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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, 2023

 

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

 

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 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). 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 3, 2023 the registrant had 21,120,270 common shares outstanding.

 

 

 

   

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarterly Period Ended September 30, 2023

 

    Page
     
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
     
  Unaudited Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 3
     
  Unaudited Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2023 and 2022 4
     
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended September 30, 2023 and 2022 5
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2023 and 2022 6
     
  Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three-month and nine-month periods ended September 30, 2023 and 2022 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
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 45
     
Item 6. Exhibits 46
     
  Signatures

47

 

 

 

 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, 
   2023   2022 
ASSETS          
Cash and cash equivalents  $8,306   $13,490 
Restricted cash and equivalents   133,787    149,299 
Finance receivables measured at fair value   2,671,540    2,476,617 
           
Finance receivables   38,493    92,304 
Less: Allowance for finance credit losses   (4,228)   (21,753)
Finance receivables, net   34,265    70,551 
           
Furniture and equipment, net   1,295    1,660 
Deferred tax assets, net   5,763    10,177 
Other assets   25,892    30,974 
 Total Assets  $2,880,848   $2,752,768 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Accounts payable and accrued expenses  $62,309   $55,421 
Warehouse lines of credit   240,384    285,328 
Residual interest financing   49,812    49,623 
Securitization trust debt   2,243,284    2,108,744 
Subordinated renewable notes   19,163    25,263 
Total liabilities   2,614,952    2,524,379 
           
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; 21,113,152 and 20,131,323 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively   28,257    28,906 
Retained earnings   240,670    202,514 
Accumulated other comprehensive loss   (3,031)   (3,031)
Total stockholders’ equity   265,896    228,389 
           
Total liability and stockholder’ equity  $2,880,848   $2,752,768 

 

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, 
   2023   2022   2023   2022 
Revenues:                
Interest income  $83,261   $79,817   $245,960   $225,547 
Mark to finance receivables measured at fair value   6,000    8,183    6,000    15,283 
Other income   2,818    2,305    8,077    5,859 
Total revenues   92,079    90,305    260,037    246,689 
                     
Expenses:                    
Employee costs   21,812    20,671    64,991    63,414 
General and administrative   13,045    9,408    36,224    25,920 
Interest   37,889    23,483    106,354    58,654 
Provision for credit losses   (2,000)   (6,000)   (20,700)   (23,400)
Sales   5,330    5,962    16,517    17,186 
Occupancy   1,586    2,031    4,756    5,820 
Depreciation and amortization   199    406    642    1,207 
Total operating expenses   77,861    55,961    208,784    148,801 
Income before income tax expense   14,218    34,344    51,253    97,888 
Income tax expense   3,839    8,931    13,097    26,040 
Net income  $10,379   $25,413   $38,156   $71,848 
                     
Earnings per share:                    
Basic  $0.49   $1.22   $1.83   $3.39 
Diluted   0.41    0.95    1.51    2.61 
                     
Number of shares used in computing earnings per share:                    
Basic   21,154    20,911    20,815    21,166 
Diluted   25,218    26,654    25,331    27,512 

 

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, 
   2023   2022   2023   2022 
                 
Net income  $10,379   $25,413   $38,156   $71,848 
                     
Other comprehensive income/(loss); change in funded status of pension plan                
Comprehensive income  $10,379   $25,413   $38,156   $71,848 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

           
   Nine Months Ended 
   September 30, 
   2023   2022 
Cash flows from operating activities:          
Net income  $38,156   $71,848 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net interest income accretion on fair value receivables   143,949    97,462 
Depreciation and amortization   642    1,207 
Amortization of deferred financing costs   7,264    5,860 
Mark to finance receivables measured at fair value   (6,000)   (15,283)
Provision for credit losses   (20,700)   (23,400)
Stock-based compensation expense   2,634    2,966 
Changes in assets and liabilities:          
Deferred tax assets, net   4,414    5,005 
Other assets   4,671    5,252 
Accounts payable and accrued expenses   6,888    13,827 
Net cash provided by operating activities   181,918    164,744 
           
