Item 1.
Financial
Statements
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands, except share and per
share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,537
|
|
|
$
|
12,731
|
|
Restricted cash and equivalents
|
|
|
110,473
|
|
|
|
111,965
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
1,697,841
|
|
|
|
2,304,984
|
|
Less: Allowance for finance credit losses
|
|
|
(82,472
|
)
|
|
|
(109,187
|
)
|
Finance receivables, net
|
|
|
1,615,369
|
|
|
|
2,195,797
|
|
|
|
|
|
|
|
|
|
|
Finance receivables measured at fair value
|
|
|
614,807
|
|
|
|
–
|
|
Furniture and equipment, net
|
|
|
1,801
|
|
|
|
1,752
|
|
Deferred tax assets, net
|
|
|
28,686
|
|
|
|
32,446
|
|
Accrued interest receivable
|
|
|
36,232
|
|
|
|
46,753
|
|
Other assets
|
|
|
25,665
|
|
|
|
23,397
|
|
|
|
$
|
2,443,570
|
|
|
$
|
2,424,841
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
33,324
|
|
|
$
|
28,715
|
|
Warehouse lines of credit
|
|
|
127,695
|
|
|
|
112,408
|
|
Residual interest financing
|
|
|
39,013
|
|
|
|
–
|
|
Securitization trust debt
|
|
|
2,034,281
|
|
|
|
2,083,215
|
|
Subordinated renewable notes
|
|
|
16,948
|
|
|
|
16,566
|
|
|
|
|
2,251,261
|
|
|
|
2,240,904
|
|
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; 22,656,075 and 21,488,589 shares
issued and outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
70,444
|
|
|
|
71,582
|
|
Retained earnings
|
|
|
129,047
|
|
|
|
119,537
|
|
Accumulated other comprehensive loss
|
|
|
(7,182
|
)
|
|
|
(7,182
|
)
|
|
|
|
192,309
|
|
|
|
183,937
|
|
|
|
$
|
2,443,570
|
|
|
$
|
2,424,841
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
93,617
|
|
|
$
|
107,014
|
|
|
$
|
291,535
|
|
|
$
|
319,074
|
|
Other income
|
|
|
2,014
|
|
|
|
2,474
|
|
|
|
7,022
|
|
|
|
8,084
|
|
|
|
|
95,631
|
|
|
|
109,488
|
|
|
|
298,557
|
|
|
|
327,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
18,806
|
|
|
|
18,455
|
|
|
|
59,288
|
|
|
|
53,807
|
|
General and administrative
|
|
|
7,784
|
|
|
|
6,355
|
|
|
|
22,730
|
|
|
|
20,096
|
|
Interest
|
|
|
25,808
|
|
|
|
23,317
|
|
|
|
75,057
|
|
|
|
68,641
|
|
Provision for credit losses
|
|
|
31,959
|
|
|
|
47,336
|
|
|
|
107,997
|
|
|
|
143,053
|
|
Marketing
|
|
|
4,377
|
|
|
|
3,807
|
|
|
|
13,176
|
|
|
|
11,757
|
|
Occupancy
|
|
|
1,935
|
|
|
|
1,865
|
|
|
|
5,644
|
|
|
|
5,258
|
|
Depreciation and amortization
|
|
|
256
|
|
|
|
244
|
|
|
|
746
|
|
|
|
692
|
|
|
|
|
90,925
|
|
|
|
101,379
|
|
|
|
284,638
|
|
|
|
303,304
|
|
Income before income tax expense
|
|
|
4,706
|
|
|
|
8,109
|
|
|
|
13,919
|
|
|
|
23,854
|
|
Income tax expense
|
|
|
1,508
|
|
|
|
3,446
|
|
|
|
4,409
|
|
|
|
10,138
|
|
Net income
|
|
$
|
3,198
|
|
|
$
|
4,663
|
|
|
$
|
9,510
|
|
|
$
|
13,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
0.44
|
|
|
$
|
0.60
|
|
Diluted
|
|
|
0.13
|
|
|
|
0.17
|
|
|
|
0.38
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,636
|
|
|
|
22,473
|
|
|
|
21,800
|
|
|
|
23,019
|
|
Diluted
|
|
|
24,735
|
|
|
|
26,779
|
|
|
|
25,178
|
|
|
|
27,606
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,198
|
|
|
$
|
4,663
|
|
|
$
|
9,510
|
|
|
$
|
13,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss); change in funded status of pension plan
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Comprehensive income
|
|
$
|
3,198
|
|
|
$
|
4,663
|
|
|
$
|
9,510
|
|
|
$
|
13,716
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME/(LOSS)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,510
|
|
|
$
|
13,716
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Accretion of deferred acquisition fees and origination costs
|
|
|
2,119
|
|
|
|
619
|
|
Net interest income accretion on fair value receivables
|
|
|
13,010
|
|
|
|
–
|
|
Depreciation and amortization
|
|
|
746
|
|
|
|
692
|
|
Amortization of deferred financing costs
|
|
|
6,430
|
|
|
|
6,559
|
|
Provision for credit losses
|
|
|
107,997
|
|
|
|
143,053
|
|
Stock-based compensation expense
|
|
|
2,816
|
|
|
|
4,266
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
10,521
|
|
|
|
(5,915
|
)
|
Deferred tax assets, net
|
|
|
3,760
|
|
|
|
(4,807
|
)
|
Other assets
|
|
|
(2,892
|
)
|
|
|
5,784
|
|
Accounts payable and accrued expenses
|
|
|
4,609
|
|
|
|
4,285
|
|
Net cash provided by operating activities
|
|
|
158,626
|
|
|
|
168,252
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of finance receivables held for investment
|
|
|
–
|
|
|
|
(668,284
|
)
|
Payments received on finance receivables held for investment
|
|
|
470,312
|
|
|
|
487,869
|
|
Purchases of finance receivables measured at fair value
|
|
|
(659,641
|
)
|
|
|
–
|
|
Payments received on finance receivables at fair value
|
|
|
31,824
|
|
|
|
4
|
|
Change in repossessions held in inventory
|
|
|
624
|
|
|
|
1,961
|
|
Purchase of furniture and equipment
|
|
|
(795
|
)
|
|
|
(585
|
)
|
Net cash used in investing activities
|
|
|
(157,676
|
)
|
|
|
(179,035
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of securitization trust debt
|
|
|
622,098
|
|
|
|
656,315
|
|
Proceeds from issuance of subordinated renewable notes
|
|
|
2,226
|
|
|
|
2,793
|
|
Payments on subordinated renewable notes
|
|
|
(1,844
|
)
|
|
|
(1,513
|
)
|
Net advances of warehouse lines of credit
|
|
|
15,005
|
|
|
|
2,951
|
|
Net advances of residual interest financing debt
|
|
|
40,000
|
|
|
|
–
|
|
Repayment of securitization trust debt
|
|
|
(671,700
|
)
|
|
|
(634,171
|
)
|
Payment of financing costs
|
|
|
(6,467
|
)
|
|
|
(5,713
|
)
|
Purchase of common stock
|
|
|
(4,437
|
)
|
|
|
(10,536
|
)
|
Exercise of options and warrants
|
|
|
483
|
|
|
|
1,031
|
|
Net cash provided by (used in) financing activities
|
|
|
(4,636
|
)
|
|
|
11,157
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(3,686
|
)
|
|
|
374
|
|
Cash and restricted cash at
beginning of period
|
|
|
124,696
|
|
|
|
126,690
|
|
Cash and restricted cash at end of period
|
|
$
|
121,010
|
|
|
$
|
127,064
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
68,042
|
|
|
$
|
61,756
|
|
Income taxes
|
|
$
|
7,256
|
|
|
$
|
6,157
|
|
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) lent money directly
to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated
lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer
to all of such contracts and loans as "automobile contracts."
Basis of Presentation
Our Unaudited Condensed Consolidated Financial
Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with
the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all
adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented.
All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the nine month period ended September
30, 2018 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, 2017.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of income and expenses during the reported periods.
Finance Receivables
Measured at Fair Value
Effective January 1, 2018, we adopted
the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable
acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the
cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired
in the past. We then compute the internal rate of return that results in the present value of those estimated cash
receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level
yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such
receivables is applied first against such interest income, and then to reduce the carrying value of the receivables.
We re-evaluate the fair value of such receivables
at the close of each measurement period. If the reevaluation were to yield a value materially different from the carrying value,
an adjustment would be required.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Anticipated credit losses are included
in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation
of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime
aggregate of credit losses is included in that initial computation. Also because we include anticipated credit losses in our computation
of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables.
Because our initial carrying value is fixed as the price we pay for the receivable, rather than as the contractual principal balance,
we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the
receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.
