UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
Commission file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
|
|
|
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including Area
Code:
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 |
| The |
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 ☐
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 ☐
As of August 3, 2023 the registrant had common shares outstanding.
| 1 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarterly Period Ended June 30, 2023
| 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)
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and equivalents | ||||||||
| Finance receivables measured at fair value | ||||||||
| Finance receivables | ||||||||
| Less: Allowance for finance credit losses | ( | ) | ( | ) | ||||
| Finance receivables, net | ||||||||
| Furniture and equipment, net | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Warehouse lines of credit | ||||||||
| Residual interest financing | ||||||||
| Securitization trust debt | ||||||||
| Subordinated renewable notes | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock, $ par value; authorized shares; issued | ||||||||
| Series A preferred stock, $ par value; authorized shares; issued | ||||||||
| Series B preferred stock, $ par value; authorized shares; issued | ||||||||
| Common stock, | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liability and stockholder’ equity | $ | $ | ||||||
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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Interest income | $ | $ | $ | $ | ||||||||||||
| Mark to finance receivables measured at fair value | ||||||||||||||||
| Other income | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Employee costs | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Interest | ||||||||||||||||
| Provision for credit losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Sales | ||||||||||||||||
| Occupancy | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income before income tax expense | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Number of shares used in computing earnings per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income/(loss); change in funded status of pension plan | ||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
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)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Net interest income accretion on fair value receivables | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | ||||||||
| Mark to finance receivables measured at fair value | ( | ) | ||||||
| Provision for credit losses | ( | ) | ( | ) | ||||
| Stock-based compensation expense | ||||||||
| Changes in assets and liabilities: | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Payments received on finance receivables held for investment | ||||||||
| Purchases of finance receivables measured at fair value | ( | ) | ( | ) | ||||
| Payments received on finance receivables at fair value | ||||||||
| Change in repossessions held in inventory | ||||||||
| Purchase of furniture and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of securitization trust debt | ||||||||
| Proceeds from issuance of subordinated renewable notes | ||||||||
| Payments on subordinated renewable notes | ( | ) | ( | ) | ||||
| Net proceeds from (repayments of) warehouse lines of credit | ( | ) | ||||||
| Net Proceeds from (repayment of) residual interest financing debt | ( | ) | ||||||
| Repayment of securitization trust debt | ( | ) | ( | ) | ||||
| Payment of financing costs | ( | ) | ( | ) | ||||
| Purchase of common stock | ( | ) | ( | ) | ||||
| Exercise of options and warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| 6 |
CONSUMER PORTFOLIO SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Common Stock (Shares Outstanding) | ||||||||||||||||
| Balance, beginning of period | ||||||||||||||||
| Common stock issued upon exercise of options and warrants | ||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance, end of period | ||||||||||||||||
| Common Stock | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Common stock issued upon exercise of options and warrants | ||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Stock-based compensation | ||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
| Retained Earnings | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
| Accumulated Other Comprehensive Loss | ||||||||||||||||
| Balance, beginning of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Pension benefit obligation | ||||||||||||||||
| Balance, end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Total Shareholders' Equity | $ | $ | $ | $ | ||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| 7 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer to all of such contracts and loans as “automobile contracts.”
Basis of Presentation
Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the six-month period ended June 30, 2023 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, 2022.
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.
| 8 |
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 first quarter include no mark down reversal to the carrying value of the portion of the receivables portfolio accounted for at fair value. 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 six-month periods ending June 30, 2023 and 2022:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Origination and servicing fees from third party receivables | $ | $ | $ | $ | ||||||||||||
| Direct mail revenues | ||||||||||||||||
| Sales tax refunds | ||||||||||||||||
| Other | ||||||||||||||||
| Other income for the period | $ | $ | $ | $ | ||||||||||||
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.
