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,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,253
|
|
|
$
|
5,295
|
|
|
Restricted cash and equivalents
|
|
|
200,912
|
|
|
|
135,537
|
|
|
Finance receivables measured at fair value
|
|
|
1,540,955
|
|
|
|
1,444,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
577,281
|
|
|
|
897,530
|
|
|
Less: Allowance for finance credit losses
|
|
|
(94,218
|
)
|
|
|
(11,640
|
)
|
|
Finance receivables, net
|
|
|
483,063
|
|
|
|
885,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
|
988
|
|
|
|
1,512
|
|
|
Deferred tax assets, net
|
|
|
31,026
|
|
|
|
15,480
|
|
|
Accrued interest receivable
|
|
|
6,291
|
|
|
|
11,645
|
|
|
Other assets
|
|
|
34,744
|
|
|
|
39,852
|
|
|
Total Assets
|
|
$
|
2,309,232
|
|
|
$
|
2,539,249
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
49,056
|
|
|
$
|
47,077
|
|
|
Warehouse lines of credit
|
|
|
31,201
|
|
|
|
134,791
|
|
|
Residual interest financing
|
|
|
32,000
|
|
|
|
39,478
|
|
|
Securitization trust debt
|
|
|
2,048,089
|
|
|
|
2,097,728
|
|
|
Subordinated renewable notes
|
|
|
20,242
|
|
|
|
17,534
|
|
|
Total Liabilities
|
|
|
2,180,588
|
|
|
|
2,336,608
|
|
|
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; 22,508,862 and 22,530,918 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
|
|
|
72,197
|
|
|
|
71,257
|
|
|
Retained earnings
|
|
|
64,868
|
|
|
|
139,805
|
|
|
Accumulated other comprehensive loss
|
|
|
(8,421
|
)
|
|
|
(8,421
|
)
|
|
Total stockholders' equity
|
|
|
128,644
|
|
|
|
202,641
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,309,232
|
|
|
$
|
2,539,249
|
|
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,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
72,582
|
|
|
$
|
82,924
|
|
|
$
|
227,271
|
|
|
$
|
253,218
|
|
|
Mark to finance receivables measured at fair value
|
|
|
(3,152
|
)
|
|
|
604
|
|
|
|
(23,051
|
)
|
|
|
604
|
|
|
Other income
|
|
|
1,239
|
|
|
|
1,994
|
|
|
|
4,508
|
|
|
|
6,255
|
|
|
Total revenues
|
|
|
70,669
|
|
|
|
85,522
|
|
|
|
208,728
|
|
|
|
260,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
19,155
|
|
|
|
20,251
|
|
|
|
60,826
|
|
|
|
59,030
|
|
|
General and administrative
|
|
|
7,846
|
|
|
|
8,185
|
|
|
|
24,352
|
|
|
|
25,109
|
|
|
Interest
|
|
|
24,901
|
|
|
|
27,940
|
|
|
|
78,377
|
|
|
|
82,933
|
|
|
Provision for credit losses
|
|
|
7,400
|
|
|
|
19,874
|
|
|
|
14,113
|
|
|
|
64,319
|
|
|
Sales
|
|
|
3,202
|
|
|
|
4,407
|
|
|
|
10,710
|
|
|
|
13,877
|
|
|
Occupancy
|
|
|
1,838
|
|
|
|
1,760
|
|
|
|
5,362
|
|
|
|
5,745
|
|
|
Depreciation and amortization
|
|
|
438
|
|
|
|
276
|
|
|
|
1,344
|
|
|
|
789
|
|
|
Total operating expenses
|
|
|
64,780
|
|
|
|
82,693
|
|
|
|
195,084
|
|
|
|
251,802
|
|
|
Income before income tax expense (benefit)
|
|
|
5,889
|
|
|
|
2,829
|
|
|
|
13,644
|
|
|
|
8,275
|
|
|
Income tax expense (benefit)
|
|
|
2,121
|
|
|
|
991
|
|
|
|
(3,888
|
)
|
|
|
2,898
|
|
|
Net income
|
|
$
|
3,768
|
|
|
$
|
1,838
|
|
|
$
|
17,532
|
|
|
$
|
5,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
0.77
|
|
|
$
|
0.24
|
|
|
Diluted
|
|
|
0.16
|
|
|
|
0.08
|
|
|
|
0.74
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,666
|
|
|
|
22,526
|
|
|
|
22,630
|
|
|
|
22,378
|
|
|
Diluted
|
|
|
23,908
|
|
|
|
24,066
|
|
|
|
23,825
|
|
|
|
24,102
|
|
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,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Net income
|
|
$
|
3,768
|
|
|
$
|
1,838
|
|
|
$
|
17,532
|
|
|
$
|
5,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss); change in funded status of pension plan
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Comprehensive income
|
|
$
|
3,768
|
|
|
$
|
1,838
|
|
|
$
|
17,532
|
|
|
$
|
5,377
|
|
See accompanying Notes to Unaudited
Condensed Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,532
|
|
|
$
|
5,377
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Accretion of deferred acquisition fees and origination costs
|
|
|
910
|
|
|
|
1,374
|
|
|
Net interest income accretion on fair value receivables
|
|
|
98,060
|
|
|
|
64,131
|
|
|
Depreciation and amortization
|
|
|
1,344
|
|
|
|
789
|
|
|
Amortization of deferred financing costs
|
|
|
6,128
|
|
|
|
6,226
|
|
|
Mark to finance receivables measured at fair value
|
|
|
23,051
|
|
|
|
(604
|
)
|
|
Provision for credit losses
|
|
|
14,113
|
|
|
|
64,319
|
|
|
Stock-based compensation expense
|
|
|
1,437
|
|
|
|
1,496
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
5,354
|
|
|
|
19,240
|
|
|
Deferred tax assets, net
|
|
|
18,985
|
|
|
|
3,063
|
|
|
Other assets
|
|
|
1,673
|
|
|
|
2,708
|
|
|
Accounts payable and accrued expenses
|
|
|
1,979
|
|
|
|
1,870
|
|
|
Net cash provided by operating activities
|
|
|
190,566
|
|
|
|
169,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Payments received on finance receivables held for investment
|
|
|
260,804
|
|
|
|
379,365
|
|
|
Purchases of finance receivables measured at fair value
|
|
|
(572,938
|
)
|
|
|
(756,555
|
)
|
|
Payments received on finance receivables at fair value
|
|
|
354,910
|
|
|
|
200,889
|
|
|
Change in repossessions held in inventory
|
|
|
3,435
|
|
|
|
(733
|
)
|
|
Purchase of furniture and equipment
|
|
|
(820
|
)
|
|
|
(654
|
)
|
|
Net cash provided by (used in) investing activities
|
|
|
45,391
|
|
|
|
(177,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of securitization trust debt
|
|
|
714,543
|
|
|
|
726,188
|
|
|
Proceeds from issuance of subordinated renewable notes
|
|
|
5,120
|
|
|
|
1,452
|
|
|
Payments on subordinated renewable notes
|
|
|
(2,412
|
)
|
|
|
(3,213
|
)
|
|
Net advances (repayments) of warehouse lines of credit
|
|
|
(104,685
|
)
|
|
|
20,914
|
|
|
Repayment of residual interest financing debt
|
|
|
(7,757
|
)
|
|
|
–
|
|
|
Repayment of securitization trust debt
|
|
|
(764,075
|
)
|
|
|
(723,205
|
)
|
|
Payment of financing costs
|
|
|
(4,861
|
)
|
|
|
(6,099
|
)
|
|
Purchase of common stock
|
|
|
(967
|
)
|
|
|
(1,440
|
)
|
|
Exercise of options and warrants
|
|
|
470
|
|
|
|
347
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(164,624
|
)
|
|
|
14,944
|
|
|
Increase in cash and cash equivalents
|
|
|
71,333
|
|
|
|
7,245
|
|
|
Cash and restricted cash at beginning of period
|
|
|
140,832
|
|
|
|
130,110
|
|
|
Cash and restricted cash at end of period
|
|
$
|
212,165
|
|
|
$
|
137,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
72,565
|
|
|
$
|
76,269
|
|
|
Income taxes
|
|
$
|
(17,561
|
)
|
|
$
|
(3,231
|
)
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Right-of-use asset, net
|
|
$
|
–
|
|
|
$
|
(21,869
|
)
|
|
Lease liability
|
|
$
|
–
|
|
|
$
|
23,327
|
|
|
Deferred office rent
|
|
$
|
–
|
|
|
$
|
(1,458
|
)
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS’ EQUITY
(In thousands)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Common Stock (Shares Outstanding)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
22,715
|
|
|
|
22,526
|
|
|
|
22,531
|
|
|
|
22,422
|
|
|
Common stock issued upon exercise of options and warrants
|
|
|
13
|
|
|
|
–
|
|
|
|
269
|
|
|
|
483
|
|
|
Repurchase of common stock
|
|
|
(219
|
)
|
|
|
–
|
|
|
|
(291
|
)
|
|
|
(379
|
)
|
|
Balance, end of period
|
|
|
22,509
|
|
|
|
22,526
|
|
|
|
22,509
|
|
|
|
22,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
72,402
|
|
|
$
|
70,299
|
|
|
$
|
71,257
|
|
|
$
|
70,273
|
|
|
Common stock issued upon exercise of options and warrants
|
|
|
18
|
|
|
|
–
|
|
|
|
470
|
|
|
|
347
|
|
|
Repurchase of common stock
|
|
|
(762
|
)
|
|
|
–
|
|
|
|
(967
|
)
|
|
|
(1,440
|
)
|
|
Stock-based compensation
|
|
|
539
|
|
|
|
377
|
|
|
|
1,437
|
|
|
|
1,496
|
|
|
Balance, end of period
|
|
$
|
72,197
|
|
|
$
|
70,676
|
|
|
$
|
72,197
|
|
|
$
|
70,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
61,100
|
|
|
$
|
137,938
|
|
|
$
|
139,805
|
|
|
$
|
134,399
|
|
|
Cumulative change in accounting principle (Note 2)
|
|
|
–
|
|
|
|
–
|
|
|
|
(92,469
|
)
|
|
|
–
|
|
|
Balance, beginning of period (as adjusted for change in accounting principle)
|
|
$
|
61,100
|
|
|
$
|
137,938
|
|
|
$
|
47,336
|
|
|
$
|
134,399
|
|
|
Net income
|
|
|
3,768
|
|
|
|
1,838
|
|
|
|
17,532
|
|
|
|
5,377
|
|
|
Balance, end of period
|
|
$
|
64,868
|
|
|
$
|
139,776
|
|
|
$
|
64,868
|
|
|
$
|
139,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(8,421
|
)
|
|
$
|
(7,554
|
)
|
|
$
|
(8,421
|
)
|
|
$
|
(7,554
|
)
|
|
Pension benefit obligation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Balance, end of period
|
|
$
|
(8,421
|
)
|
|
$
|
(7,554
|
)
|
|
$
|
(8,421
|
)
|
|
$
|
(7,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefit obligation
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
$
|
128,644
|
|
|
$
|
202,898
|
|
|
$
|
128,644
|
|
|
$
|
202,898
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(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, 2020 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, 2019.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of income and expenses during the reported periods.