Other Income
The following table presents
the primary components of Other Income for the three-month and nine-month periods ending September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Direct mail revenues
|
|
$
|
1,328
|
|
|
$
|
1,628
|
|
|
$
|
4,833
|
|
|
$
|
5,261
|
|
Convenience fee revenue
|
|
|
360
|
|
|
|
430
|
|
|
|
1,200
|
|
|
|
1,510
|
|
Recoveries on previously charged-off contracts.
|
|
|
44
|
|
|
|
140
|
|
|
|
198
|
|
|
|
464
|
|
Sales tax refunds
|
|
|
220
|
|
|
|
224
|
|
|
|
658
|
|
|
|
636
|
|
Other
|
|
|
62
|
|
|
|
52
|
|
|
|
133
|
|
|
|
213
|
|
Other income for the period
|
|
$
|
2,014
|
|
|
$
|
2,474
|
|
|
$
|
7,022
|
|
|
$
|
8,084
|
|
On January 1, 2018, the Company adopted
Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The
majority of the Company’s revenues come from interest income which is outside the scope of ASC 606. The Company’s services
that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies
its obligation to the customer. Services within the scope of ASC 606 include revenue associated with direct mail and other related
products and services that we offer to our dealers.
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,
and allocated $4,071,429 of the aggregate consideration received in that transaction to the issuance of the warrants. The warrants
represented the right to purchase CPS common shares at a nominal exercise price. In March 2010 we repurchased the warrants for
500,000 of these shares for $1.0 million. Warrants to purchase 2,000,000 shares were outstanding as of December 31, 2017. All of
such warrants were exercised on July 10, 2018 and 1,999,995 net shares were issued to the holder, following surrender of five shares
in payment of the exercise price.
Stock-based Compensation
We recognize compensation costs in the
financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions
of ASC 718 “Stock Compensation”.
For the three and nine months ended September
30, 2018, we recorded stock-based compensation costs in the amount of $663,000 and $2.8 million, respectively. These stock-based
compensation costs were $1.7 million and $4.3 million for the three and nine months ended September 30, 2017. As of September 30,
2018, unrecognized stock-based compensation costs to be recognized over future periods equaled $4.3 million. This amount will be
recognized as expense over a weighted-average period of 2.2 years.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following represents stock option activity
for the nine months ended September 30, 2018:
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
Options outstanding at the beginning of period
|
|
|
13,135
|
|
|
$
|
4.66
|
|
|
N/A
|
Granted
|
|
|
1,700
|
|
|
|
3.49
|
|
|
N/A
|
Exercised
|
|
|
(315
|
)
|
|
|
1.53
|
|
|
N/A
|
Forfeited
|
|
|
(119
|
)
|
|
|
7.20
|
|
|
N/A
|
Options outstanding at the end of period
|
|
|
14,401
|
|
|
$
|
4.57
|
|
|
4.05 years
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of period
|
|
|
10,417
|
|
|
$
|
4.79
|
|
|
3.60 years
|
At September 30, 2018, the aggregate intrinsic
value of options outstanding and exercisable was $7.7 million and $7.2 million, respectively. There were 315,500 options exercised
for the nine months ended September 30, 2018 compared to 618,773 for the comparable period in 2017. The total intrinsic value of
options exercised was $869,000 and $1.8 million for the nine-month periods ended September 30, 2018 and 2017. There were 2,893,000
shares available for future stock option grants under existing plans as of September 30, 2018.
Purchases of Company Stock
The table below describes the purchase
of our common stock for the nine-month periods ended September 30, 2018 and 2017:
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
Shares
|
|
|
Avg. Price
|
|
Open market purchases
|
|
|
1,024,410
|
|
|
$
|
3.79
|
|
|
|
2,292,070
|
|
|
$
|
4.51
|
|
Shares redeemed upon net exercise of stock options
|
|
|
33,604
|
|
|
|
4.37
|
|
|
|
44,942
|
|
|
|
4.65
|
|
Other
|
|
|
90,000
|
|
|
|
4.13
|
|
|
|
–
|
|
|
|
–
|
|
Total stock purchases
|
|
|
1,148,014
|
|
|
$
|
3.84
|
|
|
|
2,337,012
|
|
|
$
|
4.51
|
|
Reclassifications
Some items in the prior year financial
statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or shareholders’
equity.
Financial Covenants
Certain of our securitization transactions,
our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial
ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage
levels. As of September 30, 2018, 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.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Provision for Contingent
Liabilities
We are routinely involved
in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our
legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication
that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.
We record at each measurement
date, most recently as of September 30, 2018, our best estimate of probable incurred losses for legal contingencies. The amount
of losses that may ultimately be incurred cannot be estimated with certainty.
Adoption of New Accounting
Standards
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase
transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about
leasing arrangements. We will adopt ASU 2016-02 effective January 1, 2019 utilizing the modified retrospective transition method.
The Company is currently evaluating the impact of adopting ASU 2016-20.
(2)
Finance Receivables
Our portfolio of finance
receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated
for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a
homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively
little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater
than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments
to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first
applied to accrued interest and then to principal reduction.
In January 2018 the
Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at
fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote.
The following table
presents the components of Finance Receivables, net of unearned interest:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Finance receivables
|
|
|
|
|
|
|
|
|
Automobile finance receivables, net of unearned interest
|
|
$
|
1,693,584
|
|
|
$
|
2,298,608
|
|
Unearned acquisition fees and originations costs.
|
|
|
4,257
|
|
|
|
6,376
|
|
Finance receivables
|
|
$
|
1,697,841
|
|
|
$
|
2,304,984
|
|
CONSUMER PORTFOLIO SERVICES, INC.
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 September 30, 2018 and December 31, 2017:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,475,029
|
|
|
$
|
2,069,617
|
|
31 - 60 days
|
|
|
132,030
|
|
|
|
138,395
|
|
61 - 90 days.
|
|
|
58,667
|
|
|
|
63,081
|
|
91 + days
|
|
|
27,858
|
|
|
|
27,515
|
|
|
|
$
|
1,693,584
|
|
|
$
|
2,298,608
|
|
Finance receivables
totaling $27.9 million and $27.5 million at September 30, 2018 and December 31, 2017, 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 nine-month periods ended
September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
94,376
|
|
|
$
|
107,315
|
|
|
$
|
109,187
|
|
|
$
|
95,578
|
|
Provision for credit losses on finance receivables
|
|
|
31,959
|
|
|
|
47,336
|
|
|
|
107,997
|
|
|
|
143,053
|
|
Charge-offs
|
|
|
(54,033
|
)
|
|
|
(53,628
|
)
|
|
|
(163,628
|
)
|
|
|
(152,401
|
)
|
Recoveries
|
|
|
10,170
|
|
|
|
7,596
|
|
|
|
28,916
|
|
|
|
22,389
|
|
Balance at end of period
|
|
$
|
82,472
|
|
|
$
|
108,619
|
|
|
$
|
82,472
|
|
|
$
|
108,619
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Excluded from finance
receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because
we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together
with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Gross balance of repossessions in inventory
|
|
$
|
32,323
|
|
|
$
|
33,679
|
|
Allowance for losses on repossessed inventory
|
|
|
(23,292
|
)
|
|
|
(24,024
|
)
|
Net repossessed inventory included in other assets
|
|
$
|
9,031
|
|
|
$
|
9,655
|
|
(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
|
|
September 30,
|
|
|
Initial
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
Series
|
|
|
Date (1)
|
|
2018 (2)
|
|
|
Principal
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
CPS 2013-B
|
|
|
September 2020
|
|
|
–
|
|
|
|
205,000
|
|
|
|
–
|
|
|
|
18,407
|
|
|
|
–
|
|
|
CPS 2013-C
|
|
|
December 2020
|
|
|
–
|
|
|
|
205,000
|
|
|
|
–
|
|
|
|
25,559
|
|
|
|
–
|
|
|
CPS 2013-D
|
|
|
March 2021
|
|
|
–
|
|
|
|
183,000
|
|
|
|
–
|
|
|
|
24,917
|
|
|
|
–
|
|
|
CPS 2014-A
|
|
|
June 2021
|
|
|
20,652
|
|
|
|
180,000
|
|
|
|
18,447
|
|
|
|
30,521
|
|
|
|
5.01%
|
|
|
CPS 2014-B
|
|
|
September 2021
|
|
|
30,370
|
|
|
|
202,500
|
|
|
|
28,542
|
|
|
|
44,516
|
|
|
|
4.23%
|
|
|
CPS 2014-C
|
|
|
December 2021
|
|
|
49,690
|
|
|
|
273,000
|
|
|
|
47,685
|
|
|
|
71,174
|
|
|
|
4.41%
|
|
|
CPS 2014-D
|
|
|
March 2022
|
|
|
55,838
|
|
|
|
267,500
|
|
|
|
53,711
|
|
|
|
79,099
|
|
|
|
4.74%
|
|
|
CPS 2015-A
|
|
|
June 2022
|
|
|
62,557
|
|
|
|
245,000
|
|
|
|
60,077
|
|
|
|
87,194
|
|
|
|
4.27%
|
|
|
CPS 2015-B
|
|
|
September 2022
|
|
|
74,678
|
|
|
|
250,000
|
|
|
|
73,012
|
|
|
|
102,873
|
|
|
|
4.26%
|
|
|
CPS 2015-C
|
|
|
December 2022
|
|
|
103,397
|
|
|
|
300,000
|
|
|
|
102,156
|
|
|
|
141,362
|
|
|
|
4.73%
|
|
|
CPS 2016-A
|
|
|
March 2023
|
|
|
135,737
|
|
|
|
329,460
|
|
|
|
133,612
|
|
|
|
180,761
|
|
|
|
4.99%
|
|
|
CPS 2016-B
|
|
|
June 2023
|
|
|
153,931
|
|
|
|
332,690
|
|
|
|
149,522
|
|
|
|
201,199
|
|
|
|
5.19%
|
|
|
CPS 2016-C
|
|
|
September 2023
|
|
|
154,934
|
|
|
|
318,500
|
|
|
|
151,409
|
|
|
|
203,504
|
|
|
|
4.85%
|
|
|
CPS 2016-D
|
|
|
April 2024
|
|
|
117,334
|
|
|
|
206,325
|
|
|
|
114,540
|
|
|
|
149,671
|
|
|
|
3.64%
|
|
|
CPS 2017-A
|
|
|
April 2024
|
|
|
127,389
|
|
|
|
206,320
|
|
|
|
124,560
|
|
|
|
161,892
|
|
|
|
3.79%
|
|
|
CPS 2017-B
|
|
|
December 2023
|
|
|
153,829
|
|
|
|
225,170
|
|
|
|
140,756
|
|
|
|
186,594
|
|
|
|
3.27%
|
|
|
CPS 2017-C
|
|
|
September 2024
|
|
|
156,928
|
|
|
|
224,825
|
|
|
|
146,720
|
|
|
|
197,155
|
|
|
|
3.19%
|
|
|
CPS 2017-D
|
|
|
June 2024
|
|
|
155,682
|
|
|
|
196,300
|
|
|
|
146,842
|
|
|
|
189,277
|
|
|
|
3.00%
|
|
|
CPS 2018-A
|
|
|
March 2025
|
|
|
164,281
|
|
|
|
190,000
|
|
|
|
154,758
|
|
|
|
–
|
|
|
|
3.05%
|
|
|
CPS 2018-B
|
|
|
December 2024
|
|
|
188,338
|
|
|
|
201,823
|
|
|
|
180,508
|
|
|
|
–
|
|
|
|
3.52%
|
|
|
CPS 2018-C
|
|
|
September 2025
|
|
|
229,241
|
|
|
|
230,275
|
|
|
|
219,216
|
|
|
|
–
|
|
|
|
3.60%
|
|
|
|
|
|
|
|
$
|
2,134,806
|
|
|
$
|
4,972,688
|
|
|
$
|
2,046,073
|
|
|
$
|
2,095,675
|
|
|
|
|
|
_
________
(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 $233.8 million in 2018, $853.1 million in 2019, $527.2 million
in 2020, $272.2 million in 2021, $112.5 million in 2022, $35.5 million in 2023.