| 9 |
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:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Less: Accumulated amortization right-of-use assets | ( | ) | ( | ) | ||||
| Operating lease right-of-use assets, net | $ | $ | ||||||
| Operating lease liabilities | $ | ( | ) | $ | ( | ) | ||
| Finance Leases | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Finance lease liabilities | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Discount Rate | ||||||||
| Operating lease | ||||||||
| Finance lease | ||||||||
Maturities of lease liabilities were as follows:
| (In thousands) | Operating | Finance | ||||||
| Year Ending June 30, | Lease | Lease | ||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total undiscounted lease payments | ||||||||
| Less amounts representing interest | ( | ) | ( | ) | ||||
| Lease Liability | $ | $ | ||||||
| 10 |
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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
The following table presents the supplemental cash flow information related to leases:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
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 six months ended June 30, 2023, we recorded stock-based compensation costs in the amount of $ and $ million, respectively. These stock-based compensation costs were $ and $ million for the three and six months ended June 30, 2022. As of June 30, 2023, unrecognized stock-based compensation costs to be recognized over future periods equaled $ million. This amount will be recognized as expense over a weighted-average period of years.
| 11 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following represents stock option activity for the six months ended June 30, 2023:
| Weighted | ||||||||||
| Number of | Weighted | Average | ||||||||
| Shares | Average | Remaining | ||||||||
| (in thousands) | Exercise Price | Contractual Term | ||||||||
| Options outstanding at the beginning of period | $ | N/A | ||||||||
| Granted | N/A | |||||||||
| Exercised | ( | ) | N/A | |||||||
| Forfeited | N/A | |||||||||
| Options outstanding at the end of period | $ | years | ||||||||
| Options exercisable at the end of period | $ | years | ||||||||
The following table presents the price distribution of stock options outstanding and exercisable for the years ended June 30, 2023 and December 31, 2022:
| Number of shares as of | Number of shares as of | |||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Outstanding | Exercisable | Outstanding | Exercisable | |||||||||||||
| Range of exercise prices: | (In thousands) | (In thousands) | ||||||||||||||
| $2.00 - $2.99 | ||||||||||||||||
| $3.00 - $3.99 | ||||||||||||||||
| $4.00 - $4.99 | ||||||||||||||||
| $5.00 - $5.99 | ||||||||||||||||
| $6.00 - $6.99 | ||||||||||||||||
| $7.00 - $7.99 | ||||||||||||||||
| $10.00 - $10.99 | ||||||||||||||||
| Total shares | ||||||||||||||||
At June 30, 2023 the aggregate intrinsic value of options outstanding and exercisable was $ million and $ million, respectively. There were million options exercised for the six months ended June 30, 2023 compared to million for the comparable period in 2022. The total intrinsic value of options exercised was $ million and $ million for the six-month periods ended June 30, 2023 and 2022. There were shares available for future stock option grants under existing plans as of June 30, 2023.
| 12 |
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 six months ended June 30, 2023 and 2022:
| Six Months Ended | ||||||||||||||||
| June 30, 2023 | June 30, 2022 | |||||||||||||||
| Shares | Avg. Price | Shares | Avg. Price | |||||||||||||
| Open market purchases | $ | $ | ||||||||||||||
| Shares redeemed upon net exercise of stock options | ||||||||||||||||
| Total stock purchases | $ | $ | ||||||||||||||
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 June 30, 2023, 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.
Adoption of New Accounting Standards
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2022-02, known as the Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40 on troubled debt restructurings for entities that have adopted the CECL model introduced by ASU 2016-13, Current Expected Credit Loss. ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. This guidance is effective for fiscal years beginning after December 15, 2022, and the adoption of this guidance did not have a material impact on the condensed consolidated financial statements.
| 13 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2) Finance Receivables
Our portfolio of finance receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first applied to accrued interest and then to principal reduction.
In January 2018 the Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote.