Cash flows from investing activities:          
Payments received on finance receivables held for investment   56,986    109,894 
Purchases of finance receivables measured at fair value   (958,587)   (1,311,735)
Payments received on finance receivables at fair value   625,715    635,401 
Change in repossessions held in inventory   411    1,694 
Purchase of furniture and equipment   (277)   (1,778)
Net cash used in investing activities   (275,752)   (566,524)
           
Cash flows from financing activities:          
Proceeds from issuance of securitization trust debt   949,385    1,104,000 
Proceeds from issuance of subordinated renewable notes       4,004 
Payments on subordinated renewable notes   (6,100)   (3,214)
Net proceeds from (repayments of) warehouse lines of credit   (46,407)   139,477 
Net proceeds from (repayment of) residual interest financing debt       (4,311)
Repayment of securitization trust debt   (814,473)   (804,774)
Payment of financing costs   (5,984)   (10,407)
Purchase of common stock   (19,116)   (41,535)
Exercise of options and warrants   15,833    14,698 
Net cash provided by financing activities   73,138    397,938 
Increase in cash and cash equivalents   (20,696)   (3,842)
Cash and restricted cash at beginning of period   162,789    176,548 
Cash and restricted cash at end of period  $142,093   $172,706 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $97,812   $51,300 
Income taxes  $4,389   $13,977 

 

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, 
   2023   2022   2023   2022 
Common Stock (Shares Outstanding)                    
Balance, beginning of period   21,152    21,207    20,131    21,144 
Common stock issued upon exercise of options and warrants   27    79    2,832    2,974 
Repurchase of common stock   (66)   (679)   (1,850)   (3,511)
Balance, end of period   21,113    20,607    21,113    20,607 
                     
Common Stock                    
Balance, beginning of period  $27,937   $36,947   $28,906   $55,298 
Common stock issued upon exercise of options and warrants   155    282    15,833    14,698 
Repurchase of common stock   (652)   (7,250)   (19,116)   (41,535)
Stock-based compensation   817    1,448    2,634    2,966 
Balance, end of period  $28,257   $31,427   $28,257   $31,427 
                     
Retained Earnings                    
Balance, beginning of period  $230,291   $162,966   $202,514   $116,531 
Net income   10,379    25,413    38,156    71,848 
Balance, end of period  $240,670   $188,379   $240,670   $188,379 
                     
Accumulated Other Comprehensive Loss                    
Balance, beginning of period  $(3,031)  $(1,622)  $(3,031)  $(1,622)
Pension benefit obligation                
Balance, end of period  $(3,031)  $(1,622)  $(3,031)  $(1,622)
Balance, beginning of period                
Pension benefit obligation                
Total Shareholders' Equity  $265,896   $218,184   $265,896   $218,184 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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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, 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.

 

 

 

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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.

 

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, 2023 and 2022:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Origination and servicing fees from third party receivables  $2,546   $2,016   $7,207   $4,268 
Direct mail revenues               774 
Sales tax refunds   256    209    780    512 
Other   16    80    90    305 
Other income for the period  $2,818   $2,305   $8,077   $5,859 

 

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, 
   2023   2022 
   (In thousands) 
Operating Leases          
Operating lease right-of-use assets  $29,575   $28,397 
Less: Accumulated amortization right-of-use assets   (25,673)   (22,613)
Operating lease right-of-use assets, net  $3,902   $5,784 
           
Operating lease liabilities  $(4,222)  $(6,234)
           
Finance Leases          
Property and equipment, at cost  $3,454   $3,407 
Less: Accumulated depreciation   (3,373)   (3,301)
Property and equipment, net  $81   $106 
           
Finance lease liabilities  $(85)  $(177)
           
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 
2023  $1,365   $12 
2024   1,787    37 
2025   737    20 
2026   455    11 
2027   452    11 
Thereafter   565    1 
Total undiscounted lease payments   5,361    92 
Less amounts representing interest   (1,139)   (7)
Lease Liability  $4,222   $85 

 

 

 