|
(2)
|
Includes
repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated
Balance Sheet.
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Debt issuance costs of
$11.8 million and $12.5 million as of September 30, 2018 and December 31, 2017, respectively, have been excluded from the table
above. These debt issuance costs are presented as a direct deduction to the carrying amount of the securitization trust debt on
our Unaudited Condensed Consolidated Balance Sheets.
All of the securitization
trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned
bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets.
The terms of the securitization
agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain
delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain
minimum levels of liquidity and not exceed maximum leverage levels. As of September 30, 2018, we were in compliance with all such
covenants.
We are responsible for
the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held
in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization
trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of September
30, 2018, restricted cash under the various agreements totaled approximately $110.5 million. Interest expense on the securitization
trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing
include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts
on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost
of the securitization trust debt is greater than the contractual rate of interest disclosed above.
Our wholly-owned bankruptcy remote subsidiaries
were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt
outstanding under our credit facilities. Bankruptcy remote refers to a legal structure in which it is expected that the applicable
entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have
been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes,
are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries
are available to pay other creditors.
On October 17, 2018 we completed our fourth
securitization transaction of 2018. In the transaction, qualified institutional buyers purchased $233.7 million of asset-backed
notes secured by $245 million in automobile receivables purchased by us. The sold notes, issued by CPS Auto Receivables Trust 2018-D,
consist of five classes. Ratings of the notes were provided by Standard & Poor’s and Kroll Bond Rating Agency, and were
based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer.
The weighted average yield on the notes is approximately 4.25%.
(4)
Debt
The terms and amounts
of our other debt outstanding at September 30, 2018 and December 31, 2017 are summarized below:
|
|
|
|
|
|
Amount Outstanding at
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
(In thousands)
|
|
Description
|
|
Interest Rate
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
5.50% over one month Libor (Minimum 6.50%)
|
|
April 2019
|
|
$
|
79,438
|
|
|
$
|
25,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00% over one month Libor (Minimum 4.5%)
|
|
September 2020
|
|
|
38,241
|
|
|
|
77,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% over a commercial paper rate (Minimum 7.75%)
|
|
November 2019
|
|
|
11,599
|
|
|
|
11,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest financing
|
|
8.60%
|
|
January 2026
|
|
|
40,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated renewable notes
|
|
Weighted average rate of 8.31% and 7.99% at September 30, 2018 and December 31, 2017,
respectively
|
|
Weighted average maturity of August 2020 and March 2020 at September 30, 2018 and December 31,
2017, respectively
|
|
|
16,948
|
|
|
|
16,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,226
|
|
|
$
|
130,841
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On September 21, 2018, we renewed our $100
million warehouse credit line that was first established in May 2012. There was $38.2 million outstanding under this facility at
September 30, 2018. The revolving period for this facility was extended to September 2020 followed by an amortization period through
September 2021 for any receivables pledged at the end of the revolving period.
On May 16, 2018, we completed a $40 million
securitization of residual interests from previously issued securitizations. In this residual interest financing transaction, qualified
institutional buyers purchased $40.0 million of asset-backed notes secured by residual interests in thirteen CPS securitizations
consecutively conducted from September 2013 through December 2016, and an 80% interest in a CPS affiliate that owns the residual
interests in the four CPS securitizations conducted in 2017. The sold notes (“2018-1 Notes”), issued by CPS Auto Securitization
Trust 2018-1, consist of a single class with a coupon of 8.595%.
The agreed valuation of the collateral
for the 2018-1 Notes is the sum of the amounts on deposit in the underlying spread accounts for each related securitization and
the over-collateralization of each related securitization, which is the difference between the outstanding principal balances of
the related receivables less the principal balance of the outstanding notes issued in the related securitization. With respect
to the securitizations conducted by CPS in 2017, only 80% of such amounts are included in the collateral. On each monthly payment
date, the 2018-1 Notes are entitled to interest at the coupon rate and, if necessary, a principal payment necessary to maintain
a specified minimum collateral ratio.
Unamortized debt issuance costs of $987,000
have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of
$1.6 million and $1.9 million as of September 30, 2018 and December 31, 2017, respectively, have been excluded from the Warehouse
lines of credit amounts in the table above. These debt issuance costs are presented as a direct deduction to the carrying amount
of the debt on our Unaudited Condensed Consolidated Balance Sheets.
(5)
Interest Income and Interest Expense
The following table presents the components
of interest income:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Interest on finance receivables
|
|
$
|
79,573
|
|
|
$
|
106,830
|
|
|
$
|
264,545
|
|
|
$
|
318,670
|
|
Interest on finance receivables at fair value
|
|
|
13,482
|
|
|
|
–
|
|
|
|
25,822
|
|
|
|
–
|
|
Other interest income
|
|
|
562
|
|
|
|
184
|
|
|
|
1,168
|
|
|
|
404
|
|
Interest income
|
|
$
|
93,617
|
|
|
$
|
107,014
|
|
|
$
|
291,535
|
|
|
$
|
319,074
|
|
The following table
presents the components of interest expense:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Securitization trust debt
|
|
$
|
22,678
|
|
|
$
|
20,973
|
|
|
$
|
66,762
|
|
|
$
|
61,589
|
|
Warehouse lines of credit
|
|
|
1,827
|
|
|
|
1,994
|
|
|
|
5,850
|
|
|
|
6,081
|
|
Residual interest financing
|
|
|
936
|
|
|
|
–
|
|
|
|
1,387
|
|
|
|
–
|
|
Subordinated renewable notes
|
|
|
367
|
|
|
|
350
|
|
|
|
1,058
|
|
|
|
971
|
|
Interest expense
|
|
$
|
25,808
|
|
|
$
|
23,317
|
|
|
$
|
75,057
|
|
|
$
|
68,641
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(6)
Earnings Per Share
Earnings per share for
the three-month and nine-month periods ended September 30, 2018 and 2017 were calculated using the weighted average number of shares
outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted
earnings per share for the three-month and nine-month periods ended September 30, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Weighted average number of common shares outstanding during the period used to compute basic earnings per share
|
|
|
22,636
|
|
|
|
22,473
|
|
|
|
21,800
|
|
|
|
23,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to exercise of outstanding options and warrants
|
|
|
2,099
|
|
|
|
4,306
|
|
|
|
3,378
|
|
|
|
4,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used to compute diluted earnings per share
|
|
|
24,735
|
|
|
|
26,779
|
|
|
|
25,178
|
|
|
|
27,606
|
|
If the anti-dilutive
effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month
and nine-month periods ended September 30, 2018 would have included an additional 11.0 million and 10.1 million shares, respectively,
attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30,
2017, an additional 9.7 million and 7.3 million shares, respectively, would be included in the diluted earnings per share calculation.