Finance Receivables
Measured at Fair Value
Effective January 1, 2018, we adopted the
fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after
2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received
in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We
then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the
purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal
rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest
income, and then to reduce the recorded value of the receivables.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
We re-evaluate the fair value of such receivables
at the close of each measurement period. If the reevaluation were to yield a value materially different from the recorded value,
an adjustment would be required. Results for the third quarter include the estimated potential effect on credit performance resulting
from the COVID-19 pandemic. We recorded a $3.2 million mark down to the recorded value of the portion of the receivables portfolio
accounted for at fair value in the third quarter, $9.5 million in the second quarter, and $10.4 million in the first quarter. The
mark down is reflected as a reduction in revenue for each period.
Anticipated credit losses are included
in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation
of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime
aggregate of credit losses is included in that initial computation. Also, because we include anticipated credit losses in our computation
of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables.
Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual principal balance,
we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the
receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.
Other Income
The following table presents
the primary components of Other Income for the three-month and nine-month periods ending September 30, 2020 and 2019:
|
Schedule of other income
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Direct mail revenues
|
|
$
|
760
|
|
|
$
|
1,121
|
|
|
$
|
2,444
|
|
|
$
|
3,508
|
|
|
Convenience fee revenue
|
|
|
280
|
|
|
|
600
|
|
|
|
1,340
|
|
|
|
1,870
|
|
|
Recoveries on previously charged-off contracts
|
|
|
4
|
|
|
|
30
|
|
|
|
79
|
|
|
|
132
|
|
|
Sales tax refunds
|
|
|
192
|
|
|
|
200
|
|
|
|
601
|
|
|
|
631
|
|
|
Other
|
|
|
3
|
|
|
|
43
|
|
|
|
44
|
|
|
|
114
|
|
|
Other income for the period
|
|
$
|
1,239
|
|
|
$
|
1,994
|
|
|
$
|
4,508
|
|
|
$
|
6,255
|
|
Leases
The Company has operating leases for corporate
offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations,
primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable
life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded
on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The following table presents
the supplemental balance sheet information related to leases:
|
Supplemental balance sheet information related to leases
|
|
September,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
23,735
|
|
|
$
|
23,735
|
|
|
Less: Accumulated amortization right-of-use assets
|
|
|
(11,280
|
)
|
|
|
(6,600
|
)
|
|
Operating lease right-of-use assets, net
|
|
$
|
12,455
|
|
|
$
|
17,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
(13,698
|
)
|
|
$
|
(18,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
3,352
|
|
|
$
|
876
|
|
|
Less: Accumulated depreciation
|
|
|
(945
|
)
|
|
|
(150
|
)
|
|
Property and equipment, net
|
|
$
|
2,407
|
|
|
$
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
$
|
(2,457
|
)
|
|
$
|
(718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
|
Operating lease
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
Finance lease
|
|
|
6.5
|
%
|
|
|
6.4
|
%
|
Maturities of lease liabilities
were as follows:
|
Maturities of leases
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating
|
|
|
Finance
|
|
|
Year Ending December 31,
|
|
Lease
|
|
|
Lease
|
|
|
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
1,959
|
|
|
$
|
305
|
|
|
2021
|
|
|
7,458
|
|
|
|
1,217
|
|
|
2022
|
|
|
6,066
|
|
|
|
1,038
|
|
|
2023
|
|
|
1,397
|
|
|
|
71
|
|
|
2024
|
|
|
419
|
|
|
|
14
|
|
|
Thereafter
|
|
|
282
|
|
|
|
–
|
|
|
Total undiscounted lease payments
|
|
|
17,581
|
|
|
|
2,645
|
|
|
Less amounts representing interest
|
|
|
(4,524
|
)
|
|
|
(188
|
)
|
|
Lease Liability
|
|
$
|
13,698
|
|
|
$
|
2,457
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The following table presents
the lease expense included in General and administrative and Occupancy expense on our Unaudited Condensed Consolidated Statement
of Operations:
|
Lease information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Operating lease cost
|
|
$
|
1,885
|
|
|
$
|
1,884
|
|
|
$
|
5,654
|
|
|
$
|
5,659
|
|
|
Finance lease cost
|
|
|
299
|
|
|
|
46
|
|
|
|
871
|
|
|
|
90
|
|
|
Total lease cost
|
|
$
|
2,184
|
|
|
$
|
1,930
|
|
|
$
|
6,525
|
|
|
$
|
5,749
|
|
The following table presents the supplemental
cash flow information related to leases:
|
Supplemental cash flow information related to leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,945
|
|
|
$
|
1,901
|
|
|
$
|
5,803
|
|
|
$
|
5,678
|
|
|
Operating cash flows from finance leases
|
|
|
256
|
|
|
|
37
|
|
|
|
737
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing cash flows from finance leases
|
|
|
42
|
|
|
|
9
|
|
|
|
133
|
|
|
|
17
|
|
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, 2020, we recorded stock-based compensation costs in the amount of $539,000
and $1.4 million 1,437
respectively. These stock-based compensation costs were $377,000
and $1.5 million 1,496 for the three and nine months ended September 30, 2019.
As of September 30, 2020, unrecognized stock-based compensation costs to be recognized over future periods equaled $3.7
million. This amount will be recognized as expense over a weighted-average period of 2.4 years.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The following represents stock option activity
for the nine months ended September 30, 2020:
|
Schedule of stock option activity
|
|
Number of Shares (in
thousands)
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual
Term
|
|
Options outstanding at the beginning of period
|
|
|
15,348
|
|
|
$
|
4.59
|
|
|
N/A
|
|
Granted
|
|
|
1,600
|
|
|
|
2.47
|
|
|
N/A
|
|
Exercised
|
|
|
(269
|
)
|
|
|
1.75
|
|
|
N/A
|
|
Forfeited
|
|
|
(215
|
)
|
|
|
5.55
|
|
|
N/A
|
|
Options outstanding at the end of period
|
|
|
16,464
|
|
|
$
|
4.41
|
|
|
3.07 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of period
|
|
|
12,816
|
|
|
$
|
4.78
|
|
|
2.30 years
|
At September 30, 2020, the aggregate intrinsic
value of options outstanding and exercisable was $5.5 million and $4.1 million, respectively. There were 269,100 options exercised
for the nine months ended September 30, 2020 compared to 482,500 for the comparable period in 2019. The total intrinsic value of
options exercised was $308,000 and $1.4 million for the nine-month periods ended September 30, 2020 and 2019. There were 72,581
shares available for future stock option grants under existing plans as of September 30, 2020.
Purchases of Company Stock
The table below describes the purchase
of our common stock for the nine-month ended September 30, 2020 and 2019:
|
Schedule of purchases of company stock
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
Open market purchases
|
|
|
44,247
|
|
|
$
|
2.94
|
|
|
|
335,546
|
|
|
$
|
3.95
|
|
|
Shares redeemed upon net exercise of stock options
|
|
|
46,909
|
|
|
|
2.86
|
|
|
|
18,424
|
|
|
|
3.76
|
|
|
Other purchases
|
|
|
200,000
|
|
|
|
3.51
|
|
|
|
24,500
|
|
|
|
4.20
|
|
|
Total stock purchases
|
|
|
291,156
|
|
|
$
|
3.32
|
|
|
|
378,470
|
|
|
$
|
3.97
|
|
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.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
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, 2020, we were in compliance with all such covenants. In addition, certain of our debt
agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the
respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only
if such other event of default were to be accompanied by acceleration of such other indebtedness.
Provision for Contingent
Liabilities
We are routinely involved
in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our
legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication
that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.
Adoption of New Accounting
Standards
In June 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-13, which changes the
criteria under which credit losses on financial instruments (such as the Company’s finance receivables) are measured. ASU
2016-3 introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which replaces
the incurred loss impairment methodology previously used under U.S. GAAP with a methodology that records currently the expected
lifetime credit losses on financial instruments. To establish such lifetime credit loss estimates, consideration of a broadened
range of reasonable and supportable information to establish credit loss estimates is required. ASU 2016-13 was initially scheduled
to become effective for interim and annual reporting periods beginning after December 15, 2019, however on October 16, 2019, the
FASB changed the effective date for smaller reporting companies to interim and annual reporting
periods beginning after December 15, 2022, with early adoption permitted.
Effective January 1,
2020, the Company adopted the CECL model. The adoption of CECL required that we establish an allowance for the remaining expected
lifetime credit losses on the portion of the Company’s receivable portfolio for which the Company was not already using fair
value accounting. We refer to that portion, which is those receivables that were originated prior to January 2018, as our “legacy
portfolio”. To comply with CECL, the Company recorded an addition to its allowance for finance credit losses of $127.0 million.
In accordance with the rules for adopting CECL, the offset to the addition to the allowance for finance credit losses was a tax
affected reduction to retained earnings using the modified retrospective method, and not a current period expense.
Coronavirus Pandemic
In December 2019, a
new strain of coronavirus (the “COVID-19 virus”) originated in Wuhan, China. Since its discovery, the COVID-19 virus
has spread throughout the world, and the outbreak has been declared to be a pandemic by the World Health Organization. We refer
from time to time in this report to the outbreak and spread of the COVID-19 virus as “the pandemic.”
Results for the nine-month period ending
September 30, 2020 include the estimated potential effect on credit performance resulting from the pandemic. We recorded a $14.1
million charge to the provision for credit losses for the legacy portfolio accounted for under CECL and a $23.1 million mark down
to the recorded value of the finance receivables measured at fair value.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The pandemic itself, if sufficient numbers
of people were to be afflicted, could cause obligors under our automobile contracts to be unable to pay their contractual obligations.
As the future course of the COVID-19 pandemic is as yet unknown, its direct effect on future obligor payments is likewise uncertain.
The mandatory shutdown of large portions
of the United States economy pursuant to emergency restrictions has impaired and will impair the ability of obligors under our
automobile contracts to pay their contractual obligations. The extent to which that ability will be impaired, and the extent to
which public ameliorative measures such as stimulus payments and enhanced unemployment benefits may restore such ability, cannot
be estimated.
We measure our portfolio
of finance receivables carried at fair value with consideration for unobservable inputs that 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. The pandemic and the adverse effect it may have on the U.S. economy and our obligors may cause us to consider
significant changes in any of those inputs, which in turn may have a significant effect on our fair
value measurement.
(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:
|
Schedule of finance receivables
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Finance receivables
|
|
|
|
|
Automobile finance receivables, net of unearned interest
|
|
$
|
576,227
|
|
|
$
|
895,566
|
|
|
Unearned acquisition fees and originations costs
|
|
|
1,054
|
|
|
|
1,964
|
|
|
Finance receivables
|
|
$
|
577,281
|
|
|
$
|
897,530
|
|
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, 2020 and December 31, 2019:
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
|
Schedule of amortized cost basis of finance receivables
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
490,096
|
|
|
$
|
698,870
|
|
|
31 - 60 days
|
|
|
57,463
|
|
|
|
107,951
|
|
|
61 - 90 days
|
|
|
21,760
|
|
|
|
57,395
|
|
|
91 + days
|
|
|
6,908
|
|
|
|
31,350
|
|
|
|
|
$
|
576,227
|
|
|
$
|
895,566
|
|
Finance receivables
totaling $6.9 million and $31.4 million at September 30, 2020 and December 31, 2019, respectively, including all receivables greater
than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.