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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, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Operating lease cost  $1,410   $1,767   $4,181   $5,288 
Finance lease cost   18    257    144    813 
Total lease cost  $1,428   $2,024   $4,325   $6,101 

 

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

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 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  $1,410   $1,921   $4,181   $5,616 
Operating cash flows from finance leases   17    249    139    776 
Financing cash flows from finance leases   1    8    5    36 

 

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, 2023, we recorded stock-based compensation costs in the amount of $816,000 and $2.6 million, respectively. These stock-based compensation costs were $1.4 million and $3.0 million for the three and nine months ended September 30, 2022. As of September 30, 2023, unrecognized stock-based compensation costs to be recognized over future periods equaled $6.8 million. This amount will be recognized as expense over a weighted-average period of 2.0 years.

 

The following represents stock option activity for the nine months ended September 30, 2023:

             
           Weighted
   Number of   Weighted   Average
   Shares   Average   Remaining
   (in thousands)   Exercise Price   Contractual Term
Options outstanding at the beginning of period   11,167   $5.21   N/A
Granted          N/A
Exercised   (2,832)   5.59   N/A
Forfeited          N/A
Options outstanding at the end of period   8,335   $5.08   3.36 years
              
Options exercisable at the end of period   6,250   $4.30   2.80 years

 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents the price distribution of stock options outstanding and exercisable for the years ended September 30, 2023 and December 31, 2022:

                    
   Number of shares as of   Number of shares as of 
   September 30, 2023   December 31, 2022 
   Outstanding   Exercisable   Outstanding   Exercisable 
   (In thousands)   (In thousands) 
Range of exercise prices:                
$2.00 - $2.99   1,440    1,105    1,445    775 
$3.00 - $3.99   2,533    2,533    3,785    3,495 
$4.00 - $4.99   2,659    2,034    2,739    1,802 
$5.00 - $5.99                
$6.00 - $6.99           740    740 
$7.00 - $7.99           748    748 
$10.00 - $10.99   1,703    578    1,710    210 
Total shares   8,335    6,250    11,167    7,770 

   

At September 30, 2023 the aggregate intrinsic value of options outstanding and exercisable was $35.3 million and $30.5 million, respectively. There were 2.8 million options exercised for the nine months ended September 30, 2023 compared to 3.0 million for the comparable period in 2022. The total intrinsic value of options exercised was $13.5 million and $23.1 million for the nine-month periods ended September 30, 2023 and 2022. There were 2,661,000 shares available for future stock option grants under existing plans as of September 30, 2023.

 

Purchases of Company Stock

 

The table below describes the purchase of our common stock for the nine-month ended September 30, 2023 and 2022:

                    
   Nine Months Ended 
   September 30, 2023   September 30, 2022 
   Shares   Avg. Price   Shares   Avg. Price 
Open market purchases   625,887   $11.20    2,617,548   $11.20 
Shares redeemed upon net exercise of stock options   1,224,673    13.56    893,153    13.56 
Total stock purchases   1,850,560   $11.80    3,510,701   $11.80 

 

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, 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.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

(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 $38.5 million and $92.3 million as of September 30, 2023 and December 31, 2022, respectively. The following table summarizes the delinquency status of finance receivables as of September 30, 2023 and December 31, 2022:

          
   September 30,   December 31, 
   2023   2022 
   (In thousands) 
Delinquency Status          
Current  $25,805   $65,764 
31-60 days   7,167    16,796 
61-90 days   4,086    7,756 
90+ days   1,435    1,988 
Balance at end of period  $38,493   $92,304 

 

Finance receivables totaling $1.4 million and $2.0 million at September 30, 2023 and December 31, 2022, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.

 

 

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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, 2023 and December 31, 2022.

