renewable notes   4,004    7,416 
Payments on subordinated renewable notes   (3,214)   (1,277)
Net proceeds from (repayments of) warehouse lines of credit   139,477    (22,089)
Net Proceeds from (repayment of) residual interest financing debt   (4,311)   39,705 
Repayment of securitization trust debt   (804,774)   (861,045)
Payment of financing costs   (10,407)   (5,752)
Purchase of common stock   (41,535)   (3,959)
Exercise of options and warrants   14,698    2,167 
Net cash provided by (used in) financing activities   397,938    (83,289)
Increase (decrease) in cash and cash equivalents   (3,842)   29,613 
Cash and restricted cash at beginning of period   176,548    144,152 
Cash and restricted cash at end of period  $172,706   $173,765 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $51,300   $53,931 
Income taxes  $13,977   $8,997 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

 

                     
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Common Stock (Shares Outstanding)                    
Balance, beginning of period   21,207    23,055    21,144    22,737 
Common stock issued upon exercise of options and warrants   79    379    2,974    1,055 
Repurchase of common stock   (679)   (434)   (3,511)   (792)
Balance, end of period   20,607    23,000    20,607    23,000 
                     
Common Stock                    
Balance, beginning of period  $36,947   $73,204   $55,298   $72,926 
Common stock issued upon exercise of options and warrants   282    1,042    14,698    2,167 
Repurchase of common stock   (7,250)   (2,377)   (41,535)   (3,959)
Stock-based compensation   1,448    530    2,966    1,265 
Balance, end of period  $31,427   $72,399   $31,427   $72,399 
                     
Retained Earnings                    
Balance, beginning of period  $162,966   $83,884   $116,531   $69,007 
Net income   25,413    13,683    71,848    28,559 
Balance, end of period  $188,379   $97,566   $188,379   $97,566 
                     
Accumulated Other Comprehensive Loss                    
Balance, beginning of period  $(1,622)  $(8,571)  $(1,622)  $(8,571)
Pension benefit obligation                
Balance, end of period  $(1,622)  $(8,571)  $(1,622)  $(8,571)
                     
Balance, beginning of period                
Pension benefit obligation                
Total Shareholders' Equity  $218,184   $161,394   $218,184   $161,394 

 

 

 

 

 

 

 

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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, 2022 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, 2021.

 

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 recorded value of the receivables.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

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 recorded value, an adjustment would be required. Results for the three-month and nine-month periods ending September 30, 2022 include a $8.2 million and $15.3 million positive mark to the carrying value of the portion of the receivables portfolio accounted for at fair value. Mark downs of $4.4 million were included in the results for the nine months ending September 30, 2021. Mark downs are reflected as a reduction in revenue.

 

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 recorded 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, 2022 and 2021:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Origination and servicing fees from third party receivables  $2,016   $495   $4,268   $611 
Direct mail revenues       779    774    2,648 
Convenience fee revenue   50    120    170    540 
Recoveries on previously charged-off contracts   10    18    54    78 
Sales tax refunds   209    134    512    423 
Other   20    1    81    12 
Other income for the period  $2,305   $1,547   $5,859   $4,312 

 

Leases

 

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.

 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

          
   September 30,   December 31, 
   2022   2021 
   (In thousands) 
Operating Leases          
Operating lease right-of-use assets  $25,819   $25,819 
Less: Accumulated amortization right-of-use assets   (21,599)   (17,624)
Operating lease right-of-use assets, net  $4,220   $8,195 
    $      
Operating lease liabilities  $(4,749)  $(9,058)
    $      
Finance Leases   $      
Property and equipment, at cost   3,407    3,407 
Less: Accumulated depreciation   (3,086)   (2,348)
Property and equipment, net  $321   $1,059 
    $      
Finance lease liabilities  $(348)  $(1,124)
    $      
Weighted Average Discount Rate          
Operating lease   5.0%    5.0% 
Finance lease   6.5%    6.5% 

 

Maturities of lease liabilities were as follows:

          
(In thousands)  Operating   Finance 
Year Ending September 30,  Lease   Lease 
2022  $817   $238 
2023   1,888    84 
2024   921    26 
2025   794    9 
2026   501     
Thereafter   1,160     
Total undiscounted lease payments   6,081    357 
Less amounts representing interest   (1,332)   (9)
Lease Liability  $4,749   $348 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Operating lease cost  $1,767   $1,768   $5,288   $5,398 
Finance lease cost   257    308    813    924 
Total lease cost  $2,024   $2,076   $6,101   $6,322 

 

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

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Cash paid for amounts included in the measurement of lease liabilities:  (In thousands)   (In thousands) 
Operating cash flows from operating leases  $1,921   $1,840   $5,616   $5,662 
Operating cash flows from finance leases  $249   $283   $776   $834 
Financing cash flows from finance leases  $8   $25   $36   $90 

 

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, 2022, we recorded stock-based compensation costs in the amount of $1.4 million and $3.0 million, respectively. These stock-based compensation costs were $530,000 and $1.3 million for the three and nine months ended September 30, 2021. As of September 30, 2022, unrecognized stock-based compensation costs to be recognized over future periods equaled $10.9 million. This amount will be recognized as expense over a weighted-average period of 2.6 years.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following represents stock option activity for the nine months ended September 30, 2022:

             
           Weighted
   Number of   Weighted   Average
   Shares   Average   Remaining
   (in thousands)   Exercise Price   Contractual Term
Options outstanding at the beginning of period   13,075   $4.54    N/A
Granted   1,710    10.28    N/A
Exercised   (2,975)   4.94    N/A
Forfeited   (520)   7.26    N/A
Options outstanding at the end of period   11,290   $5.18    3.29 years
              
Options exercisable at the end of period   7,708   $4.39    2.13 years

 

The following table presents the price distribution of stock options outstanding and exercisable as of September 30, 2022 and December 31, 2021:

                    
   Number of shares as of   Number of shares as of 
   September 30, 2022   December 31, 2021 
   Outstanding   Exercisable   Outstanding   Exercisable 
Range of exercise prices:  (In thousands)   (In thousands) 
$0.95 - $1.99           577    577 
$2.00 - $2.99   1,445    775    1,517    489 
$3.00 - $3.99   3,933    3,638    4,285    3,382 
$4.00 - $4.99   2,738    1,801    2,870    1,410 
$5.00 - $5.99                
$6.00 - $6.99   746    746    2,651    2,652 
$7.00 - $7.99   748    748    1,175    1,175 
$8.00 - $11.00   1,680             
                     
Total shares   11,290    7,708    13,075    9,685 

 

At September 30, 2022 the aggregate intrinsic value of options outstanding and exercisable was $29.2 million and $22.7 million, respectively. There were 2,974,223 million options exercised for the nine months ended September 30, 2022 compared to 1,054,541 for the comparable period in 2021. The total intrinsic value of options exercised was $23.1 million and $3.0 million for the nine-month periods ended September 30, 2022 and 2021. There were 2,691,000 shares available for future stock option grants under existing plans as of September 30, 2022.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Purchases of Company Stock

 

The table below describes the purchase of our common stock for the nine-month ended September 30, 2022 and 2021:

                    
   Nine Months Ended 
   September 30, 2022   September 30, 2021 
   Shares   Avg. Price   Shares   Avg. Price 
Open market purchases   2,617,548   $11.20    734,700   $5.03 
Shares redeemed upon net exercise of stock options   893,153    13.56    56,983    4.47 
Total stock purchases   3,510,701   $11.80    791,683   $4.99 

 

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, 2022, 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.

 

(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.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

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. Automobile finance receivables, net of unearned interest was $116.7 million and $232.4 million as of September 30, 2022 and December 31, 2021, respectively. The following table summarizes the delinquency status of finance receivables as of September 30, 2022 and December 31, 2021:

          
   September 30,   December 31, 
   2022   2021 
   (In thousands) 
Deliquency Status          
Current  $89,041   $186,625 
31 - 60 days   18,090    30,980 
61 - 90 days   8,047    12,070 
91 + days   2,508    2,715 
   $117,686   $232,390 

 

Finance receivables totaling $2.5 million and $2.7 million at September 30, 2022 and December 31, 2021, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.

 

Allowance for Credit Losses – Finance Receivables

 

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of finance receivables to present the net amount expected to be collected. Charge offs are deducted from the allowance when management believes that collectability is unlikely.

 

Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions and, reasonable and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation of expected credit losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools based on their calendar quarter of origination, to forecast expected losses for less seasoned quarterly vintage pools.

 

We measure the weighted average monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the pools in the relevant historical period, we consider each pool’s performance from its inception through the end of the current period. We then apply the results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s most recent actual cumulative net loss experience and extrapolating from that point based on the historical data. We believe the pattern and magnitude of losses on older vintages allows us to establish a reasonable and supportable forecast of less seasoned vintages.

 

Our contract purchase guidelines are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor credit history, job stability, residence stability and ability to pay, there is relatively little variation from the average for the portfolio. Similarly, for key structural characteristics such as loan-to-value, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. Consequently, we do not believe there are significant differences in risk characteristics between various segments of our portfolio.

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Our methodology incorporates historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools. Furthermore, the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive landscape, the Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment.

 

In consideration of the depth and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss information for differences in risk characteristics such as credit or structural composition of segments of the portfolio or for changes in environmental conditions such as changes in unemployment rates, collateral values or other factors. However, we have considered how certain qualitative factors may affect future credit losses and have incorporated our judgement of the effect of such factors into our estimates.

 

The following table presents the amortized cost basis of our finance receivables by annual vintage as of September 30, 2022 and December 31, 2021.

