Item 1. Financial Statements
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,197
|
|
|
$
|
13,466
|
|
Restricted cash and equivalents
|
|
|
159,404
|
|
|
|
130,686
|
|
Finance receivables measured at fair value
|
|
|
1,533,723
|
|
|
|
1,523,726
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
411,109
|
|
|
|
492,133
|
|
Less: Allowance for finance credit losses
|
|
|
(73,497
|
)
|
|
|
(80,790
|
)
|
Finance receivables, net
|
|
|
337,612
|
|
|
|
411,343
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
|
826
|
|
|
|
828
|
|
Deferred tax assets, net
|
|
|
27,503
|
|
|
|
28,512
|
|
Accrued interest receivable
|
|
|
3,744
|
|
|
|
5,017
|
|
Other assets
|
|
|
23,798
|
|
|
|
32,317
|
|
Total Assets
|
|
$
|
2,095,807
|
|
|
$
|
2,145,895
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
50,370
|
|
|
$
|
43,112
|
|
Warehouse lines of credit
|
|
|
71,097
|
|
|
|
118,999
|
|
Residual interest financing
|
|
|
20,540
|
|
|
|
25,426
|
|
Securitization trust debt
|
|
|
1,791,583
|
|
|
|
1,803,673
|
|
Subordinated renewable notes
|
|
|
23,740
|
|
|
|
21,323
|
|
Total Liabilities
|
|
|
1,957,330
|
|
|
|
2,012,533
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value; authorized 4,998,130 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Series B preferred stock, $1 par value; authorized 1,870 shares; none issued
|
|
|
–
|
|
|
|
–
|
|
Common stock, no par value; authorized 75,000,000 shares; 22,656,229 and 22,737,342 shares issued and
outstanding at March 31, 2021 and December 31, 2020, respectively
|
|
|
72,877
|
|
|
|
72,926
|
|
Retained earnings
|
|
|
74,171
|
|
|
|
69,007
|
|
Accumulated other comprehensive loss
|
|
|
(8,571
|
)
|
|
|
(8,571
|
)
|
Total stockholders' equity
|
|
|
138,477
|
|
|
|
133,362
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,095,807
|
|
|
$
|
2,145,895
|
|
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
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues:
|
|
|
|
|
|
|
Interest income
|
|
$
|
66,093
|
|
|
$
|
79,136
|
|
Mark to finance receivables measured at fair value
|
|
|
(4,417
|
)
|
|
|
(10,350
|
)
|
Other income
|
|
|
1,436
|
|
|
|
1,981
|
|
Total revenues
|
|
|
63,112
|
|
|
|
70,767
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
20,159
|
|
|
|
21,842
|
|
General and administrative
|
|
|
7,748
|
|
|
|
8,669
|
|
Interest
|
|
|
20,946
|
|
|
|
26,991
|
|
Provision for credit losses
|
|
|
–
|
|
|
|
3,613
|
|
Sales
|
|
|
3,986
|
|
|
|
4,430
|
|
Occupancy
|
|
|
1,901
|
|
|
|
1,691
|
|
Depreciation and amortization
|
|
|
428
|
|
|
|
419
|
|
Total operating expenses
|
|
|
55,168
|
|
|
|
67,655
|
|
Income before income tax expense (benefit)
|
|
|
7,944
|
|
|
|
3,112
|
|
Income tax expense (benefit)
|
|
|
2,780
|
|
|
|
(7,680
|
)
|
Net income
|
|
$
|
5,164
|
|
|
$
|
10,792
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.48
|
|
Diluted
|
|
|
0.21
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,741
|
|
|
|
22,539
|
|
Diluted
|
|
|
24,967
|
|
|
|
23,879
|
|
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
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,164
|
|
|
$
|
10,792
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss); change in funded status of pension
plan
|
|
|
–
|
|
|
|
–
|
|
Comprehensive income
|
|
$
|
5,164
|
|
|
$
|
10,792
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,164
|
|
|
$
|
10,792
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Accretion of deferred acquisition fees and origination costs
|
|
|
251
|
|
|
|
339
|
|
Net interest income accretion on fair value receivables
|
|
|
35,025
|
|
|
|
29,715
|
|
Depreciation and amortization
|
|
|
428
|
|
|
|
419
|
|
Amortization of deferred financing costs
|
|
|
1,873
|
|
|
|
2,097
|
|
Mark to fair value of finance receivables measured at fair value
|
|
|
4,417
|
|
|
|
10,350
|
|
Provision for credit losses
|
|
|
–
|
|
|
|
3,613
|
|
Stock-based compensation expense
|
|
|
408
|
|
|
|
487
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
1,273
|
|
|
|
2,850
|
|
Deferred tax assets, net
|
|
|
1,009
|
|
|
|
(8,364
|
)
|
Other assets
|
|
|
8,244
|
|
|
|
1,901
|
|
Accounts payable and accrued expenses
|
|
|
7,258
|
|
|
|
9,855
|
|
Net cash provided by operating activities
|
|
|
65,350
|
|
|
|
64,054
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments received on finance receivables held for investment
|
|
|
73,480
|
|
|
|
94,535
|
|
Purchases of finance receivables measured at fair value
|
|
|
(205,459
|
)
|
|
|
(265,282
|
)
|
Payments received on finance receivables at fair value
|
|
|
156,020
|
|
|
|
109,558
|
|
Change in repossessions held in inventory
|
|
|
275
|
|
|
|
382
|
|
Purchase of furniture and equipment
|
|
|
(426
|
)
|
|
|
(295
|
)
|
Net cash provided by (used in) investing activities
|
|
|
23,890
|
|
|
|
(61,102
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of securitization trust debt
|
|
|
230,545
|
|
|
|
260,000
|
|
Proceeds from issuance of subordinated renewable notes
|
|
|
2,750
|
|
|
|
1,114
|
|
Payments on subordinated renewable notes
|
|
|
(333
|
)
|
|
|
(326
|
)
|
Net advances (repayments) of warehouse lines of credit
|
|
|
(48,256
|
)
|
|
|
6,837
|
|
Repayment of residual interest financing debt
|
|
|
(4,979
|
)
|
|
|
(1,658
|
)
|
Repayment of securitization trust debt
|
|
|
(242,489
|
)
|
|
|
(266,056
|
)
|
Payment of financing costs
|
|
|
(1,572
|
)
|
|
|
(1,674
|
)
|
Purchase of common stock
|
|
|
(755
|
)
|
|
|
–
|
|
Exercise of options and warrants
|
|
|
298
|
|
|
|
48
|
|
Net cash used in financing activities
|
|
|
(64,791
|
)
|
|
|
(1,715
|
)
|
Increase in cash and cash equivalents
|
|
|
24,449
|
|
|
|
1,237
|
|
Cash and restricted cash at beginning of period
|
|
|
144,152
|
|
|
|
140,832
|
|
Cash and restricted cash at end of period
|
|
$
|
168,601
|
|
|
$
|
142,069
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
19,252
|
|
|
$
|
24,739
|
|
Income taxes
|
|
$
|
(123
|
)
|
|
$
|
(410
|
)
|
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
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Common Stock (Shares Outstanding)
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
22,737
|
|
|
|
22,531
|
|
Common stock issued upon exercise of options and warrants
|
|
|
98
|
|
|
|
28
|
|
Repurchase of common stock
|
|
|
(179
|
)
|
|