          
   September 30,   December 31, 
   2023   2022 
   (In thousands) 
Annual Vintage Pool          
2014 and prior  $595   $1,865 
2015   2,748    8,627 
2016   11,243    28,632 
2017   23,907    53,180 
   $38,493   $92,304 

 

 

 

 

 14 

 

 

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 and nine-month periods ended September 30, 2023 and 2022:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Balance at beginning of period  $5,721   $35,672   $21,753   $56,206 
Provision for credit losses on finance receivables   (2,000)   (6,000)   (20,700)   (23,400)
Charge-offs   (1,477)   (4,375)   (6,391)   (14,181)
Recoveries   1,984    2,699    9,566    9,371 
Balance at end of period  $4,228   $27,996   $4,228   $27,996 

 

The following table presents the gross charge-offs by year of origination of our finance receivables for the three-month and nine-month ended September 30, 2023 and 2022:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Annual Vintage Pool  (In thousands)   (In thousands) 
2014 and prior  $43   $261   $251   $795 
2015   129    602    870    2,343 
2016   568    1,598    2,602    5,136 
2017   948    2,072    3,548    6,304 
Applied against repos in inventory (net)   (211)   (158)   (880)   (397)
   $1,477   $4,375   $6,391   $14,181 

 

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, 
   2023   2022 
   (In thousands) 
Gross balance of repossessions in inventory  $604   $1,894 
Allowance for losses on repossessed inventory   (444)   (1,323)
Net repossessed inventory included in other assets  $160   $571 

 

 

 

 

 

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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)  2023 (2)   Principal   2023   2022   2023 
   (Dollars in thousands)    
CPS 2018-A  March 2025  $   $190,000   $   $12,939     
CPS 2018-B  December 2024       201,823        17,077     
CPS 2018-C  September 2025       230,275        20,222    0.00%
CPS 2018-D  June 2025       233,730        25,563    0.00%
CPS 2019-A  March 2026   21,838    254,400    16,739    32,898    5.81%
CPS 2019-B  June 2026   24,211    228,275    19,935    33,897    5.82%
CPS 2019-C  September 2026   29,160    243,513    24,635    41,515    4.90%
CPS 2019-D  December 2026   38,268    274,313    33,693    53,625    4.28%
CPS 2020-A  March 2027   36,578    260,000    31,769    52,705    4.67%
CPS 2020-B  June 2027   42,170    202,343    27,649    41,736    6.88%
CPS 2020-C  November 2027   58,424    252,200    49,298    72,894    3.81%
CPS 2021-A  March 2028   62,378    230,545    44,128    72,076    1.74%
CPS 2021-B  June 2028   78,721    240,000    65,432    101,206    2.31%
CPS 2021-C  September 2028   117,555    291,000    98,915    147,593    1.92%
CPS 2021-D  December 2028   160,217    349,202    143,583    209,277    2.36%
CPS 2022-A  April 2029   177,253    316,800    155,921    222,613    2.65%
CPS 2022-B  October 2029   267,738    395,600    237,944    325,907    4.64%
CPS 2022-C  April 2030   304,257    391,600    255,748    346,714    5.62%
CPS 2022-D  June 2030   255,071    307,018    227,124    292,461    7.73%
CPS 2023-A  August 2030   177,253    324,768    255,056        6.25%
CPS 2023-B  November 2030   267,738    332,885    293,825        6.53%
CPS 2023-C  February 2031   304,257    291,732    276,438        6.61%
      $2,423,087   $6,042,022   $2,257,832   $2,122,918      

_________________

 

(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 $201.0 million in 2023, $844.3 million in 2024, $529.7 million in 2025, $317.1 million in 2026, $206.2 million in 2027, $119.0 million in 2028, and $26.0 million in 2029.
   
(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 $14.5 million and $14.2 million as of September 30, 2023 and December 31, 2022, 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, 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 September 30, 2023, restricted cash under the various agreements totaled approximately $142.1 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, 2023 and December 31, 2022 are summarized below:

           
          Amount Outstanding at 
          September 30,   December 31, 
          2023   2022 
          (In thousands) 
Description  Interest Rate  Maturity         
                
Warehouse lines of credit  3.00% over one month Libor (Minimum 3.75%) 8.59% and 7.48% at September 30, 2023 and December 31, 2022, respectively   July 2024   $163,462   $150,293 
                   
   4.15% over a commercial paper rate (Minimum 5.15%) 9.60% and 8.60% at September 30, 2023, and December 31, 2022, respectively   January 2024    78,009    137,585 
                   