          
   September 30,   December 31, 
   2022   2021 
   (In thousands) 
Annual Vintage Pool        
2012 and prior  $39   $131 
2013   335    1,091 
2014   2,349    6,881 
2015   11,987    29,695 
2016   37,268    76,728 
2017   65,708   117,864 
   $117,686   $232,390 

 

The following table presents a summary of the activity for the allowance for finance credit losses for the three-month and nine-month periods ended September 30, 2022 and 2021:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Balance at beginning of period  $35,672   $72,242   $56,206   $80,790 
Provision for credit losses on finance receivables   (6,000)   (1,590)   (23,400)   (1,590)
Charge-offs   (4,375)   (6,336)   (14,181)   (25,157)
Recoveries   2,699    4,408    9,371    14,681 
Balance at end of period  $27,996   $68,724   $27,996   $68,724 

 

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, 
   2022   2021 
   (In thousands) 
Gross balance of repossessions in inventory  $2,250   $4,341 
Allowance for losses on repossessed inventory   (1,474)   (1,871)
Net repossessed inventory included in other assets  $776   $2,470 

 

 

 15 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

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:

                       
                      Weighted 
                      Average 
   Final  Receivables       Outstanding   Outstanding   Contractual Debt 
   Scheduled  Pledged at       Principal at   Principal at   Interest Rate at 
   Payment  September 30,   Initial   September 30,   December 31,   September 30, 
Series  Date (1)  2022 (2)   Principal   2022   2021   2022 
   (Dollars in thousands)    
CPS 2017-A  April 2024       206,320        17,644     
CPS 2017-B  December  2023       225,170        12,491     
CPS 2017-C  September 2024       224,825        25,846     
CPS 2017-D  June 2024   17,526    196,300    13,892    26,744    5.30% 
CPS 2018-A  March 2025   20,221    190,000    16,770    29,518    5.17% 
CPS 2018-B  December  2024   24,742    201,823    21,179    36,092    5.61% 
CPS 2018-C  September 2025   29,131    230,275    24,879    42,765    5.90% 
CPS 2018-D  June 2025   35,386    233,730    30,545    49,634    5.61% 
CPS 2019-A  March 2026   44,846    254,400    38,693    62,667    5.32% 
CPS 2019-B  June 2026   46,255    228,275    39,622    61,730    5.15% 
CPS 2019-C  September 2026   54,352    243,513    48,110    75,065    4.19% 
CPS 2019-D  December  2026   69,792    274,313    61,562    98,625    3.58% 
CPS 2020-A  March 2027   64,894    260,000    60,828    99,485    3.83% 
CPS 2020-B  June 2027   72,574    202,343    47,591    87,048    5.87% 
CPS 2020-C  November 2027   97,439    252,200    84,204    138,899    3.03% 
CPS 2021-A  March 2028   103,253    230,545    86,058    147,516    1.29% 
CPS 2021-B  June 2028   127,433    240,000    116,429    179,856    1.71% 
CPS 2021-C  September 2028   183,844    291,000    168,163    250,003    1.50% 
CPS 2021-D  December  2028   249,729    349,202    236,820    330,325    1.70% 
CPS 2022-A  April 2029   266,687    316,800    247,530        2.04% 
CPS 2022-B  October 2029   384,556    395,600    356,044        4.05% 
CPS 2022-C  April 2030   420,885    391,600    372,262        5.17% 
      $2,313,545   $5,638,234   $2,071,179   $1,771,953      

_________________

(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 $213.6 million in 2022, $967.3 million in 2023, $302.1 million in 2024, $283.2 million in 2025, $165.3 million in 2026, $101.6 million in 2027, and $23.9 million in 2028.
  
(2)Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Debt issuance costs of $14.1 million and $12.0 million as of September 30, 2022 and December 31, 2021, 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 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, 2022, 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, 2022, restricted cash under the various agreements totaled approximately $159.8 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.

 

(4) Debt

 

The terms and amounts of our other debt outstanding at September 30, 2022 and December 31, 2021 are summarized below:

                
         Amount Outstanding at 
         September 30,   December 31, 
         2022   2021 
         (In thousands) 
Description  Interest Rate  Maturity        
               
Warehouse lines of credit  3.00% over one month Libor (Minimum 3.75%)  July 2024  $138,596   $70,590 
                 
   4.15% over a commercial paper rate (Minimum 5.15%)  January 2024   106,891    35,420 
                 
Residual interest financing  8.60%  January 2026       4,311 
                 
Residual interest financing  7.86%  June 2026   50,000    50,000 
                 
Subordinated renewable notes  Weighted average rate of 7.67% and 8.93% at September 30, 2022 and December 31, 2021, respectively  Weighted average maturity of July 2024 and January 2024 at September 30, 2022 and December 31, 2021, respectively   27,249    26,459 
                 
         $322,736   $186,780 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

On February 2, 2022, we renewed our two-year revolving credit agreement with Ares Agent Services, L.P. There was $106.9 million outstanding under this facility at September 30, 2022. On June 28, 2022, we increased the capacity of its credit agreement with Ares Agent Services, L.P. from $100 million to $200 million. The revolving period for this facility was extended to January 2024 followed by an amortization period through January 2028 for any receivables pledged at the end of the revolving period.

 

On July 15, 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity from $100 million to $200 million. There was $138.6 million outstanding under this facility at September 30, 2022. The revolving period for this facility was extended to July 2024 followed by an amortization period through July 2025 for any receivables pledged at the end of the revolving period

 

Unamortized debt issuance costs of $440,000 and $629,000 as of September 30, 2022 and December 31, 2021, respectively, have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of $3.0 million and $400,000 as of September 30, 2022 and December 31, 2021, 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.