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. Automobile finance receivables, net of unearned interest was $
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Deliquency Status | ||||||||
| Current | $ | $ | ||||||
| 31 - 60 days | ||||||||
| 61 - 90 days | ||||||||
| 91 + days | ||||||||
| $ | $ | |||||||
Finance receivables totaling
$
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.
| 14 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 June 30, 2023 and December 31, 2022.
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Annual Vintage Pool | ||||||||
| 2014 and prior | $ | $ | ||||||
| 2015 | ||||||||
| 2016 | ||||||||
| 2017 | ||||||||
| $ | $ | |||||||
| 15 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the activity for the allowance for finance credit losses for the three-month periods ended June 30, 2023 and 2022:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| Provision for credit losses on finance receivables | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recoveries | ||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
The following table presents the gross charge-offs by year of origination of our finance receivables for the three-month and six-month ended June 30, 2023 and 2022:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Annual Vintage Pool | (In thousands) | (In thousands) | ||||||||||||||
| 2014 and prior | $ | $ | $ | $ | ||||||||||||
| 2015 | ||||||||||||||||
| 2016 | ||||||||||||||||
| 2017 | ||||||||||||||||
| Applied against repos in inventory (net) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | $ | |||||||||||||
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:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Gross balance of repossessions in inventory | $ | $ | ||||||
| Allowance for losses on repossessed inventory | ( | ) | ( | ) | ||||
| Net repossessed inventory included in other assets | $ | $ | ||||||
| 16 |
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:
| Series | Final Scheduled Payment Date (1) | Receivables Pledged at June 30, 2023 (2) | Initial Principal | Outstanding Principal at June 30, 2023 | Outstanding Principal at December 31, 2022 | Weighted Average Contractual Debt
Interest Rate at June 30, 2023 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||
| CPS 2018-A | $ | $ | $ | $ | ||||||||||||||||||
| CPS 2018-B | ||||||||||||||||||||||
| CPS 2018-C | ||||||||||||||||||||||
| CPS 2018-D | ||||||||||||||||||||||
| CPS 2019-A | ||||||||||||||||||||||
| CPS 2019-B | ||||||||||||||||||||||
| CPS 2019-C | ||||||||||||||||||||||
| CPS 2019-D | ||||||||||||||||||||||
| CPS 2020-A | ||||||||||||||||||||||
| CPS 2020-B | ||||||||||||||||||||||
| CPS 2020-C | ||||||||||||||||||||||
| CPS 2021-A | ||||||||||||||||||||||
| CPS 2021-B | ||||||||||||||||||||||
| CPS 2021-C | ||||||||||||||||||||||
| CPS 2021-D | ||||||||||||||||||||||
| CPS 2022-A | ||||||||||||||||||||||
| CPS 2022-B | ||||||||||||||||||||||
| CPS 2022-C | ||||||||||||||||||||||
| CPS 2022-D | ||||||||||||||||||||||
| CPS 2023-A |
| |||||||||||||||||||||
| CPS 2023-B | ||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||
_________________
| (1) |
| (2) |
| 17 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debt issuance costs of $
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 June 30, 2023, 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 June 30, 2023, restricted cash
under the various agreements totaled approximately $
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.