Residual interest financing  7.86%   June 2026    50,000    50,000 
                   
Subordinated renewable notes  Weighted average rate of 8.16% and 7.82% at September 30, 2023 and December 31, 2022, respectively   Weighted average maturity of July 2025 and October 2024 at September 30, 2023 and December 31, 2022, respectively    19,163    25,263 
                   
           $310,634   $363,141 

 

 

 

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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 $163.5 million outstanding under this facility at September 30, 2023. 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 $78.0 million outstanding under this facility at September 30, 2023. 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 $188,000 and $377,000 as of September 30, 2023 and December 31, 2022, respectively, have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of $1.1 million and $2.6 million as of September 30, 2023 and December 31, 2022, 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, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Interest on finance receivables  $3,769   $7,620   $12,809   $28,766 
Interest on finance receivables at fair value   77,848    71,734    228,641    196,204 
Other interest income   1,644    463    4,510    577 
                     
Interest income  $83,261   $79,817   $245,960   $225,547 

 

The following table presents the components of interest expense:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Securitization trust debt  $31,734   $18,519   $87,258   $47,792 
Warehouse lines of credit   4,665    3,342    14,521    5,887 
Residual interest financing   1,050    1,050    3,149    3,193 
Subordinated renewable notes   440    572    1,426    1,782 
                     
Interest expense  $37,889   $23,483   $106,354   $58,654 

 

 

 

 18 

 

 

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, 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 nine-month periods ended September 30, 2023 and 2022:

                    
   Three Months Ended   Nine Months Ended 
   September 30,   September 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   21,154    20,911    20,815    21,166 
                     
Incremental common shares attributable to exercise of outstanding options and warrants   4,064    5,743    4,516    6,346 
                     
Weighted average number of common shares used to compute diluted earnings per share   25,218    26,654    25,331    27,512 

 

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, 2023 would have included an additional 1.5 million and 1.5 million shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30, 2022, 1.7 million and 1.0 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, 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.

 

 

 

 19 

 

 

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 $5.8 million as of September 30, 2023 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $5.8 million consists of approximately $3.5 million of net U.S. federal deferred tax assets and $2.3 million of net state deferred tax assets.

 

Income tax expense was $3.8 million and $13.1 million for the three months and nine months ended September 30, 2023, representing effective income tax rates of 27% and 26% respectively, compared to income tax expense of $8.9 million and $26.0 million for the three months and nine months ended September 30, 2022, and represents an effective income tax rates of 26% and 27% 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.

 

Following our filing of a complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim on October 16, 2019 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 complaint seeks primarily damages, injunctive relief, waiver of contract deficiencies, and attorney fees and interest. 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.

 

 

 

 20 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

In General. There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently as of September 30, 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 September 30, 2023 is $3.8 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, 2023 does not exceed $7.3 million.

 

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

 

(9) Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

For the quarter ended September 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.

 

 

 

 21 

 

 

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   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (In thousands)   (In thousands) 
Balance at beginning of period  $2,618,420   $2,174,133   $2,476,617   $1,749,098 
Finance receivables at fair value acquired during period   300,539    407,260    958,587    1,311,735 
Payments received on finance receivables at fair value   (203,775)   (209,627)   (625,715)   (635,401)
Net interest income accretion on fair value receivables   (49,644)   (36,696)   (143,949)   (97,462)
Mark to fair value   6,000    8,183    6,000    15,283 
Balance at end of period  $2,671,540   $2,343,253   $2,671,540   $2,343,253 

 

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

                
   September 30, 2023   December 31, 2022 
   Contractual   Fair   Contractual   Fair 
   Balance   Value   Balance   Value 
   (In thousands) 
Finance receivables measured at fair value.  $2,904,235   $2,671,540   $2,701,184   $2,476,617 

 

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,
   2023   2022   Unobservable Inputs  2023  2022
   (In thousands)          
Assets:                 
Finance receivables measured at fair value  $2,671,540   $2,476,617   Discount rate  11.0% - 11.7%  11.0% - 11.3%
             Cumulative net losses  10.0% - 21.7%  13.4% - 19.4%