|
–
|
|
Balance, end of period
|
|
|
22,656
|
|
|
|
22,559
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
72,926
|
|
|
$
|
71,257
|
|
Common stock issued upon exercise of options and warrants
|
|
|
298
|
|
|
|
48
|
|
Repurchase of common stock
|
|
|
(755
|
)
|
|
|
–
|
|
Stock-based compensation
|
|
|
408
|
|
|
|
487
|
|
Balance, end of period
|
|
$
|
72,877
|
|
|
$
|
71,792
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
69,007
|
|
|
$
|
139,805
|
|
Cumulative change in accounting principle (Note 2)
|
|
|
–
|
|
|
|
(92,469
|
)
|
Balance, beginning of period (as adjusted for change in accounting principle)
|
|
$
|
69,007
|
|
|
$
|
47,336
|
|
Net income
|
|
|
5,164
|
|
|
|
10,792
|
|
Balance, end of period
|
|
$
|
74,171
|
|
|
$
|
58,128
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(8,571
|
)
|
|
$
|
(8,421
|
)
|
Pension benefit obligation
|
|
|
–
|
|
|
|
–
|
|
Balance, end of period
|
|
$
|
(8,571
|
)
|
|
$
|
(8,421
|
)
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
133,362
|
|
|
|
|
|
Pension benefit obligation
|
|
|
–
|
|
|
|
|
|
Total Shareholders' Equity
|
|
$
|
138,477
|
|
|
$
|
121,499
|
|
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
We were formed in California on March 8, 1991.
We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance
receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale
of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers
for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source
of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment
purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased
immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four
merger and acquisition transactions. In this report, we refer to all of such contracts and loans as "automobile contracts."
Basis of Presentation
Our Unaudited Condensed Consolidated Financial
Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions
to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in
management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are,
in the opinion of management, of a normal recurring nature. Results for the three-month period ended March 31, 2021 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, 2020.
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.
SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
We re-evaluate the fair value of such receivables
at the close of each measurement period. If the reevaluation were to yield a value materially different from the recorded value, an adjustment
would be required. Results for the first quarter include a $4.4 million mark down to the carrying value of the portion of the receivables
portfolio accounted for 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. The
mark down is reflected as a reduction in revenue for the quarter.
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 periods ending March 31, 2021 and 2020:
Schedule of other income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Direct mail revenues
|
|
$
|
979
|
|
|
$
|
1,183
|
|
Convenience fee revenue
|
|
|
240
|
|
|
|
530
|
|
Recoveries on previously charged-off contracts
|
|
|
15
|
|
|
|
25
|
|
Sales tax refunds
|
|
|
171
|
|
|
|
202
|
|
Other
|
|
|
31
|
|
|
|
41
|
|
Other income for the period
|
|
$
|
1,436
|
|
|
$
|
1,981
|
|
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. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents
the supplemental balance sheet information related to leases:
Supplemental balance sheet information related to leases
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
23,840
|
|
|
$
|
23,735
|
|
Less: Accumulated amortization right-of-use assets
|
|
|
(14,257
|
)
|
|
|
(12,792
|
)
|
Operating lease right-of-use assets, net
|
|
$
|
9,583
|
|
|
$
|
10,943
|
|
|
|
|
$
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
(10,643
|
)
|
|
$
|
(12,096
|
)
|
|
|
|
$
|
|
|
|
|
|
Finance Leases
|
|
|
$
|
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
3,407
|
|
|
$
|
3,407
|
|
Less: Accumulated depreciation
|
|
|
(1,507
|
)
|
|
|
(1,226
|
)
|
Property and equipment, net
|
|
$
|
1,900
|
|
|
$
|
2,181
|
|
|
|
|
$
|
|
|
|
|
|
Finance lease liabilities
|
|
$
|
(1,969
|
)
|
|
$
|
(2,243
|
)
|
|
|
|
$
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
$
|
|
|
|
|
|
Operating lease
|
|
|
5.0%
|
|
|
|
5.0%
|
|
Finance lease
|
|
|
6.5%
|
|
|
|
6.5%
|
|
Maturities of leases
|
|
|
|
|
|
|
|
|
Maturities of lease liabilities were as follows:
|
|
|
$
|
|
|
|
|
|
(In thousands)
|
|
|
Operating
|
|
|
|
Finance
|
|
Year Ending December 31,
|
|
|
Lease
|
|
|
|
Lease
|
|
2021 (excluding the three months ended March 31, 2021)
|
|
$
|
5,549
|
|
|
$
|
921
|
|
2022
|
|
|
6,089
|
|
|
|
1,051
|
|
2023
|
|
|
1,421
|
|
|
|
84
|
|
2024
|
|
|
443
|
|
|
|
26
|
|
2025
|
|
|
305
|
|
|
|
9
|
|
Thereafter
|
|
|
2
|
|
|
|
–
|
|
Total undiscounted lease payments
|
|
|
13,809
|
|
|
|
2,091
|
|
Less amounts representing interest
|
|
|
(3,166
|
)
|
|
|
(122
|
)
|
Lease Liability
|
|
$
|
10,643
|
|
|
$
|
1,969
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents
the lease expense included in General and administrative and Occupancy expense on our Unaudited Condensed Consolidated Statement of Operations:
Lease information
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Operating lease cost
|
|
$
|
1,837
|
|
|
$
|
1,885
|
|
Finance lease cost
|
|
|
308
|
|
|
|
278
|
|
Total lease cost
|
|
$
|
2,145
|
|
|
$
|
2,163
|
|
The following table presents the supplemental
cash flow information related to leases:
Supplemental cash flow information related to leases
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
(In thousands)
|
|
Operating cash flows from operating leases
|
|
$
|
1,930
|
|
|
$
|
1,926
|
|
Operating cash flows from finance leases
|
|
|
274
|
|
|
|
231
|
|
Financing cash flows from finance leases
|
|
|
35
|
|
|
|
46
|
|
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 months ended March 31, 2021 and
2020, we recorded stock-based compensation costs in the amount of $408,000 and $487,000, respectively. As of March 31, 2021, unrecognized
stock-based compensation costs to be recognized over future periods equaled $2.8 million. This amount will be recognized as expense over
a weighted-average period of 2.0 years.