 

(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, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Interest on finance receivables  $7,620   $16,062   $28,766   $56,652 
Interest on finance receivables at fair value   71,734    50,951    196,204    141,882 
Other interest income   463    5    577    17 
    $                
Interest income  $79,817   $67,018   $225,547   $198,551 

 

The following table presents the components of interest expense:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Securitization trust debt  $18,519   $15,292   $47,792   $50,568 
Warehouse lines of credit   3,342    929    5,887    3,264 
Residual interest financing   1,050    1,413    3,193    2,446 
Subordinated renewable notes   572    700    1,782    1,982 
    $                
Interest expense  $23,483   $18,334   $58,654   $58,260 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(6) Earnings Per Share

 

Earnings per share for the three-month and nine-month periods ended September 30, 2022 and 2021 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-month and nine-month periods ended September 30, 2022 and 2021:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Weighted average number of common shares outstanding during the period used to compute basic earnings per share   20,911    23,011    21,166    22,866 
                     
Incremental common shares attributable to exercise of outstanding options and warrants   5,743    3,207    6,346    2,573 
                     
Weighted average number of common shares used to compute diluted earnings per share   26,654   26,218    27,512    25,439 

 

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, 2022 would have included an additional 1.7 million and 1.0 million shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30, 2021, an additional 5.6 million and 5.8 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 2015.

 

As of September 30, 2022, and December 31, 2021, 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.

 

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.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 $14.6 million as of September 30, 2022 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $14.6 million consists of approximately $8.3 million of net U.S. federal deferred tax assets and $6.3 million of net state deferred tax assets.

 

Income tax expense was $8.9 million and $26.0 million for the three months and nine months ended September 30, 2022, representing effective income tax rates of 26% and 27%, respectively, compared to income tax expense of $5.9 million and $12.8 million for the three months and nine months ended September 30, 2021, and represents an effective income tax rates of 30% and 31% respectively.

 

(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. There are as of the date of this report two civil actions that could possibly result in a material liability, if resolved adversely and on a class basis, as the respective plaintiffs allege would be appropriate.

 

Following our filing of a complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim alleging that our deficiency notices were not compliant with Connecticut law, and seeking relief on behalf of a class of Connecticut obligors whose vehicles we had repossessed. The defendant’s contract provided for resolution of disputes exclusively by arbitration, and exclusively on an individual basis, not a class basis. Nevertheless, in August 2021, the court denied our motion to compel arbitration, without opinion. In April 2022, a motion for certification of a class was filed but has not been ruled upon. It is reasonable to expect that resolution of these claims will be on a class basis.

 

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.

 

Massachusetts Civil Investigative Demand. In September 2021, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the Company’s communications with and repossession notices sent to Massachusetts customers. We are cooperating with the inquiry. At this time, it is not possible to determine any amount of loss that is probable and measurable.

 

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, 2022, our best estimate of probable incurred losses for legal contingencies, including the matters identified above, and consumer claims. 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, 2022 is $3.4 million, and that the range of reasonably possible losses for the legal proceedings and contingencies we face, including those described or identified above, as of September 30, 2022 does not exceed $11.3 million.

 

 

 

 20 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 effect on our fair value measurement.

 

For the quarter ended September 30, 2022, the Company evaluated the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential additional future net losses on the portfolio of finance receivables carried at fair value and did not record a mark down to that portfolio.

 

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, 
   2022   2021   2022   2021 
   (In thousands)   (In thousands) 
Balance at beginning of period  $2,174,133  $1,582,175   $1,749,098   $1,523,726 
Finance receivables at fair value acquired during period   407,260    310,340    1,311,735    795,457 
Payments received on finance receivables at fair value  (209,627)   (191,458)   (635,401)   (546,897)
Net interest income accretion on fair value receivables   (36,696)   (33,864)   (97,462)   (100,676)
Mark to fair value   8,183        15,283    (4,417)
Balance at end of period  $2,343,253  $1,667,193   $2,343,253   $1,667,193 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

                
   September 30, 2022   December 31, 2021 
   Contractual   Fair   Contractual   Fair 
   Balance   Value   Balance   Value 
   (In thousands) 
                 
Finance receivables measured at fair value  $2,567,372   $2,343,253   $1,972,699   $1,749,098 

 

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,
   2022   2021   Unobservable Inputs  2022  2021
   (In thousands)          
Assets:                 
Finance receivables measured at fair value  $2,343,253   $1,749,098   Discount rate  8.9% - 11.3%  8.9% - 11.3%
             Cumulative net losses  10.0% - 18.4%  10.0% - 18.4%

 

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2022 and December 31, 2021:

          
   September 30,   December 31, 
   2022   2021 
   (In thousands) 
Delinquency Status          
Current   $2,306,615   $1,787,641 
31 - 60 days   152,622    115,924 
61 - 90 day   57,888    38,999 
91 + days   22,018    11,564 
Repo   28,229    18,571 
   $2,567,372   $1,972,699 

 

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, 2022 the finance receivables related to the repossessed vehicles in inventory totaled $2.3 million. We have applied a valuation adjustment, or loss allowance, of $1.5 million, which is based on a recovery rate of approximately 34%, resulting in an estimated fair value and carrying amount of $776,000. The fair value and carrying amount of the repossessed inventory at December 31, 2021 was $2.4 million after applying a valuation adjustment of $1.9 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, 2022 and 2021.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The estimated fair values of financial assets and liabilities at September 30, 2022 and December 31, 2021, were as follows:

                         
   As of September 30, 2022 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                         
Cash and cash equivalents  $12,944   $12,944   $   $   $12,944 
Restricted cash and equivalents   159,762    159,762            159,762 
Finance receivables, net   89,690            79,700    79,700 
Accrued interest receivable   776            776    776 
Liabilities:                         
Warehouse lines of credit  $242,449   $   $   $242,449   $242,449 
Residual interest financing   49,560              49,560    49,560 
Accrued interest payable   5,063            5,063    5,063 
Securitization trust debt   2,057,100            1,969,599    1,969,599 
Subordinated renewable notes   27,249            27,249    27,249 

 

                          
   As of December 31, 2021 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                         
Cash and cash equivalents  $29,928   $29,928   $   $   $29,928 
Restricted cash and equivalents   146,620    146,620            146,620 
Finance receivables, net   176,184            178,795    178,795 
Accrued interest receivable   2,269            2,269    2,269 
Liabilities:                         
Warehouse lines of credit  $105,610   $   $   $105,610   $105,610 
Residual interest financing   53,682              53,682    53,682 
Accrued interest payable   3,568            3,568    3,568 
Securitization trust debt   1,759,972            1,740,901    1,740,901 
Subordinated renewable notes   26,459            26,459    26,459 

 

(10) Subsequent Events

 

On August 3, 2022 we executed our third securitization of 2022. In the transaction, qualified institutional buyers purchased $391.6 million of asset-backed notes secured by $440.0 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2022-C, consist of five classes. Ratings of the notes were provided by Standard & Poor’s and DBRS Morningstar, 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 6.02%.

 

The 2022-C transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 11.00%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 13.00% of the original receivable pool balance, or 31.50% of the then outstanding pool balance. The transaction utilizes a pre-funding structure, in which CPS sold approximately $368.0 million of receivables at inception and plans to sell approximately $72.0 million of additional receivables in August 2022. The transaction was a private offering of securities, not registered under the Securities Act of 1933, or any state securities law.

 

 

 

 23 

 

 

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, 2022, we have originated a total of approximately $19.6 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 
2016   1,088,785    2,308,070 
2017   859,069    2,333,530 
2018   902,416    2,380,847 
2019   1,002,782    2,416,042 
2020   742,584    2,174,972 
2021   1,146,321    2,249,069 
Nine months ended September 30, 2022   1,426,302    2,838,858 

 

In May 2021 we began purchasing some contracts for immediate sale to a third-party to whom we refer applications that don’t meet our lending criteria. We service all such contracts on behalf of the third-party. We earn fees for originating the receivable and also servicing fees on active accounts in the third-party portfolio. For the nine months ended September 30, 2022, we originated $126.8 million under this third-party program. As of September 30, 2022, our managed portfolio includes $151.5 million of such third-party receivables.

 

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.

 

 

 

 24 

 

 

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 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. For contracts acquired before 2018, we adopted CECL on January 1, 2020 and we may, as circumstances warrant, record as expense provisions for credit losses.

 

Since 1994 we have conducted 94 term securitizations of automobile contracts that we originated. As of September 30, 2022, 19 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 2020, we closed only three term securitization transactions in that calendar year rather than four.

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 
2016   4    1,214,997 
2017   4    870,000 
2018   4    883,452 
2019   4    1,014,124 
2020   3    741,867 
2021   4    1,145,002 
Nine months ended September 30, 2022   3    1,200,000 

 

Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. We previously had short-term funding capacity of $200 million, comprising three credit facilities. The first credit facility was established in May 2012. This facility was most recently renewed in July 2022, extending the revolving period to July 2024, with an optional amortization period through July 2025. In addition, the capacity was doubled from $100 million to $200 million at the July 2022 renewal.

 

In November 2015, we entered into another $100 million facility. This facility was most recently renewed in January 2022, extending the revolving period to January 2024, followed by an amortization period to January 2026. In June 2022, we doubled the capacity for this facility from $100 million to $200 million.

 

In April 2015, we entered into a $100 million facility that was renewed in April 2017 and again in February 2019. We repaid the outstanding balance for this facility at its maturity date in February 2021 and elected not to renew it. We currently have short-term funding capacity of $400 million over two credit facilities.

 

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.

 

 

 

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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.

 

Receivables we originate and service for third-parties are not pledged to our warehouse facilities or included in our securitizations.

 

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, 2022, we were in compliance with all such covenants.

 

Results of Operations

 

Comparison of Operating Results for the three months ended September 30, 2022 with the three months ended September 30, 2021

 

Revenues.  During the three months ended September 30, 2022, our revenues were $90.3 million, an increase of $21.7 million, or 31.7%, from the prior year revenue of $68.6 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. In addition, mark ups to the finance receivables measured at fair value also contributed to the increase in revenues during the quarter. Revenues for the three months ended September 30, 2022 include an $8.2 million mark up to the recorded value of the finance receivables measured at fair value. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. During the three months ended September 30, 2022, we reduced our estimate for expected future losses in finance receivables measured at fair value as we have observed that our previous estimates for increased losses due to the pandemic had not materialized. The change in estimated losses resulted in the $8.2 million mark up for the three months ended September 30, 2022. There was no mark up or mark down to the fair value portfolio in the prior year period.

