Item 1.
Financial Statements
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share
data)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,810
|
|
|
$
|
13,936
|
|
Restricted cash and equivalents
|
|
|
118,298
|
|
|
|
112,754
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
2,314,522
|
|
|
|
2,267,943
|
|
Less: Allowance for finance credit losses
|
|
|
(107,315
|
)
|
|
|
(95,578
|
)
|
Finance receivables, net
|
|
|
2,207,207
|
|
|
|
2,172,365
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
|
2,094
|
|
|
|
2,017
|
|
Deferred tax assets, net
|
|
|
45,198
|
|
|
|
42,845
|
|
Accrued interest receivable
|
|
|
36,952
|
|
|
|
36,233
|
|
Other assets
|
|
|
22,237
|
|
|
|
30,252
|
|
|
|
$
|
2,447,796
|
|
|
$
|
2,410,402
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
25,204
|
|
|
$
|
24,977
|
|
Warehouse lines of credit
|
|
|
131,272
|
|
|
|
103,358
|
|
Securitization trust debt
|
|
|
2,081,989
|
|
|
|
2,080,900
|
|
Subordinated renewable notes
|
|
|
16,080
|
|
|
|
14,949
|
|
|
|
|
2,254,545
|
|
|
|
2,224,184
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value; authorized 4,998,130 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Series B preferred stock, $1 par value; authorized 1,870 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Common stock, no par value; authorized 75,000,000 shares; 22,883,867 and 23,587,126 shares
issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
75,109
|
|
|
|
77,128
|
|
Retained earnings
|
|
|
124,824
|
|
|
|
115,772
|
|
Accumulated other comprehensive loss
|
|
|
(6,682
|
)
|
|
|
(6,682
|
)
|
|
|
|
193,251
|
|
|
|
186,218
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,447,796
|
|
|
$
|
2,410,402
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
107,485
|
|
|
$
|
101,709
|
|
|
$
|
212,060
|
|
|
$
|
198,372
|
|
Other income
|
|
|
2,587
|
|
|
|
3,224
|
|
|
|
5,610
|
|
|
|
7,210
|
|
|
|
|
110,072
|
|
|
|
104,933
|
|
|
|
217,670
|
|
|
|
205,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
17,572
|
|
|
|
15,678
|
|
|
|
35,352
|
|
|
|
30,822
|
|
General and administrative
|
|
|
6,819
|
|
|
|
6,569
|
|
|
|
13,741
|
|
|
|
11,900
|
|
Interest
|
|
|
23,236
|
|
|
|
19,727
|
|
|
|
45,324
|
|
|
|
37,548
|
|
Provision for credit losses
|
|
|
48,550
|
|
|
|
44,423
|
|
|
|
95,717
|
|
|
|
88,619
|
|
Marketing
|
|
|
3,990
|
|
|
|
4,731
|
|
|
|
7,950
|
|
|
|
9,401
|
|
Occupancy
|
|
|
1,733
|
|
|
|
1,288
|
|
|
|
3,394
|
|
|
|
2,371
|
|
Depreciation and amortization
|
|
|
220
|
|
|
|
192
|
|
|
|
448
|
|
|
|
367
|
|
|
|
|
102,120
|
|
|
|
92,608
|
|
|
|
201,926
|
|
|
|
181,028
|
|
Income before income tax expense
|
|
|
7,952
|
|
|
|
12,325
|
|
|
|
15,744
|
|
|
|
24,554
|
|
Income tax expense
|
|
|
3,380
|
|
|
|
5,053
|
|
|
|
6,692
|
|
|
|
10,068
|
|
Net income
|
|
$
|
4,572
|
|
|
$
|
7,272
|
|
|
$
|
9,052
|
|
|
$
|
14,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
0.39
|
|
|
$
|
0.58
|
|
Diluted
|
|
|
0.17
|
|
|
|
0.25
|
|
|
|
0.32
|
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,076
|
|
|
|
24,538
|
|
|
|
23,296
|
|
|
|
24,917
|
|
Diluted
|
|
|
27,602
|
|
|
|
29,111
|
|
|
|
28,024
|
|
|
|
29,632
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,572
|
|
|
$
|
7,272
|
|
|
$
|
9,052
|
|
|
$
|
14,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss); change in funded status of pension
plan
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Comprehensive income
|
|
$
|
4,572
|
|
|
$
|
7,272
|
|
|
$
|
9,052
|
|
|
$
|
14,486
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,052
|
|
|
$
|
14,486
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Accretion of deferred acquisition fees and origination costs
|
|
|
152
|
|
|
|
(2,114
|
)
|
Amortization of discount on securitization trust debt
|
|
|
–
|
|
|
|
20
|
|
Depreciation and amortization
|
|
|
448
|
|
|
|
367
|
|
Amortization of deferred financing costs
|
|
|
4,367
|
|
|
|
4,129
|
|
Provision for credit losses
|
|
|
95,717
|
|
|
|
88,619
|
|
Stock-based compensation expense
|
|
|
2,622
|
|
|
|
2,595
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(719
|
)
|
|
|
(2,051
|
)
|
Deferred tax assets, net
|
|
|
(2,353
|
)
|
|
|
(2,753
|
)
|
Other assets
|
|
|
5,172
|
|
|
|
1,032
|
|
Accounts payable and accrued expenses
|
|
|
227
|
|
|
|
9,000
|
|
Net cash provided by operating activities
|
|
|
114,685
|
|
|
|
113,330
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of finance receivables held for investment
|
|
|
(463,546
|
)
|
|
|
(631,412
|
)
|
Payments received on finance receivables held for investment
|
|
|
332,835
|
|
|
|
326,176
|
|
Payments received on receivables portfolio at fair value
|
|
|
4
|
|
|
|
48
|
|
Change in repossessions held in inventory
|
|
|
2,839
|
|
|
|
2,192
|
|
Change in restricted cash and cash equivalents, net
|
|
|
(5,544
|
)
|
|
|
(9,214
|
)
|
Purchase of furniture and equipment
|
|
|
(525
|
)
|
|
|
(444
|
)
|
Net cash used in investing activities
|
|
|
(133,937
|
)
|
|
|
(312,654
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of securitization trust debt
|
|
|
431,490
|
|
|
|
662,150
|
|
Proceeds from issuance of subordinated renewable notes
|
|
|
2,340
|
|
|
|
904
|
|
Payments on subordinated renewable notes
|
|
|
(1,209
|
)
|
|
|
(785
|
)
|
Net advances of warehouse lines of credit
|
|
|
28,029
|
|
|
|
(29,853
|
)
|
Repayments of residual interest financing debt
|
|
|
–
|
|
|
|
(1,587
|
)
|
Repayment of securitization trust debt
|
|
|
(430,750
|
)
|
|
|
(424,155
|
)
|
Payment of financing costs
|
|
|
(4,133
|
)
|
|
|
(4,645
|
)
|
Purchase of common stock
|
|
|
(5,379
|
)
|
|
|
(6,323
|
)
|
Exercise of options and warrants
|
|
|
738
|
|
|
|
48
|
|
Net cash provided by financing activities
|
|
|
21,126
|
|
|
|
195,754
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
1,874
|
|
|
|
(3,570
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
13,936
|
|
|
|
19,322
|
|
Cash and cash equivalents at end of period
|
|
$
|
15,810
|
|
|
$
|
15,752
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
40,579
|
|
|
$
|
32,746
|
|
Income taxes
|
|
$
|
3,302
|
|
|
$
|
3,784
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
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) acquired installment
purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans
from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of loans secured by vehicles.
In this report, we refer to all of such contracts and loans as "automobile contracts."
Basis of Presentation
Our Unaudited Condensed Consolidated Financial
Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with
the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all
adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented.
All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the six month period ended June
30, 2017 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, 2016.
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.
Other Income
The following table presents
the primary components of Other Income for the three-month and six-month periods ending June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Direct mail revenues
|
|
$
|
1,634
|
|
|
$
|
2,378
|
|
|
$
|
3,633
|
|
|
$
|
5,222
|
|
Convenience fee revenue
|
|
|
510
|
|
|
|
460
|
|
|
|
1,080
|
|
|
|
1,105
|
|
Recoveries on previously charged-off contracts
|
|
|
138
|
|
|
|
122
|
|
|
|
324
|
|
|
|
365
|
|
Sales tax refunds
|
|
|
215
|
|
|
|
202
|
|
|
|
412
|
|
|
|
401
|
|
Other
|
|
|
90
|
|
|
|
62
|
|
|
|
161
|
|
|
|
117
|
|
Other income for the period
|
|
$
|
2,587
|
|
|
$
|
3,224
|
|
|
$
|
5,610
|
|
|
$
|
7,210
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Warrants
In connection with the amendment to and
partial repayment of our residual interest financing in July 2008, we issued warrants exercisable for 2,500,000 common shares for
$4,071,429. The warrants represent the right to purchase 2,500,000 CPS common shares at a nominal exercise price, at any time prior
to July 10, 2018. In March 2010 we repurchased warrants for 500,000 of these shares for $1.0 million. Warrants to purchase 2,000,000
shares remain outstanding as of June 30, 2017.
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 six months ended June
30, 2017, we recorded stock-based compensation costs in the amount of $1.3 million and $2.6 million, respectively. These stock-based
compensation costs were $1.2 million and $2.6 million for the three and six months ended June 30, 2016. As of June 30, 2017, unrecognized
stock-based compensation costs to be recognized over future periods equaled $9.0 million. This amount will be recognized as expense
over a weighted-average period of 2.2 years.