The following represents stock option activity
for the three months ended March 31, 2021:
|
|
Number of Shares
|
|
|
Weighted Average Exercise
|
|
|
Weighted Average Remaining Contractual
|
|
|
(in thousands)
|
|
|
Price
|
|
|
Term
|
Options outstanding at the beginning of period
|
|
|
15,977
|
|
|
$
|
4.46
|
|
|
N/A
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
N/A
|
Exercised
|
|
|
(98
|
)
|
|
|
3.05
|
|
|
N/A
|
Forfeited
|
|
|
(45
|
)
|
|
|
3.65
|
|
|
N/A
|
Options outstanding at the end of period
|
|
|
15,834
|
|
|
$
|
4.47
|
|
|
2.58 years
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of period
|
|
|
12,499
|
|
|
$
|
4.82
|
|
|
1.87 years
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents the price distribution
of stock options outstanding and exercisable for the years ended March 31, 2021 and December 31, 2020:
Schedule of stock options outstanding and exercisable
|
|
Number of shares as of
|
|
|
Number of shares as of
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
|
|
Outstanding
|
|
|
|
Exercisable
|
|
Range of exercise prices:
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
$0.95 - $1.99
|
|
|
1,878
|
|
|
|
1,878
|
|
|
|
1,904
|
|
|
|
1,904
|
|
$2.00 - $2.99
|
|
|
1,570
|
|
|
|
180
|
|
|
|
1,570
|
|
|
|
180
|
|
$3.00 - $3.99
|
|
|
4,863
|
|
|
|
3,234
|
|
|
|
4,973
|
|
|
|
3,306
|
|
$4.00 - $4.99
|
|
|
1,533
|
|
|
|
1,217
|
|
|
|
1,540
|
|
|
|
1,217
|
|
$5.00 - $5.99
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
$6.00 - $6.99
|
|
|
4,770
|
|
|
|
4,770
|
|
|
|
4,770
|
|
|
|
4,770
|
|
$7.00 - $7.99
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
1,220
|
|
Total shares
|
|
|
15,834
|
|
|
|
12,499
|
|
|
|
15,977
|
|
|
|
12,597
|
|
At March 31, 2021 the aggregate intrinsic
value of options outstanding and exercisable was $10.0 million and $7.0 million, respectively. There were 98,000 options exercised for
the three months ended March 31, 2021 compared to 28,000 for the comparable period in 2020. The total intrinsic value of options exercised
was $122,000 and $51,000 for the three-month periods ended March 31, 2021 and 2020. There were 315,000 shares available for future stock
option grants under existing plans as of March 31, 2021.
Purchases of Company Stock
The table below describes the purchase of our
common stock for the three-month ended March 31, 2021 and 2020:
Schedule of purchases of company stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
|
Shares
|
|
|
|
Avg. Price
|
|
|
|
Shares
|
|
|
|
Avg. Price
|
|
Open market purchases
|
|
|
138,004
|
|
|
$
|
4.18
|
|
|
|
–
|
|
|
$
|
–
|
|
Shares redeemed upon net exercise of stock options
|
|
|
40,727
|
|
|
|
4.36
|
|
|
|
–
|
|
|
|
–
|
|
Total stock purchases
|
|
|
178,731
|
|
|
$
|
4.22
|
|
|
|
–
|
|
|
$
|
–
|
|
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. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Financial Covenants
Certain of our securitization
transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum
financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage
levels. As of March 31, 2021, 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.
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.”
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.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents
the components of Finance Receivables, net of unearned interest:
Schedule of finance receivables
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Finance receivables
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Automobile finance receivables, net of unearned interest
|
|
$
|
410,623
|
|
|
$
|
491,307
|
|
Unearned acquisition fees and originations costs
|
|
|
486
|
|
|
|
826
|
|
Finance receivables
|
|
$
|
411,109
|
|
|
$
|
492,133
|
|
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 March 31, 2021 and December 31,
2020:
Schedule of delinquency status of finance receivables
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
360,369
|
|
|
$
|
406,693
|
|
31 - 60 days
|
|
|
35,533
|
|
|
|
56,572
|
|
61 - 90 days
|
|
|
11,683
|
|
|
|
22,660
|
|
91 + days
|
|
|
3,038
|
|
|
|
5,382
|
|
|
|
$
|
410,623
|
|
|
$
|
491,307
|
|
Finance receivables totaling
$3.0 million and $5.4 million at March 31, 2021 and December 31, 2020, 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.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Management estimates the allowance
using relevant available information, from internal and external sources, relating to past events, current conditions and, reasonable
and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation of expected credit
losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools based on their calendar quarter
of origination, to forecast expected losses for less seasoned quarterly vintage pools.