(7)
Income Taxes
We file numerous consolidated
and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S.
federal, state, or local examinations by tax authorities for years before 2013.
As of September 30, 2018
and December 31, 2017, 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 $28.7
million as of September 30, 2018 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of
$28.7 million consists of approximately $19.9 million of net U.S. federal deferred tax assets and $8.8 million of net state deferred
tax assets.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Income tax expense
was $1.5 million and $4.4 million for the three months and nine months ended September 30, 2018 and represents an effective income
tax rate of 32%, compared to income tax expense of $3.4 million and $10.1 million for the three and nine months ended September
30, 2017, and represents an effective income tax rate of and 43%.
(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
Industry Inquiry.
In January 2015, we were served with a subpoena by the U.S. Department of Justice (the “DOJ”)
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 DOJ in contemplation of a civil proceeding
for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The DOJ in its investigation
requested information relating, among other matters, to the underwriting criteria used to originate these automobile contracts
and to the representations and warranties relating to those underwriting criteria that were made in connection with the securitization
of the automobile contracts. We are among several other securitizers of sub-prime automobile receivables who received such subpoenas
in 2014, 2015 and 2016. We have provided the required information, and we were advised by the DOJ in February 2018 that no further
information is required of us and that no enforcement action is recommended.
Although the inquiry
commenced January 2015 is thus completed as to us, no assurance can be given as to whether some other government agency may commence
inquiries into or actions against us, nor as to whether the DOJ may recommence its investigation, any of which hypothetical proceedings
might materially and adversely affect us.
In General
.
There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date,
most recently as of September 30, 2018, our best estimate of probable incurred losses for legal contingencies, including each of
the matters described or referenced above. The amount of losses that may ultimately be incurred cannot be estimated with certainty.
However, based on such information as is available to us, we believe that the total of probable incurred losses for legal contingencies
as of September 30, 2018 is immaterial, and that the range of reasonably possible losses for the legal proceedings and contingencies
we face, including those described or referenced above, as of September 30, 2018 does not exceed $3 million.
Accordingly, we believe
that the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our consolidated
financial condition. We note, however, that in light of the uncertainties inherent in contested proceedings, the wide discretion
vested in the DOJ 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 nine-month periods ended September 30, 2018 and 2017.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Components of net periodic cost (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Interest cost
|
|
|
194
|
|
|
|
214
|
|
|
|
582
|
|
|
|
642
|
|
Expected return on assets
|
|
|
(291
|
)
|
|
|
(287
|
)
|
|
|
(873
|
)
|
|
|
(861
|
)
|
Amortization of transition (asset)/obligation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Amortization of net (gain) / loss
|
|
|
111
|
|
|
|
101
|
|
|
|
333
|
|
|
|
303
|
|
Net periodic cost (benefit)
|
|
$
|
14
|
|
|
$
|
28
|
|
|
$
|
42
|
|
|
$
|
84
|
|
We did not make any contributions to the
Plan during the three-month period ended September 30, 2017. We made a contribution in the amount of $1.0 million during the three-month
period ended September 30, 2018. We do not anticipate making any contributions for the remainder of 2018.
(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.
Effective January 2018
we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter.
Our valuation policies
and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with
outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and
include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes
an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available
third-party information such as broker quotes or pricing services available to assist us in our valuation process.
Our level 3, unobservable
inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based
on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net
charge-offs and the rate of amortization of the portfolio of finance receivable.
Significant changes
in any of those inputs in isolation would have a significant impact on our fair value measurement.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The table below presents
a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
412,895
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Finance receivables at fair value acquired during period
|
|
|
229,030
|
|
|
|
–
|
|
|
|
659,641
|
|
|
|
–
|
|
Payments received on finance receivables at fair value
|
|
|
(18,851
|
)
|
|
|
–
|
|
|
|
(31,824
|
)
|
|
|
–
|
|
Net interest income accretion on fair value receivables
|
|
|
(8,267
|
)
|
|
|
–
|
|
|
|
(13,010
|
)
|
|
|
–
|
|
Mark to fair value
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance at end of period
|
|
$
|
614,807
|
|
|
$
|
–
|
|
|
$
|
614,807
|
|
|
$
|
–
|
|
The table below compares
the fair values of these finance receivables to their contractual balances for the periods shown:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Contractual
|
|
|
Fair
|
|
|
Contractual
|
|
|
Fair
|
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables measured at fair value
|
|
$
|
614,578
|
|
|
$
|
614,807
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The following table
provides certain qualitative information about our level 3 fair value measurements:
Financial Instrument
|
|
Fair Values as of
|
|
|
|
|
Inputs as of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
S
eptember 30,
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
Unobservable Inputs
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables measured at fair value
|
|
$
|
614,807
|
|
|
$
|
–
|
|
|
Discount rate
|
|
8.9% - 10.7%
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net losses
|
|
15% - 16%
|
|
|
n/a
|
|
The following table
summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2018 and December 31,
2017:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
595,920
|
|
|
$
|
–
|
|
31 - 60 days
|
|
|
12,812
|
|
|
|
–
|
|
61 - 90 days
|
|
|
3,975
|
|
|
|
–
|
|
91 + days
|
|
|
1,871
|
|
|
|
–
|
|
|
|
$
|
614,578
|
|
|
$
|
–
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Repossessed vehicle
inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using
level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At September 30, 2018 the finance receivables
related to the repossessed vehicles in inventory totaled $32.3 million. We have applied a valuation adjustment, or loss allowance,
of $23.3 million, which is based on a recovery rate of approximately 28%, resulting in an estimated fair value and carrying amount
of $9.0 million. The fair value and carrying amount of the repossessed inventory at December 31, 2017 was $9.7 million after applying
a valuation adjustment of $24.0 million.
There were no transfers
in or out of level 1 or level 2 assets and liabilities for the three months ended September 30, 2018 and 2017. 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 September 30, 2018 and December 31, 2017, were as follows:
|
|
As of September 30, 2018
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
10,537
|
|
Restricted cash and equivalents
|
|
|
110,473
|
|
|
|
110,473
|
|
|
|
–
|
|
|
|
–
|
|
|
|
110,473
|
|
Finance receivables, net
|
|
|
1,615,369
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,620,076
|
|
|
|
1,620,076
|
|
Finance receivables measured at fair value
|
|
|
614,807
|
|
|
|
–
|
|
|
|
–
|
|
|
|
614,807
|
|
|
|
614,807
|
|
Accrued interest receivable
|
|
|
36,232
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,232
|
|
|
|
36,232
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
127,695
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
127,695
|
|
|
$
|
127,695
|
|
Accrued interest payable
|
|
|
4,797
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,797
|
|
|
|
4,797
|
|
Securitization trust debt
|
|
|
2,034,281
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,033,598
|
|
|
|
2,033,598
|
|
Subordinated renewable notes
|
|
|
16,948
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,948
|
|
|
|
16,948
|
|
|
|
As of December 31, 2017
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,731
|
|
|
$
|
12,731
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
12,731
|
|
Restricted cash and equivalents
|
|
|
111,965
|
|
|
|
111,965
|
|
|
|
–
|
|
|
|
–
|
|
|
|
111,965
|
|
Finance receivables, net
|
|
|
2,195,797
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,171,846
|
|
|
|
2,171,846
|
|
Accrued interest receivable
|
|
|
46,753
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46,753
|
|
|
|
46,753
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
112,408
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
112,408
|
|
|
$
|
112,408
|
|
Accrued interest payable
|
|
|
4,212
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,212
|
|
|
|
4,212
|
|
Securitization trust debt
|
|
|
2,083,215
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,089,678
|
|
|
|
2,089,678
|
|
Subordinated renewable notes
|
|
|
16,566
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,566
|
|
|
|
16,566
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 September 30, 2018 and December 31, 2017, 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 discount rates at which similar receivables
could be sold.
Finance Receivables Measured at
Fair Value
The carrying value
equals fair value.
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 September 30, 2018, we have originated a total of approximately
$15.0 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser
degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately
$822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and, 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
|
|
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
|
|
2017
|
|
|
859,069
|
|
|
|
2,333,530
|
|
Nine months ended September 30, 2018
|
|
|
650,583
|
|
|
|
2,342,889
|
|
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, and (ii) recognize interest expense on the securities issued in the transaction.
For automobile contracts acquired before 2018, we also periodically record as expense a provision for credit losses on the contracts;
for automobile contracts acquired after 2017 we take account of estimated credit losses in our computation of a level yield used
to determine recognition of interest on the contracts.
Since 1994 we have
conducted 79 term securitizations of automobile contracts that we originated. As of September 30, 2018, 18 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 recent history of
term securitizations is summarized in the table below:
Recent Asset-Backed Term Securitizations
|
|
|
$
in thousands
|
Period
|
|
Number of
Term
Securitizations
|
|
Receivables
Pledged in Term
Securitizations
|
|
2012
|
|
4
|
|
$
|
603,500
|
|
2013
|
|
4
|
|
|
778,000
|
|
2014
|
|
4
|
|
|
923,000
|
|
2015
|
|
3
|
|
|
795,000
|
|
2016
|
|
4
|
|
|
1,214,997
|
|
2017
|
|
4
|
|
|
870,000
|
|
Nine months ended September 30, 2018
|
|
3
|
|
|
638,452
|
|
Generally, prior to a
securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities.