The following represents stock option activity
for the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
(in thousands)
|
|
|
Exercise Price
|
|
|
Contractual Term
|
Options outstanding at the beginning of period
|
|
|
12,595
|
|
|
$
|
4.56
|
|
|
N/A
|
Granted
|
|
|
1,470
|
|
|
|
4.35
|
|
|
N/A
|
Exercised
|
|
|
(429
|
)
|
|
|
1.72
|
|
|
N/A
|
Forfeited
|
|
|
(178
|
)
|
|
|
5.67
|
|
|
N/A
|
Options outstanding at the end of period
|
|
|
13,458
|
|
|
$
|
4.61
|
|
|
4.85 years
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of period
|
|
|
8,475
|
|
|
$
|
4.36
|
|
|
4.37 years
|
At June 30, 2017, the aggregate intrinsic
value of options outstanding and exercisable was $13.4 million and $11.6 million, respectively. There were 429,300 options exercised
for the six months ended June 30, 2017 compared to 29,200 for the comparable period in 2016. The total intrinsic value of options
exercised was $1.3 million and $91,000 for the six-month periods ended June 30, 2017 and 2016. There were 2.4 million shares available
for future stock option grants under existing plans as of June 30, 2017.
Purchases of Company Stock
During the six-month period ended June
30, 2017, we purchased 1.1 million shares of our common stock, at an average price of $4.75. We purchased 1,102,410 shares of our
stock in the open market at an average price of $4.74. The remaining purchases of 30,149 shares were related to net exercises of
outstanding options. In transactions during the six-month period ended June 30, 2017, the holders of options to purchase 60,000
shares of our common stock paid the aggregate $149,000 exercise price by surrender to us of 30,149 of such 60,000 shares.
During the six-month period ended June
30, 2016, we purchased 1.6 million shares of our stock in the open market at an average price of $4.06.
Reclassifications
Some items in the prior year financial
statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or
total shareholders’ equity.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Financial Covenants
Certain of our securitization
transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring
minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding
maximum leverage levels. As of June 30, 2017, we were in compliance with all such covenants. In addition, certain of our debt agreements
other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective
creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other
event of default were to be accompanied by acceleration of such other indebtedness.
Provision for Contingent
Liabilities
We are routinely involved
in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our
legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication
that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.
We record at each measurement
date, most recently as of June 30, 2017, our best estimate of probable incurred losses for legal contingencies. The amount of losses
that may ultimately be incurred cannot be estimated with certainty.
(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.
The following table
presents the components of Finance Receivables, net of unearned interest:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Finance receivables
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Automobile finance receivables, net of unearned interest
|
|
$
|
2,310,103
|
|
|
$
|
2,266,619
|
|
Unearned acquisition fees and originations costs
|
|
|
4,419
|
|
|
|
1,324
|
|
Finance receivables
|
|
$
|
2,314,522
|
|
|
$
|
2,267,943
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
We consider an automobile
contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which
date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number
of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are
not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash
flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity
date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions
such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions
to be insignificant delays in payments rather than troubled debt restructurings. The following table summarizes the delinquency
status of finance receivables as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,115,708
|
|
|
$
|
2,053,759
|
|
31 - 60 days
|
|
|
121,354
|
|
|
|
116,073
|
|
61 - 90 days
|
|
|
49,094
|
|
|
|
52,404
|
|
91 + days
|
|
|
23,947
|
|
|
|
44,383
|
|
|
|
$
|
2,310,103
|
|
|
$
|
2,266,619
|
|
Finance receivables
totaling $23.9 million and $44.4 million at June 30, 2017 and December 31, 2016, respectively, including all receivables greater
than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.
We use a loss allowance methodology commonly
referred to as
"
static pooling,
"
which stratifies our finance receivable portfolio into separately identified pools based on the period of origination. Using analytical
and formula driven techniques, we estimate an allowance for finance credit losses, which we believe is adequate for probable incurred
credit losses that can be reasonably estimated in our portfolio of automobile contracts. The estimate for probable incurred credit
losses is reduced by our estimate for future recoveries on previously incurred losses. Provision for credit losses is charged to
our consolidated statement of operations. Net losses incurred on finance receivables are charged to the allowance. We establish
the allowance for new receivables over the 12-month period following their acquisition.
The following table presents a summary
of the activity for the allowance for finance credit losses for the three-month and six-month periods ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
99,255
|
|
|
$
|
79,867
|
|
|
$
|
95,578
|
|
|
$
|
75,603
|
|
Provision for credit losses on finance receivables
|
|
|
48,550
|
|
|
|
44,423
|
|
|
|
95,717
|
|
|
|
88,619
|
|
Charge-offs
|
|
|
(48,474
|
)
|
|
|
(41,901
|
)
|
|
|
(98,773
|
)
|
|
|
(87,834
|
)
|
Recoveries
|
|
|
7,984
|
|
|
|
7,779
|
|
|
|
14,793
|
|
|
|
13,780
|
|
Balance at end of period
|
|
$
|
107,315
|
|
|
$
|
90,168
|
|
|
$
|
107,315
|
|
|
$
|
90,168
|
|
Excluded from finance receivables are
contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed
the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance
for losses in repossessed inventory that is not included in the allowance for finance credit losses:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Gross balance of repossessions in inventory
|
|
$
|
31,382
|
|
|
$
|
40,069
|
|
Allowance for losses on repossessed inventory
|
|
|
(23,076
|
)
|
|
|
(28,924
|
)
|
Net repossessed inventory included in other assets
|
|
$
|
8,306
|
|
|
$
|
11,145
|
|
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
|
|
|
|
|
Scheduled
|
|
Pledged at
|
|
|
|
|
|
Principal at
|
|
|
Principal at
|
|
|
Interest Rate at
|
|
|
|
|
Payment
|
|
June 30,
|
|
|
Initial
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
Series
|
|
|
Date (1)
|
|
2017 (2)
|
|
|
Principal
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
CPS 2012-C
|
|
|
December 2019
|
|
$
|
–
|
|
|
$
|
147,000
|
|
|
$
|
–
|
|
|
$
|
14,421
|
|
|
|
–
|
|
|
CPS 2012-D
|
|
|
March 2020
|
|
|
–
|
|
|
|
160,000
|
|
|
|
–
|
|
|
|
17,865
|
|
|
|
–
|
|
|
CPS 2013-A
|
|
|
June 2020
|
|
|
21,277
|
|
|
|
185,000
|
|
|
|
19,482
|
|
|
|
28,661
|
|
|
|
1.72%
|
|
|
CPS 2013-B
|
|
|
September 2020
|
|
|
29,141
|
|
|
|
205,000
|
|
|
|
26,540
|
|
|
|
37,570
|
|
|
|
2.15%
|
|
|
CPS 2013-C
|
|
|
December 2020
|
|
|
35,387
|
|
|
|
205,000
|
|
|
|
34,653
|
|
|
|
46,830
|
|
|
|
5.23%
|
|
|
CPS 2013-D
|
|
|
March 2021
|
|
|
35,962
|
|
|
|
183,000
|
|
|
|
34,333
|
|
|
|
46,345
|
|
|
|
4.52%
|
|
|
CPS 2014-A
|
|
|
June 2021
|
|
|
43,308
|
|
|
|
180,000
|
|
|
|
41,114
|
|
|
|
54,988
|
|
|
|
3.83%
|
|
|
CPS 2014-B
|
|
|
September 2021
|
|
|
59,344
|
|
|
|
202,500
|
|
|
|
58,167
|
|
|
|
75,140
|
|
|
|
3.35%
|
|
|
CPS 2014-C
|
|
|
December 2021
|
|
|
93,080
|
|
|
|
273,000
|
|
|
|
91,285
|
|
|
|
116,280
|
|
|
|
3.53%
|
|
|
CPS 2014-D
|
|
|
March 2022
|
|
|
101,294
|
|
|
|
267,500
|
|
|
|
100,325
|
|
|
|
127,307
|
|
|
|
3.74%
|
|
|
CPS 2015-A
|
|
|
June 2022
|
|
|
109,649
|
|
|
|
245,000
|
|
|
|
108,821
|
|
|
|
134,466
|
|
|
|
3.29%
|
|
|
CPS 2015-B
|
|
|
September 2022
|
|
|
126,623
|
|
|
|
250,000
|
|
|
|
125,584
|
|
|
|
153,893
|
|
|
|
3.27%
|
|
|
CPS 2015-C
|
|
|
December 2022
|
|
|
172,332
|
|
|
|
300,000
|
|
|
|
171,144
|
|
|
|
207,636
|
|
|
|
3.74%
|
|
|
CPS 2016-A
|
|
|
March 2023
|
|
|
220,103
|
|
|
|
329,460
|
|
|
|
218,351
|
|
|
|
262,260
|
|
|
|
4.07%
|
|
|
CPS 2016-B
|
|
|
June 2023
|
|
|
247,067
|
|
|
|
332,690
|
|
|
|
240,209
|
|
|
|
284,752
|
|
|
|
4.11%
|
|
|
CPS 2016-C
|
|
|
September 2023
|
|
|
250,358
|
|
|
|
318,500
|
|
|
|
244,183
|
|
|
|
285,618
|
|
|
|
3.65%
|
|
|
CPS 2016-D
|
|
|
December 2023
|
|
|
180,742
|
|
|
|
206,325
|
|
|
|
175,822
|
|
|
|
200,221
|
|
|
|
2.90%
|
|
|
CPS 2017-A
|
|
|
April 2024
|
|
|
193,575
|
|
|
|
206,320
|
|
|
|
187,641
|
|
|
|
–
|
|
|
|
3.08%
|
|
|
CPS 2017-B
|
|
|
September 2024
|
|
|
223,593
|
|
|
|
225,170
|
|
|
|
217,340
|
|
|
|
–
|
|
|
|
2.74%
|
|
|
|
|
|
|
|
$
|
2,142,835
|
|
|
$
|
4,421,465
|
|
|
$
|
2,094,994
|
|
|
$
|
2,094,253
|
|
|
|
|
|
_________________
|
(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 $445.5 million in 2017, $740.9 million in 2018, $479.2 million in 2019, $272.5 million in 2020, $127.2
million in 2021, $16.7 million in 2022.
|
|
(2)
|
Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated
Balance Sheet.
|
Debt issuance costs of
$13.0 million and $13.4 million as of June 30, 2017 and December 31, 2016, respectively, have been excluded from the table above.