 

Interest income for the three months ended September 30, 2022 increased $12.8 million, or 19.1%, to $79.8 million from $67.0 million in the prior year. The primary reason for the increase in interest income is the 37.0% increase in the average balance of finance receivables measured at fair value over the prior year period. The table below shows the average balances and interest yields of the two components of our loan portfolio for the three months ended September 30, 2022 and 2021:

 

   Three Months Ended September 30, 
   2022   2021 
   (Dollars in thousands) 
   Average       Interest   Average       Interest 
   Balance   Interest   Yield   Balance   Interest   Yield 
Interest Earning Assets                        
Finance receivables  $130,546  $8,083    24.8%   $305,820   $16,067    21.0% 
Finance receivables measured at fair value   2,517,663    71,734    11.4%    1,837,138    50,951    11.1% 
Total  $2,648,209  $79,817    12.1%   $2,142,958   $67,018    12.5% 

 

 

 

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Other income was $2.3 million for the three months ended September 30, 2022 compared to $1.5 million for the comparable period in 2021. This 49.0% increase was primarily driven by the origination and servicing fees we earned from third party receivables that began in May 2021. These fees were $2.0 million for the quarter ended September 30, 2022.

 

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 internal rate of return or the recorded value 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 purchased 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 $56.0 million for the three months ended September 30, 2022, compared to $49.0 million for the prior period, an increase of $7.0 million, or 14.2%. The increase is primarily due to increases in interest expense, employee costs and general and administrative expenses.

 

Employee costs were $20.7 million during the three months ended September 30, 2022 compared to $18.2 million for the same quarter in the prior year. 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, 2022 and 2021:

 

   Three Months Ended September 30, 
   2022   2021 
         
   (Dollars in millions) 
Contracts purchased (dollars)  $468.2   $326.8 
Contracts purchased (units)   20,888    14,741 
Managed portfolio outstanding (dollars)  $2,838.9   $2,184.1 
Managed portfolio outstanding (units)   173,774    156,456 
           
Number of Originations staff   187    170 
Number of Sales staff   134    110 
Number of Servicing staff   404    397 
Number of other staff   67    74 
Total number of employees   792    751 

 

 

 

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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 was $9.4 million, an increase from $7.5 million in the previous year and represented 16.8% of total operating expenses.

 

Interest expense for the three months ended September 30, 2022 were $23.5 million and represented 42.0% of total operating expenses, compared to $18.3 million in the previous year, when it was 37.4% of total operating expenses.

 

Interest on securitization trust debt increased by $3.2 million for the three months ended September 30, 2022 compared to the prior period. The average balance of securitization trust debt increased to $2,032.5 million for the three months ended September 30, 2022 compared to $1,819.8 million for the three months ended September 30, 2021. The annualized average rate on our securitization trust debt was 3.6% for the three months ended September 30, 2022 compared to 3.4% in the prior year period. The blended interest rates on new term securitizations have been increasing in 2022. For each 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 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%
October 2019   2.95%
January 2020   3.08%
June 2020   4.09%
September 2020   2.39%
January 2021   1.11%
April 2021   1.65%
July 2021   1.55%
October 2021   2.09%
January 2022   2.54%
April 2022   4.83%
July 2022   6.02%

 

Interest expense on warehouse credit line debt increased by $2.4 million to $3.3 million for the three months ended September 30, 2022 compared to $929,000 in the prior year period. The increase was due to the higher utilization of our credit lines during the quarter compared to last year. The average balance of our warehouse debt was $172.9 million during the three months ended September 30, 2022 compared to $39.4 million for the same period in 2021.

 

 

 

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Interest expense on subordinated renewable notes was $572,000 for the three months ended September 30, 2022. The average balance of the outstanding subordinated debt increased 2.4% to $27.5 million for the three months ended September 30, 2022 compared to $26.9 million for the prior year. The average yield of subordinated notes decreased to 8.3% compared to 10.4% in the prior period.

 

In May 2018 and June 2021, we completed two residual interest financings of our residual interests from previously issued securitizations in the amounts of $40.0 million and $50.0 million, respectively. Interest expense on these residual interest financings was $1.1 million for the three months ended September 30, 2022 compared to $1.4 million in the prior year period.

 

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, 2022 and 2021:

 

   Three Months Ended September 30, 
   2022   2021 
   (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)  $130,546   $8,083    24.8%   $305,820   $16,067    21.0% 
Finance receivables at fair value   2,517,663    71,734    11.4%    1,837,138    50,951    11.1% 
    2,648,209    79,817    12.1%    2,142,958    67,018    12.5% 
    $                          
Interest Bearing Liabilities   $                          
Warehouse lines of credit  $172,895    3,342    7.7%   $39,447    929    9.4% 
Residual interest financing   50,000    1,050    8.4%    66,824    1,413    8.5% 
Securitization trust debt   2,032,527    18,519    3.6%    1,819,789    15,292    3.4% 
Subordinated renewable notes   27,506    572    8.3%    26,868    700    10.4% 
   $2,282,928    23,483    4.1%   $1,952,928    18,334    3.8% 
    $                          
Net interest income/spread   $   $56,334             $48,684      
Net interest yield (3)   $         8.0%              8.7% 
Ratio of average interest earning assets to average interest bearing liabilities   $         116%              110% 

 

     (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.