Our current short-term funding capacity is $300 million, comprising three credit facilities. The first $100 million credit facility
was established in May 2012. This facility was most recently renewed in September 2018, extending the revolving period to September
2020, with an optional amortization period through September 2021. In April 2015, we entered into a second $100 million facility.
This facility was renewed in April 2017, 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. This facility was renewed in November 2017, extending the
revolving period to November 2019, followed by an amortization period to November 2021.
In a securitization
and in our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar
to the representations and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach
any of our representations or warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal
balance plus accrued and unpaid interest. We may then be entitled under the terms of our dealer agreement to require the selling
dealer to repurchase the contract at a price equal to our purchase price, less any principal payments made by the customer. Subject
to any recourse against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts
that we repurchase.
In a securitization,
the related special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized
automobile contracts falls short of pre-determined standards. Such releases represent a material portion of the cash that we use
to fund our operations. An unexpected deterioration in the performance of securitized automobile contracts could therefore have
a material adverse effect on both our liquidity and results of operations.
Financial Covenants
Certain of our securitization
transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios
and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels.
In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default
provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness
of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of September
30, 2018, we were in compliance with all such covenants.
Results
of Operations
Comparison of Operating Results
for the three months ended September 30, 2018 with the three months ended September 30, 2017
Revenues
. During
the three months ended September 30, 2018, our revenues were $95.6 million, a decrease of $13.9 million, or 12.7%, from the prior
year revenue of $109.5 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income
for the three months ended September 30, 2018 decreased $13.4 million, or 12.5%, to $93.6 million from $107.0 million in the prior
year. The primary reason for the decrease in interest income is the lower interest yield on the receivables measured at fair value.
The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than
the yield on other finance receivables. The table below shows the average balances and interest yields of our loan portfolio for
the three months ended September 30, 2018 and 2017:
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
1,787,428
|
|
|
$
|
80,135
|
|
|
|
17.9%
|
|
|
$
|
2,344,965
|
|
|
$
|
107,014
|
|
|
|
18.3%
|
|
Finance receivables measured at fair value
|
|
|
547,468
|
|
|
|
13,482
|
|
|
|
9.9%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
2,334,896
|
|
|
$
|
93,617
|
|
|
|
16.0%
|
|
|
$
|
2,344,965
|
|
|
$
|
107,014
|
|
|
|
18.3%
|
|
In the three months ended September 30, 2018, other income of $2.0
million decreased by $460,000, or 18.6% compared to the prior year. The three-month period ended September 30, 2018 includes a
decrease of $300,000 in revenues associated with direct mail and other related products and services that we offer to our dealers,
a decrease of $70,000 in payments from third-party providers of convenience fees paid by our customers for web based and other
electronic payments, and a decrease of $96,000 on payments to us for our interest in certain sold charge offs and acquired third-party
portfolios.
Expenses
. Our operating
expenses consist largely of interest expense, provision for credit losses, employee costs, marketing and general and administrative
expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables
(other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of
reducing the interest rate applicable to such receivables). Interest expense is significantly affected by the volume of automobile
contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations
to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile
contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and
automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing
and advertising expenses, and depreciation and amortization.
Total operating expenses
were $90.9 million for the three months ended September 30, 2018, compared to $101.4 million for the prior period, a decrease of
$10.5 million, or 10.3%. The decrease is primarily due to a decrease in provision for credit losses, offsetting increases in employee
costs, interest expense and general and administrative expenses.
Employee costs increased
by $351,000 or 1.9%, to $18.8 million during the three months ended September 30, 2018, representing 20.7% of total operating expenses,
from $18.5 million for the prior year, or 18.2% of total operating expenses. Employee costs for the prior year period were net
of $1.3 million of direct employee costs associated with the originations of contracts during that period. Such deferred costs
are then recognized over the life of the related receivables using the interest method. In the current period, new originations
of our finance receivables contracts are measured at fair value and the related direct originations costs are no longer deferred.
All direct origination or acquisition costs are now expensed in the acquisition period. The increase in employee costs were partially
offset by a decrease of $1.0 million in stock compensation expense. The table below summarizes our employees by category as well
as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, September 30, 2018 and 2017:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in millions)
|
|
Contracts purchased (dollars)
|
|
$
|
225.2
|
|
|
$
|
204.7
|
|
Contracts purchased (units)
|
|
|
12,853
|
|
|
|
12,589
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,342.9
|
|
|
$
|
2,346.0
|
|
Managed portfolio outstanding (units)
|
|
|
174,584
|
|
|
|
174,383
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
211
|
|
|
|
210
|
|
Number of Marketing staff
|
|
|
132
|
|
|
|
117
|
|
Number of Servicing staff
|
|
|
567
|
|
|
|
564
|
|
Number of other staff
|
|
|
101
|
|
|
|
93
|
|
Total number of employees
|
|
|
1,011
|
|
|
|
984
|
|
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 $7.8 million, an increase of $1.4 million or
22.5% compared to the previous year and represented 8.6% of total operating expenses.
Interest expense for
the three months ended September 30, 2018 increased by $2.5 million to $25.8 million, or 10.7% and represented 28.4% of total operating
expenses, compared to $23.3 million in the previous year, when it was 23.0% of total operating expenses.
Interest on securitization
trust debt increased by $1.7 million, or 8.1%, for the three months ended September 30, 2018 compared to the prior period. The
average balance of securitization trust debt decreased 2.6% to $2,128.1 million for the three months ended September 30, 2018 compared
to $2,184.2 million for the three months ended September 30, 2017. However, 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 September
30, 2018 was 4.3%, compared to 3.8% in the prior year period. For any particular quarterly securitization transaction, the blended
cost of funds is ultimately the result of many factors including the market interest rates for risk-free securities (against which
our bonds are priced), and the margin over those benchmarks that investors are willing to accept, which in turn is influenced by
investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward
higher securitization trust debt interest costs since June 2014. 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
|
|
3.62%
|
January 2017
|
|
3.91%
|
April 2017
|
|
3.45%
|
July 2017
|
|
3.52%
|
October 2017
|
|
3.39%
|
January 2018
|
|
3.46%
|
April 2018
|
|
3.98%
|
July 2018
|
|
4.18%
|
Interest expense on subordinated
renewable notes increased by $17,000, or 4.8%. The average yield of subordinated notes increased to 8.8% in the three-month period
ended September 30, 2018 compared to 8.7% in the prior period.
Interest expense on warehouse
debt decreased by $167,000, or 8.4%, for the three months ended September 30, 2018 compared to the prior period. The average rate
on the debt increased to 12.5% in the three-month period ended September 30, 2018 compared to 11.9% in the prior period. However,
the increase was offset by lower outstanding warehouse debt balance in the current period.
The following table presents
the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended September
30, 2018 and 2017:
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
1,787,427
|
|
|
$
|
80,135
|
|
|
|
17.9%
|
|
|
$
|
2,313,083
|
|
|
$
|
107,014
|
|
|
|
18.5%
|
|
Finance receivables at fair value
|
|
|
547,468
|
|
|
|
13,482
|
|
|
|
9.9%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2,334,895
|
|
|
|
93,617
|
|
|
|
16.0%
|
|
|
|
2,313,083
|
|
|
|
107,014
|
|
|
|
18.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit (3)
|
|
$
|
58,806
|
|
|
|
1,827
|
|
|
|
12.5%
|
|
|
$
|
66,514
|
|
|
|
1,994
|
|
|
|
11.9%
|
|
Residual interest financing
|
|
|
40,000
|
|
|
|
936
|
|
|
|
9.4%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Securitization trust debt
|
|
|
2,128,142
|
|
|
|
22,678
|
|
|
|
4.3%
|
|
|
|
2,184,164
|
|
|
|
20,973
|
|
|
|
3.8%
|
|
Subordinated renewable notes
|
|
|
16,655
|
|
|
|
367
|
|
|
|
8.8%
|
|
|
|
16,113
|
|
|
|
350
|
|
|
|
8.7%
|
|
|
|
$
|
2,243,603
|
|
|
|
25,808
|
|
|
|
4.6%
|
|
|
$
|
2,266,791
|
|
|
|
23,317
|
|
|
|
4.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
67,809
|
|
|
|
|
|
|
|
|
|
|
$
|
83,697
|
|
|
|
|
|
Net interest yield (3)
|
|
|
$
|
|
|
|
|
|
|
|
11.4%
|
|
|
|
|
|
|
|
|
|
|
|
14.4%
|
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
104%
|
|
|
|
|
|
|
|
|
|
|
|
102%
|
|
_________________________
(1) Average
balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Net
of deferred fees and direct costs.