These debt issuance costs are presented as a direct deduction to the carrying amount of the securitization trust debt on our Unaudited
Condensed Consolidated Balance Sheets.
All of the securitization
trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned
bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The terms of the securitization
agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain
delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain
minimum levels of liquidity and not exceed maximum leverage levels. As of June 30, 2017, we were in compliance with all such covenants.
We are responsible for
the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held
in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization
trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of June 30,
2017, restricted cash under the various agreements totaled approximately $118.3 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 June 30, 2017 and December 31, 2016 are summarized below:
|
|
|
|
|
|
Amount Outstanding at
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
(In thousands)
|
|
Description
|
|
Interest Rate
|
|
Revolving Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
5.50% over one month Libor (Minimum 6.50%)
|
|
April 2019
|
|
$
|
60,602
|
|
|
$
|
64,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.50% over one month Libor (Minimum 6.25%)
|
|
August 2018
|
|
|
41,539
|
|
|
|
26,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% over a commercial paper rate (Minimum 7.75%)
|
|
November 2017
|
|
|
30,853
|
|
|
|
14,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated renewable notes
|
|
Weighted average rate of 7.55% and 7.50% at June 30, 2017 and December 31, 2016 , respectively
|
|
Weighted average maturity of July 2019 and January 2019 at June 30, 2017 and December 31,
2016, respectively
|
|
|
16,080
|
|
|
|
14,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149,074
|
|
|
$
|
119,914
|
|
Debt issuance costs of $1.7 million and $1.6 million as of June 30, 2017 and December 31,
2016, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the
carrying amount of the Warehouse lines of credit on our Unaudited Condensed Consolidated Balance Sheets.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In April 2017, we renewed
our $100 million warehouse credit line that was first established in May 2012. There was $60.6 million outstanding under this facility
at June 30, 2017. The revolving period for this facility was extended to April 2019 followed by an amortization period through
April 2021 for any receivables pledged at the end of the revolving period.
(5)
Interest Income and Interest Expense
The following table presents the components
of interest income:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Interest on finance receivables
|
|
$
|
107,344
|
|
|
$
|
101,624
|
|
|
$
|
211,840
|
|
|
$198,252
|
Other interest income
|
|
|
141
|
|
|
|
85
|
|
|
|
220
|
|
|
120
|
Interest income
|
|
$
|
107,485
|
|
|
$
|
101,709
|
|
|
$
|
212,060
|
|
|
$198,372
|
The following table
presents the components of interest expense:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Securitization trust debt
|
|
$
|
20,537
|
|
|
$
|
16,875
|
|
|
$
|
40,617
|
|
|
$
|
31,639
|
|
Warehouse lines of credit
|
|
|
2,379
|
|
|
|
2,244
|
|
|
|
4,087
|
|
|
|
4,666
|
|
Residual interest financing
|
|
|
–
|
|
|
|
245
|
|
|
|
–
|
|
|
|
516
|
|
Subordinated renewable notes
|
|
|
320
|
|
|
|
363
|
|
|
|
620
|
|
|
|
727
|
|
Interest expense
|
|
$
|
23,236
|
|
|
$
|
19,727
|
|
|
$
|
45,324
|
|
|
$
|
37,548
|
|
(6)
Earnings Per Share
Earnings per share for
the three-month and six-month periods ended June 30, 2017 and 2016 were calculated using the weighted average number of shares
outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted
earnings per share for the three-month and six-month periods ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
(In thousands)
|
|
|
(In thousands)
|
Weighted average number of common shares outstanding during
the period used to compute basic earnings per share
|
|
|
23,076
|
|
|
|
24,538
|
|
|
|
23,296
|
|
|
24,917
|
Incremental common shares attributable to exercise of outstanding options and warrants
|
|
|
4,526
|
|
|
|
4,573
|
|
|
|
4,728
|
|
|
4,715
|
Weighted average number of common shares used to compute diluted earnings per share
|
|
|
27,602
|
|
|
|
29,111
|
|
|
|
28,024
|
|
|
29,632
|
If the anti-dilutive
effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month
and six-month periods ended June 30, 2017 would have included an additional 8.7 million and 7.0 million shares, respectively attributable
to the exercise of outstanding options and warrants. For the three-month and six-month periods ended June 30, 2016, an additional
7.9 million and 7.4 million shares, respectively, would be included in the diluted earnings per share calculation.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(7)
Income Taxes
We file numerous consolidated
and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S.
federal, state, or local examinations by tax authorities for years before 2013.
As of June 30, 2017 and
December 31, 2016, 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.
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 $45.2
million as of June 30, 2017 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $45.2
million consists of approximately $38.4 million of net U.S. federal deferred tax assets and $6.8 million of net state deferred
tax assets.
Income tax expense
was $3.4 million and $6.7 million for the three months and six months ended June 30, 2017 and represents an effective income tax
rate of 43%, compared to income tax expense of $5.1 million and $10.1 million for the three and six months ended June 30, 2016,
and represents an effective income tax rate of and 41%.
(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.
Department of Justice
Subpoena.
In January 2015, we were served with a subpoena by the U.S. Department of Justice directing us to produce certain
documents relating to our and our subsidiaries’ and affiliates’ origination and securitization of sub-prime automobile
contracts since 2005, in connection with an investigation by the U.S. Department of Justice in contemplation of a civil proceeding
for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. We are among several other
securitizers of sub-prime automobile receivables who received such subpoenas in 2014 and 2015. Among other matters, the subpoena
requested information relating to the underwriting criteria used to originate these automobile contracts and the representations
and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile contracts.
In response to the January 2015 subpoena we produced documents in March 2015, September 2016 and July 2017. We are unaware of any
material developments in the government’s investigation subsequent to its initiation. The investigation could in the future
result in the imposition of damages, fines or civil or criminal claims and/or penalties. No assurance can be given as to the ultimate
outcome of the investigation or any resulting proceeding(s), which might materially and adversely affect us.
In General
.
There can be no assurance as to the outcomes of the matters referenced above. We record at each measurement date, most recently
as of June 30, 2017, our best estimate of probable incurred losses for legal contingencies, including each of the matters described
or referenced above. The amount of losses that may ultimately be incurred cannot be estimated with certainty. However, based on
such information as is available to us, we believe that the range of reasonably possible losses for the legal proceedings and contingencies
we face, including those described or referenced above, as of June 30, 2017 does not exceed $1 million.
Accordingly, we believe
that the ultimate resolution of such legal proceedings and contingencies, after taking into account our current litigation reserves,
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, the wide discretion vested in the U.S. Department of Justice and other government agencies,
and the deference that courts may give to assertions made by government litigants, 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)
Employee Benefits
On March 8, 2002 we acquired
MFN Financial Corporation and its subsidiaries in a merger. We sponsor the MFN Financial Corporation Benefit Plan (the “Plan”).
Plan benefits were frozen June 30, 2001. The table below sets forth the Plan’s net periodic benefit cost for the three-month
and six-month periods ended June 30, 2017 and 2016.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Components of net periodic cost (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Interest cost
|
|
|
214
|
|
|
|
221
|
|
|
|
428
|
|
|
|
442
|
|
Expected return on assets
|
|
|
(287
|
)
|
|
|
(300
|
)
|
|
|
(574
|
)
|
|
|
(600
|
)
|
Amortization of transition (asset)/obligation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Amortization of net (gain) / loss
|
|
|
101
|
|
|
|
138
|
|
|
|
202
|
|
|
|
276
|
|
Net periodic cost (benefit)
|
|
$
|
28
|
|
|
$
|
59
|
|
|
$
|
56
|
|
|
$
|
118
|
|
We did not make any
contributions to the Plan during the six-month periods ended June 30, 2017 and 2016. We do not anticipate making any contributions
for the remainder of 2017.
(10) 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.
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 June 30, 2017 the finance receivables
related to the repossessed vehicles in inventory totaled $31.4 million. We have applied a valuation adjustment, or loss allowance,
of $23.1 million, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount
of $8.3 million. The fair value and carrying amount of the repossessed inventory at December 31, 2016 was $11.1 million after applying
a valuation adjustment of $28.9 million.