 

 

 

 

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   Three Months Ended September 30, 2022 
   Compared to September 30, 2021 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
   (In thousands) 
Interest Earning Assets   $           
Finance receivables gross  $(7,984)  $(9,224)  $1,240 
Finance receivables at fair value   20,783    18,895    1,888 
    12,799    9,671    3,128 
Interest Bearing Liabilities   $           
Warehouse lines of credit   2,413    3,148    (735)
Residual interest financing   (363)   (350)   (13)
Securitization trust debt   3,227    2,211    1,016 
Subordinated renewable notes   (128)   16    (144)
    5,149    5,025    124 
                
Net interest income/spread  $7,650   $4,646   $3,004 

 

The annualized yield on our finance receivables was 12.1% for the three months ended September 30, 2022 and 12.5% for the same period in 2021. 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 fair value receivables was $2,517.7 million for the three months ended September 30, 2022 compared to $1,837.1 million in the prior year period.

 

For the three months ended September 30, 2022, we recorded a reduction to provision for credit losses on finance receivables in the amount of $6.0 million. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance as our previous estimates for future losses exceeded actual incurred losses. This compares to $1.6 million in reductions to provision for credit losses for the three months ended September 30, 2021.

 

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of September 30, 2022. Although we have not yet seen a meaningful deterioration in the credit performance for these receivables, worsening economic conditions, inflation and a reversion to the mean for used car pricing could negatively affect credit performance in the future.

 

The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio.  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 $1.7 million to $6.0 million during the three months ended September 30, 2022 and represented 10.7% of total operating expenses. We purchased $468.2 million of new contracts during the three months ended September 30, 2022 compared to $326.8 million in the prior year period.

 

Occupancy expenses was $2.0 million for the three months ending September 30, 2022 and 2021.

 

 

 

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Depreciation and amortization expenses decreased to $406,000 compared to $409,000 in the previous year and represented 0.8% of total operating expenses.

 

For the three months ended September 30, 2022, we recorded income tax expense of $8.9 million, representing a 26% effective tax rate. In the prior period, our income tax expense was $5.9 million, representing a 30% effective tax rate.

 

Comparison of Operating Results for the nine months ended September 30, 2022 with the nine months ended September 30, 2021

 

Revenues.  During the nine months ended September 30, 2022, our revenues were $246.7 million, an increase of $48.2 million, or 24.3%, from the prior year revenue of $198.4 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. In addition, mark ups to the finance receivables measured at fair value also contributed to the increase in revenues during the period. Revenues for the nine months ended September 30, 2022 include a $15.3 million mark up to the recorded value of the finance receivables measured at fair value. This compares to a $4.4 million mark down in the prior year period. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. During the nine months ended September 30, 2022, we reduced our estimate for expected future losses in finance receivables measured at fair value as we have observed that our previous estimates for increased losses due to the pandemic had not materialized. These changes resulted in the $15.3 million mark up for the nine months ended September 30, 2022.

 

Interest income for the nine months ended September 30, 2022 increased $27.0 million, or 13.6%, to $225.5 million from $198.6 million in the prior year. The primary reason for the increase in interest income is the 30.7% increase in the average balance of finance receivables measured at fair value over the prior year period. The table below shows the average balances and interest yields of the two components of our loan portfolio for the nine months ended September 30, 2022 and 2021:

 

   Nine Months Ended September 30, 
   2022   2021 
   (Dollars in thousands) 
   Average       Interest   Average       Interest 
   Balance   Interest   Yield   Balance   Interest   Yield 
Interest Earning Assets                              
Finance receivables  $167,041   $29,343    23.4%   $375,642   $56,669    20.1% 
Finance receivables measured at fair value   2,296,841    196,204    11.4%    1,757,787    141,882    10.8% 
Total  $2,463,882   $225,547    12.2%   $2,133,429   $198,551    12.4% 

 

Other income was $5.9 million for the nine months ended September 30, 2022. This marks a decrease of $1.5 million from other income of $4.3 million for the nine months ended September 30, 2021.

 

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 internal rate of return or the recorded value 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.

 

 

 

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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 purchased 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 $148.8 million for the nine months ended September 30, 2022, compared to $157.1 million for the prior period, a decrease of $8.3 million, or 5.3%. The decrease is primarily due to larger provision for credit loss reversals in 2022.

 

Employee costs were $63.4 million during the nine months ended September 30, 2022 compared to $57.8 million for the same period in the prior year. 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, 2022 and 2021:

 

   Nine Months Ended September 30, 
   2022   2021 
         
   (Dollars in millions) 
Contracts purchased (dollars)  $1,426.3   $818.3 
Contracts purchased (units)   61,947    39,929 
Managed portfolio outstanding (dollars)  $2,838.9   $2,184.1 
Managed portfolio outstanding (units)   173,774    156,456 
           
Number of Originations staff   187    170 
Number of Sales staff   134    110 
Number of Servicing staff   404    397 
Number of other staff   67    74 
Total number of employees   792    751 

 

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 $25.9 million, an increase from $23.0 million in the previous year and represented 17.4% of total operating expenses.