(3) Annualized
net interest income divided by average interest earning assets.
|
|
Three Months Ended September 30, 2018
|
|
|
|
Compared to September 30, 2017
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
(In thousands)
|
|
Interest Earning Assets
|
|
$
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
(26,879
|
)
|
|
$
|
(24,198
|
)
|
|
$
|
(2,681
|
)
|
Finance receivables at fair value
|
|
|
13,482
|
|
|
|
13,482
|
|
|
|
–
|
|
|
|
|
(13,397
|
)
|
|
|
(10,716
|
)
|
|
|
(2,681
|
)
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(167
|
)
|
|
|
(226
|
)
|
|
|
59
|
|
Residual interest financing
|
|
|
936
|
|
|
|
936
|
|
|
|
–
|
|
Securitization trust debt
|
|
|
1,705
|
|
|
|
(955
|
)
|
|
|
2,660
|
|
Subordinated renewable notes
|
|
|
17
|
|
|
|
13
|
|
|
|
4
|
|
|
|
|
2,491
|
|
|
|
(232
|
)
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
$
|
(15,888
|
)
|
|
$
|
(10,484
|
)
|
|
$
|
(5,404
|
)
|
The reduction in the
annualized yield on our finance receivables for the three months ended September 30, 2018 compared to the prior year period is
the result of our decision over the last twelve months to offer dealers slightly lower acquisition fees and to require slightly
lower contract interest rates on a portion of the contracts we purchase. Another reason for the decrease in the annualized yield
is the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value
is reduced to take account of expected losses and is therefore less than the yield on other finance receivables.
Provision for credit
losses was $32.0 million for the three months ended September 30, 2018, a decrease of $15.4 million, or 32.5% compared to the prior
year and represented 35.1% 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. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under
the fair value method of accounting, we recognize interest income under the interest method on a level yield basis based on forecasted
future cash flows net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables
measured at fair value.
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 increased by $570,000, or 15.0%, to
$4.4 million during the three months ended September 30, 2018, compared to $3.8 million in the prior year period, and represented
4.8% of total operating expenses. Our marketing staff increased to 132 as of September 30, 2018 compared to 117 at September 30,
2017. In addition, in recent months, we have gradually shifted to more field marketing representatives as compared to in-house
marketing representatives. Field marketing representatives are somewhat more costly than in-house marketing representatives, but
we feel will ultimately be more effective. For the three months ended September 30, 2018, we purchased 12,853 contracts representing
$225.2 million in receivables compared to 12,589 contracts representing $204.7 million in receivables in the prior period.
Occupancy expenses increased
by $70,000 or 3.8%, to $1.9 million compared to $1.9 million in the previous year and represented 2.2% of total operating expenses.
Depreciation and amortization
expenses increased by $12,000 or 4.9%, to $256,000 compared to $244,000 in the previous year and represented 0.3% of total operating
expenses.
For the three months
ended September 30, 2018 we recorded income tax expense of $1.5 million, representing a 32.0% effective income tax rate. In the
prior year period, we recorded $3.4 million in income tax expense, representing a 42.5% effective income tax rate. In December
2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act”). The Tax Act lowered the federal corporate income tax rate from 35% to 21% beginning in 2018.
Comparison of Operating Results
for the nine months ended September 30, 2018 with the nine months ended September 30, 2017
Revenues
. During
the nine months ended September 30, 2018, our revenues were $298.6 million, a decrease of $28.6 million, or 8.7%, from the prior
year revenue of $327.2 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income
for the nine months ended September 30, 2018 decreased $27.5 million, or 8.6%, to $291.5 million from $319.1 million in the prior
year. The primary reason for the decrease in interest income is the lower interest yield on the receivables measured at fair value.
The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than
the yield on other finance receivables. The table below shows the outstanding and average balances of our portfolio held by consolidated
subsidiaries for the nine months ended September 30, 2018 and 2017:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
1,990,289
|
|
|
$
|
265,713
|
|
|
|
17.8%
|
|
|
$
|
2,297,218
|
|
|
$
|
319,074
|
|
|
|
18.5%
|
|
Finance receivables measured at fair value
|
|
|
341,967
|
|
|
|
25,822
|
|
|
|
10.1%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
2,332,256
|
|
|
$
|
291,535
|
|
|
|
16.7%
|
|
|
$
|
2,297,218
|
|
|
$
|
319,074
|
|
|
|
18.5%
|
|
In the nine months ended September 30, 2018, other income of $7.0
million decreased by $1.1 million, or 13.1% compared to the prior year. The nine-month period ended September 30, 2018 includes
a decrease of $428,000 in revenue associated with direct mail and other related products and services that we offer to our dealers.
We also incurred a decrease of $310,000 in payments from third-party providers of convenience fees paid by our customers for web
based and other electronic payments, a decrease of $266,000 on payments to us for our interest in certain sold charge offs and
acquired third-party portfolios.
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 is affected by the balance and credit performance of our portfolio of finance
receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the
effect of reducing the interest rate applicable to such receivables). Interest expense is significantly affected by the volume
of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed
securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications
and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the
automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment
level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing
and advertising expenses, and depreciation and amortization.
Total operating expenses
were $284.6 million for the nine months ended September 30, 2018, compared to $303.3 million for the prior period, a decrease of
$18.7 million, or 6.2%. The decrease is primarily due to a decrease in provision for credit losses, offsetting increases in employee
costs, interest expense and general and administrative expenses.
Employee costs increased
by $5.5 million or 10.2%, to $59.3 million during the nine months ended September 30, 2018, representing 20.8% of total operating
expenses, from $53.8 million for the prior year, or 17.7% of total operating expenses. Employee costs for the prior year period
were net of $4.1 million of direct employee costs associated with the originations of contracts during that period. Such deferred
costs are then recognized over the life of the related receivables using the interest method. The table below summarizes our employees
by category as well as contract purchases and units in our managed portfolio as of, and for the nine-month periods ended, September
30, 2018 and 2017:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in millions)
|
|
Contracts purchased (dollars)
|
|
$
|
650.6
|
|
|
$
|
668.3
|
|
Contracts purchased (units)
|
|
|
38,749
|
|
|
|
41,137
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,342.9
|
|
|
$
|
2,346.0
|
|
Managed portfolio outstanding (units)
|
|
|
174,584
|
|
|
|
174,383
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
211
|
|
|
|
210
|
|
Number of Marketing staff
|
|
|
132
|
|
|
|
117
|
|
Number of Servicing staff
|
|
|
567
|
|
|
|
564
|
|
Number of other staff
|
|
|
101
|
|
|
|
93
|
|
Total number of employees
|
|
|
1,011
|
|
|
|
984
|
|
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 $22.7 million, an increase of $2.6 million, or
13.1% compared to the previous year and represented 8.0% of total operating expenses.
Interest expense for
the nine months ended September 30, 2018 increased by $6.4 million to $75.1 million, or 9.3% and represented 26.4% of total operating
expenses, compared to $68.6 million in the previous year, when it was 22.6% of total operating expenses.
Interest on securitization
trust debt increased by $5.2 million, or 8.4%, for the nine months ended September 30, 2018 compared to the prior period. The average
balance of securitization trust debt decreased to $2,137.5 million for the nine months ended September 30, 2018 compared to $2,173.4
million for the nine months ended September 30, 2017. However, the blended interest rates on new term securitizations have generally
increased since June 2014. As a result, the cost of securitization debt during the nine-month period ended September 30, 2018 was
4.2%, compared to 3.8% in the prior year period, resulting in an increase in our interest expense despite the lower average debt
balance. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors
including the market interest rates for risk-free securities (against which our bonds are priced), and the margin over those benchmarks
that investors are willing to accept, which in turn is influenced by investor demand for our bonds at the time of the securitization.
These and other factors have resulted in a general trend toward higher securitization trust debt interest costs since June 2014.
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
|
|
3.62%
|
January 2017
|
|
3.91%
|
April 2017
|
|
3.45%
|
July 2017
|
|
3.52%
|
October 2017
|
|
3.39%
|
January 2018
|
|
3.46%
|
April 2018
|
|
3.98%
|
July 2018
|
|
4.18%
|
Interest expense on subordinated
renewable notes increased by $87,000, or 9.0%. The increase is due to an increase in the average yield on our subordinated renewable
notes to 8.6% for the nine-month period ended September 30, 2018 compared to the prior year when the average yield on our subordinated
renewable notes was 8.2%.