We measure the weighted average
monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the pools in the relevant
historical period, we consider each pool’s performance from its inception through the end of the current period. We then apply the
results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s most recent actual cumulative
net loss experience and extrapolating from that point based on the historical data. We believe the pattern and magnitude of losses on
older vintages allows us to establish a reasonable and supportable forecast of less seasoned vintages.
Our contract purchase guidelines
are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor credit history,
job stability, residence stability and ability to pay, there is relatively little variation from the average for the portfolio. Similarly,
for key structural characteristics such as loan-to-value, length of contract, monthly payment and amount financed, there is relatively
little variation from the average for the portfolio. Consequently, we do not believe there are significant differences in risk characteristics
between various segments of our portfolio.
Our methodology incorporates
historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools. Furthermore,
the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive landscape,
the Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment.
In consideration of the depth
and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss information for
differences in risk characteristics such as credit or structural composition of segments of the portfolio or for changes in environmental
conditions such as changes in unemployment rates, collateral values or other factors. However, we have considered how certain qualitative
factors may affect future credit losses and have incorporated our judgement of the effect of such factors into our estimates.
Effective January 1, 2020, the Company adopted
Accounting Standards Codification ("ASC") 326, which changes the criteria under which credit losses on financial instruments
(such as the Company’s finance receivables) are measured. ASC 326 introduced 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. 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. 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.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents
the amortized cost basis of our finance receivables by annual vintage as of March 31, 2021 and December 31, 2020.
Schedule of amortized cost basis of finance receivables
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Annual Vintage Pool
|
|
|
|
|
|
|
|
|
2012 and prior
|
|
$
|
427
|
|
|
$
|
608
|
|
2013
|
|
|
3,102
|
|
|
|
4,483
|
|
2014
|
|
|
17,169
|
|
|
|
23,115
|
|
2015
|
|
|
62,428
|
|
|
|
78,457
|
|
2016
|
|
|
136,699
|
|
|
|
163,677
|
|
2017
|
|
|
190,798
|
|
|
|
220,967
|
|
|
|
$
|
410,623
|
|
|
$
|
491,307
|
|
The following table presents a summary of the
activity for the allowance for finance credit losses for the three-month periods ended March 31, 2021 and 2020:
Schedule of allowance for finance credit losses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
80,790
|
|
|
$
|
11,640
|
|
Early adoption of CECL
|
|
|
–
|
|
|
|
127,000
|
|
Provision for credit losses on finance receivables
|
|
|
–
|
|
|
|
3,613
|
|
Charge-offs
|
|
|
(12,122
|
)
|
|
|
(34,214
|
)
|
Recoveries
|
|
|
4,829
|
|
|
|
6,034
|
|
Balance at end of period
|
|
$
|
73,497
|
|
|
$
|
114,073
|
|
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
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Gross balance of repossessions in inventory
|
|
$
|
10,340
|
|
|
$
|
15,589
|
|
Allowance for losses on repossessed inventory
|
|
|
(6,816
|
)
|
|
|
(11,790
|
)
|
Net repossessed inventory included in other assets
|
|
$
|
3,524
|
|
|
$
|
3,799
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(3) Securitization Trust Debt
We have completed many securitization
transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown
on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are
summarized in the following table:
Series
|
|
|
Final Scheduled Payment Date (1)
|
|
Receivables Pledged at
March 31,
2021
(2)
|
|
|
Initial Principal
|
|
|
Outstanding Principal at
March
31,
2021
|
|
|
Outstanding Principal at
December
31,
2020
|
|
|
Weighted Average Contractual Interest
Rate at
March 31,
2021
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
CPS 2015-B
|
|
|
September 2022
|
|
$
|
–
|
|
|
$
|
250,000
|
|
|
$
|
–
|
|
|
$
|
17,984
|
|
|
|
–
|
|
CPS 2015-C
|
|
|
December 2022
|
|
|
21,749
|
|
|
|
300,000
|
|
|
|
23,929
|
|
|
|
28,529
|
|
|
|
6.87%
|
|
CPS 2016-A
|
|
|
March 2023
|
|
|
28,459
|
|
|
|
329,460
|
|
|
|
30,958
|
|
|
|
37,158
|
|
|
|
7.65%
|
|
CPS 2016-B
|
|
|
June 2023
|
|
|
37,418
|
|
|
|
332,690
|
|
|
|
38,724
|
|
|
|
46,079
|
|
|
|
7.58%
|
|
CPS 2016-C
|
|
|
September 2023
|
|
|
39,455
|
|
|
|
318,500
|
|
|
|
40,046
|
|
|
|
47,325
|
|
|
|
7.82%
|
|
CPS 2016-D
|
|
|
April 2024
|
|
|
32,599
|
|
|
|
206,325
|
|
|
|
30,753
|
|
|
|
36,455
|
|
|
|
6.05%
|
|
CPS 2017-A
|
|
|
April 2024
|
|
|
36,408
|
|
|
|
206,320
|
|
|
|
34,412
|
|
|
|
40,619
|
|
|
|
6.04%
|
|
CPS 2017-B
|
|
|
December 2023
|
|
|
46,080
|
|
|
|
225,170
|
|
|
|
31,951
|
|
|
|
39,016
|
|
|
|
5.23%
|
|
CPS 2017-C
|
|
|
September 2024
|
|
|
48,489
|
|
|
|
224,825
|
|
|
|
41,953
|
|
|
|
47,553
|
|
|
|
4.95%
|
|
CPS 2017-D
|
|
|
June 2024
|
|
|
50,010
|
|
|
|
196,300
|
|
|
|
43,273
|
|
|
|
49,297
|
|
|
|
4.48%
|
|
CPS 2018-A
|
|
|
March 2025
|
|
|
54,744
|
|
|
|
190,000
|
|
|
|
47,230
|
|
|
|
53,549
|
|
|
|
4.25%
|
|
CPS 2018-B
|
|
|
December 2024
|
|
|
65,851
|
|
|
|
201,823
|
|
|
|
58,112
|
|
|
|
66,955
|
|
|
|
4.65%
|
|
CPS 2018-C
|
|
|
September 2025
|
|
|
76,364
|
|
|
|
230,275
|
|
|
|
68,625
|
|
|
|
77,345
|
|
|
|
4.74%
|
|
CPS 2018-D
|
|
|
June 2025
|
|
|
91,484
|
|
|
|
233,730
|
|
|
|
78,446
|
|
|
|
88,228
|
|
|
|
4.68%
|
|
CPS 2019-A
|
|
|
March 2026
|
|
|
115,227
|
|
|
|
254,400
|
|
|
|
99,017
|
|
|
|
114,373
|
|
|
|
4.50%
|
|
CPS 2019-B
|
|
|
June 2026
|
|
|
113,420
|
|
|
|
228,275
|
|
|
|