Allowance for Credit
Losses – Finance Receivables
The allowance for credit
losses is a valuation account that is deducted from the amortized cost basis of finance receivables to present the net amount expected
to be collected. Charge offs are deducted from the allowance when management believes that collectability is unlikely.
Management estimates
the allowance using relevant available information, from internal and external sources, relating to past events, current conditions
and, reasonable and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation
of expected credit losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools
based on their calendar quarter of origination, to forecast expected losses for less seasoned quarterly vintage pools.
We measure the weighted
average monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the pools
in the relevant historical period, we consider each pool’s performance from its inception through the end of the current
period. We then apply the results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s
most recent actual cumulative net loss experience and extrapolating from that point based on the historical data. We believe the
pattern and magnitude of losses on older vintages allows us to establish a reasonable and supportable forecast of less seasoned
vintages.
Our contract purchase
guidelines are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor
credit history, job stability, residence stability and ability to pay, there is relatively little variation from the average for
the portfolio. Similarly, for key structural characteristics such as loan-to-value, length of contract, monthly payment and amount
financed, there is relatively little variation from the average for the portfolio. Consequently, we do not believe there are significant
differences in risk characteristics between various segments of our portfolio.
Our methodology incorporates
historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools. Furthermore,
the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive
landscape, the Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment.
In consideration of
the depth and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss
information for differences in risk characteristics such as credit or structural composition of segments of the portfolio or for
changes in environmental conditions such as changes in unemployment rates, collateral values or other factors. However, we have
considered how certain qualitative factors may affect future credit losses and have incorporated our judgement of the effect of
such factors into our estimates.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The following table
presents the amortized cost basis of our finance receivables by annual vintage as of September 30, 2020 and December 31, 2019.
|
Schedule of amortized cost basis of finance receivables
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Annual Vintage Pool
|
|
(In thousands)
|
|
|
2012 and prior
|
|
$
|
851
|
|
|
$
|
2,432
|
|
|
2013
|
|
|
6,212
|
|
|
|
15,489
|
|
|
2014
|
|
|
29,878
|
|
|
|
61,290
|
|
|
2015
|
|
|
95,522
|
|
|
|
162,242
|
|
|
2016
|
|
|
190,788
|
|
|
|
292,360
|
|
|
2017
|
|
|
252,976
|
|
|
|
361,753
|
|
|
|
|
$
|
576,227
|
|
|
$
|
895,566
|
|
At the adoption of CECL, the Company recorded
an addition to its allowance for finance credit losses of $127.0 million. In accordance with the rules for adopting CECL, the offset
to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified
retrospective method.
In consideration of the uncertainty associated
with the pandemic, the Company made additional provision for credit losses on finance receivables for the for the three-month and
nine-month periods ended September 30, 2020, in the amounts of $7.4 million and $14.1 million, respectively.
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, 2020
and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of allowance for finance credit losses
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
98,602
|
|
|
$
|
32,664
|
|
|
$
|
11,640
|
|
|
$
|
67,376
|
|
|
Early adoption of CECL
|
|
|
–
|
|
|
|
n/a
|
|
|
|
127,000
|
|
|
|
n/a
|
|
|
Provision for credit losses on finance receivables
|
|
|
7,400
|
|
|
|
19,874
|
|
|
|
14,113
|
|
|
|
64,319
|
|
|
Charge-offs
|
|
|
(15,574
|
)
|
|
|
(46,118
|
)
|
|
|
(73,096
|
)
|
|
|
(149,038
|
)
|
|
Recoveries
|
|
|
3,790
|
|
|
|
6,320
|
|
|
|
14,561
|
|
|
|
30,083
|
|
|
Balance at end of period
|
|
$
|
94,218
|
|
|
$
|
12,740
|
|
|
$
|
94,218
|
|
|
$
|
12,740
|
|
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:
|
Schedule of allowance for losses on repossessed inventory
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Gross balance of repossessions in inventory
|
|
$
|
17,005
|
|
|
$
|
28,933
|
|
|
Allowance for losses on repossessed inventory
|
|
|
(12,896
|
)
|
|
|
(21,389
|
)
|
|
Net repossessed inventory included in other assets
|
|
$
|
4,109
|
|
|
$
|
7,544
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
(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:
|
Schedule of securitization trust debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
2020 (2)
|
|
|
Principal
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
CPS 2014-C
|
|
|
December 2021
|
|
|
$
|
–
|
|
|
$
|
273,000
|
|
|
$
|
–
|
|
|
$
|
19,758
|
|
|
|
–
|
|
|
CPS 2014-D
|
|
|
March 2022
|
|
|
|
–
|
|
|
|
267,500
|
|
|
|
–
|
|
|
|
23,755
|
|
|
|
0.00
|
%
|
|
CPS 2015-A
|
|
|
June 2022
|
|
|
|
14,892
|
|
|
|
245,000
|
|
|
|
13,337
|
|
|
|
26,713
|
|
|
|
5.95
|
%
|
|
CPS 2015-B
|
|
|
September 2022
|
|
|
|
22,065
|
|
|
|
250,000
|
|
|
|
21,661
|
|
|
|
36,338
|
|
|
|
5.71
|
%
|
|
CPS 2015-C
|
|
|
December 2022
|
|
|
|
33,602
|
|
|
|
300,000
|
|
|
|
33,634
|
|
|
|
53,579
|
|
|
|
6.44
|
%
|
|
CPS 2016-A
|
|
|
March 2023
|
|
|
|
41,934
|
|
|
|
329,460
|
|
|
|
44,498
|
|
|
|
71,599
|
|
|
|
6.87
|
%
|
|
CPS 2016-B
|
|
|
June 2023
|
|
|
|
53,268
|
|
|
|
332,690
|
|
|
|
53,973
|
|
|
|
82,667
|
|
|
|
7.30
|
%
|
|
CPS 2016-C
|
|
|
September 2023
|
|
|
|
54,865
|
|
|
|
318,500
|
|
|
|
54,750
|
|
|
|
83,696
|
|
|
|
7.31
|
%
|
|
CPS 2016-D
|
|
|
April 2024
|
|
|
|
44,381
|
|
|
|
206,325
|
|
|
|
42,622
|
|
|
|
65,021
|
|
|
|
5.63
|
%
|
|
CPS 2017-A
|
|
|
April 2024
|
|
|
|
49,404
|
|
|
|
206,320
|
|
|
|
47,265
|
|
|
|
71,450
|
|
|
|
5.58
|
%
|
|
CPS 2017-B
|
|
|
December 2023
|
|
|
|
61,113
|
|
|
|
225,170
|
|
|
|
47,090
|
|
|
|
76,201
|
|
|
|
4.82
|
%
|
|
CPS 2017-C
|
|
|
September 2024
|
|
|
|
63,388
|
|
|
|
224,825
|
|
|
|
54,006
|
|
|
|
80,315
|
|
|
|
4.68
|
%
|
|
CPS 2017-D
|
|
|
June 2024
|
|
|
|
65,532
|
|
|
|
196,300
|
|
|
|
55,937
|
|
|
|
83,801
|
|
|
|
4.16
|
%
|
|
CPS 2018-A
|
|
|
March 2025
|
|
|
|
70,923
|
|
|
|
190,000
|
|
|
|
60,777
|
|
|
|
91,258
|
|
|
|
3.98
|
%
|
|
CPS 2018-B
|
|
|
December 2024
|
|
|
|
84,265
|
|
|
|
201,823
|
|
|
|
76,306
|
|
|
|
111,188
|
|
|
|
4.39
|
%
|
|
CPS 2018-C
|
|
|
September 2025
|
|
|
|
98,583
|
|
|
|
230,275
|
|
|
|
87,227
|
|
|
|
130,064
|
|
|
|
4.51
|
%
|
|
CPS 2018-D
|
|
|
June 2025
|
|
|
|
116,839
|
|
|
|
233,730
|
|
|
|
101,011
|
|
|
|
149,470
|
|
|
|
4.45
|
%
|
|
CPS 2019-A
|
|
|
March 2026
|
|
|
|
147,942
|
|
|
|
254,400
|
|
|
|
130,663
|
|
|
|
186,900
|
|
|
|
4.28
|
%
|
|
CPS 2019-B
|
|
|
June 2026
|
|
|
|
143,956
|
|
|
|
228,275
|
|
|
|
134,066
|
|
|
|
184,308
|
|
|
|
3.84
|
%
|
|
CPS 2019-C
|
|
|
September 2026
|
|
|
|
167,813
|
|
|
|
243,513
|
|
|
|
158,699
|
|
|
|
216,650
|
|
|
|
3.18
|
%
|
|
CPS 2019-D
|
|
|
December 2026
|
|
|
|
212,273
|
|
|
|
274,313
|
|
|
|
202,755
|
|
|
|
265,035
|
|
|
|
2.73
|
%
|
|
CPS 2020-A
|
|
|
March 2027
|
|
|
|
210,936
|
|
|
|
260,000
|
|
|
|
207,905
|
|
|
|
–
|
|
|
|
2.72
|
%
|
|
CPS 2020-B
|
|
|
June 2027
|
|
|
|
203,947
|
|
|
|
202,343
|
|
|
|
179,851
|
|
|
|
–
|
|
|
|
2.92
|
%
|
|
CPS 2020-C (3)
|
|
|
November 2027
|
|
|
|
193,242
|
|
|
|
252,200
|
|
|
|
252,200
|
|
|
|
–
|
|
|
|
1.58
|
%
|
|
|
|
|
|
|
|
$
|
2,155,163
|
|
|
$
|
5,945,962
|
|
|
$
|
2,060,233
|
|
|
$
|
2,109,766
|
|
|
|
|
|
_________________
|
(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 $225.1 million in 2020, $717.6 million in 2021, $510.7 million in 2022, $396.7 million in 2023, $92.0
million in 2024, $86.8 million in 2025, and $18.7 million in 2026.
|
|
|
|
|
(2)
|
Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated
Balance Sheet.
|
|
|
|
|
(3)
|
An additional $63.7 million of receivables were pledged to CPS 2020-C in October 2020.