Interest expense on warehouse
debt decreased by $231,000, or 3.8%, for the nine months ended September 30, 2018 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 nine-month periods ended September
30, 2018 and 2017:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
1,990,289
|
|
|
$
|
265,713
|
|
|
|
17.8%
|
|
|
$
|
2,297,218
|
|
|
$
|
319,074
|
|
|
|
18.5%
|
|
Finance receivables at fair value
|
|
|
341,967
|
|
|
|
25,822
|
|
|
|
10.1%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2,332,256
|
|
|
|
291,535
|
|
|
|
16.7%
|
|
|
|
2,297,218
|
|
|
|
319,074
|
|
|
|
18.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit (3)
|
|
$
|
64,555
|
|
|
|
5,850
|
|
|
|
12.1%
|
|
|
$
|
63,827
|
|
|
|
6,081
|
|
|
|
12.7%
|
|
Residual interest financing
|
|
|
20,220
|
|
|
|
1,387
|
|
|
|
9.1%
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Securitization trust debt
|
|
|
2,137,549
|
|
|
|
66,762
|
|
|
|
4.2%
|
|
|
|
2,173,365
|
|
|
|
61,589
|
|
|
|
3.8%
|
|
Subordinated renewable notes
|
|
|
16,357
|
|
|
|
1,058
|
|
|
|
8.6%
|
|
|
|
15,868
|
|
|
|
971
|
|
|
|
8.2%
|
|
|
|
$
|
2,238,681
|
|
|
|
75,057
|
|
|
|
4.5%
|
|
|
$
|
2,253,060
|
|
|
|
68,641
|
|
|
|
4.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
216,478
|
|
|
|
|
|
|
|
|
|
|
$
|
250,433
|
|
|
|
|
|
Net interest yield (3)
|
|
|
$
|
|
|
|
|
|
|
|
12.2%
|
|
|
|
|
|
|
|
|
|
|
|
14.5%
|
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
104%
|
|
|
|
|
|
|
|
|
|
|
|
102%
|
|
(1) Average
balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.
(2) Net
of deferred fees and direct costs.
(3) Annualized
net interest income divided by average interest earning assets.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Compared to September 30, 2017
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
(In thousands)
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
(53,361
|
)
|
|
$
|
(42,631
|
)
|
|
$
|
(10,730
|
)
|
Finance receivables at fair value
|
|
|
25,822
|
|
|
|
25,822
|
|
|
|
–
|
|
|
|
|
(27,539
|
)
|
|
|
(16,809
|
)
|
|
|
(10,730
|
)
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(231
|
)
|
|
|
69
|
|
|
|
(300
|
)
|
Residual interest financing
|
|
|
1,387
|
|
|
|
1,387
|
|
|
|
–
|
|
Securitization trust debt
|
|
|
5,173
|
|
|
|
(1,015
|
)
|
|
|
6,188
|
|
Subordinated renewable notes
|
|
|
87
|
|
|
|
30
|
|
|
|
57
|
|
|
|
|
6,416
|
|
|
|
471
|
|
|
|
5,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
$
|
(33,955
|
)
|
|
$
|
(17,280
|
)
|
|
$
|
(16,675
|
)
|
The reduction in the
annualized yield on our finance receivables for the nine months ended September 30, 2018 compared to the prior year period is the
result of our decision over the last several months to offer dealers slightly lower acquisition fees and to require slightly lower
contract interest rates on a portion of the contracts we purchase. Another reason for the decrease in the annualized yield is the
lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced
to take account of expected losses and is therefore less than the yield on other finance receivables.
Provision for credit
losses was $108.0 million for the nine months ended September 30, 2018, a decrease of $35.1 million, or 24.5% compared to the prior
year and represented 37.9% 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. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under
the fair value method of accounting, we recognize interest income under the interest method on a level yield basis based on forecasted
future cash flows net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables
measured at fair value.
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 increased by $1.4 million, or 12.1%,
to $13.2 million during the nine months ended September 30, 2018, compared to $11.8 million in the prior year period, and represented
4.6% of total operating expenses. Our marketing staff increased to 132 as of September 30, 2018 compared to 117 at September 30,
2017. In addition, in recent months, we have gradually shifted to more field marketing representatives as compared to in-house
marketing representatives. Field marketing representatives are somewhat more costly than in-house marketing representatives, but
we feel will ultimately be more effective. For the nine months ended September 30, 2018, we purchased 38,749 contracts representing
$650.6 million in receivables compared to 41,137 contracts representing $668.3 million in receivables in the prior period.
Occupancy expenses increased
by $386,000 or 7.3%, to $5.6 million compared to $5.3 million in the previous year and represented 2.0% 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. In May 2017, we acquired additional office space in Las Vegas, Nevada.
Depreciation and amortization
expenses increased by $54,000 or 7.8%, to $746,000 compared to $692,000 in the previous year and represented 0.2% of total operating
expenses.
For the nine months ended
September 30, 2018, we recorded income tax expense of $4.4 million, representing a 31.7% effective income tax rate. In the prior
year period, we recorded $10.1 million in income tax expense, representing a 42.5% effective income tax rate. In December 2017,
the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act lowered the federal corporate income tax rate from 35% to 21% beginning in 2018.
Credit Experience
Our financial results
are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such
as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted
average age of the receivables at any given time. The tables below document the delinquency, repossession and net credit loss experience
of all such automobile contracts that we originated or own an interest in as of the respective dates shown. The tables do not include
the experience of third party originated and owned portfolios.
Delinquency, Repossession and Extension
Experience (1)
Total Owned Portfolio
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
December 31, 2017
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
Delinquency Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross servicing portfolio (1)
|
|
|
174,584
|
|
|
$
|
2,342,889
|
|
|
|
174,382
|
|
|
$
|
2,345,992
|
|
|
|
173,998
|
|
|
$
|
2,333,524
|
|
Period of delinquency (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
10,509
|
|
|
$
|
144,842
|
|
|
|
9,607
|
|
|
$
|
130,456
|
|
|
|
10,163
|
|
|
$
|
138,395
|
|
61-90 days
|
|
|
4,750
|
|
|
|
62,642
|
|
|
|
3,989
|
|
|
|
51,912
|
|
|
|
4,741
|
|
|
|
63,081
|
|
91+ days
|
|
|
2,462
|
|
|
|
29,729
|
|
|
|
2,182
|
|
|
|
26,485
|
|
|
|
2,295
|
|
|
|
27,515
|
|
Total delinquencies (2)
|
|
|
17,721
|
|
|
|
237,213
|
|
|
|
15,778
|
|
|
|
208,853
|
|
|
|
17,199
|
|
|
|
228,991
|
|
Amount in repossession (3)
|
|
|
2,636
|
|
|
|
33,989
|
|
|
|
2,473
|
|
|
|
32,032
|
|
|
|
2,630
|
|
|
|
33,679
|
|
Total delinquencies and amount in repossession (2)
|
|
|
20,357
|
|
|
$
|
271,202
|
|
|
|
18,251
|
|
|
$
|
240,885
|
|
|
|
19,829
|
|
|
$
|
262,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of gross servicing portfolio
|
|
|
10.2%
|
|
|
|
10.1%
|
|
|
|
9.0%
|
|
|
|
8.9%
|
|
|
|
9.9%
|
|
|
|
9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies and amount in repossession as
a percentage of gross servicing portfolio
|
|
|
11.7%
|
|
|
|
11.6%
|
|
|
|
10.5%
|
|
|
|
10.3%
|
|
|
|
11.4%
|
|
|
|
11.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, accruing
|
|
|
27,476
|
|
|
$
|
366,400
|
|
|
|
33,013
|
|
|
$
|
449,904
|
|
|
|
31,708
|
|
|
$
|
430,801
|
|
Contracts with two or more extensions, accruing
|
|
|
61,692
|
|
|
|
833,005
|
|
|
|
49,461
|
|
|
|
677,496
|
|
|
|
55,203
|
|
|
|
756,561
|
|
|
|
|
89,168
|
|
|
|
1,199,405
|
|
|
|
82,474
|
|
|
|
1,127,400
|
|
|
|
86,911
|
|
|
|
1,187,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, non-accrual (4)
|
|
|
700
|
|
|
|
8,311
|
|
|
|
1,093
|
|
|
|
13,502
|
|
|
|
1,032
|
|
|
|
12,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with two or more extensions, non-accrual (4)
|
|
|
3,498
|
|
|
|
45,238
|
|
|
|
2,249
|
|
|
|
29,910
|
|
|
|
2,701
|
|
|
|
35,626
|
|
|
|
|
4,198
|
|
|
|
53,549
|
|
|
|
3,342
|
|
|
|
43,412
|
|
|
|
3,733
|
|
|
|
47,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contracts with extensions
|
|
|
93,366
|
|
|
$
|
1,252,954
|
|
|
|
85,816
|
|
|
$
|
1,170,812
|
|
|
|
90,644
|
|
|
$
|
1,235,229
|
|
____________________________________
(1) All
amounts and percentages are based on the amount remaining to be repaid on each automobile contract, including, for pre-computed
automobile contracts, any unearned interest. The information in the table represents the gross principal amount of all automobile
contracts we have purchased, including automobile contracts subsequently sold in securitization transactions that we continue
to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees only
and have no credit risk.
(2) We
consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following
due date, which date may have been extended within limits specified in the Servicing Agreements. The period of delinquency is
based on the number of days payments are contractually past due. Automobile contracts less than 31 days delinquent are not included.
The delinquency aging categories shown in the tables reflect the effect of extensions.
(3) Amount
in repossession represents financed vehicles that have been repossessed but not yet liquidated.
(4) Amount
in repossession and accounts past due more than 90 days are on non-accrual.
Net Charge-Off Experience (1)
|
|
Total Owned Portfolio
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Average servicing portfolio outstanding
|
|
$
|
2,332,256
|
|
|
$
|
2,332,325
|
|
|
$
|
2,334,008
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
7.9%
|
|
|
|
7.8%
|
|
|
|
7.7%
|
|
_________________________
(1) All amounts and percentages are
based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile
contracts.