| 18 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) Debt
The terms and amounts of our other debt outstanding at June 30, 2023 and December 31, 2022 are summarized below:
| Amount Outstanding at | ||||||||||||
| June 30, | December 31, | |||||||||||
| 2023 | 2022 | |||||||||||
| (In thousands) | ||||||||||||
| Description | Interest Rate | Maturity | ||||||||||
| Warehouse lines of credit | $ | $ | ||||||||||
| Residual interest financing | ||||||||||||
| Subordinated renewable notes | Weighted average maturity of | |||||||||||
| $ | $ | |||||||||||
On February 2, 2022, we renewed our two-year
revolving credit agreement with Ares Agent Services, L.P. There was $
On July 15, 2022, we renewed our two-year revolving
credit agreement with Citibank, N.A., and doubled the capacity from $
| 19 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unamortized debt issuance costs of $
(5) Interest Income and Interest Expense
The following table presents the components of interest income:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Interest on finance receivables | $ | $ | $ | $ | ||||||||||||
| Interest on finance receivables at fair value | ||||||||||||||||
| Other interest income | ||||||||||||||||
| Interest income | $ | $ | $ | $ | ||||||||||||
The following table presents the components of interest expense:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Securitization trust debt | $ | $ | $ | $ | ||||||||||||
| Warehouse lines of credit | ||||||||||||||||
| Residual interest financing | ||||||||||||||||
| Subordinated renewable notes | ||||||||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| 20 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share for the three-month and six-month periods ended June 30, 2023 and 2022 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 six-month periods ended June 30, 2023 and 2022:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Weighted average number of common shares outstanding during the period used to compute basic earnings per share | ||||||||||||||||
| Incremental common shares attributable to exercise of outstanding options and warrants | ||||||||||||||||
| Weighted average number of common shares used to compute diluted earnings per share | ||||||||||||||||
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 six-month periods ended June 30, 2023 would have included an additional million and million shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and six-month periods ended June 30, 2022, and 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 June 30, 2023, and December 31, 2022, 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.
| 21 |
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 $
Income tax expense was $
(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.
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. We believe that our compensation practices with respect to our sales representatives are compliant with applicable law. In August 2023, the parties settled by agreement the claims of the plaintiff and a California settlement class and the settlement remains subject to final court approval.
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.
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 June 30, 2023, our best estimate of probable incurred losses for legal contingencies, including the matters identified above. The amount
of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available to us,
we believe that the total of probable incurred losses for legal contingencies as of June 30, 2023 is $
| 22 |
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 June 30, 2023, 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.
| 23 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| Finance receivables at fair value acquired during period | ||||||||||||||||
| Payments received on finance receivables at fair value | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net interest income accretion on fair value receivables | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Mark to fair value | ||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
The table below compares the fair values of these finance receivables to their contractual balances for the periods shown:
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Contractual | Fair | Contractual | Fair | |||||||||||||
| Balance | Value | Balance | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Finance receivables measured at fair value | $ | $ | $ | $ | ||||||||||||
The following table provides certain qualitative information about our level 3 fair value measurements:
| Financial Instrument | Fair Values as of | Inputs as of | ||||||||||||
| June 30, | December 31, | June 30, | December 31, | |||||||||||
| 2023 | 2022 | Unobservable | 2023 | 2022 | ||||||||||
| (In thousands) | ||||||||||||||
| Assets: | ||||||||||||||
| Finance receivables measured at fair value | $ | $ | Discount rate | |||||||||||
| Cumulative net losses | ||||||||||||||
| 24 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the delinquency status of these finance receivables measured at fair value as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Delinquency Status | ||||||||
| Current | $ | $ | ||||||
| 31 - 60 days | ||||||||
| 61 - 90 days | ||||||||
| 91 + days | ||||||||
| Repo | ||||||||
| $ | $ | |||||||
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 June 30, 2023 the finance receivables related to the repossessed vehicles in inventory totaled $1.0 million. We have applied a valuation adjustment, or loss allowance, of $655,000, which is based on a recovery rate of approximately 35%, resulting in an estimated fair value and carrying amount of $348,000. The fair value and carrying amount of the repossessed inventory at December 31, 2022 was $1.9 million after applying a valuation adjustment of $1.3 million.
There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended June 30, 2023 and 2022.