There were no transfers
in or out of level 1 or level 2 assets and liabilities for the three months ended June 30, 2017 and 2016. We have no material level
3 assets that are measured at fair value on a non-recurring basis.
The estimated fair
values of financial assets and liabilities at June 30, 2017 and December 31, 2016, were as follows:
|
|
As of June 30, 2017
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,810
|
|
|
$
|
15,810
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
15,810
|
|
Restricted cash and equivalents
|
|
|
118,298
|
|
|
|
118,298
|
|
|
|
–
|
|
|
|
–
|
|
|
|
118,298
|
|
Finance receivables, net
|
|
|
2,207,207
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,155,855
|
|
|
|
2,155,855
|
|
Accrued interest receivable
|
|
|
36,952
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,952
|
|
|
|
36,952
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
131,272
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
131,272
|
|
|
$
|
131,272
|
|
Accrued interest payable
|
|
|
4,094
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,094
|
|
|
|
4,094
|
|
Securitization trust debt
|
|
|
2,081,989
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,098,115
|
|
|
|
2,098,115
|
|
Subordinated renewable notes
|
|
|
16,080
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,080
|
|
|
|
16,080
|
|
|
|
As of December 31, 2016
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,936
|
|
|
$
|
13,936
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
13,936
|
|
Restricted cash and equivalents
|
|
|
112,754
|
|
|
|
112,754
|
|
|
|
–
|
|
|
|
–
|
|
|
|
112,754
|
|
Finance receivables, net
|
|
|
2,172,365
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,104,503
|
|
|
|
2,104,503
|
|
Accrued interest receivable
|
|
|
36,233
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,233
|
|
|
|
36,233
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
103,358
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
103,358
|
|
|
$
|
103,358
|
|
Accrued interest payable
|
|
|
3,715
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,715
|
|
|
|
3,715
|
|
Securitization trust debt
|
|
|
2,080,900
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,138,892
|
|
|
|
2,138,892
|
|
Subordinated renewable notes
|
|
|
14,949
|
|
|
|
–
|
|
|
|
–
|
|
|
|
14,949
|
|
|
|
14,949
|
|
The following summary
presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much
of the information used to determine fair value is highly subjective. When applicable, readily available market information has
been utilized. However, for a significant portion of our financial instruments, active markets do not exist.
Therefore
,
significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which
are subject to change. Since the fair value is estimated as of June 30, 2017 and December 31, 2016, the amounts that will actually
be realized or paid at settlement or maturity of the instruments could be significantly different.
Cash, Cash Equivalents and Restricted
Cash and Equivalents
The carrying value equals
fair value.
Finance Receivables, net
The fair value of finance
receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar receivables
could be originated.
Accrued Interest Receivable and Payable
The carrying value approximates
fair value.
Warehouse Lines of Credit and Subordinated
Renewable Notes
The carrying value approximates
fair value because the related interest rates are estimated to reflect current market conditions for similar types of secured instruments.
Securitization Trust Debt
The fair value is estimated
by discounting future cash flows using interest rates that we believe reflect the current market rates.
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, low incomes 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 have also (i) acquired installment purchase
contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated
lenders, and (iii) directly originated an immaterial amount of vehicle purchase money loans by lending money directly to consumers.
In this report, we refer to all of such contracts and loans as "automobile contracts."
We were incorporated and
began our operations in March 1991. From inception through June 30, 2017, we have originated a total of approximately $13.9 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, most recently, in September 2011. The September 2011 acquisition
consisted of approximately $217.8 million of automobile contracts that we purchased from Fireside Bank of Pleasanton, California.
In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile contracts originated and owned
by non-affiliated entities. 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
|
|
2008
|
|
$
|
296,817
|
|
|
$
|
1,664,122
|
|
2009
|
|
|
8,599
|
|
|
|
1,194,722
|
|
2010
|
|
|
113,023
|
|
|
|
756,203
|
|
2011
|
|
|
284,236
|
|
|
|
794,649
|
|
2012
|
|
|
551,742
|
|
|
|
897,575
|
|
2013
|
|
|
764,087
|
|
|
|
1,231,422
|
|
2014
|
|
|
944,944
|
|
|
|
1,643,920
|
|
2015
|
|
|
1,060,538
|
|
|
|
2,031,136
|
|
2016
|
|
|
1,088,785
|
|
|
|
2,308,070
|
|
Six months ended June 30, 2017
|
|
|
463,546
|
|
|
|
2,343,303
|
|
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.
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.
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, (ii) recognize interest expense on the securities issued in the transaction
and (iii) record as expense a provision for credit losses on the contracts.
Since 1994 we have conducted
74 term securitizations of automobile contracts that we originated. As of June 30, 2017, 17 of those securitizations are active
and all are structured as secured financings. From 1994 through April 2008 we generally utilized financial guarantees for the senior
asset-backed notes issued in the securitization. Since September 2010 we have utilized senior subordinated structures without any
financial guarantees. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter,
resulting in four securitizations per calendar year. However, in 2015, we elected to defer what would have been our December securitization
in favor of a securitization in January 2016, and since that time have generally conducted our securitizations near the beginning
of each calendar quarter.
Our history of term securitizations,
over the most recent ten years, is summarized in the table below:
Recent Asset-Backed Term Securitizations
|
|
|
$ in thousands
|
|
Period
|
|
Number of Term
Securitizations
|
|
|
Receivables
Pledged in Term
Securitizations
|
|
2006
|
|
4
|
|
|
$
|
957,681
|
|
2007
|
|
3
|
|
|
|
1,118,097
|
|
2008
|
|
2
|
|
|
|
509,022
|
|
2009
|
|
0
|
|
|
|
–
|
|
2010
|
|
1
|
|
|
|
103,772
|
|
2011
|
|
3
|
|
|
|
335,593
|
|
2012
|
|
4
|
|
|
|
603,500
|
|
2013
|
|
4
|
|
|
|
778,000
|
|
2014
|
|
4
|
|
|
|
923,000
|
|
2015
|
|
3
|
|
|
|
795,000
|
|
2016
|
|
4
|
|
|
|
1,214,997
|
|
Six months ended June 30, 2017
|
|
2
|
|
|
|
440,000
|
|
Generally, prior to a securitization
transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. Our current short-term
funding capacity is $300 million, comprising three credit facilities. The first $100 million credit facility was established in
May 2012. This facility was renewed in August 2016, extending the revolving period to August 2018, and adding an amortization period
through August 2019. In April 2015, we entered into a $100 million facility, with a revolving period extending to April 2017, followed
by an amortization period to April 2019. That facility was renewed in April 2017, extending the revolving period to April 2019,
followed by an amortization period to April 2021. In November 2015, we entered into a third $100 million facility, with a revolving
period extending to November 2017, followed by an amortization period to November 2019.
In a securitization and
in our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar
to the representations and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach
any of our representations or warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal
balance plus accrued and unpaid interest. We may then be entitled under the terms of our dealer agreement to require the selling
dealer to repurchase the contract at a price equal to our purchase price, less any principal payments made by the customer. Subject
to any recourse against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts
that we repurchase.
In a securitization, the
related special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized automobile
contracts falls short of pre-determined standards. Such releases represent a material portion of the cash that we use to fund our
operations. An unexpected deterioration in the performance of securitized automobile contracts could therefore have a material
adverse effect on both our liquidity and results of operations.
Financial Covenants
Certain of our securitization
transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios
and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels.
In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default
provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness
of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of June
30, 2017, we were in compliance with all such covenants.
Results
of Operations
Comparison of Operating Results for
the three months ended June 30, 2017 with the three months ended June 30, 2016
Revenues
. During
the three months ended June 30, 2017, our revenues were $110.1 million, an increase of $5.1 million, or 4.9%, from the prior year
revenue of $104.9 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for
the three months ended June 30, 2017 increased $5.7 million, or 5.7%, to $107.5 million from $101.7 million in the prior year.
The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries.
The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the three months
ended June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
Amount
|
|
Finance Receivables Owned by
|
|
($ in millions)
|
|
Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
Average balance for the three-month period
|
|
$
|
2,340.2
|
|
|
$
|
2,216.6
|
|
|
|
|
|
|
|
|
|
|
Ending balance for the period
|
|
$
|
2,343.3
|
|
|
$
|
2,253.7
|
|
In the three months ended
June 30, 2017, other income of $2.6 million decreased by $637,000, or 19.8% compared to the prior year. The three-month period
ended June 30, 2017 includes a decrease of $744,000 in revenue associated with direct mail and other related products and services
that we offer to our dealers. That decrease was somewhat offset by an increase of $50,000 in payments from third-party providers
of convenience fees paid by our customers for web based and other electronic payments, an increase of $44,000 on payments to us
for our interest in certain sold charge offs and acquired third-party portfolios and an increase of $13,000 on sales tax refunds.
Expenses
. Our
operating expenses consist largely of provision for credit losses, interest expense, employee costs, marketing and general and
administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile
contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated
subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are
received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance
market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing
and advertising expenses, and depreciation and amortization.
Total operating expenses
were $102.1 million for the three months ended June 30, 2017, compared to $92.6 million for the prior period, an increase of $9.5
million, or 10.3%. The increase is primarily due to the increase in our consolidated portfolio and associated servicing costs,
and the related increases in interest expense and in our provision for credit losses.