(2) Net charge-offs include the remaining
principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid
interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other
income in the accompanying interim consolidated financial statements. September 30, 2018 and September 30, 2017 percentages represent
nine months ended September 30, 2018 and September 30, 2017 annualized. December 31, 2017 represents 12 months ended December 31,
2017.
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 September 30, 2018, for accounts that received extensions from 2008 through
2017 (2018 extension data are not included at this time due to insufficient passage of time for meaningful evaluation of results):
Period of Extension
|
|
# Extensions Granted
|
|
|
Active or Paid Off at September 30, 2018
|
|
|
% Active or Paid Off at September 30, 2018
|
|
|
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
|
|
|
|
10,275
|
|
|
|
31.9%
|
|
|
|
16,168
|
|
|
|
50.2%
|
|
|
|
5,783
|
|
|
|
17.9%
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
26,167
|
|
|
|
12,166
|
|
|
|
46.5%
|
|
|
|
12,002
|
|
|
|
45.9%
|
|
|
|
1,999
|
|
|
|
7.6%
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
18,786
|
|
|
|
10,976
|
|
|
|
58.4%
|
|
|
|
6,878
|
|
|
|
36.6%
|
|
|
|
932
|
|
|
|
5.0%
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
18,783
|
|
|
|
11,363
|
|
|
|
60.5%
|
|
|
|
6,624
|
|
|
|
35.3%
|
|
|
|
796
|
|
|
|
4.2%
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
23,398
|
|
|
|
11,693
|
|
|
|
50.0%
|
|
|
|
10,729
|
|
|
|
45.9%
|
|
|
|
976
|
|
|
|
4.2%
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
25,773
|
|
|
|
12,083
|
|
|
|
46.9%
|
|
|
|
12,864
|
|
|
|
49.9%
|
|
|
|
826
|
|
|
|
3.2%
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
53,319
|
|
|
|
29,443
|
|
|
|
55.2%
|
|
|
|
22,794
|
|
|
|
42.8%
|
|
|
|
1,082
|
|
|
|
2.0%
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
80,897
|
|
|
|
55,398
|
|
|
|
68.5%
|
|
|
|
23,566
|
|
|
|
29.1%
|
|
|
|
1,933
|
|
|
|
2.4%
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
133,881
|
|
|
|
107,419
|
|
|
|
80.2%
|
|
|
|
19,502
|
|
|
|
14.6%
|
|
|
|
6,640
|
|
|
|
5.0%
|
|
|
|
8
|
|
______________________
Note:
Table excludes extensions on portfolios serviced for third parties
We
view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions
in 2012, 60.5% were either paid in full or active and performing at September 30, 2018. Each of these successful accounts represent
continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would
have incurred a substantial loss and no interest revenue subsequent to the extension.
For the extension accounts
that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially
successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on
average, 18 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account
with additional payments of principal and interest.
Additional
information about our extensions is provided in the tables below:
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Average number of extensions granted per month
|
|
|
10,460
|
|
|
|
10,965
|
|
|
|
11,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of outstanding accounts
|
|
|
174,425
|
|
|
|
172,791
|
|
|
|
173,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly extensions as % of average outstandings
|
|
|
6.0%
|
|
|
|
6.3%
|
|
|
|
6.4%
|
|
______________________
Note: Table excludes portfolios originated
and owned by third parties
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
December 31, 2017
|
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension
|
|
|
28,176
|
|
|
$
|
374,711
|
|
|
|
34,106
|
|
|
$
|
463,405
|
|
|
|
32,740
|
|
|
$
|
443,042
|
|
Contracts with two extensions
|
|
|
21,294
|
|
|
|
285,741
|
|
|
|
23,609
|
|
|
|
327,195
|
|
|
|
24,375
|
|
|
|
335,643
|
|
Contracts with three extensions
|
|
|
17,435
|
|
|
|
237,743
|
|
|
|
14,428
|
|
|
|
199,959
|
|
|
|
16,378
|
|
|
|
227,980
|
|
Contracts with four extensions
|
|
|
13,152
|
|
|
|
180,657
|
|
|
|
7,919
|
|
|
|
106,927
|
|
|
|
9,506
|
|
|
|
129,795
|
|
Contracts with five extensions
|
|
|
8,544
|
|
|
|
114,061
|
|
|
|
3,985
|
|
|
|
52,015
|
|
|
|
5,096
|
|
|
|
67,703
|
|
Contracts with six extensions
|
|
|
4,765
|
|
|
|
60,041
|
|
|
|
1,769
|
|
|
|
21,311
|
|
|
|
2,549
|
|
|
|
31,067
|
|
|
|
|
93,366
|
|
|
$
|
1,252,954
|
|
|
|
85,816
|
|
|
$
|
1,170,812
|
|
|
|
90,644
|
|
|
$
|
1,235,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed portfolio (excluding originated and owned by 3rd parties)
|
|
|
174,584
|
|
|
$
|
2,342,889
|
|
|
|
174,382
|
|
|
$
|
2,345,993
|
|
|
|
173,998
|
|
|
$
|
2,333,524
|
|
______________________
Note: Table excludes portfolios originated and owned by third parties
In recent years, we have experienced an
increase in the number of extensions that we grant to our customers. We attribute this to a number of factors. First, in June 2014
we entered into a consent decree with the FTC that required us to make certain procedural changes in our servicing practices, which
we believe have contributed to somewhat higher delinquencies and extensions compared to prior periods. Secondly, in recent years
we have found it more difficult to communicate with our customers via outbound voice telephone calls, which have historically been
our primary means of communicating with our customers. Consequently, we have recently developed text messaging platforms to supplement
our outbound voice calling efforts. In addition, in 2016 we added features to the customer portal of our website to facilitate
the process whereby the customer may request an extension.
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 nine-month period ended September 30, 2018 was $158.6 million, a decrease of $9.7 million, compared
to net cash provided by operating activities for the nine-month period ended September 30, 2017 of $168.3 million. Cash provided
by operating activities is significantly affected by our net income before provisions for credit losses. For the nine months ended
September 30, 2018, our net income excluding provisions for credit losses was $117.5 million, or $39.2 million less than our net
income excluding provisions for credit losses for the nine months ended September 30, 2017.
Net cash used in investing
activities for the nine-month period ended September 30, 2018 was $157.7 million compared to net cash used in investing activities
of $179.0 million in the prior year period. Cash provided by investing activities primarily results from principal payments and
other proceeds received on finance receivables. Cash used in investing activities generally relates to purchases of automobile
contracts. Purchases of finance receivables were $659.6 million and $668.3 million during the first nine months of 2018 and 2017,
respectively.
Net cash used in financing
activities for the nine months ended September 30, 2018 was $4.6 million compared to net cash provided by financing activities
of $11.2 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization
trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines
of credit and other debt. In the first nine months of 2018, we issued $622.1 million in new securitization trust debt compared
to $656.3 million in the same period of 2017. In addition, we repaid $671.7 million in securitization trust debt in the nine months
ended September 30, 2018 compared to repayments of securitization trust debt of $634.2 million in the prior year period. In the
nine months ended September 30, 2018, we had net advances on warehouse lines of credit of $15.0 million, compared to net advances
of $2.9 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 September 30, 2018, we had
unrestricted cash of $10.5 million and $172.3 million aggregate available borrowings under our three warehouse credit facilities
(assuming the availability of sufficient eligible collateral). As of September 30, 2018, we had approximately $21.1 million of
such eligible collateral. During the nine-month period ended September 30, 2018, we completed three securitization aggregating
$622.1 million of notes sold. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases
at a level that matches our available capital, and, as appropriate, minimizing our operating costs. If we are unable to complete
such securitizations, we may be unable to increase our rate of automobile contract purchases, in which case our interest income
and other portfolio related income could decrease.
Our liquidity will
also be affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics
of each spread account vary among transactions, our securitization agreements generally provide that we will receive excess cash
flows, if any, only if the amount of credit enhancement has reached specified levels and the delinquency or net losses related
to the automobile contracts in the pool are below certain predetermined levels. In the event delinquencies or net losses on the
automobile contracts exceed such levels, the terms of the securitization may require increased credit enhancement to be accumulated
for the particular pool. There can be no assurance that collections from the related trusts will continue to generate sufficient
cash.
Our warehouse credit
facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining
minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements
other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective
creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other
event of default were to be accompanied by acceleration of such other indebtedness. As of September 30, 2018, we were in compliance
with all such financial covenants.
We have and will continue
to have a substantial amount of indebtedness. At September 30, 2018, we had approximately $2,217.9 million of debt outstanding.
Such debt consisted primarily of $2,034.3 million of securitization trust debt and $127.7 million of warehouse lines of credit.
Our securitization trust debt has decreased by $69.3 million while our warehouse lines of credit have increased by $21.1 million
since September 30, 2017 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the
public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $16.9 million and $16.2
million in subordinated renewable notes outstanding at September 30, 2018 and 2017, respectively. On May 16, 2018, we completed
a $40.0 million securitization of residual interests from previously issued securitizations. At September 30, 2018, $40.0 million
of this residual interest financing debt remains outstanding ($39.0 million net of deferred financing costs).
Although we believe
we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations
do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we
fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt
or equity securities.
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).