 

The following table summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2023 and December 31, 2022:

          
   September 30,   December 31, 
   2023   2022 
   (In thousands) 
Delinquency Status          
Current  $2,525,830   $2,375,271 
31 - 60 days   192,735    184,968 
61 - 90 days   90,847    72,390 
91 + days   49,337    29,048 
Repo   45,486    39,507 
   $2,904,235   $2,701,184 

 

 

 

 

 

 22 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2023 the finance receivables related to the repossessed vehicles in inventory totaled $604,000. We have applied a valuation adjustment, or loss allowance, of $444,000, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount of $160,000. 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 September 30, 2023 and 2022.

 

The estimated fair values of financial assets and liabilities at September 30, 2023 and December 31, 2022, were as follows:

                         
   As of September 30, 2023 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                    
Cash and cash equivalents  $8,306   $8,306   $   $   $8,306 
Restricted cash and equivalents   133,787    133,787            133,787 
Finance receivables, net   34,265            25,171    25,171 
Accrued interest receivable   284            284    284 
Liabilities:                         
Warehouse lines of credit  $240,384   $   $   $240,384   $240,384 
Residual interest financing   49,812              49,812    49,812 
Accrued interest payable   7,468            7,468    7,468 
Securitization trust debt   2,243,284            2,134,496    2,134,496 
Subordinated renewable notes   19,163            19,163    19,163 

 

                          
   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  $13,490   $13,490   $   $   $13,490 
Restricted cash and equivalents   149,299    149,299            149,299 
Finance receivables, net   70,551            60,063    60,063 
Accrued interest receivable   649            649    649 
Liabilities:                         
Warehouse lines of credit  $285,328   $   $   $285,328   $285,328 
Accrued interest payable   6,190            6,190    6,190 
Securitization trust debt   2,108,744            1,957,995    1,957,995 
Subordinated renewable notes   25,263            25,263    25,263 

 

 

 

 23 

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(10) Subsequent Events

 

On October 24, 2023 we executed our fourth securitization of 2023. In the transaction, qualified institutional buyers purchased $286.1 million of asset-backed notes secured by $306.7 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2023-D, 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 7.89%.

 

The 2023-D 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 26.75% 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 24 

 

 

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, 2023, we have originated a total of approximately $21.0 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

 

Contract Purchases and Outstanding Managed Portfolio

 

   $ in thousands 
Period  Contracts Purchased in Period   Managed Portfolio at Period End 
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 
Nine months ended September 30, 2023   1,055,957    3,181,758 

 

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, 2023, we originated $92.0 million under this third-party program. As of September 30, 2023, our managed portfolio includes $238.4 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.

 

 

 

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Securitization and Warehouse Credit Facilities

 

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

 

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, and (ii) recognize interest expense on the securities issued in the transaction. For automobile contracts acquired 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 98 term securitizations of automobile contracts that we originated. As of September 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 
Nine months ended September 30, 2023  3   1,045,425 

 

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.

 

 

 

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

 

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

 

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, 2023, we were in compliance with all such covenants.

 

Results of Operations

 

Comparison of Operating Results for the three months ended September 30, 2023 with the three months ended September 30, 2022

 

Revenues.  During the three months ended September 30, 2023, our revenues were $92.1 million, an increase of $1.8 million, or 2.0%, from the prior year revenue of $90.3 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 three months ended September 30, 2023 include a $6.0 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. In the current period, our re-evaluation of the fair values of these receivables resulted in a mark up for certain older receivables and a mark down to the fair values of newer receivables. The fair value mark up on the older receivables exceeded the mark down to the newer receivables resulting in a net mark up of $6.0 million. Revenues for the prior year period include an $8.2 million mark up to the fair value portfolio.