Employee costs increased
by $1.9 million or 12.1%, to $17.6 million during the three months ended June 30, 2017, representing 17.2% of total operating
expenses, from $15.7 million for the prior year, or 16.9% of total operating expenses. The table below summarizes our employees
by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, June
30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in millions)
|
|
Contracts purchased (dollars)
|
|
$
|
233.9
|
|
|
$
|
319.1
|
|
Contracts purchased (units)
|
|
|
14,244
|
|
|
|
19,316
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,343.3
|
|
|
$
|
2,253.7
|
|
Managed portfolio outstanding (units)
|
|
|
173,598
|
|
|
|
164,403
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
209
|
|
|
|
231
|
|
Number of Marketing staff
|
|
|
117
|
|
|
|
106
|
|
Number of Servicing staff
|
|
|
565
|
|
|
|
530
|
|
Number of other staff
|
|
|
93
|
|
|
|
90
|
|
Total number of employees
|
|
|
984
|
|
|
|
957
|
|
General and administrative
expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities,
credit services, and telecommunications. General and administrative expenses were $6.8 million, an increase of $251,000, or 3.8%
compared to the previous year and represented 6.7% of total operating expenses.
Interest expense for the
three months ended June 30, 2017 increased by $3.5 million to $23.2 million, or 17.8% and represented 22.8% of total operating
expenses, compared to $19.7 million in the previous year, when it was 21.3% of total operating expenses.
Interest on securitization
trust debt increased by $3.7 million, or 21.7%, for the three months ended June 30, 2017 compared to the prior period. The average
balance of securitization trust debt increased 5.9% to $2,168.0 million for the three months ended June 30, 2017 compared to $2,047.6
million for the three months ended June 30, 2016. In addition, the blended interest rates on new term securitizations have generally
increased since June 2014. As a result, the cost of securitization debt during the three-month period ended June 30, 2017 was
3.8%, compared to 3.3% in the prior year period. For any particular quarterly securitization transaction, the blended cost of
funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against
which our bonds are priced and the margin over those benchmarks that investors are willing accept, which in turn, is influenced
by investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward
higher securitization trust debt interest costs since June 2014, although that trend has reversed somewhat since July 2016. 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
|
June 2014
|
|
2.37%
|
September 2014
|
|
2.71%
|
December 2014
|
|
3.07%
|
March 2015
|
|
3.04%
|
June 2015
|
|
3.18%
|
September 2015
|
|
3.78%
|
January 2016
|
|
4.34%
|
April 2016
|
|
4.65%
|
July 2016
|
|
4.48%
|
October 2016
|
|
3.66%
|
January 2017
|
|
3.90%
|
April 2017
|
|
3.45%
|
Interest expense on subordinated
renewable notes decreased by $42,000, or 11.7%. The decrease is due to a decrease in the average yield on our subordinated renewable
notes to 7.9% for the three-month period ended June 30, 2017 compared to the prior year when the average yield on our subordinated
renewable notes was 9.5%. The decrease in the average yield on our subordinated renewable notes offset an increase in the average
balance of $859,000, or 5.6%, for the three months ended June 30, 2017 compared to the prior period.
Interest expense on warehouse
debt increased by $135,000, or 6.0%, for the three months ended June 30, 2017 compared to the prior period. When possible, we hold
contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.
The following table presents
the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended June
30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
2,306,632
|
|
|
$
|
107,485
|
|
|
|
18.6%
|
|
|
$
|
2,182,203
|
|
|
$
|
101,709
|
|
|
|
18.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit (3)
|
|
$
|
72,404
|
|
|
|
2,379
|
|
|
|
13.2%
|
|
|
$
|
84,564
|
|
|
|
2,244
|
|
|
|
10.6%
|
|
Residual interest financing
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,770
|
|
|
|
246
|
|
|
|
12.7%
|
|
Securitization trust debt
|
|
|
2,167,971
|
|
|
|
20,537
|
|
|
|
3.8%
|
|
|
|
2,047,621
|
|
|
|
16,874
|
|
|
|
3.3%
|
|
Subordinated renewable notes
|
|
|
16,180
|
|
|
|
320
|
|
|
|
7.9%
|
|
|
|
15,321
|
|
|
|
363
|
|
|
|
9.5%
|
|
|
|
$
|
2,256,555
|
|
|
|
23,236
|
|
|
|
4.1%
|
|
|
$
|
2,155,276
|
|
|
|
19,727
|
|
|
|
3.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
84,249
|
|
|
|
|
|
|
|
|
|
|
$
|
81,982
|
|
|
|
|
|
Net interest yield (4)
|
|
|
$
|
|
|
|
|
|
|
|
14.5%
|
|
|
|
|
|
|
|
|
|
|
|
15.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest earning assets to average interest
bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
102%
|
|
|
|
|
|
|
|
|
|
|
|
101%
|
|
____________________________________
(1) Average
balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Net
of deferred fees and direct costs.
(3) Interest
expense includes deferred financing costs and non-utilization fees.
(4) Annualized
net interest income divided by average interest earning assets.
|
|
Three Months Ended June 30, 2017
|
|
|
|
Compared to June 30, 2016
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
(In thousands)
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
5,776
|
|
|
$
|
6,353
|
|
|
$
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
135
|
|
|
|
(329
|
)
|
|
|
464
|
|
Residual interest financing
|
|
|
(246
|
)
|
|
|
(246
|
)
|
|
|
–
|
|
Securitization trust debt
|
|
|
3,663
|
|
|
|
992
|
|
|
|
2,671
|
|
Subordinated renewable notes
|
|
|
(43
|
)
|
|
|
20
|
|
|
|
(63
|
)
|
|
|
|
3,509
|
|
|
|
437
|
|
|
|
3,072
|
|
Net interest income/spread
|
|
$
|
2,267
|
|
|
$
|
5,916
|
|
|
$
|
(3,649
|
)
|
The reduction in the annualized
yield on our finance receivables for the three months ended June 30, 2017 compared to the prior year period is the result of our
decision to offer dealers slightly lower acquisition fees and also to require slightly lower contract interest rates on a portion
of the contracts we purchase.
Provision for credit losses
was $48.6 million for the three months ended June 30, 2017, an increase of $4.1 million, or 9.3% compared to the prior year and
represented 47.5% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses
at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing
the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition,
we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance
credit losses. Consequently, the increase in provision expense is the result of the increase in contract purchases, the larger
portfolio owned by our consolidated subsidiaries, and somewhat higher delinquency and charge off rates compared to the prior year.
Marketing expenses consist
primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a
salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers,
such as training programs, internet lead sales, and direct mail products. Marketing expenses decreased by $741,000, or 15.7%, to
$4.0 million during the three months ended June 30, 2017, compared to $4.7 million in the prior year period, and represented 3.9%
of total operating expenses. For the three months ended June 30, 2017, we purchased 14,244 contracts representing $233.9 million
in receivables compared to 19,316 contracts representing $319.1 million in receivables in the prior period.
Occupancy expenses increased
by $444,000 or 34.5%, to $1.7 million compared to $1.3 million in the previous year and represented 1.7% of total operating expenses.
In July 2015, we entered into a lease for additional office space in Irvine, California. We then occupied that space, and incurred
incremental occupancy expense, in phases. The first phase was in July 2015 and the second and final phase was in April 2016. In
May 2017, we acquired additional office space in Las Vegas, Nevada.
Depreciation and amortization
expenses increased by $29,000 or 15.1%, to $220,000 compared to $192,000 in the previous year and represented 0.2% of total operating
expenses.
For the three months ended
June 30, 2017, we recorded income tax expense of $3.4 million, representing a 42.5% effective income tax rate. In the prior year
period, we recorded $5.1 million in income tax expense, representing a 41.0% effective income tax rate.
Comparison of Operating Results for
the six months ended June 30, 2017 with the six months ended June 30, 2016
Revenues
. During
the six months ended June 30, 2017, our revenues were $217.7 million, an increase of $12.1 million, or 5.9%, from the prior year
revenue of $205.6 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for
the six months ended June 30, 2017 increased $13.7 million, or 6.9%, to $212.1 million from $198.4 million in the prior year. The
primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries. The
table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the six months ended
June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
Amount
|
|
Finance Receivables Owned by
|
|
($ in millions)
|
|
Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
Average balance for the six-month period
|
|
$
|
2,326.0
|
|
|
$
|
2,157.3
|
|
|
|
|
|
|
|
|
|
|
Ending balance for the period
|
|
$
|
2,343.3
|
|
|
$
|
2,253.7
|
|
In the six months ended
June 30, 2017, other income of $5.6 million decreased by $1.6 million, or 22.2% compared to the prior year. The six-month period
ended June 30, 2017 includes a decrease of $1.6 million in revenue associated with direct mail and other related products and services
that we offer to our dealers. We also incurred a decrease of $25,000 in payments from third-party providers of convenience fees
paid by our customers for web based and other electronic payments, an increase of $14,000 on payments to us for our interest in
certain sold charge offs and acquired third-party portfolios and an increase of $11,000 on sales tax refunds.
Expenses. Our
operating expenses consist largely of provision for credit losses, interest expense, employee costs, marketing and general and
administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile
contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated
subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are
received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance
market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing
and advertising expenses, and depreciation and amortization.