The estimated fair values of financial assets and liabilities at June 30, 2023 and December 31, 2022, were as follows:
| As of June 30, 2023 | ||||||||||||||||||||
| Financial Instrument | (In thousands) | |||||||||||||||||||
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Restricted cash and equivalents | ||||||||||||||||||||
| Finance receivables, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Warehouse lines of credit | $ | $ | $ | $ | $ | |||||||||||||||
| Residual interest financing | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Securitization trust debt | ||||||||||||||||||||
| Subordinated renewable notes | ||||||||||||||||||||
| 25 |
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| As of December 31, 2022 | ||||||||||||||||||||
| Financial Instrument | (In thousands) | |||||||||||||||||||
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Restricted cash and equivalents | ||||||||||||||||||||
| Finance receivables, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Warehouse lines of credit | $ | $ | $ | $ | $ | |||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Securitization trust debt | ||||||||||||||||||||
| Subordinated renewable notes | ||||||||||||||||||||
(10) Subsequent Events
On July 25, 2023 we executed our third securitization of 2023. In the transaction, qualified institutional buyers purchased $291.7 million of asset-backed notes secured by $312.7 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2023-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 7.13%.
The 2023-C transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 6.70%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 9.70% of the original receivable pool balance, or 21.50% of the then outstanding pool balance. The transaction was a private offering of securities, not registered under the Securities Act of 1933, or any state securities law.
| 26 |
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 June 30, 2023, we have originated a total of approximately $20.7 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 | ||||||
| 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 | ||||||
| 2022 | 1,845,385 | 3,001,308 | ||||||
| Six months ended June 30, 2023 | 733,537 | 3,150,108 | ||||||
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 six months ended June 30, 2023, we originated $70.8 million under this third-party program. As of June 30, 2023, our managed portfolio includes $239.8 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.
| 27 |
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 or reverse expense provisions for credit losses.
Since 1994 we have conducted 97 term securitizations of automobile contracts that we originated. As of June 30, 2023, 18 of those securitizations are active and all are structured as secured financings. 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 | ||||
| 2017 | 4 | $ | 870,000 | |||
| 2018 | 4 | 883,452 | ||||
| 2019 | 4 | 1,014,124 | ||||
| 2020 | 3 | 741,867 | ||||
| 2021 | 4 | 1,145,002 | ||||
| 2022 | 4 | 1,537,383 | ||||
| Six months ended June 30, 2023 | 2 | 732,733 | ||||
Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. We currently have short-term funding capacity of $400 million over two 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 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.
| 28 |
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 June 30, 2023, we were in compliance with all such covenants.
Results of Operations
Comparison of Operating Results for the three months ended June 30, 2023 with the three months ended June 30, 2022
Revenues. During the three months ended June 30, 2023, our revenues were $84.9 million, an increase of $2.9 million, or 3.5%, from the prior year revenue of $82.0 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. Revenues for the prior year period include a $4.7 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. Our evaluation of the finance receivables measured at fair value resulted in no mark up or mark down to the fair value portfolio in the current year period.
Interest income for the three months ended June 30, 2023 increased $7.0 million, or 9.2%, to $82.6 million from $75.7 million in the prior year. The primary reason for the increase in interest income is the 17.6% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 12.3% in the prior year period to 11.4% in the current year period. The receivables measured at fair value make up a larger portion of our total loan portfolio in the current year period and this is the primary reason for the decrease in total interest yield. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balance and interest yield of our loan portfolio for the three months ended June 30, 2023 and 2022:
| Three Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||||||||||
| Balance | Interest | Yield | Balance | Interest | Yield | |||||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||||
| Loan Portfolio | $ | 2,903,988 | $ | 82,637 | 11.4% | $ | 2,469,955 | $ | 75,670 | 12.3% | ||||||||||||||
Other income was $2.2 million for the three months ended June 30, 2023 compared to $1.6 million for the comparable period in 2022. This 34.8% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $1.9 million for the quarter ended June 30, 2023 compared to $1.2 million in the prior year period.
| 29 |
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 $66.3 million for the three months ended June 30, 2023, compared to $47.8 million for the prior period, an increase of $18.5 million, or 38.6%. The increase is primarily due to increases in interest expense and general and administrative expenses.