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
Debt issuance costs of
$12.1 million and $12.0 million as of September 30, 2020 and December 31, 2019, 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, 2020, 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, 2020, restricted cash under the various agreements totaled approximately $200.91 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 September 15, 2020 we completed our
third securitization transaction of 2020. In the transaction, qualified institutional buyers purchased $252.2 million of asset-backed
notes secured by $260 million in automobile receivables purchased by us. The sold notes, issued by CPS Auto Receivables Trust 2020-C,
consist of six classes. Ratings of the notes were provided by Moody’s and DBRS, 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 2.39%.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
(4) Debt
The terms and amounts
of our other debt outstanding at September 30, 2020 and December 31, 2019 are summarized below:
|
Schedule of debt outstanding
|
|
|
|
|
|
|
Amount Outstanding at
|
|
|
|
|
|
|
|
|
|
September
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Description
|
|
Interest Rate
|
|
Maturity
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
5.50% over one month Libor (Minimum 6.50%)
|
|
|
February 2021
|
|
|
$
|
11,539
|
|
|
$
|
40,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00% over one month Libor (Minimum 3.75%)
|
|
|
November 2020
|
|
|
|
20,559
|
|
|
|
96,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00% over a commercial paper rate (Minimum 5.00%)
|
|
|
December 2021
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest financing
|
|
8.60%
|
|
|
January 2026
|
|
|
|
32,243
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated renewable notes
|
|
Weighted average rate of 10.24% and 9.75% at September 30, 2020 and December 31, 2019 , respectively
|
|
|
Weighted average maturity of December 2022 and April 2022 at September 30, 2020 and December
31, 2019, respectively
|
|
|
|
20,242
|
|
|
|
17,534
|
|
|
|
|
|
|
|
|
|
|
$
|
84,583
|
|
|
$
|
194,317
|
|
Unamortized debt issuance costs of $243,000
and $522,000 as of September 30, 2020 and December 31, 2019, respectively, have been excluded from the amount reported above for
residual interest financing. Similarly, unamortized debt issuance costs of $897,000 and $2.0 million as of September 30, 2020 and
December 31, 2019, 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.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
(5) Interest Income and Interest Expense
The following table presents the components
of interest income:
|
Schedule of interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Interest on finance receivables
|
|
$
|
29,753
|
|
|
$
|
49,912
|
|
|
$
|
101,333
|
|
|
$
|
167,862
|
|
|
Interest on finance receivables at fair value
|
|
|
42,808
|
|
|
|
32,903
|
|
|
|
125,273
|
|
|
|
83,696
|
|
|
Mark to finance receivables measured at fair value
|
|
|
(3,152
|
)
|
|
|
–
|
|
|
|
(23,051
|
)
|
|
|
–
|
|
|
Other interest income
|
|
|
21
|
|
|
|
713
|
|
|
|
665
|
|
|
|
2,264
|
|
|
Interest income
|
|
$
|
69,430
|
|
|
$
|
83,528
|
|
|
$
|
204,220
|
|
|
$
|
253,822
|
|
The following table presents the components
of interest expense:
|
Schedule of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Securitization trust debt
|
|
$
|
21,605
|
|
|
$
|
24,208
|
|
|
$
|
67,770
|
|
|
$
|
72,662
|
|
|
Warehouse lines of credit
|
|
|
1,856
|
|
|
|
2,407
|
|
|
|
6,294
|
|
|
|
6,387
|
|
|
Residual interest financing
|
|
|
876
|
|
|
|
956
|
|
|
|
2,734
|
|
|
|
2,867
|
|
|
Subordinated renewable notes
|
|
|
564
|
|
|
|
369
|
|
|
|
1,579
|
|
|
|
1,017
|
|
|
Interest expense
|
|
$
|
24,901
|
|
|
$
|
27,940
|
|
|
$
|
78,377
|
|
|
$
|
82,933
|
|
(6) Earnings Per Share
Earnings per share for
the three-month and nine-month periods ended September 30, 2020 and 2019 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, 2020 and 2019:
|
Computation of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Weighted average number of common shares outstanding during the period used to compute basic earnings per share
|
|
|
22,666
|
|
|
|
22,526
|
|
|
|
22,630
|
|
|
|
22,378
|
|
|
Incremental common shares attributable to exercise of outstanding options and warrants
|
|
|
1,242
|
|
|
|
1,540
|
|
|
|
1,195
|
|
|
|
1,724
|
|
|
Weighted average number of common shares used to compute diluted earnings per share
|
|
|
23,908
|
|
|
|
24,066
|
|
|
|
23,825
|
|
|
|
24,102
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
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, 2020 would have included an additional 14.2 million and 13.5 million shares, respectively,
attributable to the exercise of outstanding options and warrants. For the three-month and nine-month periods ended September 30,
2019, an additional 10.6 million and 10.6 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.
On March 27, 2020, the
Coronavirus Aid, Relief and Economic Security (“CARES”) Act was adopted, providing wide ranging economic relief for
individuals and businesses. One component of the CARES Act provides the Company with an opportunity to carry back net operating
losses (“NOLs”) arising from 2018, 2019 and 2020 to the prior five tax years. The Company has such NOLs reflected on
its balance sheet as a portion of deferred tax assets. The Company has previously valued its NOLs at the federal corporate income
tax rate of 21%. However, the provisions of the CARES Act provide for NOL carryback claims to be calculated based on a rate of
35%, which was the federal corporate tax rate in effect for the carryback years. Consequently, the Company has revalued the benefit
from its NOLs to reflect a 35% tax rate. The result of the revaluation of NOLs and other tax adjustments is a net tax benefit of
$8.8 million, which is reflected in income taxes for the nine-month period ending September 30, 2020.
As of September 30, 2020,
and December 31, 2019, 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 $31.0
million as of September 30, 2020 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of
$31.0 million consists of approximately $20.3 million of net U.S. federal deferred tax assets and $10.7 million of net state deferred
tax assets.
Income tax
expense was $2.1 million 2,121
for the three months ended September 30, 2020. Income tax benefit was $3.9 million (3,888)
for the nine months ended September 30, 2020, which includes net tax benefits of $8.8 million. Excluding the tax benefit,
income tax expense would have been $8.7 million for the nine months ended September 30, 2020, representing an effective
income tax rate of 36%. For the prior year period, income tax expense was $991,000
and $2.9 million 2,898 for the three months and nine months ended September 30, 2019 and represents an effective income tax
rate of 35%.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
(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.
Wage and Hour Claim.
On September 24, 2018, a former employee filed a lawsuit against us in the Superior Court of Orange County, California, alleging
that we incorrectly classified our sales representatives as outside salespersons exempt from overtime wages, mandatory break periods
and certain other employee protective provisions of California and federal law. The complaint seeks injunctive relief, an award
of unpaid wages, liquidated damages, and attorney fees and interest. The plaintiff purports to act on behalf of a class of similarly
situated employees and ex-employees. As of the date of this report, no motion for class certification has been filed or granted.
We believe that our
compensation practices with respect to our sales representatives are compliant with applicable law. Accordingly, we have defended
and intend to continue to defend this lawsuit. We have not recorded a liability with respect to this claim on the accompanying
consolidated financial statements.
In General. There
can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently
as of September 30, 2020, our best estimate of probable incurred losses for legal contingencies, including the matters identified
above, and consumer claims. The amount of losses that may ultimately be incurred cannot be estimated with certainty. However, based
on such information as is available to us, we believe that the total of probable incurred losses for legal contingencies as of
September 30, 2020 is immaterial, and that the range of reasonably possible losses for the legal proceedings and contingencies
we face, including those described or identified above, as of September 30, 2020 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 there can be no assurance
that the ultimate resolution of these matters will not be material to our operating results for a particular period, depending
on, among other factors, the size of the loss or liability imposed and the level of our income for that period.
(9) Fair Value Measurements
ASC 820, "Fair
Value Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
ASC 820 defines fair
value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value
measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1
- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level
2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Effective January 2018
we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter.
Our valuation policies
and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with
outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and
include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes
an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available
third-party information such as broker quotes or pricing services available to assist us in our valuation process.
Our level 3, unobservable
inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based
on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net
charge-offs and the rate of amortization of the portfolio of finance receivable. Significant changes
in any of those inputs in isolation would have a significant effect on our fair value measurement.
For the period ended
September 30, 2020, the Company considered the effect of the pandemic on the portfolio of finance receivables carried at fair value
and recorded a mark down to that portfolio of $23.1 million.
The table below presents
a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:
|
Schedule of reconciliation of the finance receivables measured at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
1,537,649
|
|
|
$
|
1,158,365
|
|
|
$
|
1,444,038
|
|
|
$
|
821,066
|
|
|
Finance receivables at fair value acquired during period
|
|
|
173,209
|
|
|
|
261,929
|
|
|
|
572,938
|
|
|
|
756,555
|
|
|
Payments received on finance receivables at fair value
|
|
|
(132,847
|
)
|
|
|
(83,384
|
)
|
|
|
(354,910
|
)
|
|
|
(200,889
|
)
|
|
Net interest income accretion on fair value receivables
|
|
|
(33,904
|
)
|
|
|
(24,309
|
)
|
|
|
(98,060
|
)
|
|
|
(64,131
|
)
|
|
Mark to fair value
|
|
|
(3,152
|
)
|
|
|
604
|
|
|
|
(23,051
|
)
|
|
|
604
|
|
|
Balance at end of period
|
|
$
|
1,540,955
|
|
|
$
|
1,313,205
|
|
|
$
|
1,540,955
|
|
|
$
|
1,313,205
|
|
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The table below compares
the fair values of these finance receivables to their contractual balances for the periods shown:
|
Schedule of finance receivables to their contractual balances
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Contractual
|
|
|
Fair
|
|
|
Contractual
|
|
|
Fair
|
|
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
Finance receivables measured at fair value
|
|
$
|
1,658,662
|
|
|
$
|
1,540,955
|
|
|
$
|
1,492,803
|
|
|
$
|
1,444,038
|
|
The following table
provides certain qualitative information about our level 3 fair value measurements:
|
Schedule of level 3 fair value measurements
|
|
|
|
|
|
|
|
|
|
Financial Instrument
|
|
Fair Values as of
|
|
|
|
Inputs as of
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Unobservable Inputs
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Finance receivables measured at fair value
|
|
$
|
1,540,955
|
|
|
$
|
1,444,038
|
|
|
Discount rate
|
|
|
10.5% - 11.1%
|
|
|
|
8.9% - 11.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net losses
|
|
|
16.4% - 18.4%
|
|
|
|
15.0% - 16.1%
|
|
The following table
summarizes the delinquency status of these finance receivables measured at fair value as of September 30, 2020 and December 31,
2019:
|
Schedule of delinquency status of finance receivables measured at fair value
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,530,301
|
|
|
$
|
1,344,883
|
|
|
31 - 60 days
|
|
|
76,208
|
|
|
|
81,262
|
|
|
61 - 90 days
|
|
|
27,616
|
|
|
|
34,280
|
|
|
91 + days
|
|
|
9,159
|
|
|
|
15,167
|
|
|
Repo
|
|
|
15,378
|
|
|
|
17,211
|
|
|
|
|
$
|
1,658,662
|
|
|
$
|
1,492,803
|
|
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, 2020 the finance receivables
related to the repossessed vehicles in inventory totaled $17.0 million. We have applied a valuation adjustment, or loss allowance,
of $12.9 million, which is based on a recovery rate of approximately 24.2%, resulting in an estimated fair value and carrying amount
of $4.1 million. The fair value and carrying amount of the repossessed inventory at December 31, 2019 was $7.5 million after applying
a valuation adjustment of $21.4 million.
There were no transfers
in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended September 30, 2020 and 2019.