Total operating expenses
were $201.9 million for the six months ended June 30, 2017, compared to $181.0 million for the prior period, an increase of $20.9
million, or 11.5%. The increase is primarily due to the increase in our consolidated portfolio and associated servicing costs,
and the related increases in interest expense and in our provision for credit losses.
Employee costs increased
by $4.5 million or 14.7%, to $35.4 million during the six months ended June 30, 2017, representing 17.5% of total operating expenses,
from $30.8 million for the prior year, or 17.0% of total operating expenses. The table below summarizes our employees by category
as well as contract purchases and units in our managed portfolio as of, and for the six-month periods ended, June 30, 2017 and
2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in millions)
|
|
Contracts purchased (dollars)
|
|
$
|
463.5
|
|
|
$
|
631.4
|
|
Contracts purchased (units)
|
|
|
28,548
|
|
|
|
38,538
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,343.3
|
|
|
$
|
2,253.7
|
|
Managed portfolio outstanding (units)
|
|
|
173,598
|
|
|
|
164,403
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
209
|
|
|
|
231
|
|
Number of Marketing staff
|
|
|
117
|
|
|
|
106
|
|
Number of Servicing staff
|
|
|
565
|
|
|
|
530
|
|
Number of other staff
|
|
|
93
|
|
|
|
90
|
|
Total number of employees
|
|
|
984
|
|
|
|
957
|
|
General and administrative
expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities,
credit services, and telecommunications. General and administrative expenses were $13.7 million, an increase of $1.8 million, or
15.5% compared to the previous year and represented 6.8% of total operating expenses.
Interest expense for the
six months ended June 30, 2017 increased by $7.8 million to $45.3 million, or 20.7% and represented 22.4% of total operating expenses,
compared to $37.5 million in the previous year, when it was 20.7% of total operating expenses.
Interest on securitization
trust debt increased by $9.0 million, or 28.4%, for the six months ended June 30, 2017 compared to the prior period. The average
balance of securitization trust debt increased 8.8% to $2,168.0 million for the six months ended June 30, 2017 compared to $1,993.0
million for the six months ended June 30, 2016. In addition, the blended interest rates on new term securitizations have generally
increased since June 2014. As a result, the cost of securitization debt during the six-month period ended June 30, 2017 was 3.7%,
compared to 3.2% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is
ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which
our bonds are priced and the margin over those benchmarks that investors are willing accept, which in turn, is influenced by investor
demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward higher
securitization trust debt interest costs since June 2014, although that trend has reversed somewhat since July 2016. 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
|
June 2014
|
|
2.37%
|
September 2014
|
|
2.71%
|
December 2014
|
|
3.07%
|
March 2015
|
|
3.04%
|
June 2015
|
|
3.18%
|
September 2015
|
|
3.78%
|
January 2016
|
|
4.34%
|
April 2016
|
|
4.65%
|
July 2016
|
|
4.48%
|
October 2016
|
|
3.66%
|
January 2017
|
|
3.90%
|
April 2017
|
|
3.45%
|
Interest expense on subordinated
renewable notes decreased by $106,000, or 14.6%. The decrease is due to a decrease in the average yield on our subordinated renewable
notes to 7.9% for the six-month period ended June 30, 2017 compared to the prior year when the average yield on our subordinated
renewable notes was 9.5%. The decrease in the average yield on our subordinated renewable notes offset an increase in the average
balance of $382,000, or 2.5%, for the six months ended June 30, 2017 compared to the prior period.
Interest expense on warehouse
debt decreased by $579,000, or 12.4%, for the six months ended June 30, 2017 compared to the prior period. When possible, we hold
contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.
The following table presents
the components of interest income and interest expense and a net interest yield analysis for the six-month periods ended June 30,
2017 and 2016:
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
2,289,285
|
|
|
$
|
212,060
|
|
|
|
18.5%
|
|
|
$
|
2,119,581
|
|
|
$
|
198,372
|
|
|
|
18.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit (3)
|
|
$
|
62,462
|
|
|
|
4,087
|
|
|
|
13.2%
|
|
|
$
|
91,415
|
|
|
|
4,666
|
|
|
|
10.2%
|
|
Residual interest financing
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,188
|
|
|
|
516
|
|
|
|
12.6%
|
|
Securitization trust debt
|
|
|
2,167,966
|
|
|
|
40,617
|
|
|
|
3.7%
|
|
|
|
1,993,009
|
|
|
|
31,639
|
|
|
|
3.2%
|
|
Subordinated renewable notes
|
|
|
15,746
|
|
|
|
620
|
|
|
|
7.9%
|
|
|
|
15,364
|
|
|
|
727
|
|
|
|
9.5%
|
|
|
|
$
|
2,246,174
|
|
|
|
45,324
|
|
|
|
4.0%
|
|
|
$
|
2,107,976
|
|
|
|
37,548
|
|
|
|
3.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
166,736
|
|
|
|
|
|
|
|
|
|
|
$
|
160,824
|
|
|
|
|
|
Net interest yield (4)
|
|
|
$
|
|
|
|
|
|
|
|
14.5%
|
|
|
|
|
|
|
|
|
|
|
|
15.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest earning assets to average interest
bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
102%
|
|
|
|
|
|
|
|
|
|
|
|
101%
|
|
____________________________________
(1) Average
balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Net
of deferred fees and direct costs.
(3) Interest
expense includes deferred financing costs and non-utilization fees.
(4) Annualized
net interest income divided by average interest earning assets.
|
|
Six Months Ended June 30, 2017
|
|
|
|
Compared to June 30, 2016
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
(In thousands)
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
13,688
|
|
|
$
|
15,977
|
|
|
$
|
(2,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(579
|
)
|
|
|
(1,512
|
)
|
|
|
933
|
|
Residual interest financing
|
|
|
(516
|
)
|
|
|
(516
|
)
|
|
|
–
|
|
Securitization trust debt
|
|
|
8,978
|
|
|
|
2,777
|
|
|
|
6,201
|
|
Subordinated renewable notes
|
|
|
(107
|
)
|
|
|
18
|
|
|
|
(125
|
)
|
|
|
|
7,776
|
|
|
|
767
|
|
|
|
7,009
|
|
Net interest income/spread
|
|
$
|
5,912
|
|
|
$
|
15,210
|
|
|
$
|
(9,298
|
)
|
The reduction in the annualized
yield on our finance receivables for the six months ended June 30, 2017 compared to the prior year period is the result of our
decision to offer dealers slightly lower acquisition fees and also to require slightly lower contract interest rates on a portion
of the contracts we purchase.
Provision for credit losses
was $95.7 million for the six months ended June 30, 2017, an increase of $7.1 million, or 8.0% compared to the prior year and represented
47.4% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels
that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the
allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we
monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance
credit losses. Consequently, the increase in provision expense is the result of the increase in contract purchases, the larger
portfolio owned by our consolidated subsidiaries, and somewhat higher delinquency and charge off rates compared to the prior year.
Marketing expenses consist
primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a
salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers,
such as training programs, internet lead sales, and direct mail products. Marketing expenses decreased by $1.5 million, or 15.4%,
to $8.0 million during the six months ended June 30, 2017, compared to $9.4 million in the prior year period, and represented 3.9%
of total operating expenses. For the six months ended June 30, 2017, we purchased 28,548 contracts representing $463.5 million
in receivables compared to 38,538 contracts representing $631.4 million in receivables in the prior period.
Occupancy expenses increased
by $1.0 million or 43.1%, to $3.4 million compared to $2.4 million in the previous year and represented 1.7% of total operating
expenses. In July 2015, we entered into a lease for additional office space in Irvine, California. We then occupied that space,
and incurred incremental occupancy expense, in phases. The first phase was in July 2015 and the second and final phase was in April
2016. In May 2017, we acquired additional office space in Las Vegas, Nevada.
Depreciation and amortization
expenses increased by $81,000 or 22.2%, to $448,000 compared to $367,000 in the previous year and represented 0.2% of total operating
expenses.
For the six months ended
June 30, 2017, we recorded income tax expense of $6.7 million, representing a 42.5% effective income tax rate. In the prior year
period, we recorded $10.1 million in income tax expense, representing a 41.0% effective income tax rate.
Credit Experience
Our financial results are
dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such
as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted
average age of the receivables at any given time. In addition, in June 2014 we entered into a consent decree with the FTC that
required us to make certain procedural changes in our servicing practices, which we believe have contributed to somewhat higher
delinquencies and extensions compared to prior periods. The tables below document the delinquency, repossession and net credit
loss experience of all such automobile contracts that we originated or own an interest in as of the respective dates shown. The
tables do not include the experience of third party originated and owned portfolios.