Employee costs were $21.1 million during the three months ended June 30, 2023 compared to $20.6 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, June 30, 2023 and 2022:
| Three Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (Dollars in millions) | ||||||||
| Contracts purchased (dollars) | $ | 318.4 | $ | 548.1 | ||||
| Contracts purchased (units) | 15,296 | 23,261 | ||||||
| Managed portfolio outstanding (dollars) | $ | 2,910.3 | $ | 2,650.9 | ||||
| Managed portfolio outstanding (units) | 176,458 | 167,146 | ||||||
| Number of Originations staff | 165 | 194 | ||||||
| Number of Sales staff | 102 | 132 | ||||||
| Number of Servicing staff | 448 | 405 | ||||||
| Number of other staff | 88 | 68 | ||||||
| Total number of employees | 803 | 799 | ||||||
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 $11.8 million, an increase of $3.5 million from $8.3 million in the prior year period.
| 30 |
Interest expense for the three months ended June 30, 2023 was $35.7 million and represented 53.9% of total operating expenses, compared to $18.8 million in the previous year, when it was 39.3% of total operating expenses.
Interest on securitization trust debt increased by $13.4 million for the three months ended June 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,333.0 million for the three months ended June 30, 2023 compared to $2,037.3 million for the three months ended June 30, 2022. The annualized average rate on our securitization trust debt was 5.0% for the three months ended June 30, 2023 compared to 3.1% in the prior year period. The blended interest rates on new term securitizations have been increasing since 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:
| Period | Blended Cost of Funds | |
| 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% | |
| October 2022 | 8.48% | |
| January 2023 | 6.48% | |
| April 2023 | 7.17% |
Interest expense on warehouse credit line debt increased by $3.6 million to $5.0 million for the three months ended June 30, 2023 compared to $1.4 million in the prior year period. The increase was due to the higher utilization of our credit lines and higher rates on credit line debt during the quarter compared to last year. The average balance of our warehouse debt was $193.4 million during the three months ended June 30, 2023 compared to $85.6 million for the same period in 2022. The annualized average rate on our credit line debt was 10.4% for the three months ended June 30, 2023 compared to 6.5% in the prior year period.
Interest expense on subordinated renewable notes was $477,000 for the three months ended June 30, 2023. The average balance of the outstanding subordinated debt decreased by $4.5 million to $22.2 million for the three months ended June 30, 2023 compared to $26.7 million for the prior year. The average yield of subordinated notes decreased to 8.6% compared to 8.8% in the prior period.
In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on this residual interest financing was $1.1 million for the three months ended June 30, 2023 and 2022.
| 31 |
The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended June 30, 2023 and 2022:
| Three Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Annualized | Annualized | |||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance (1) | Interest | Yield/Rate | Balance (1) | Interest | Yield/Rate | |||||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||||
| Loan Portfolio | $ | 2,903,988 | $ | 82,637 | 11.4% | $ | 2,469,955 | $ | 75,670 | 12.3% | ||||||||||||||
| Interest Bearing Liabilities | ||||||||||||||||||||||||
| Warehouse lines of credit | $ | 193,408 | $ | 5,008 | 10.4% | $ | 85,598 | $ | 1,387 | 6.5% | ||||||||||||||
| Residual interest financing | 50,000 | 1,050 | 8.4% | 50,000 | 1,050 | 8.4% | ||||||||||||||||||
| Securitization trust debt | 2,332,997 | 29,171 | 5.0% | 2,037,327 | 15,745 | 3.1% | ||||||||||||||||||
| Subordinated renewable notes | 22,208 | 477 | 8.6% | 26,688 | 590 | 8.8% | ||||||||||||||||||
| $ | 2,598,613 | 35,706 | 5.5% | $ | 2,199,613 | 18,772 | 3.4% | |||||||||||||||||
| Net interest income/spread | $ | 46,931 | $ | 56,898 | ||||||||||||||||||||
| Net interest yield (2) | 5.9% | 8.9% | ||||||||||||||||||||||
| Ratio of average interest earning assets to average interest bearing liabilities | 112% | 112% | ||||||||||||||||||||||
(1) Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Annualized net interest income divided by average interest earning assets.