105,045
|
|
|
|
118,982
|
|
|
|
4.06%
|
|
CPS 2019-C
|
|
|
September 2026
|
|
|
133,374
|
|
|
|
243,513
|
|
|
|
125,430
|
|
|
|
142,080
|
|
|
|
3.35%
|
|
CPS 2019-D
|
|
|
December 2026
|
|
|
168,358
|
|
|
|
274,313
|
|
|
|
160,999
|
|
|
|
181,485
|
|
|
|
2.88%
|
|
CPS 2020-A
|
|
|
March 2027
|
|
|
165,519
|
|
|
|
260,000
|
|
|
|
163,649
|
|
|
|
184,944
|
|
|
|
2.89%
|
|
CPS 2020-B
|
|
|
June 2027
|
|
|
168,416
|
|
|
|
202,343
|
|
|
|
147,587
|
|
|
|
164,403
|
|
|
|
3.31%
|
|
CPS 2020-C
|
|
|
November 2027
|
|
|
223,358
|
|
|
|
252,200
|
|
|
|
214,018
|
|
|
|
231,961
|
|
|
|
1.75%
|
|
CPS 2021-A
|
|
|
March 2028
|
|
|
232,317
|
|
|
|
230,545
|
|
|
|
218,218
|
|
|
|
–
|
|
|
|
0.77%
|
|
|
|
|
|
|
$
|
1,949,099
|
|
|
$
|
5,391,007
|
|
|
$
|
1,802,375
|
|
|
$
|
1,814,320
|
|
|
|
|
|
_________________
|
(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 $642.9 million in 2021, $498.5 million in 2022, $411.9 million in 2023, $100.4 million in 2024, $102.2 million in 2025, $33.7 million
in 2026, and $2.0 million in 2027.
|
|
(2)
|
Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated
Balance Sheet.
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Debt issuance costs of $10.8
million and $10.6 million as of March 31, 2021 and December 31, 2020, 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 March 31, 2021, 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 March 31, 2021, restricted cash under the various
agreements totaled approximately $159.4 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 April 28, 2021 we completed our second securitization
transaction of 2021. In the transaction, qualified institutional buyers purchased $240.0 million of asset-backed notes secured by $240.0
million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2021-B, consist of five classes.
Ratings of the notes were provided by Moody’s and DBRS Morningstar, and were based on the structure of the transaction, the historical
performance of similar receivables and CPS’s experience as a servicer. The weighted average yield on the notes is approximately
1.65%.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(4) Debt
The terms and amounts of our
other debt outstanding at March 31, 2021 and December 31, 2020 are summarized below:
Schedule of debt outstanding
|
|
|
|
|
|
|
Amount Outstanding at
|
|
|
|
|
|
|
|
|
March
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Description
|
|
Interest Rate
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
5.50% over one month Libor (Minimum 6.50%)
|
|
N/A
|
|
|
$
|
–
|
|
|
$
|
42,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00% over one month Libor (Minimum 3.75%)
|
|
December 2022
|
|
|
|
44,956
|
|
|
|
45,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00% over a commercial paper rate (Minimum 5.00%)
|
|
December 2021
|
|
|
|
27,300
|
|
|
|
32,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest financing
|
|
8.60%
|
|
January 2026
|
|
|
|
20,597
|
|
|
|
25,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated renewable notes
|
|
Weighted average rate of 9.92% and 10.09% at March 31, 2021 and December 31, 2020, respectively
|
|
Weighted average maturity of March 2023 and January 2023 at March 31, 2021 and December 31,
2020, respectively
|
|
|
|
23,740
|
|
|
|
21,323
|
|
|
|
|
|
|
|
|
$
|
116,593
|
|
|
$
|
167,411
|
|
As of December 31, 2020 we had
short-term funding capacity of $300 million, comprising three credit facilities. We repaid the outstanding balance for the facility first
established in April 2015 at its maturity date in February 2021 and elected not to renew it. As of March 31, 2021, our short-term funding
capacity is $200 million, comprising two credit facilities.
Unamortized debt issuance costs of $57,000 and
$150,000 as of March 31, 2021 and December 31, 2020, respectively, have been excluded from the amount reported above for residual interest
financing. Similarly, unamortized debt issuance costs of $1.2 million and $1.5 million as of March 31, 2021 and December 31, 2020, 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. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(5) Interest Income and Interest Expense
The following table presents the components of interest
income:
Schedule of interest income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Interest on finance receivables
|
|
$
|
22,099
|
|
|
$
|
37,807
|
|
Interest on finance receivables at fair value
|
|
|
43,988
|
|
|
|
40,806
|
|
Mark to finance receivables measured at fair value
|
|
|
(4,417
|
)
|
|
|
(10,350
|
)
|
Other interest income
|
|
|
6
|
|
|
|
523
|
|
Interest income
|
|
$
|
61,676
|
|
|
$
|
68,786
|
|
The following table presents the components
of interest expense:
Schedule of interest expense
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Securitization trust debt
|
|
$
|
18,453
|
|
|
$
|
23,798
|
|
Warehouse lines of credit
|
|
|
1,314
|
|
|
|
1,763
|
|
Residual interest financing
|
|
|
566
|
|
|
|
938
|
|
Subordinated renewable notes
|
|
|
613
|
|
|
|
492
|
|
Interest expense
|
|
$
|
20,946
|
|
|
$
|
26,991
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(6) Earnings Per Share
Earnings per share for the three-month
periods ended March 31, 2021 and 2020 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
periods ended March 31, 2021 and 2020:
Computation of earnings per share
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Weighted average number of common shares outstanding during the period used to compute basic earnings per share
|
|
|
22,741
|
|
|
|
22,539
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares attributable to exercise of outstanding options and warrants
|
|
|
2,226
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used to compute diluted earnings per share
|
|
|
24,967
|
|
|
|
23,879
|
|
If the anti-dilutive effects
of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-months ended
March 31, 2021 and 2020 would have included an additional 7.5 million and 12.9 million shares, respectively, attributable to the exercise
of outstanding options and warrants.