 

Interest income for the three months ended September 30, 2023 increased $3.4 million, or 4.3%, to $83.3 million from $79.8 million in the prior year. The primary reason for the increase in interest income is the 10.8% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 12.1% in the prior year period to 11.3% in the current year period. The receivables measured at fair value makes up a larger portion of our total loan portfolio in the current year period 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 September 30, 2023 and 2022:

 

 

 

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   Three Months Ended September 30, 
   2023   2022 
   (Dollars in thousands) 
   Average       Interest   Average       Interest 
   Balance   Interest   Yield   Balance   Interest   Yield 
Interest Earning Assets                              
Loan Portfolio  $2,934,749   $83,261    11.3%  $2,648,209   $79,817    12.1%

 

Other income was $2.8 million for the three months ended September 30, 2023 compared to $2.3 million for the comparable period in 2022. This 22.3% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $2.5 million for the quarter ended September 30, 2023 compared to $2.0 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 $77.9 million for the three months ended September 30, 2023, compared to $56.0 million for the prior period, an increase of $21.9 million, or 39.1%. The increase is primarily due to increases in interest expense and general and administrative expenses.

 

Employee costs were $21.8 million during the three months ended September 30, 2023 compared to $20.7 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, 2023 and 2022:

 

   Three Months Ended September 30, 
   2023   2022 
   (Dollars in millions) 
Contracts purchased (dollars)  $322.4   $468.2 
Contracts purchased (units)   15,275    20,888 
Managed portfolio outstanding (dollars)  $3,181.8   $2,838.9 
Managed portfolio outstanding (units)   189,747    173,774 
           
Number of Originations staff   181    187 
Number of Sales staff   103    134 
Number of Servicing staff   511    404 
Number of other staff   72    67 
Total number of employees   867    792 

 

 

 

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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 $13.0 million, an increase of $3.6 million from $9.4 million in the prior year period.

 

Interest expense for the three months ended September 30, 2023 was $37.9 million and represented 48.7% of total operating expenses, compared to $23.5 million in the previous year, when it was 42.0% of total operating expenses.

 

Interest on securitization trust debt increased by $13.2 million for the three months ended September 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,349.7 million for the three months ended September 30, 2023 compared to $2,032.5 million for the three months ended September 30, 2022. The annualized average rate on our securitization trust debt was 5.4% for the three months ended September 30, 2023 compared to 3.6% 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%
July 2023   7.13%

 

Interest expense on warehouse credit line debt increased by $1.4 million to $4.7 million for the three months ended September 30, 2023 compared to $3.3 million in the prior year period. The increase was due to the higher rates on credit line debt during the quarter compared to last year. The average balance of our warehouse debt was $170.9 million during the three months ended September 30, 2023 compared to $172.9 million for the same period in 2022. The annualized average rate on our credit line debt was 10.9% for the three months ended September 30, 2023 compared to 7.7% in the prior year period.

 

Interest expense on subordinated renewable notes was $440,000 for the three months ended September 30, 2023. The average balance of the outstanding subordinated debt decreased by $7.6 million to $19.9 million for the three months ended September 30, 2023 compared to $27.5 million for the prior year. The average yield of subordinated notes increased to 8.8% compared to 8.3% in the prior period.

 

 

 

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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 September 30, 2023 and 2022.

 

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, 2023 and 2022:

 

   Three Months Ended September 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  $2,934,749   $83,261    11.3%  $2,648,209   $79,817    12.1%
                               
Interest Bearing Liabilities                              
Warehouse lines of credit  $170,870    4,665    10.9%  $172,895    3,342    7.7%
Residual interest financing   50,000    1,050    8.4%   50,000    1,050    8.4%
Securitization trust debt   2,349,655    31,734    5.4%   2,032,527    18,519    3.6%
Subordinated renewable notes   19,928    440    8.8%   27,506    572    8.3%
   $2,590,453    37,889    5.9%  $2,282,928    23,483    4.1%
                               
Net interest income/spread       $45,371             $56,334      
Net interest yield (2)             5.4%             8.0%
 Ratio of average interest earning assets to average interest bearing liabilities             113%             116%

 

     (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 September 30, 2023
   Compared to September 30, 2022
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
   (In thousands) 
Interest Earning Assets               
Loan Portfolio  $3,444   $5,119   $(1,675)
                
Interest Bearing Liabilities               
Warehouse lines of credit   1,324    (43)   1,367 
Residual interest financing            
Securitization trust debt   13,215    2,642    10,573 
Subordinated renewable notes   (132)   (157)   25 
    14,407    2,442    11,965 
                
Net interest income/spread  $(10,963)  $2,677   $(13,640)

 

 

 

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For the three months ended September 30, 2023, we recorded a reduction to provision for credit losses on finance receivables in the amount of $2.0 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 $6.0 million in reductions to provision for credit losses for the three months ended September 30, 2022.