CONSUMER PORTFOLIO SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands)
The estimated fair
values of financial assets and liabilities at September 30, 2020 and December 31, 2019, were as follows:
|
Schedule of estimated fair values of financial assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,253
|
|
|
$
|
11,253
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
11,253
|
|
|
Restricted cash and equivalents
|
|
|
200,912
|
|
|
|
200,912
|
|
|
|
–
|
|
|
|
–
|
|
|
|
200,912
|
|
|
Finance receivables, net
|
|
|
483,063
|
|
|
|
–
|
|
|
|
–
|
|
|
|
450,325
|
|
|
|
450,325
|
|
|
Accrued interest receivable
|
|
|
6,291
|
|
|
|
–
|
|
|
|
–
|
|
|
|
6,291
|
|
|
|
6,291
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
31,201
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
31,201
|
|
|
$
|
31,201
|
|
|
Accrued interest payable
|
|
|
4,937
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,937
|
|
|
|
4,937
|
|
|
Residual interest financing
|
|
|
32,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
32,000
|
|
|
|
32,000
|
|
|
Securitization trust debt
|
|
|
2,048,089
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,137,877
|
|
|
|
2,137,877
|
|
|
Subordinated renewable notes
|
|
|
20,242
|
|
|
|
–
|
|
|
|
–
|
|
|
|
20,242
|
|
|
|
20,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,295
|
|
|
$
|
5,295
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
5,295
|
|
|
Restricted cash and equivalents
|
|
|
135,537
|
|
|
|
135,537
|
|
|
|
–
|
|
|
|
–
|
|
|
|
135,537
|
|
|
Finance receivables, net
|
|
|
885,890
|
|
|
|
–
|
|
|
|
–
|
|
|
|
841,160
|
|
|
|
841,160
|
|
|
Accrued interest receivable
|
|
|
11,645
|
|
|
|
–
|
|
|
|
–
|
|
|
|
11,645
|
|
|
|
11,645
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
134,791
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
134,791
|
|
|
$
|
134,791
|
|
|
Accrued interest payable
|
|
|
5,254
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,254
|
|
|
|
5,254
|
|
|
Residual interest financing
|
|
|
39,478
|
|
|
|
–
|
|
|
|
–
|
|
|
|
39,478
|
|
|
|
39,478
|
|
|
Securitization trust debt
|
|
|
2,097,728
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,116,520
|
|
|
|
2,116,520
|
|
|
Subordinated renewable notes
|
|
|
17,534
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
17,534
|
|
|
|
17,534
|
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Overview
We are a specialty
finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile
dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light
trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers
who have limited credit histories or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source
of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional
sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers.
In addition to purchasing installment purchase contracts directly from dealers, we also originate vehicle purchase money loans
by lending directly to consumers and have (i) acquired installment purchase contracts in four merger and acquisition transactions,
and (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders. In this report, we refer to
all of such contracts and loans as "automobile contracts."
We were incorporated
and began our operations in March 1991. From inception through September 30, 2020, we have originated a total of approximately
$16.8 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser
degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately
$822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. Recent contract purchase volumes
and managed portfolio levels are shown in the table below:
|
|
|
|
$ in thousands
|
|
|
|
Period
|
|
Contracts Purchased in Period
|
|
|
Managed Portfolio at Period End
|
|
|
|
2015
|
|
|
1,060,538
|
|
|
|
2,031,136
|
|
|
|
2016
|
|
|
1,088,785
|
|
|
|
2,308,070
|
|
|
|
2017
|
|
|
859,069
|
|
|
|
2,333,530
|
|
|
|
2018
|
|
|
902,416
|
|
|
|
2,380,847
|
|
|
|
2019
|
|
|
1,002,782
|
|
|
|
2,416,042
|
|
|
|
Nine months ended September 30, 2020
|
|
|
575,876
|
|
|
|
2,250,395
|
|
Since April 2020, due
to the onset of the pandemic, we have seen a decrease in the monthly volumes of our contract purchases compared to the prior year
period and also compared to our first quarter of 2020.
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. All of our active securitizations are structured as secured financings.
When structured to be treated as a secured
financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related
debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest
and fee income on the contracts, and (ii) recognize interest expense on the securities issued in the transaction. For automobile
contracts acquired after 2017 we take account of estimated credit losses in our computation of a level yield used to determine
recognition of interest on the contracts. For contracts acquired before 2018, we adopted CECL on January 1, 2020 and we may, as
circumstances warrant, record as expense provisions for credit losses, as we did during the three-month and nine-month periods
ended September 30, 2020 as a result of the uncertainty related to the pandemic.
Since 1994 we have
conducted 87 term securitizations of automobile contracts that we originated. As of September 30, 2020, 22 of those securitizations
are active and all are structured as secured financings. Since September 2010 we have utilized senior subordinated structures without
any financial guarantees. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter,
resulting in four securitizations per calendar year. However, in 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
|
|
|
|
2015
|
|
|
3
|
|
|
$
|
795,000
|
|
|
|
2016
|
|
|
4
|
|
|
|
1,214,997
|
|
|
|
2017
|
|
|
4
|
|
|
|
870,000
|
|
|
|
2018
|
|
|
4
|
|
|
|
883,452
|
|
|
|
2019
|
|
|
4
|
|
|
|
1,014,124
|
|
|
|
Nine months ended September 30, 2020
|
|
|
3
|
|
|
|
741,867
|
|
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. The revolving period for this facility was extended to November
2020. In April 2015, we entered into a second $100 million facility. This facility was renewed in April 2017 and again in February
2019, extending the revolving period to February 2021, followed by an amortization period to February 2023. In November 2015, we
entered into a third $100 million facility. This facility was renewed in November 2017 and again in December 2019, extending the
revolving period to December 2021, followed by an amortization period to December 2023.
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, 2020, we were in compliance with all such covenants.
Results
of Operations
Comparison of Operating Results
for the three months ended September 30, 2020 with the three months ended September 30, 2019
Revenues.
During the three months ended September 30, 2020, our revenues were $70.7 million, a decrease of $14.9 million, or 17.4%,
from the prior year revenue of $85.5 million. The primary reason for the decrease in revenues is a decrease in interest
income and a mark down to the recorded value of the portion of the receivables portfolio accounted for at fair value.
Interest income for the three months ended September 30, 2020 decreased $10.9 million, or 13.1%, to $72.6 million from $83.5
million in the prior year. The primary reason for the decrease in interest income is the continued runoff of our portfolio of
finance receivables originated prior to January 2018, which accrued interest at an average of 18.5%, which is offset only in
part by the increase in our portfolio of receivables measured at fair value, which are those originated since January 2018.
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 the two
components of our loan portfolio for the three months ended September 30, 2020 and 2019:
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Interest Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
624,532
|
|
|
$
|
29,775
|
|
|
|
19.1%
|
|
|
$
|
1,105,087
|
|
|
$
|
50,625
|
|
|
|
18.3%
|
|
|
Finance
receivables measured at fair value
|
|
|
1,646,022
|
|
|
|
42,807
|
|
|
|
10.4%
|
|
|
|
1,304,012
|
|
|
|
32,903
|
|
|
|
10.1%
|
|
|
Total
|
|
$
|
2,270,554
|
|
|
$
|
72,582
|
|
|
|
12.8%
|
|
|
$
|
2,409,099
|
|
|
$
|
83,528
|
|
|
|
13.9%
|
|
Revenues for the third quarter of 2020 include a $3.2 million mark down to the recorded
value of the finance receivables measured at fair value. The mark down is an estimate based on our evaluation of the appropriate
fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential
additional future net losses arising from the pandemic.
In the three months ended
September 30, 2020, other income of $1.2 million decreased by $755,000, or 37.9% compared to the prior year. The three-month period
ended September 30, 2020 includes a decrease of $361,000 in revenues associated with direct mail and other related products and
services that we offer to our dealers and a decrease of $320,000 in payments from third-party providers of convenience fees paid
by our customers for web based and other electronic payments.
Expenses.
Our operating expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general
and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio
of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit
losses have the effect of reducing the internal rate of return or the recorded value applicable to such receivables).
Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month
period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee
costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed
and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market
environments, and macroeconomic factors such as interest rates and changes in the unemployment level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts purchased and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, sales and
advertising expenses, and depreciation and amortization.
Total operating expenses
were $64.8 million for the three months ended September 30, 2020, compared to $82.7 million for the prior period, a decrease of
$17.9 million, or 21.7%. The decrease is primarily due to a decrease in provision for credit losses.
Employee costs decreased
by $1.1 million or 5.4%, to $19.2 million during the three months ended September 30, 2020, representing 29.6% of total operating
expenses, from $20.3 million for the prior year, or 24.5% of total operating expenses. The table below summarizes our employees
by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, September
30, 2020 and 2019:
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
($ in millions)
|
|
|
Contracts purchased (dollars)
|
|
$
|
174.0
|
|
|
$
|
262.1
|
|
|
Contracts purchased (units)
|
|
|
9,106
|
|
|
|
14,353
|
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,250.4
|
|
|
$
|
2,412.6
|
|
|
Managed portfolio outstanding (units)
|
|
|
168,071
|
|
|
|
177,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
161
|
|
|
|
203
|
|
|
Number of Sales staff
|
|
|
94
|
|
|
|
118
|
|
|
Number of Servicing staff
|
|
|
472
|
|
|
|
622
|
|
|
Number of other staff
|
|
|
73
|
|
|
|
75
|
|
|
Total number of employees
|
|
|
800
|
|
|
|
1,018
|
|
During the second quarter,
we laid off 114 staff members due to the decrease in our business caused by the pandemic. Throughout the third quarter we experienced
further staff reductions due in part to the fact that our contract purchases have not returned to pre-pandemic levels. If our contract
purchase volumes remain at current levels, we expect somewhat lower employee costs in future periods.
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, a decrease from $8.2 million in
the previous year and represented 12.1% of total operating expenses.
Interest expense for
the three months ended September 30, 2020 were $24.9 million and represented 38.4% of total operating expenses, compared to $27.9
million in the previous year, when it was 33.8% of total operating expenses.
Interest on securitization
trust debt decreased by $2.6 million for the three months ended September 30, 2020 compared to the prior period. The average balance
of securitization trust debt decreased to $1,979.5 million for the three months ended September 30, 2020 compared to $2,165.9 million
for the three months ended September 30, 2019. The blended interest rates on new term securitizations have generally increased
in 2017 and 2018 before declining in 2019 and 2020. For any particular quarterly securitization transaction, the blended cost of
funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against
which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced
by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our
securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table
below:
|
Blended Cost of Funds on Recent Asset-Backed Term Securitizations
|
|
|
|
|
|
Period
|
|
Blended Cost of Funds
|
|
January 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%
|
|
October 2018
|
|
4.25%
|
|
January 2019
|
|
4.22%
|
|
April 2019
|
|
3.95%
|
|
July 2019
|
|
3.36%
|
|
October 2019
|
|
2.95%
|
|
January 2020
|
|
3.08%
|
|
June 2020
|
|
4.09%
|
|
September 2020
|
|
2.39%
|
The annualized average
rate on our securitization trust debt was 4.4% for the three months ended September 30, 2020 compared to 4.5% in the prior year
period. The annualized average rate is influenced by the manner in which the underlying securitization trust bonds are repaid.