(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 three-month
period ending March 31, 2020.
As of March 31, 2021, and December
31, 2020, 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.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Deferred tax assets are recognized
subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax
asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not
be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization
is not assured, we believe that the realization of the recognized net deferred tax asset of $27.5 million as of March 31, 2021 is more
likely than not based on forecasted future net earnings. Our net deferred tax asset of $27.5 million consists of approximately $16.2 million
of net U.S. federal deferred tax assets and $11.3 million of net state deferred tax assets.
Income tax expense was $2.8
million for the three months ended March 31, 2021, representing an effective income tax rate of 35%. Income tax benefit was $7.7 million
for the three months ended March 31, 2020, which includes net tax benefits of $8.8 million. Excluding the tax benefit, income tax expense
would have been $1.1 million, representing an effective income tax rate of 36%.
(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 December 31, 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 March 31, 2021 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 March 31, 2021 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.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(9) Fair Value Measurements
ASC 820, "Fair Value
Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when pricing
an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under
the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.
ASC 820 defines fair value,
establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement
and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the
valuation methodology are unobservable and significant to the fair value measurement.
Effective January 2018 we
have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter.
Our valuation policies and
procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with outside
valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include methodologies
for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in
fair value measurements and documentation of the reasons for such changes. There is little available third-party information such as broker
quotes or pricing services available to assist us in our valuation process.
Our level 3, unobservable
inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on the
best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs
and the rate of amortization of the portfolio of finance receivable. Significant changes in any of those
inputs in isolation would have a significant effect on our fair value measurement.
For the period ended March
31, 2021, the Company evaluated 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 on the portfolio of finance receivables carried at fair value
and recorded a mark down to that portfolio of $4.4 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
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
1,523,726
|
|
|
$
|
1,444,038
|
|
Finance receivables at fair value acquired during period
|
|
|
205,459
|
|
|
|
265,282
|
|
Payments received on finance receivables at fair value
|
|
|
(156,020
|
)
|
|
|
(109,558
|
)
|
Net interest income accretion on fair value receivables
|
|
|
(35,025
|
)
|
|
|
(29,715
|
)
|
Mark to fair value
|
|
|
(4,417
|
)
|
|
|
(10,350
|
)
|
Balance at end of period
|
|
$
|
1,533,723
|
|
|
$
|
1,559,697
|
|
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Contractual
|
|
|
Fair
|
|
|
Contractual
|
|
|
Fair
|
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
|
|
(In thousands)
|
|
Finance receivables measured at fair value
|
|
$
|
1,698,110
|
|
|
$
|
1,533,723
|
|
|
$
|
1,668,076
|
|
|
$
|
1,523,726
|
|
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
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
|
2020
|
|
Unobservable Inputs
|
|
2021
|
|
2020
|
|
(In thousands)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables measured at fair value
|
$
|
1,533,723
|
|
$
|
1,523,726
|
|
Discount rate
|
|
11.0% - 11.3%
|
|
10.4% - 11.1%
|
|
|
|
|
|
|
|
Cumulative net losses
|
|
15.4% - 18.4%
|
|
15.3% - 18.4%
|
The following table summarizes
the delinquency status of these finance receivables measured at fair value as of March 31, 2021 and December 31, 2020:
Schedule of delinquency status of finance receivables measured at fair value
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Delinquency Status
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,594,070
|
|
|
$
|
1,505,486
|
|
31 - 60 days
|
|
|
58,534
|
|
|
|
96,296
|
|
61 - 90 days
|
|
|
20,114
|
|
|
|
36,436
|
|
91 + days
|
|
|
5,378
|
|
|
|
9,607
|
|
Repo
|
|
|
20,014
|
|
|
|
20,251
|
|
|
|
$
|
1,698,110
|
|
|
$
|
1,668,076
|
|
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 March 31, 2021 the finance receivables related to the repossessed
vehicles in inventory totaled $10.3 million. We have applied a valuation adjustment, or loss allowance, of $6.8 million, which is based
on a recovery rate of approximately 34%, resulting in an estimated fair value and carrying amount of $3.5 million. The fair value and
carrying amount of the repossessed inventory at December 31, 2020 was $3.8 million after applying a valuation adjustment of $11.8 million.
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
There were no transfers in
or out of level 1, level 2 or level 3 assets and liabilities for the three months ended March 31, 2021 and 2020.