 

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of September 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 expenses consist 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 $5.3 million during the three months ended September 30, 2023 from $6.0 million in the same quarter in 2022. We purchased $322.4 million of new contracts during the three months ended September 30, 2023 compared to $468.2 million in the prior year period.

 

Occupancy expenses was $1.6 million for the three months ending September 30, 2023, which is down from the $2.0 million in the third quarter of 2022.

 

Depreciation and amortization expenses decreased to $199,000 compared to $406,000 in the previous year.

 

For the three months ended September 30, 2023, we recorded income tax expense of $3.8 million, representing a 27% 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 nine months ended September 30, 2023 with the nine months ended September 30, 2022

 

Revenues.  During the nine months ended September 30, 2023, our revenues were $260.0 million, an increase of $13.3 million, or 5.4%, from the prior year revenue of $246.7 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, 2023 include a $6.0 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. For the nine months ended September 30, 2023, our re-evaluation of the fair values of these receivables resulted in a mark up for certain older receivables and a mark down to the fair values of newer receivables. The fair value mark up on the older receivables exceeded the mark down to the newer receivables resulting in a net mark up of $6.0 million. Revenues for the prior year period include a $15.3 million mark up to the fair value portfolio.

 

 

 

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Interest income for the nine months ended September 30, 2023 increased $20.4 million, or 9.1%, to $246.0 million from $225.5 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 12.2% in the prior year period to 11.3% in the current year period. The receivables measured at fair value makes up a larger portion of our total loan portfolio in the current year period 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 nine months ended September 30, 2023 and 2022:

 

   Nine Months Ended September 30, 
   2023   2022 
   (Dollars in thousands) 
   Average       Interest   Average       Interest 
   Balance   Interest   Yield   Balance   Interest   Yield 
Interest Earning Assets                              
Loan Portfolio  $2,898,445   $245,960    11.3%  $2,463,882   $225,547    12.2%

 

Other income was $8.1 million for the nine months ended September 30, 2023 compared to $5.9 million for the comparable period in 2022. This 37.8% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $7.2 million for the nine months ended September 30, 2023 compared to $4.3 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 $208.8 million for the nine months ended September 30, 2023, compared to $148.8 million for the prior period, an increase of $60.0 million, or 40.3%. The increase is primarily due to increases in interest expense and general and administrative expenses.

 

 

 

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Employee costs were $65.0 million during the nine months ended September 30, 2023 compared to $63.4 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, 2023 and 2022:

 

   Nine Months Ended September 30, 
   2023   2022 
   (Dollars in millions) 
Contracts purchased (dollars)  $1,056.0   $1,426.3 
Contracts purchased (units)   50,746    61,947 
Managed portfolio outstanding (dollars)  $3,181.8   $2,838.9 
Managed portfolio outstanding (units)   189,747    173,774 
           
Number of Originations staff   181    187 
Number of Sales staff   103    134 
Number of Servicing staff   511    404 
Number of other staff   72    67 
Total number of employees   867    792 

 

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 $36.2 million for the nine months ended September 30, 2023, an increase of $10.3 million from $25.9 million in the prior year period.

 

Interest expense for the nine months ended September 30, 2023 was $106.4 million, compared to $58.7 million in the previous year, an increase of $47.7 million.

 

Interest on securitization trust debt increased by $39.5 million for the nine months ended September 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,322.0 million for the nine months ended September 30, 2023 compared to $1,959.5 million for the nine months ended September 30, 2022. The annualized average rate on our securitization trust debt was 5.0% for the nine months ended September 30, 2023 compared to 3.3% 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%