| Three Months Ended June 30, 2023 Compared to June 30, 2022 | ||||||||||||
| Total | Change Due | Change Due | ||||||||||
| Change | to Volume | to Rate | ||||||||||
| (In thousands) | ||||||||||||
| Interest Earning Assets | ||||||||||||
| Loan Portfolio | $ | 6,967 | $ | 8,894 | $ | (1,927 | ) | |||||
| Interest Bearing Liabilities | ||||||||||||
| Warehouse lines of credit | 3,621 | 1,735 | 1,886 | |||||||||
| Residual interest financing | – | – | – | |||||||||
| Securitization trust debt | 13,426 | 2,344 | 11,082 | |||||||||
| Subordinated renewable notes | (113 | ) | (102 | ) | (11 | ) | ||||||
| 16,934 | 3,977 | 12,957 | ||||||||||
| Net interest income/spread | $ | (9,967 | ) | $ | 4,917 | $ | (14,884 | ) | ||||
| 32 |
For the three months ended June 30, 2023, we recorded a reduction to provision for credit losses on finance receivables in the amount of $9.7 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 $8.0 million in reductions to provision for credit losses for the three months ended June 30, 2022.
Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of June 30, 2023.
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. Sales expense decreased to $5.5 million during the three months ended June 30, 2023 from $5.8 million in the same quarter in 2022. We purchased $318.4 million of new contracts during the three months ended June 30, 2023 compared to $548.1 million in the prior year period.
Occupancy expenses was $1.6 million for the three months ending June 30, 2023, which is down from the $1.9 million in the first quarter of 2022.
Depreciation and amortization expenses decreased to $211,000 compared to $385,000 in the previous year.
For the three months ended June 30, 2023, we recorded income tax expense of $4.6 million, representing a 25% effective tax rate. In the prior period, our income tax expense was $8.9 million, representing a 26% effective tax rate.
Comparison of Operating Results for the six months ended June 30, 2023 with the six months ended June 30, 2022
Revenues. During the six months ended June 30, 2023, our revenues were $168.0 million, an increase of $11.6 million, or 7.4%, from the prior year revenue of $156.4 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. Revenues for the prior year period include a $7.1 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. Our evaluation of the finance receivables measured at fair value resulted in no mark up or mark down to the fair value portfolio in the current year period.
Interest income for the six months ended June 30, 2023 increased $17.0 million, or 11.6%, to $162.7 million from $145.7 million in the prior year. The primary reason for the increase in interest income is the 21.4% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 12.3% in the prior year period to 11.3% in the current year period. The receivables measured at fair value make up a larger portion of our total loan portfolio in the current year period and this is the primary reason for the decrease in total interest yield. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balance and interest yield of our loan portfolio for the six months ended June 30, 2023 and 2022:
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||||||||||
| Balance | Interest | Yield | Balance | Interest | Yield | |||||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||||
| Loan Portfolio | $ | 2,880,293 | $ | 162,699 | 11.3% | $ | 2,371,719 | $ | 145,730 | 12.3% | ||||||||||||||
| 33 |
Other income was $5.3 million for the six months ended June 30, 2023 compared to $3.6 million for the comparable period in 2022. This 48.0% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $4.6 million for the six months ended June 30, 2023 compared to $2.3 million in the prior year period.
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 $130.9 million for the six months ended June 30, 2023, compared to $92.8 million for the prior period, an increase of $38.1 million, or 41.0%. The increase is primarily due to increases in interest expense and general and administrative expenses.