The estimated fair values
of financial assets and liabilities at March 31, 2021 and December 31, 2020, were as follows:
Schedule of estimated fair values of financial assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,197
|
|
|
$
|
9,197
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
9,197
|
|
Restricted cash and equivalents
|
|
|
159,404
|
|
|
|
159,404
|
|
|
|
–
|
|
|
|
–
|
|
|
|
159,404
|
|
Finance receivables, net
|
|
|
337,612
|
|
|
|
–
|
|
|
|
–
|
|
|
|
348,892
|
|
|
|
348,892
|
|
Accrued interest receivable
|
|
|
3,744
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,744
|
|
|
|
3,744
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
71,097
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
71,097
|
|
|
$
|
71,097
|
|
Accrued interest payable
|
|
|
4,740
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,740
|
|
|
|
4,740
|
|
Securitization trust debt
|
|
|
1,791,583
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,813,370
|
|
|
|
1,813,370
|
|
Subordinated renewable notes
|
|
|
23,740
|
|
|
|
–
|
|
|
|
–
|
|
|
|
23,740
|
|
|
|
23,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Financial Instrument
|
|
(In thousands)
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,466
|
|
|
$
|
13,466
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
13,466
|
|
Restricted cash and equivalents
|
|
|
130,686
|
|
|
|
130,686
|
|
|
|
–
|
|
|
|
–
|
|
|
|
130,686
|
|
Finance receivables, net
|
|
|
411,343
|
|
|
|
–
|
|
|
|
–
|
|
|
|
429,972
|
|
|
|
429,972
|
|
Accrued interest receivable
|
|
|
5,017
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,017
|
|
|
|
5,017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
118,999
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
118,999
|
|
|
$
|
118,999
|
|
Accrued interest payable
|
|
|
4,919
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,919
|
|
|
|
4,919
|
|
Securitization trust debt
|
|
|
1,803,673
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,862,630
|
|
|
|
1,862,630
|
|
Subordinated renewable notes
|
|
|
21,323
|
|
|
|
–
|
|
|
|
–
|
|
|
|
21,323
|
|
|
|
21,323
|
|
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 March 31, 2021, we have originated a total of approximately $17.2 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
|
|
2020
|
|
|
742,584
|
|
|
|
2,174,972
|
|
Three months ended March 31, 2021
|
|
|
205,482
|
|
|
|
2,119,073
|
|
Since April 2020, due to
the onset of the pandemic, we have seen a decrease in the monthly volumes of our contract purchases when compared to the 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 year ended December 31, 2020 because of the uncertainty related to the pandemic.
Since 1994 we have conducted
88 term securitizations of automobile contracts that we originated. As of March 31, 2021, 21 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 and 2020, we closed only three term securitization transactions in each calendar year rather than
four.
Our recent history of term securitizations
is summarized in the table below:
Recent Asset-Backed Term Securitizations
|
|
|
|
$ in thousands
|
|
Period
|
|
Number of Term Securitizations
|
|
|
Receivables Pledged in Term Securitizations
|
|
2015
|
|
|
3
|
|
|
$
|
795,000
|
|
2016
|
|
|
4
|
|
|
|
1,214,997
|
|
2017
|
|
|
4
|
|
|
|
870,000
|
|
2018
|
|
|
4
|
|
|
|
883,452
|
|
2019
|
|
|
4
|
|
|
|
1,014,124
|
|
2020
|
|
|
3
|
|
|
|
741,867
|
|
Three months ended March 31, 2021
|
|
|
1
|
|
|
|
245,000
|
|
Generally, prior to a securitization
transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. We previously had short-term
funding capacity of $300 million, comprising three credit facilities. The first $100 million credit facility was established in May 2012.
This facility was most recently renewed in December 2020, extending the revolving period to December 2022, with an optional amortization
period through December 2023. In November 2015, we entered into another $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 April
2015, we entered into a $100 million facility that was renewed in April 2017 and again in February 2019. We repaid the outstanding balance
for this facility at its maturity date in February 2021 and elected not to renew it. We currently have short-term funding capacity of
$200 million.
In a securitization and in
our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar to the representations
and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach any of our representations or
warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid
interest. We may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract at
a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse against dealers, we will
bear the risk of loss on repossession and resale of vehicles under automobile contracts that we repurchase.
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 March 31, 2021, we were in compliance
with all such covenants.
Results
of Operations
Comparison of Operating Results for the
three months ended March 31, 2021 with the three months ended March 31, 2020
Revenues. During
the three months ended March 31, 2021, our revenues were $63.1 million, a decrease of $7.7 million, or 10.8%, from the prior year revenue
of $70.8 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the three months
ended March 31, 2021 decreased $13.0 million, or 16.5%, to $66.1 million from $79.1 million in the prior year. The primary reason for
the decrease in interest income is the continued runoff of our legacy portfolio of finance receivables originated prior to January 2018,
the average balance of which decreased by 46.6% from the prior period. The decrease in interest from that legacy portion of our portfolio
was partially offset 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 March 31, 2021 and 2020:
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
451,425
|
|
|
$
|
22,105
|
|
|
|
19.6%
|
|
|
$
|
845,727
|
|
|
$
|
38,330
|
|
|
|
18.1%
|
|
Finance receivables
measured at fair value
|
|
|
1,687,232
|
|
|
|
43,988
|
|
|
|
10.4%
|
|
|
|
1,580,468
|
|
|
|
40,806
|
|
|
|
10.3%
|
|
Total
|
|
$
|
2,138,657
|
|
|
$
|
66,093
|
|
|
|
12.4%
|
|
|
$
|
2,426,195
|
|
|
$
|
79,136
|
|
|
|
13.0%
|
|
Revenues for the three months ended March 31, 2021 and 2020 are net of mark downs of $4.4 million
and $10.4 million, respectively, to the recorded value of the finance receivables measured at fair value. The mark downs are estimates
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 March
31, 2021, other income of $1.4 million decreased by $545,000, or 27.5% compared to the prior year. The three-month period ended March
31, 2021 includes a decrease of $204,000 in revenues associated with direct mail and other related products and services that we offer
to our dealers and a decrease of $290,000 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
$55.2 million for the three months ended March 31, 2021, compared to $67.7 million for the prior period, a decrease of $12.5 million,
or 18.5%. The decrease is primarily due to decreases in interest expense, provisions for credit losses and employee costs.