The rate tends to increase over time on any particular securitization since the structures of our securitization trusts generally
provide for sequential repayment of the shorter term, lower interest rate bonds before the longer term, higher interest rate bonds.
Interest expense on subordinated
renewable notes increased by $194,000. The average balance of the outstanding subordinated debt increased 30.4% to $19.7 million
for the three months ended September 30, 2020 compared to $15.1 million for the three months ended September 30, 2019. The average
yield of subordinated notes increased to 11.4% in the three-month period ended September 30, 2020 compared to 9.8% in the prior
period.
Interest expense on warehouse
debt decreased by $550,000 to $1.9 million for the three months ended September 30, 2020 compared to $2.4 million in the prior
year period. The average rate on the debt also declined to 8.2% for the third quarter of 2020 compared to 9.8% for the same quarter
in 2019.
On May 16, 2018, we completed
a $40.0 million securitization of residual interests from previously issued securitizations. Interest expense on this residual
interest financing was $876,000 for the three months ended September 30, 2020 compared to $956,000 in the prior year period.
The following table
presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods
ended September 30, 2020 and 2019:
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Average Balance (1)
|
|
|
Interest
|
|
|
Annualized Average Yield/Rate
|
|
|
Average Balance (1)
|
|
|
Interest
|
|
|
Annualized Average Yield/Rate
|
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
624,532
|
|
|
$
|
29,775
|
|
|
|
19.1%
|
|
|
$
|
1,105,087
|
|
|
$
|
50,625
|
|
|
|
18.3%
|
|
|
Finance receivables at fair value
|
|
|
1,646,022
|
|
|
|
42,807
|
|
|
|
10.4%
|
|
|
|
1,304,012
|
|
|
|
32,903
|
|
|
|
10.1%
|
|
|
|
|
|
2,270,554
|
|
|
|
72,582
|
|
|
|
12.8%
|
|
|
|
2,409,099
|
|
|
|
83,528
|
|
|
|
13.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
90,697
|
|
|
|
1,857
|
|
|
|
8.2%
|
|
|
$
|
98,520
|
|
|
|
2,407
|
|
|
|
9.8%
|
|
|
Residual interest financing
|
|
|
36,407
|
|
|
|
876
|
|
|
|
9.6%
|
|
|
|
40,000
|
|
|
|
956
|
|
|
|
9.6%
|
|
|
Securitization trust debt
|
|
|
1,979,491
|
|
|
|
21,605
|
|
|
|
4.4%
|
|
|
|
2,165,927
|
|
|
|
24,208
|
|
|
|
4.5%
|
|
|
Subordinated renewable notes
|
|
|
19,737
|
|
|
|
563
|
|
|
|
11.4%
|
|
|
|
15,133
|
|
|
|
369
|
|
|
|
9.8%
|
|
|
|
|
$
|
2,126,332
|
|
|
|
24,901
|
|
|
|
4.7%
|
|
|
$
|
2,319,580
|
|
|
|
27,940
|
|
|
|
4.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
47,681
|
|
|
|
|
|
|
|
|
|
|
$
|
55,588
|
|
|
|
|
|
|
Net interest yield (3)
|
|
|
$
|
|
|
|
|
|
|
|
8.1%
|
|
|
|
|
|
|
|
|
|
|
|
9.1%
|
|
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
107%
|
|
|
|
|
|
|
|
|
|
|
|
104%
|
|
|
|
(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, 2020
Compared to September 30, 2019
|
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
|
(In thousands)
|
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
(20,850
|
)
|
|
$
|
(22,099
|
)
|
|
$
|
1,249
|
|
|
Finance receivables at fair value
|
|
|
9,904
|
|
|
|
8,669
|
|
|
|
1,235
|
|
|
|
|
|
(10,946
|
)
|
|
|
(13,430
|
)
|
|
|
2,484
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(550
|
)
|
|
|
(187
|
)
|
|
|
(363
|
)
|
|
Residual interest financing
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
|
–
|
|
|
Securitization trust debt
|
|
|
(2,603
|
)
|
|
|
(2,108
|
)
|
|
|
(495
|
)
|
|
Subordinated renewable notes
|
|
|
194
|
|
|
|
115
|
|
|
|
79
|
|
|
|
|
|
(3,039
|
)
|
|
|
(2,260
|
)
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
$
|
(7,907
|
)
|
|
$
|
(11,170
|
)
|
|
$
|
3,263
|
|
The reduction in the annualized yield on
our finance receivables for the three months ended September 30, 2020 compared to the prior year period is the result of 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 average balance of these
receivables was $1,646.0 million for the three months ended September 30, 2020 compared to $1,304.0 million in the prior year period.
Effective January 1, 2020, the Company
adopted Accounting Standards Update 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss model, generally
referred to as CECL. Adoption of CECL required the establishment of an allowance for the remaining expected lifetime credit losses
on the portion of the Company’s receivable portfolio that was originated prior to January 2018. To comply with CECL, the
Company recorded an addition to its allowance for finance credit losses of $127.0 million. In accordance with the rules for adopting
CECL, the offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using
the modified retrospective method.
Provision for credit losses was $7.4 million
for the three months ended September 30, 2020. The provision represents our estimate of additional forecasted losses that may be
incurred on the portfolio of finance receivables resulting from the pandemic. Such losses were not considered in our initial estimate
of remaining lifetime losses that we recorded with the adoption of CECL in January 2020. In the prior year period, prior to the
adoption of CECL, provision for credit losses was $19.9 million.
The allowance applies
only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio. Finance receivables
that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize
interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured
at fair value.
Sales expense consists
primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary
plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers,
such as training programs, internet lead sales, and direct mail products. Sales expense decreased by $1.2 million to $3.2 million
during the three months ended September 30, 2020 and represented 4.9% of total operating expenses. We purchased $174.0 million
of new contracts during the three months ended September 30, 2020 compared to $262.1 million in the prior year period. In our second
quarter of 2020, we experienced a significant reduction in contract purchases due to the pandemic and partial shutdown of the economy.
In our third quarter our contract purchase volumes increased but have not recovered to pre-pandemic levels.
Occupancy expenses was
$1.8 million for the three months ending September 30, 2020 and 2019.
Depreciation and amortization
expenses increased to $438,000 compared to $276,000 in the previous year and represented 0.7% of total operating expenses.
For the three months ended September 30,
2020 we recorded income tax expense of $2.1 million, representing a 36% effective tax rate. In the prior year period, we our income
tax expense was $991,000, for an effective income tax rate of 35%.
Comparison of Operating Results
for the nine months ended September 30, 2020 with the nine months ended September 30, 2019
Revenues.
During the nine months ended September 30, 2020, our revenues were $208.7 million, a decrease of $51.3 million, or 19.7%,
from the prior year revenue of $260.1 million. The primary reason for the decrease in revenues is a decrease in interest
income and a mark down to the recorded value of the portion of the receivables portfolio accounted for at fair value.
Interest income for the nine months ended September 30, 2020 decreased $26.5 million, or 10.5%, to $227.3 million from $253.8
million in the prior year. The primary reason for the decrease in interest income is the continued runoff of our portfolio of
finance receivables originated prior to January 2018, which accrued interest at an average of 18.5%, which is offset only in
part by the increase in our portfolio of receivables measured at fair value, which are those originated since January 2018.
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 nine months ended September 30, 2020 and 2019:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Interest Earning
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
734,195
|
|
|
$
|
101,998
|
|
|
|
18.5%
|
|
|
$
|
1,268,190
|
|
|
$
|
170,126
|
|
|
|
17.9%
|
|
|
Finance
receivables measured at fair value
|
|
|
1,619,399
|
|
|
|
125,273
|
|
|
|
10.3%
|
|
|
|
1,131,888
|
|
|
|
83,696
|
|
|
|
9.9%
|
|
|
Total
|
|
$
|
2,353,594
|
|
|
$
|
227,271
|
|
|
|
12.9%
|
|
|
$
|
2,400,078
|
|
|
$
|
253,822
|
|
|
|
14.1%
|
|
Revenues for the nine months ended September 30, 2020 include a $23.1 million mark down
to the recorded value of the finance receivables measured at fair value. The mark down is an estimate based on our evaluation of
the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment
of potential additional future net losses arising from the pandemic.
In the nine months ended
September 30, 2020, other income of $4.5 million decreased by $1.7 million, or 27.9% compared to the prior year. The nine-month
period ended September 30, 2020 includes a decrease of $1.3 million in revenues associated with direct mail and other related products
and services that we offer to our dealers and a decrease of $530,000 in payments from third-party providers of convenience fees
paid by our customers for web based and other electronic payments.
Expenses. Our operating
expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general and administrative
expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables
(other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of
reducing the internal rate of return or the recorded value applicable to such receivables). Interest expense is significantly affected
by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities
and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred
as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include
changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes
in the unemployment level.
Employee costs include
base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding
stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options)
generally fluctuate with the level of applications and automobile contracts purchased and serviced.
Other operating expenses
consist largely of facilities expenses, telephone and other communication services, credit services, computer services, sales and
advertising expenses, and depreciation and amortization.
Total operating expenses
were $195.1 million for the nine months ended September 30, 2020, compared to $251.8 million for the prior period, a decrease of
$56.7 million, or 22.5%. The decrease is primarily due to a decrease in provision for credit losses.
Employee costs increased
by $1.8 million or 3.0%, to $60.8 million during the nine months ended September 30, 2020, representing 31.2% of total operating
expenses, from $59.0 million for the prior year, or 23.4% of total operating expenses. The table below summarizes our employees
by category as well as contract purchases and units in our managed portfolio as of, and for the nine-month periods ended, September
30, 2020 and 2019:
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
($ in millions)
|
|
|
Contracts purchased (dollars)
|
|
$
|
575.9
|
|
|
$
|
755.3
|
|
|
Contracts purchased (units)
|
|
|
31,475
|
|
|
|
42,534
|
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,250.4
|
|
|
$
|
2,412.6
|
|
|
Managed portfolio outstanding (units)
|
|
|
168,071
|
|
|
|
177,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
161
|
|
|
|
203
|
|
|
Number of Sales staff
|
|
|
94
|
|
|
|
118
|
|
|
Number of Servicing staff
|
|
|
472
|
|
|
|
622
|
|
|
Number of other staff
|
|
|
73
|
|
|
|
75
|
|
|
Total number of employees
|
|
|
800
|
|
|
|
1,018
|
|
In the first
Quarter of 2020, prior to the onset of the pandemic, our employee costs were greater than in the first quarter of 2019. Those
increases have been partially offset by decreases since the first quarter of 2020, which are the result of staff reductions
due in part to the fact that our contract purchases have not returned to pre-pandemic levels. If our contract purchase
volumes remain at current levels, we expect somewhat lower employee costs in future periods.
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 $24.4 million, a decrease from $25.1 million
in the previous year and represented 12.5% of total operating expenses.
Interest expense for
the nine months ended September 30, 2020 were $78.4 million and represented 40.2% of total operating expenses, compared to $82.9
million in the previous year.