 

Interest expense for the nine months ended September 30, 2022 were $58.7 million and represented 39.4% of total operating expenses, compared to $58.3 million in the previous year, when it was 37.1% of total operating expenses.

 

 

 

 

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Interest on securitization trust debt decreased by $2.8 million for the nine months ended September 30, 2022 compared to the prior period. The average balance of securitization trust debt increased to $1,959.5 million for the nine months ended September 30, 2022 compared to $1,842.7 million for the nine months ended September 30, 2021. The annualized average rate on our securitization trust debt was 3.3% for the nine months ended September 30, 2022 compared to 3.7% in the prior year period. For each 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 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%
October 2019   2.95%
January 2020   3.08%
June 2020   4.09%
September 2020   2.39%
January 2021   1.11%
April 2021   1.65%
July 2021   1.55%
October 2021   2.09%
January 2022   2.54%
April 2022   4.83%
July 2022   6.02%

 

Interest expense on warehouse credit line debt was $5.9 million for the nine months ended September 30, 2022 compared to $3.3 million in the prior year period. Lower rates were offset by higher utilization of our credit lines during the quarter compared to last year. The average balance of our warehouse debt was $108.7 million during the nine months ended September 30, 2022 compared to $46.7 million for the same period in 2021.

 

Interest expense on subordinated renewable notes decreased by $198,000. The average balance of the outstanding subordinated debt increased 9.2% to $26.9 million for the nine months ended September 30, 2022 compared to $24.6 million for the nine months ended September 30, 2021. The average yield of subordinated notes decreased to 8.8% in the nine-month period ended September 30, 2022 compared to 10.7% in the prior period.

 

On May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. On June 30, 2021, we completed a $50 million securitization of residual from other previously issued securitizations. Interest expense on these residual interest financings were $3.2 million for the nine months ended September 30, 2022 compared to $2.4 million 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 nine-month periods ended September 30, 2022 and 2021:

 

   Nine Months Ended September 30, 
   2022   2021 
           (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)  $167,041   $29,343    23.4%   $375,642   $56,669    20.1% 
Finance receivables at fair value   2,296,841    196,204    11.4%    1,757,787    141,882    10.8% 
    2,463,882    225,547    12.2%    2,133,429    198,551    12.4% 
    $                          
Interest Bearing Liabilities   $                          
Warehouse lines of credit  $108,709   $5,887    7.2%   $46,709   $3,265    9.3% 
Residual interest financing   50,652    3,193    8.4%    36,101    2,446    9.0% 
Securitization trust debt   1,959,452    47,792    3.3%    1,842,694    50,568    3.7% 
Subordinated renewable notes   26,910    1,783    8.8%    24,637    1,981    10.7% 
   $2,145,723    58,655    3.6%   $1,950,141    58,260    4.0% 
    $                          
Net interest income/spread   $   $166,892             $140,291      
Net interest yield (3)   $         8.6%              8.4% 
Ratio of average interest earning assets to average interest bearing liabilities   $         115%              109% 

 

     (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, 2022 
   Compared to September 30, 2021 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
   (In thousands) 
Interest Earning Assets   $           
Finance receivables gross  $(27,326)  $(32,850)  $5,524 
Finance receivables at fair value   54,322    39,907    14,415 
    26,996    7,057    19,939 
Interest Bearing Liabilities   $           
Warehouse lines of credit   2,622    4,905    (2,283)
Residual interest financing   747    1,065    (318)
Securitization trust debt   (2,776)   5,198    (7,974)
Subordinated renewable notes   (198)   310    (508)
    395    11,478    (11,083)
                
Net interest income/spread  $26,601   $(4,421)  $31,022 

 

 

 

 34 

 

 

The annualized yield on our finance receivables was 12.2% for the nine months ended September 30, 2022 and 12.4% for the same period in 2021. 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 fair value receivables was $2,296.8 million for the nine months ended September 30, 2022 compared to $1,757.8 million in the prior year period.

 

For the nine months ended September 30, 2022, we recorded a reduction to provision for credit losses on finance receivables in the amount of $23.4 million. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance as our previous estimates for future losses exceeded actual incurred losses. In the prior year period, reductions to provision for credit losses were $1.6 million.

 

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of September 30, 2022. Although we have not yet seen a meaningful deterioration in the credit performance for these receivables, worsening economic conditions, inflation and a reversion to the mean for used car pricing could negatively affect credit performance in the future.

 

The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio.  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 $4.7 million to $17.2 million during the nine months ended September 30, 2022 and represented 11.5% of total operating expenses. We purchased $1,426.3 million of new contracts during the nine months ended September 30, 2022 compared to $818.3 million in the prior year period.

 

Occupancy expenses was $5.8 million for the nine months ending September 30, 2022 compared to $5.9 million for the same period in 2021.

 

Depreciation and amortization expenses decreased to $1.2 million compared to $1.3 million in the previous year and represented 0.8% of total