Employee costs were $43.2 million during the six months ended June 30, 2023 compared to $42.7 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 six-month periods ended, June 30, 2023 and 2022:
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (Dollars in millions) | ||||||||
| Contracts purchased (dollars) | $ | 733.5 | $ | 958.1 | ||||
| Contracts purchased (units) | 36,184 | 41,059 | ||||||
| Managed portfolio outstanding (dollars) | $ | 2,910.3 | $ | 2,650.9 | ||||
| Managed portfolio outstanding (units) | 176,458 | 167,146 | ||||||
| Number of Originations staff | 165 | 194 | ||||||
| Number of Sales staff | 102 | 132 | ||||||
| Number of Servicing staff | 448 | 405 | ||||||
| Number of other staff | 88 | 68 | ||||||
| Total number of employees | 803 | 799 | ||||||
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 $23.2 million for the six months ended June 30, 2023, an increase of $6.7 million from $16.5 million in the prior year period.
| 34 |
Interest expense for the six months ended June 30, 2023 was $68.5 million, compared to $35.2 million in the previous year, an increase of $33.3 million.
Interest on securitization trust debt increased by $26.3 million for the six months ended June 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,308.0 million for the six months ended June 30, 2023 compared to $1,922.9 million for the six months ended June 30, 2022. The annualized average rate on our securitization trust debt was 4.8% for the six months ended June 30, 2023 compared to 3.0% in the prior year period. The blended interest rates on new term securitizations have been increasing since 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 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% | |
| October 2022 | 8.48% | |
| January 2023 | 6.48% | |
| April 2023 | 7.17% | |
Interest expense on warehouse credit line debt increased by $7.3 million to $9.9 million for the six months ended June 30, 2023 compared to $2.5 million in the prior year period. The increase was due to the higher utilization of our credit lines and higher rates on the debt during the six month period compared to last year. The average balance of our warehouse debt was $194.2 million during the six months ended June 30, 2023 compared to $76.1 million for the same period in 2022. The annualized average rate on our credit line debt was 10.2% for the six months ended June 30, 2023 compared to 6.7% in the prior year period.
Interest expense on subordinated renewable notes was $985,000 for the six months ended June 30, 2023. The average balance of the outstanding subordinated debt decreased by $3.5 million to $23.2 million for the six months ended June 30, 2023 compared to $26.6 million for the prior year. The average yield of subordinated notes decreased to 8.5% compared to 9.1% in the prior period.
In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on this residual interest financing was $2.1 million for the six months ended June 30, 2023 and 2022.
| 35 |
The following table presents the components of interest income and interest expense and a net interest yield analysis for the six-month periods ended June 30, 2023 and 2022:
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Annualized | Annualized | |||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance (1) | Interest | Yield/Rate | Balance (1) | Interest | Yield/Rate | |||||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||||
| Loan portfolio | $ | 2,880,293 | $ | 162,699 | 11.3% | $ | 2,371,719 | $ | 145,730 | 12.3% | ||||||||||||||
| Interest Bearing Liabilities | ||||||||||||||||||||||||
| Warehouse lines of credit | $ | 194,159 | 9,856 | 10.2% | $ | 76,085 | 2,544 | 6.7% | ||||||||||||||||
| Residual interest financing | 50,000 | 2,100 | 8.4% | 50,984 | 2,144 | 8.4% | ||||||||||||||||||
| Securitization trust debt | 2,308,128 | 55,524 | 4.8% | 1,922,914 | 29,273 | 3.0% | ||||||||||||||||||
| Subordinated renewable notes | 23,158 | 985 | 8.5% | 26,607 | 1,210 | 9.1% | ||||||||||||||||||
| $ | 2,575,445 | 68,465 | 5.3% | $ | 2,076,590 | 35,171 | 3.4% | |||||||||||||||||
| Net interest income/spread | $ | 94,234 | $ | 110,559 | ||||||||||||||||||||
| Net interest yield (2) | 6.0% | 8.9% | ||||||||||||||||||||||
| Ratio of average interest earning assets to average interest bearing liabilities | 112% | 114% | ||||||||||||||||||||||
(1) Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Annualized net interest income divided by average interest earning assets.
| Six Months Ended June 30, 2023 Compared to June 30, 2022 | ||||||||||||
| Total | </ | |||||||||||