Interest on securitization
trust debt decreased by $4.9 million for the nine months ended September 30, 2020 compared to the prior period. The average balance
of securitization trust debt decreased to $2,058.1 million for the nine months ended September 30, 2020 compared to $2,178.4 million
for the nine months ended September 30, 2019. The blended interest rates on new term securitizations have generally increased in
2017 and 2018 before declining in 2019 and 2020. For any particular quarterly securitization transaction, the blended cost of funds
is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against
which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced
by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our
securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table
below:
|
Blended Cost of Funds on Recent Asset-Backed Term Securitizations
|
|
|
|
|
|
Period
|
|
Blended Cost of Funds
|
|
January 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%
|
|
October 2018
|
|
4.25%
|
|
January 2019
|
|
4.22%
|
|
April 2019
|
|
3.95%
|
|
July 2019
|
|
3.36%
|
|
October 2019
|
|
2.95%
|
|
January 2020
|
|
3.08%
|
|
June 2020
|
|
4.09%
|
|
September 2020
|
|
2.39%
|
The annualized average
rate on our securitization trust debt was 4.4% for the nine months ended September 30, 2020 and 2019. The annualized average rate
is influenced by the manner in which the underlying securitization trust bonds are repaid. The rate tends to increase over time
on any particular securitization since the structures of our securitization trusts generally provide for sequential repayment of
the shorter term, lower interest rate bonds before the longer term, higher interest rate bonds.
Interest expense on subordinated
renewable notes increased by $563,000. The average balance of the outstanding subordinated debt increased 30.0% to $18.8 million
for the nine months ended September 30, 2020 compared to $14.5 million for the nine months ended September 30, 2019. The average
yield of subordinated notes increased to 11.2% in the nine-month period ended September 30, 2020 compared to 9.3% in the prior
period.
Interest expense on warehouse
debt decreased by $93,000 for the nine months ended September 30, 2020 compared to the prior period. The average rate on the debt
was 7.8% in 2020 compared to 10.0% in the prior year while the average balance of the warehouse debt increased to $107.4 million
from $85.3 million.
On May 16, 2018, we completed
a $40.0 million securitization of residual interests from previously issued securitizations. Interest expense on this residual
interest financing was $2.7 million for the current year period and $2.9 million in the prior year period as the average outstanding
balance has decreased.
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, 2020 and 2019:
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Average Balance (1)
|
|
|
Interest
|
|
|
Annualized Average Yield/Rate
|
|
|
Average Balance (1)
|
|
|
Interest
|
|
|
Annualized Average Yield/Rate
|
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
734,195
|
|
|
$
|
101,998
|
|
|
|
18.5%
|
|
|
$
|
1,233,413
|
|
|
$
|
170,125
|
|
|
|
18.4%
|
|
|
Finance receivables at fair value
|
|
|
1,619,399
|
|
|
|
125,273
|
|
|
|
10.3%
|
|
|
|
1,131,888
|
|
|
|
83,696
|
|
|
|
9.9%
|
|
|
|
|
|
2,353,594
|
|
|
|
227,271
|
|
|
|
12.9%
|
|
|
|
2,365,301
|
|
|
|
253,821
|
|
|
|
14.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
107,388
|
|
|
|
6,294
|
|
|
|
7.8%
|
|
|
$
|
85,289
|
|
|
|
6,387
|
|
|
|
10.0%
|
|
|
Residual interest financing
|
|
|
37,959
|
|
|
|
2,734
|
|
|
|
9.6%
|
|
|
|
40,000
|
|
|
|
2,867
|
|
|
|
9.6%
|
|
|
Securitization trust debt
|
|
|
2,058,110
|
|
|
|
67,770
|
|
|
|
4.4%
|
|
|
|
2,178,437
|
|
|
|
72,662
|
|
|
|
4.4%
|
|
|
Subordinated renewable notes
|
|
|
18,847
|
|
|
|
1,580
|
|
|
|
11.2%
|
|
|
|
14,513
|
|
|
|
1,017
|
|
|
|
9.3%
|
|
|
|
|
$
|
2,222,304
|
|
|
|
78,378
|
|
|
|
4.7%
|
|
|
$
|
2,318,239
|
|
|
|
82,933
|
|
|
|
4.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
148,893
|
|
|
|
|
|
|
|
|
|
|
$
|
170,888
|
|
|
|
|
|
|
Net interest yield (3)
|
|
|
$
|
|
|
|
|
|
|
|
8.2%
|
|
|
|
|
|
|
|
|
|
|
|
9.5%
|
|
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
106%
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020
Compared to September 30, 2019
|
|
|
$
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
|
$
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
|
(In thousands)
|
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
(68,127
|
)
|
|
$
|
(69,033
|
)
|
|
$
|
906
|
|
|
Finance receivables at fair value
|
|
|
41,577
|
|
|
|
34,867
|
|
|
|
6,710
|
|
|
|
|
|
(26,550
|
)
|
|
|
(34,166
|
)
|
|
|
7,616
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(93
|
)
|
|
|
2,254
|
|
|
|
(2,347
|
)
|
|
Residual interest financing
|
|
|
(133
|
)
|
|
|
(133
|
)
|
|
|
–
|
|
|
Securitization trust debt
|
|
|
(4,892
|
)
|
|
|
(4,695
|
)
|
|
|
(197
|
)
|
|
Subordinated renewable notes
|
|
|
563
|
|
|
|
209
|
|
|
|
354
|
|
|
|
|
|
(4,555
|
)
|
|
|
(2,365
|
)
|
|
|
(2,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
$
|
(21,995
|
)
|
|
$
|
(31,801
|
)
|
|
$
|
9,806
|
|
The reduction in the annualized yield on
our finance receivables for the nine months ended September 30, 2020 compared to the prior year period is the result of 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 average balance of these
receivables was $1,619.4 million for the nine months ended September 30, 2020 compared to $1,131.9 million in the prior year period.
Effective January 1, 2020, the Company
adopted Accounting Standards Update 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss model, generally
referred to as CECL. Adoption of CECL required the establishment of an allowance for the remaining expected lifetime credit losses
on the portion of the Company’s receivable portfolio that was originated prior to January 2018. To comply with CECL, the
Company recorded an addition to its allowance for finance credit losses of $127.0 million. In accordance with the rules for adopting
CECL, the offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using
the modified retrospective method.
Provision for credit losses was $14.1 million
for the nine months ended September 30, 2020. The provision represents our estimate of additional losses that may be incurred on
the portfolio of finance receivables resulting from the pandemic. Such losses were not considered in our initial estimate of remaining
lifetime losses that we recorded with the adoption of CECL in January 2020. In the prior year period, prior to the adoption of
CECL, provision for credit losses was $64.3 million.
The allowance applies
only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio. Finance receivables
that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize
interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured
at fair value.
Sales expense consists
primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary
plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers,
such as training programs, internet lead sales, and direct mail products. Sales expense decreased by $3.2 million to $10.7 million
during the nine months ended September 30, 2020 and represented 5.5% of total operating expenses. We purchased $575.9 million of
new contracts during the nine months ended September 30, 2020 compared to $755.3 million in the prior year period. In our second
quarter of 2020, we experienced a significant reduction in contract purchases due to the pandemic and partial shutdown of the economy.
In our third quarter our contract purchase volumes increased but have not recovered to pre-pandemic levels.
Occupancy expenses decreased
by $383,000 or 6.7%, to $5.4 million compared to $5.7 million in the previous year and represented 2.7% of total operating expenses.
Depreciation and amortization
expenses increased to $1.3 million compared to $789,000 in the previous year and represented 0.7% of total operating expenses.
Income tax benefit was $3.9 million for
the nine months ended September 30, 2020, which includes an $8.8 million tax benefit. On March 27, 2020, the Coronavirus Aid, Relief
and Economic Security (“CARES”) Act was passed into law, providing wide ranging economic relief for individuals and
businesses. One component of the CARES Act provides the Company with an opportunity to carry back net operating losses (“NOLs”)
arising from 2018, 2019 and 2020 to the prior five tax years. The Company has previously valued its NOLs at the federal corporate
income tax rate of 21%. However, the CARES Act provides for NOL carryback claims to be calculated based on a rate of 35%, which
was the federal corporate tax rate in effect for the carryback years. The result of the revaluation of NOLs and other tax adjustments
is a net tax benefit of $8.8 million. Excluding the tax benefit, income tax expense would have been $4.9 million, representing
an effective income tax rate of 36%. For the prior year period, income tax expense was $2.9 million, which represents an effective
income tax rate of 35%.
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. Recent effects of the
pandemic include higher volumes of payment extensions requested by our customers and, in some states, temporary suspension of our
rights to repossess automobiles. The pandemic will likely have a negative effect on our delinquency and charge off experience in
the future, which is not yet reflected in the tables below.
Delinquency, Repossession and Extension
Experience (1)
Total Owned Portfolio
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
|
December
31, 2019
|
|
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
|
Delinquency Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross servicing portfolio (1)
|
|
|
|
168,071
|
|
|
$
|
2,250,395
|
|
|
|
177,575
|
|
|
$
|
2,412,638
|
|
|
|
177,604
|
|
|
$
|
2,416,042
|
|
|
Period of delinquency (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
|
9,883
|
|
|
$
|
133,671
|
|
|
|
14,071
|
|
|
$
|
195,016
|
|
|
|
13,737
|
|
|
$
|
189,214
|
|
|
61-90 days
|
|
|
|
3,771
|
|
|
|
49,376
|
|
|
|
6,909
|
|
|
|
94,603
|
|
|
|
6,695
|
|
|
|
91,675
|
|
|
91+ days
|
|
|
|
1,413
|
|
|
|
16,067
|
|
|
|
3,059
|
|
|
|
39,476
|
|
|
|
3,530
|
|
|
|
46,516
|
|
|
Total delinquencies (2)
|
|
|
|
15,067
|
|
|
|
199,114
|
|
|
|
24,039
|
|
|
|
329,095
|
|
|
|
23,962
|
|
|
|
327,405
|
|
|
Amount in repossession (3)
|
|
|
|
2,733
|
|
|
|
32,383
|
|
|
|
4,047
|
|
|
|
50,779
|
|
|
|
3,779
|
|
|
|
46,144
|
|
|
Total delinquencies and amount in repossession
(2)
|
|
|
|
17,800
|
|
|
$
|
231,497
|
|
|
|
28,086
|
|
|
$
|
379,874
|
|
|
|
27,741
|
|
|
$
|
373,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of gross servicing portfolio
|
|
|
|
9.0%
|
|
|
|
8.8%
|
|
|
|
13.5%
|
|
|
|
13.6%
|
|
|
|
13.5%
|
|
|
|
13.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies and amount in repossession as a percentage of
gross servicing portfolio
|
|
|
|
10.6%
|
|
|
|
10.3%
|
|
|
|
15.8%
|
|
|
|
15.7%
|
|
|
|
15.6%
|
|
|
|
15.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, accruing
|
|
|
|
30,912
|
|
|
$
|
441,306
|
|
|
|
25,036
|
|
|
$
|
337,383
|
|
|
|
27,677
|
|
|
$
|
385,673
|
|
|
Contracts with two or more extensions, accruing
|
|
|
|
56,204
|
|
|
|
675,607
|
|
|
|
54,182
|
|
|
|
681,939
|
|
|
|
54,440
|
|
|
|
673,918
|
|
|
|
|
|
|
87,116
|
|
|
|
1,116,913
|
|
|
|
79,218
|
|
|
|
1,019,322
|
|
|
|
82,117
|
|
|
|
1,059,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, non-accrual (4)
|
|
|
|
761
|
|
|
|
9,872
|
|
|
|
1,084
|
|
|
|
13,636
|
|
|
|
1,130
|
|
|
|
14,528
|
|
|
Contracts with two or more extensions, non-accrual
(4)
|
|
|
|
2,505
|
|
|
|
28,126
|
|
|
|
4,435
|
|
|
|
56,347
|
|
|
|
4,441
|
|
|
|
55,436
|
|
|
|
|
|
|
3,266
|
|
|
|
37,998
|
|
|
|
5,519
|
|
|
|
69,983
|
|
|
|
5,571
|
|
|
|
69,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contracts with extensions
|
|
|
|
90,382
|
|
|
$
|
1,154,911
|
|
|
|
84,737
|
|
|
$
|
1,089,305
|
|
|
|
87,688
|
|
|
$
|
1,129,555
|
|
____________________________________
(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
|
|
|
Finance Receivables Portfolio
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
Average servicing portfolio outstanding
|
|
$
|
624,532
|
|
|
$
|
1,105,087
|
|
|
$
|
1,192,484
|
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
14.1%
|
|
|
|
13.0%
|
|
|
|
12.2%
|
|
|
|
|
Fair Value Receivables Portfolio
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
Average servicing portfolio outstanding
|
|
$
|
1,646,022
|
|
|
$
|
1,304,012
|
|
|
$
|
1,212,226
|
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
3.5%
|
|
|
|
3.9%
|
|
|
|
3.8%
|
|
|
|
|
Total Managed Portfolio
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
Average servicing portfolio outstanding
|
|
$
|
2,270,554
|
|
|
$
|
2,409,099
|
|
|
$
|
2,404,710
|
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
6.4%
|
|
|
|
8.1%
|
|
|
|
8.0%
|
|
_________________________
(1) All amounts and percentages are
based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile
contracts.