Delinquency, Repossession and Extension
Experience (1)
Total Owned Portfolio
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
December 31, 2016
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
|
|
|
(Dollars in thousands)
|
|
Delinquency Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross servicing portfolio (1)
|
|
|
|
|
173,597
|
|
|
$
|
2,343,297
|
|
|
|
164,392
|
|
|
$
|
2,141,601
|
|
|
|
169,720
|
|
|
$
|
2,308,058
|
|
Period of delinquency (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
|
|
8,877
|
|
|
$
|
121,354
|
|
|
|
6,710
|
|
|
$
|
89,126
|
|
|
|
8,673
|
|
|
$
|
116,073
|
|
61-90 days
|
|
|
|
|
3,722
|
|
|
|
49,094
|
|
|
|
2,961
|
|
|
|
32,817
|
|
|
|
3,998
|
|
|
|
52,403
|
|
91+ days
|
|
|
|
|
1,907
|
|
|
|
23,947
|
|
|
|
2,577
|
|
|
|
31,231
|
|
|
|
3,407
|
|
|
|
44,384
|
|
Total delinquencies (2)
|
|
|
|
|
14,506
|
|
|
|
194,395
|
|
|
|
12,248
|
|
|
|
153,174
|
|
|
|
16,078
|
|
|
|
212,860
|
|
Amount in repossession (3)
|
|
|
|
|
2,465
|
|
|
|
31,383
|
|
|
|
2,690
|
|
|
|
38,836
|
|
|
|
3,162
|
|
|
|
40,125
|
|
Total delinquencies and amount in repossession (2)
|
|
|
|
|
16,971
|
|
|
$
|
225,778
|
|
|
|
14,938
|
|
|
$
|
192,010
|
|
|
|
19,240
|
|
|
$
|
252,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of gross servicing portfolio
|
|
|
|
|
8.4%
|
|
|
|
8.3%
|
|
|
|
7.5%
|
|
|
|
7.2%
|
|
|
|
9.5%
|
|
|
|
9.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies and amount in repossession as a
percentage of gross servicing portfolio
|
|
|
|
|
9.8%
|
|
|
|
9.6%
|
|
|
|
9.1%
|
|
|
|
9.0%
|
|
|
|
11.3%
|
|
|
|
11.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, accruing (4)
|
|
|
|
|
32,871
|
|
|
$
|
449,931
|
|
|
|
28,330
|
|
|
$
|
385,978
|
|
|
|
34,354
|
|
|
$
|
479,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with two or more extensions, accruing (4)
|
|
|
|
|
42,732
|
|
|
|
583,364
|
|
|
|
22,001
|
|
|
|
291,921
|
|
|
|
30,450
|
|
|
|
407,631
|
|
|
|
|
|
|
75,603
|
|
|
|
1,033,295
|
|
|
|
50,331
|
|
|
|
677,899
|
|
|
|
64,804
|
|
|
|
886,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, non-accrual (4)
|
|
|
|
|
1,184
|
|
|
|
14,863
|
|
|
|
1,463
|
|
|
|
18,519
|
|
|
|
1,676
|
|
|
|
22,335
|
|
Contracts with two or more extensions, non-accrual (4)
|
|
|
|
|
1,671
|
|
|
|
21,896
|
|
|
|
1,463
|
|
|
|
18,808
|
|
|
|
1,999
|
|
|
|
25,617
|
|
|
|
|
|
|
2,855
|
|
|
|
36,759
|
|
|
|
2,926
|
|
|
|
37,327
|
|
|
|
3,675
|
|
|
|
47,952
|
|
Total contracts with extensions
|
|
|
|
|
78,458
|
|
|
$
|
1,070,054
|
|
|
|
53,257
|
|
|
$
|
715,226
|
|
|
|
68,479
|
|
|
$
|
934,820
|
|
____________________________________
(1) All amounts and percentages are based
on the amount remaining to be repaid on each automobile contract, including, for pre-computed automobile contracts, any unearned
interest. The information in the table represents the gross principal amount of all automobile contracts we have purchased, including
automobile contracts subsequently sold in securitization transactions that we continue to service. The table does not include certain
contracts we have serviced for third parties on which we earn servicing fees only and have no credit risk.
(2) We consider an automobile contract delinquent
when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended
within limits specified in the Servicing Agreements. The period of delinquency is based on the number of days payments are contractually
past due. Automobile contracts less than 31 days delinquent are not included. The delinquency aging categories shown in the tables
reflect the effect of extensions.
(3) Amount in repossession represents financed
vehicles that have been repossessed but not yet liquidated.
(4) Accounts past due more than 90 days
are on non-accrual.
Net Charge-Off Experience
(1)
Total Owned Portfolio
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Average servicing portfolio outstanding
|
|
$
|
2,326,008
|
|
|
$
|
2,157,554
|
|
|
$
|
2,226,056
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
7.8%
|
|
|
|
7.2%
|
|
|
|
7.0%
|
|
_________________________
(1) All amounts and percentages are based
on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts.
(2) Net charge-offs include the remaining
principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid
interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other
income in the accompanying interim consolidated financial statements. June 30, 2017 and June 30, 2016 percentages represent six
months ended June 30, 2017 and June 30, 2016 annualized. December 31, 2016 represents 12 months ended December 31, 2016.
Extensions
In certain circumstances
we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor would
not be entitled to more than two such extensions in any 12-month period and no more than six over the life of the contract. The
only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable
by one month. In some cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest
rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in
payments rather than troubled debt restructurings.
The basic question in deciding
to grant an extension is whether or not we will (a) be delaying the inevitable repossession and liquidation or (b) risk losing
the vehicle as a result of not being able to locate the obligor and vehicle. In both of those situations, the loss would likely
be higher than if the vehicle had been repossessed without the extension. The benefits of granting an extension include minimizing
current losses and delinquencies, minimizing lifetime losses, getting the obligor’s account current (or close to it) and
building goodwill with the obligor so that he might prioritize us over other creditors on future payments. Our servicing staff
are trained to identify when a past due obligor is facing a temporary problem that may be resolved with an extension. In most cases,
the extension will be granted in conjunction with our receiving a past due payment (and where allowed by law, a nominal fee, applied
to the loan as a partial payment) from the obligor, thereby indicating an additional monetary and psychological commitment to the
contract on the obligor’s part.
The credit assessment for
granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with
the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor
has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed
such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history,
including past extensions if applicable; and (4) the obligor’s willingness to communicate and cooperate on resolving the
delinquency. If the collector believes the obligor is a good candidate for an extension, he must obtain approval from his supervisor,
who will review the same factors stated above prior to offering the extension to the obligor. After receiving an extension, an
account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.
We believe that a prudent
extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table
below summarizes the status, as of June 30, 2017, for accounts that received extensions from 2008 through 2015 (2016 and 2017 extension
data are not included at this time due to insufficient passage of time for meaningful evaluation of results):
Period of Extension
|
|
# Extensions Granted
|
|
Active or Paid Off at June 30, 2017
|
|
% Active or Paid Off at June 30, 2017
|
|
Charged Off > 6 Months After Extension
|
|
% Charged Off > 6 Months After Extension
|
|
Charged Off <= 6 Months After Extension
|
|
% Charged Off <= 6 Months After Extension
|
|
Avg Months to Charge Off Post Extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
35,588
|
|
10,710
|
|
30.1%
|
|
20,059
|
|
56.4%
|
|
4,819
|
|
13.5%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
32,226
|
|
10,278
|
|
31.9%
|
|
16,165
|
|
50.2%
|
|
5,783
|
|
17.9%
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
26,167
|
|
12,169
|
|
46.5%
|
|
11,999
|
|
45.9%
|
|
1,999
|
|
7.6%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
18,786
|
|
10,989
|
|
58.5%
|
|
6,865
|
|
36.5%
|
|
932
|
|
5.0%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
18,783
|
|
11,455
|
|
61.0%
|
|
6,532
|
|
34.8%
|
|
796
|
|
4.2%
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
23,398
|
|
12,476
|
|
53.3%
|
|
9,946
|
|
42.5%
|
|
976
|
|
4.2%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
25,773
|
|
14,023
|
|
54.4%
|
|
10,924
|
|
42.4%
|
|
826
|
|
3.2%
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
53,319
|
|
36,584
|
|
68.6%
|
|
15,653
|
|
29.4%
|
|
1,082
|
|
2.0%
|
|
13
|
______________________
Note: Table excludes extensions on portfolios
serviced for third parties
We view these results
as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2012, 61.0%
were either paid in full or active and performing at June 30, 2017. Each of these successful accounts represent continued payments
of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred
a substantial loss and no interest revenue subsequent to the extension.
For the extension accounts
that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially
successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on
average, 17 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account
with additional payments of principal and interest.