(2) Net charge-offs include the remaining
principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid
interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other
income in the accompanying interim consolidated financial statements. September 30, 2020 and September 30, 2019 percentages represent
three months ended September 30, 2020 and September 30, 2019 annualized. December 31, 2019 represents 12 months ended December
31, 2019.
Extensions
In
certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In
general, we are bound by our securitization agreements to refrain from agreeing to more than two such extensions in any 12-month
period and to 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. Because
financial regulatory authorities have encouraged obligors to expect payment deferrals as a response to the pandemic, we may seek
amendments or waivers of our securitization agreements to relax the limits on extensions; however, we have not sought such changes
in terms as of the date of this report, and if we do seek such changes, there can be no assurance that the other parties to our
securitization agreements will agree to such amendments or waivers, nor as to the effect on credit performance that may result
if such amendments or waivers are agreed to.
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, 2020, for accounts that received extensions from 2008 through
2019 (2020 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, 2020
|
% Active or Paid Off at September 30, 2020
|
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
|
10,274
|
31.9%
|
16,170
|
50.2%
|
5,783
|
17.9%
|
17
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
26,167
|
12,165
|
46.5%
|
12,003
|
45.9%
|
1,999
|
7.6%
|
19
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
18,786
|
10,974
|
58.4%
|
6,880
|
36.6%
|
932
|
5.0%
|
19
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
18,783
|
11,322
|
60.3%
|
6,665
|
35.5%
|
796
|
4.2%
|
18
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
23,398
|
11,197
|
47.9%
|
11,225
|
48.0%
|
976
|
4.2%
|
23
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
25,773
|
10,707
|
41.5%
|
14,240
|
55.3%
|
826
|
3.2%
|
24
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
53,319
|
23,602
|
44.3%
|
28,635
|
53.7%
|
1,082
|
2.0%
|
24
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
80,897
|
40,998
|
50.7%
|
37,966
|
46.9%
|
1,933
|
2.4%
|
22
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
133,881
|
71,590
|
53.5%
|
55,331
|
41.3%
|
6,926
|
5.2%
|
18
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
121,531
|
78,883
|
64.9%
|
36,641
|
30.1%
|
6,007
|
4.9%
|
14
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
71,548
|
61,493
|
85.9%
|
8,113
|
11.3%
|
1,942
|
2.7%
|
9
|
______________________
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, 60.3% were either paid in full or active and performing at September 30, 2020. 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,
|
|
|
|
2020
|
|
2019
|
|
2019
|
|
|
|
|
|
|
|
|
|
Average number of extensions granted per month
|
|
7,256
|
|
5,152
|
|
5,962
|
|
|
|
|
|
|
|
|
|
Average number of outstanding accounts
|
|
174,549
|
|
177,094
|
|
177,256
|
|
|
|
|
|
|
|
|
|
Average monthly extensions as % of average outstandings
|
|
4.2%
|
|
2.9%
|
|
3.4%
|
______________________
Note: Table excludes portfolios originated
and owned by third parties
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
December 31, 2019
|
|
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
|
Contracts with one extension
|
|
|
31,673
|
|
|
$
|
451,178
|
|
|
|
26,120
|
|
|
$
|
351,019
|
|
|
|
28,807
|
|
|
$
|
400,202
|
|
|
Contracts with two extensions
|
|
|
19,028
|
|
|
|
252,189
|
|
|
|
17,816
|
|
|
|
228,337
|
|
|
|
17,895
|
|
|
|
229,555
|
|
|
Contracts with three extensions
|
|
|
13,228
|
|
|
|
161,303
|
|
|
|
14,611
|
|
|
|
187,088
|
|
|
|
14,423
|
|
|
|
181,896
|
|
|
Contracts with four extensions
|
|
|
11,281
|
|
|
|
130,279
|
|
|
|
12,372
|
|
|
|
157,264
|
|
|
|
12,367
|
|
|
|
153,170
|
|
|
Contracts with five extensions
|
|
|
8,801
|
|
|
|
95,481
|
|
|
|
8,507
|
|
|
|
104,396
|
|
|
|
8,742
|
|
|
|
103,989
|
|
|
Contracts with six extensions
|
|
|
6,371
|
|
|
|
64,481
|
|
|
|
5,311
|
|
|
|
61,201
|
|
|
|
5,454
|
|
|
|
60,743
|
|
|
|
|
|
90,382
|
|
|
$
|
1,154,911
|
|
|
|
84,737
|
|
|
$
|
1,089,305
|
|
|
|
87,688
|
|
|
$
|
1,129,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed portfolio (excluding originated and owned by 3rd parties)
|
|
|
168,071
|
|
|
$
|
2,250,395
|
|
|
|
177,575
|
|
|
$
|
2,412,638
|
|
|
|
177,604
|
|
|
$
|
2,416,042
|
|
______________________
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. Since January of 2019, we have attempted to reduce
extensions by working with our servicing staff to be more selective in granting extensions including, where appropriate, to exhaust
all possibilities of payment by the customer before granting an extension. During our second quarter we granted significantly
more extensions than normal due to the onset of the pandemic. During our third quarter, extensions reverted to pre-pandemic levels.
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, 2020 was $190.6 million, an increase of $20.6 million, compared
to net cash provided by operating activities for the nine-month period ended September 30, 2019 of $170.0 million. Net cash from
operating activities is generally provided by net income from operations adjusted for significant non-cash items such as our provision
for credit losses and interest accretion on fair value receivables.
Net cash provided by
investing activities for the nine-month period ended September 30, 2020 was $45.4 million compared to net cash used in investing
activities of $177.7 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 excluding acquisition fees were $572.9 million and $755.3 million during the first
nine months of 2020 and 2019, respectively.
Net cash used in financing
activities for the nine months ended September 30, 2020 was $164.6 million compared to net cash provided by financing activities
of $14.9 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 2020, we issued $714.5 million in new securitization trust debt compared
to $726.2 million in the same period of 2019. We repaid $764.1 million in securitization trust debt in the nine months ended September
30, 2020 compared to repayments of securitization trust debt of $723.2 million in the prior year period. In the nine months ended
September 31, 2020, we had net repayments on warehouse lines of credit of $104.7 million, compared to net advances of $20.9 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. We have been dependent on warehouse credit facilities to purchase automobile contracts and our securitization
transactions for long term financing of our contracts. In addition, we have accessed other sources, such as residual financings
and subordinated debt in order to finance our continuing operations.
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. Since approximately April
1, 2020, due to the onset of the pandemic, we have seen a decrease in the number of purchased 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, 2020, we had
unrestricted cash of $11.3 million and $268.8 million aggregate available borrowings under our three warehouse credit facilities
(assuming the availability of sufficient eligible collateral). As of September 30, 2020, we had approximately $37.2 million of
such eligible collateral. 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. During the nine-month period ended
September 30, 2020, we completed three securitizations aggregating $714.5 million of notes sold. We generally complete one securitization
each calendar quarter and have completed four securitizations every year since 2012, except for 2015 in which we completed three.
We had planned to complete a securitization in April 2020 but chose to delay it because the market for asset-backed securities
had been significantly interrupted in April due to the pandemic. We have since securitized receivables in June and September 2020.
The terms available to us in June were inferior to those available in September, both as to the interest rates payable on the issued
bonds, and as to the aggregate amount of such bonds that we were able to sell on acceptable terms, measured as a fraction of our
cost basis in the underlying receivables. If the securitization markets were to return to an unfavorable state similar to June
2020, that could have a material adverse effect on our liquidity, on our capital requirements, and on our results of operations.
There is no assurance that the markets will not return to such an unfavorable state, in which case we may be required to further
reduce our automobile contract purchases, win turn would cause our interest income and other portfolio related income to 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 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, 2020, we were in compliance
with all such financial covenants.
We have and will continue
to have a substantial amount of indebtedness. At September 30, 2020, we had approximately $2,131.5 million of debt outstanding.
Such debt consisted primarily of $2,048.1 million of securitization trust debt and $31.2 million of debt from warehouse lines of
credit. Our securitization trust debt has decreased by $49.6 million while our warehouse lines of credit debt has decreased by
$103.6 million since December 30, 2019 (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 $20.2
million and $17.5 million in subordinated renewable notes outstanding at September 30, 2020 and 2019, respectively. On May 16,
2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations. At September 30,
2020, $32.2 million of this residual interest financing debt remains outstanding ($32.0 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. Our valuation of receivables measured at fair value is a forward-looking statement,
as it is dependent, among other things, on our estimates of cash to be received in the future with respect to such receivables.
Each of the factors listed above as affecting charge-offs and recovery rates could have a similar effect on cash to be received
in the future with respect to receivables measured at fair value. 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). The factors
identified in this and other reports as “Risk Factors” could affect our revenues, expenses, liquidity and financial
condition, and the timing and amount of cash received with respect to our automobile contracts.