Additional information
about our extensions is provided in the tables below:
|
|
Six Months Ended June 30,
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of extensions granted per month
|
|
|
9,598
|
|
|
|
5,274
|
|
|
|
6,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of outstanding accounts
|
|
|
172,121
|
|
|
|
158,035
|
|
|
|
163,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly extensions as % of average outstandings
|
|
|
5.6%
|
|
|
|
3.3%
|
|
|
|
4.1%
|
|
______________________
Note: Table excludes portfolios originated
and owned by third parties
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
December 31, 2016
|
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension
|
|
|
34,055
|
|
|
$
|
464,795
|
|
|
|
29,793
|
|
|
$
|
404,497
|
|
|
|
36,030
|
|
|
$
|
501,572
|
|
Contracts with two extensions
|
|
|
22,108
|
|
|
|
307,357
|
|
|
|
13,942
|
|
|
|
187,305
|
|
|
|
17,800
|
|
|
|
242,216
|
|
Contracts with three extensions
|
|
|
12,130
|
|
|
|
165,846
|
|
|
|
6,267
|
|
|
|
82,626
|
|
|
|
8,794
|
|
|
|
116,929
|
|
Contracts with four extensions
|
|
|
6,247
|
|
|
|
83,349
|
|
|
|
2,423
|
|
|
|
30,826
|
|
|
|
4,032
|
|
|
|
52,368
|
|
Contracts with five extensions
|
|
|
2,846
|
|
|
|
36,404
|
|
|
|
693
|
|
|
|
8,346
|
|
|
|
1,426
|
|
|
|
17,190
|
|
Contracts with six extensions
|
|
|
1,072
|
|
|
|
12,303
|
|
|
|
139
|
|
|
|
1,626
|
|
|
|
397
|
|
|
|
4,545
|
|
|
|
|
78,458
|
|
|
$
|
1,070,054
|
|
|
|
53,257
|
|
|
$
|
715,226
|
|
|
|
68,479
|
|
|
$
|
934,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed portfolio (excluding originated and owned by 3rd parties)
|
|
|
173,597
|
|
|
$
|
2,343,297
|
|
|
|
164,392
|
|
|
$
|
2,253,686
|
|
|
|
169,720
|
|
|
$
|
2,308,058
|
|
________________________
Note: Table excludes portfolios originated
and owned by third parties
Non-Accrual Receivables
It
is not uncommon for our obligors to fall behind in their payments. However, with the diligent efforts of our Servicing staff and
systems for managing our collection efforts, we regularly work with our customers to resolve delinquencies. Our staff are trained
to employ a counseling approach to assist our customers with their cash flow management skills and help them to prioritize their
payment obligations in order to avoid losing their vehicle to repossession. Through our experience, we have learned that once a
customer becomes greater than 90 days past due, it is not likely that the delinquency will be resolved and will ultimately result
in a charge-off. As a result, we do not recognize any interest income for contracts that are greater than 90 days past due.
If
a contract exceeds the 90 days past due threshold at the end of one period, and then makes the necessary payments such that it
becomes less than or equal to 90 days delinquent at the end of a subsequent period, it would be restored to full accrual status
for our financial reporting purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance
that full repayment of interest and principal will ultimately be made. However, we monitor each obligor’s payment performance
and are aware of the severity of his delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold
is a positive indicator. Should the contract again exceed the 90-day delinquency level at the end of any reporting period, it would
again be reflected as a non-accrual account.
Our
policy for placing a contract on non-accrual status is independent of our policy to grant an extension. In practice, it would be
an uncommon circumstance where an extension was granted and the account remained in a non-accrual status, since the goal of the
extension is to bring the contract current (or nearly current).
Liquidity and Capital Resources
Our
business requires substantial cash to support our purchases of automobile contracts and other operating activities. Our primary
sources of cash have been cash flows from the proceeds from term securitization transactions and other sales of automobile contracts,
amounts borrowed under various revolving credit facilities (also sometimes known as warehouse credit facilities), customer payments
of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash from securitization
transactions and their related spread accounts. Our primary uses of cash have been the purchases of automobile contracts, repayment
of amounts borrowed under lines of credit, securitization transactions and otherwise, operating expenses such as employee, interest,
occupancy expenses and other general and administrative expenses, the establishment of spread accounts and initial overcollateralization,
if any, the increase of credit enhancement to required levels in securitization transactions, and income taxes. There can be no
assurance that internally generated cash will be sufficient to meet our cash demands. The sufficiency of internally generated cash
will depend on the performance of securitized pools (which determines the level of releases from those pools and their related
spread accounts), the rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to acquire
and borrow against automobile contracts.
Net cash provided by operating
activities for the six-month period ended June 30, 2017 was $114.7 million, an increase of $1.4 million, compared to net cash provided
by operating activities for the six-month period ended June 30, 2016 of $113.3 million. Cash provided by operating activities is
significantly affected by our net income before provisions for credit losses. For the six months ended June 30, 2017, our net income
excluding provisions for credit losses was $104.8 million, or $1.7 million more than our net income excluding provisions for credit
losses for the six months ended June 30, 2016.
Net cash used in investing
activities for the six-month period ended June 30, 2017 was $133.9 million compared to net cash used in investing activities of
$312.7 million in the prior year period. Cash provided by investing activities primarily results from principal payments and other
proceeds received on finance receivables held for investment. Cash used in investing activities generally relates to originations
of automobile contracts. Originations of finance receivables held for investment were $463.5 million and $631.4 million during
the first six months of 2017 and 2016, respectively.
Net cash provided by financing
activities for the six months ended June 30, 2017 was $21.1 million compared to net cash provided by financing activities of $195.8
million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization
trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines
of credit and other debt. In the first six months of 2017, we issued $431.5 million in new securitization trust debt compared to
$662.2 million in the same period of 2016. In addition, we repaid $430.8 million in securitization trust debt in the six months
ended June 30, 2017 compared to repayments of securitization trust debt of $424.2 million in the prior year period. In the six
months ended June 30, 2017, we had net advances on warehouse lines of credit of $28.0 million, compared to net repayments of $29.9
million in the prior year’s period.
We purchase automobile
contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may
either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over
a period of years. As a result, we have been dependent on warehouse credit facilities to purchase automobile contracts, and on
the availability of cash from outside sources in order to finance our continuing operations, as well as to fund the portion of
automobile contract purchase prices not financed under revolving warehouse credit facilities.
The acquisition of automobile
contracts for subsequent financing in securitization transactions, and the need to fund spread accounts and initial overcollateralization,
if any, and increase credit enhancement levels when those transactions take place, results in a continuing need for capital. The
amount of capital required is most heavily dependent on the rate of our automobile contract purchases, the required level of initial
credit enhancement in securitizations, and the extent to which the previously established trusts and their related spread accounts
either release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most subject
to our control is the rate at which we purchase automobile contracts.
We are and may in the future
be limited in our ability to purchase automobile contracts due to limits on our capital. As of June 30, 2017, we had unrestricted
cash of $15.8 million and $167.0 million aggregate available borrowings under our three warehouse credit facilities (assuming the
availability of sufficient eligible collateral). As of June 30, 2017, we had approximately $19.2 million of such eligible collateral.
During the six-month period ended June 30, 2017, we completed two securitizations aggregating $431.5 million of notes sold. Our
plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available
capital, and, as appropriate, minimizing our operating costs. If we are unable to complete such securitizations, we may be unable
to increase our rate of automobile contract purchases, in which case our interest income and other portfolio related income could
decrease.
Our liquidity will also
be affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics of
each spread account vary among transactions, our securitization agreements generally provide that we will receive excess cash flows,
if any, only if the amount of credit enhancement has reached specified levels and the delinquency or net losses related to the
automobile contracts in the pool are below certain predetermined levels. In the event delinquencies or net losses on the automobile
contracts exceed such levels, the terms of the securitization may require increased credit enhancement to be accumulated for the
particular pool. There can be no assurance that collections from the related trusts will continue to generate sufficient cash.
Our warehouse credit facilities
contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining
minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements
other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective
creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other
event of default were to be accompanied by acceleration of such other indebtedness. As of June 30, 2017, we were in compliance
with all such financial covenants.
We have and will continue
to have a substantial amount of indebtedness. At June 30, 2017, we had approximately $2,229.3 million of debt outstanding. Such
debt consisted primarily of $2,082.0 million of securitization trust debt and $131.3 million of warehouse lines of credit. Our
securitization trust debt has increased by $125.4 million while our warehouse lines of credit have decreased by $33.8 million since
June 30, 2016 (each net of deferred financing costs). As of June 30, 2016, our debt included $8.3 million of residual interest
financing which was repaid in full in November 2016. Since 2005, we have offered renewable subordinated notes to the public on
a continuous basis, and such notes have maturities that range from six months to 10 years. We had $16.1 million and $15.3 million
in subordinated renewable notes outstanding at June 30, 2017 and 2016, respectively.
Our recent operating results
include pre-tax earnings of $15.7 million for the six months ended June 30, 2017 and $49.7 million, $61.4 million, $52.2 million,
$37.2 million and $9.2 for the years ended December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December
31, 2012, respectively. Those periods were preceded by pre-tax losses of $14.5 million and $16.2 million in 2011 and 2010, respectively.
We believe that our 2011 and 2010 results were materially and adversely affected by the disruption in the capital markets that
began in the fourth quarter of 2007, by the recession that began in December 2007, and by related high levels of unemployment.
Although we believe we
are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations
do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we
fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt
or equity securities.
Forward
Looking Statements
This report on Form 10-Q
includes certain “forward-looking statements.” Forward-looking statements may be identified by the use of words such
as “anticipates,” “expects,” “plans,” “estimates,” or words of like meaning. Our
provision for credit losses is a forward-looking statement, as it is dependent on our estimates as to future chargeoffs and recovery
rates. Factors that could affect charge-offs and recovery rates include changes in the general economic climate, which could affect
the willingness or ability of obligors to pay pursuant to the terms of automobile contracts, changes in laws respecting consumer
finance, which could affect our ability to enforce rights under automobile contracts, and changes in the market for used vehicles,
which could affect the levels of recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current
year include the levels of cash releases from existing pools of automobile contracts, which would affect our ability to purchase
automobile contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell automobile contracts
to us on the terms that we offer, and the terms on which and whether we are able to complete term securitizations once automobile
contracts are acquired. Factors that could affect our expenses in the current year include competitive conditions in the market
for qualified personnel and interest rates (which affect the rates that we pay on notes issued in our securitizations).