Employee costs decreased by
$1.7 million or 7.7%, to $20.2 million during the three months ended March 31, 2021, representing 36.5% of total operating expenses, from
$21.8 million for the prior year, or 32.3% of total operating expenses. The table below summarizes our employees by category as well as
contract purchases and units in our managed portfolio as of, and for the three-month periods ended, March 31, 2021 and 2020:
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in millions)
|
|
Contracts purchased (dollars)
|
|
$
|
205.5
|
|
|
$
|
266.0
|
|
Contracts purchased (units)
|
|
|
10,736
|
|
|
|
14,747
|
|
Managed portfolio outstanding (dollars)
|
|
$
|
2,119.1
|
|
|
$
|
2,435.1
|
|
Managed portfolio outstanding (units)
|
|
|
158,933
|
|
|
|
179,253
|
|
|
|
|
|
|
|
|
|
|
Number of Originations staff
|
|
|
160
|
|
|
|
198
|
|
Number of Sales staff
|
|
|
102
|
|
|
|
113
|
|
Number of Servicing staff
|
|
|
446
|
|
|
|
601
|
|
Number of other staff
|
|
|
75
|
|
|
|
76
|
|
Total number of employees
|
|
|
783
|
|
|
|
988
|
|
During the second quarter of
2020, we laid off 114 staff members due to the decrease in our business caused by the pandemic. Since then, we have 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 $7.7 million, a decrease from $8.7 million in the previous
year and represented 14.0% of total operating expenses.
Interest expense for the three
months ended March 31, 2021 were $20.9 million and represented 38.0% of total operating expenses, compared to $27.0 million in the previous
year, when it was 39.9% of total operating expenses.
Interest on securitization trust
debt decreased by $5.3 million for the three months ended March 31, 2021 compared to the prior period. The average balance of securitization
trust debt decreased to $1,876.8 million for the three months ended March 31, 2021 compared to $2,186.8 million for the three months ended
March 31, 2020. The blended interest rates on new term securitizations have generally increased in 2017 and 2018 before declining from
2019 to 2021. For each quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including
the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks
that investors are willing to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization.
These and other factors have resulted in fluctuations in our securitization trust debt interest costs. The blended interest rates of our
recent securitizations are summarized in the table below:
Blended Cost of Funds on Recent Asset-Backed
Term Securitizations
|
|
|
|
Period
|
|
Blended Cost of Funds
|
January 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%
|
January 2021
|
|
1.11%
|
The annualized average
rate on our securitization trust debt was 3.9% for the three months ended March 31, 2021 compared to 4.4% 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 each 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 $119,000. The average balance of the outstanding subordinated debt increased 22.9% to $22.2 million for the
three months ended March 31, 2021 compared to $18.1 million for the three months ended March 31, 2020. The average yield of subordinated
notes increased to 11.0% in the three-month period ended March 31, 2021 compared to 10.9% in the prior period.
Interest expense on warehouse
debt decreased by $448,000 to $1.3 million for the three months ended March 31, 2021 compared to $1.8 million in the prior year period.
The average rate on the debt increased to 10.4% for the first quarter of 2021 compared to 9.7% for the same quarter in 2020.
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 $566,000 for the three months ended March 31, 2021 compared to $938,000 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 March 31, 2021
and 2020:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Yield/Rate
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables gross (2)
|
|
$
|
451,425
|
|
|
$
|
22,105
|
|
|
|
19.6%
|
|
|
$
|
845,727
|
|
|
$
|
38,330
|
|
|
|
18.1%
|
|
Finance receivables at fair value
|
|
|
1,687,232
|
|
|
|
43,988
|
|
|
|
10.4%
|
|
|
|
1,580,468
|
|
|
|
40,806
|
|
|
|
10.3%
|
|
|
|
|
2,138,657
|
|
|
|
66,093
|
|
|
|
12.4%
|
|
|
|
2,426,195
|
|
|
|
79,136
|
|
|
|
13.0%
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
$
|
50,322
|
|
|
|
1,314
|
|
|
|
10.4%
|
|
|
$
|
72,684
|
|
|
|
1,762
|
|
|
|
9.7%
|
|
Residual interest financing
|
|
|
22,011
|
|
|
|
566
|
|
|
|
10.3%
|
|
|
|
38,895
|
|
|
|
938
|
|
|
|
9.6%
|
|
Securitization trust debt
|
|
|
1,876,807
|
|
|
|
18,453
|
|
|
|
3.9%
|
|
|
|
2,186,833
|
|
|
|
23,798
|
|
|
|
4.4%
|
|
Subordinated renewable notes
|
|
|
22,180
|
|
|
|
612
|
|
|
|
11.0%
|
|
|
|
18,053
|
|
|
|
493
|
|
|
|
10.9%
|
|
|
|
$
|
1,971,320
|
|
|
|
20,945
|
|
|
|
4.2%
|
|
|
$
|
2,316,465
|
|
|
|
26,991
|
|
|
|
4.7%
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
|
$
|
|
|
$
|
45,148
|
|
|
|
|
|
|
|
|
|
|
$
|
52,145
|
|
|
|
|
|
Net interest yield (3)
|
|
|
$
|
|
|
|
|
|
|
|
8.2%
|
|
|
|
|
|
|
|
|
|
|
|
8.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
$
|
|
|
|
|
|
|
|
108%
|
|
|
|
|
|
|
|
|
|
|
|
105%
|
|
_____________________
(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 March 31, 2021
|
|
|
|
Compared to March 31, 2020
|
|
|
|
Total
|
|
|
Change Due
|
|
|
Change Due
|
|
|
|
Change
|
|
|
to Volume
|
|
|
to Rate
|
|
|
|
(In thousands)
|
|
Interest Earning Assets
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Finance receivables gross
|
|
$
|
(16,225
|
)
|
|
$
|
(17,918
|
)
|
|
$
|
1,693
|
|
Finance receivables at fair value
|
|
|
3,182
|
|
|
|
2,760
|
|
|
|
422
|
|
|
|
|
(13,043
|
)
|
|
|
(15,158
|
)
|
|
|
2,115
|
|
Interest Bearing Liabilities
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
(448
|
)
|
|
|
(536
|
)
|
|
|
88
|
|
Residual interest financing
|
|
|
(372
|
)
|
|
|
(411
|
)
|
|
|
39
|
|
Securitization trust debt
|
|
|
(5,345
|
)
|
|
|
(2,999
|
)
|
|
|
(2,346
|
)
|
Subordinated renewable notes
|
|
|
119
|
|
|
|
113
|
|
|
|
6
|
|
|
|
|
(6,046
|
)
|
|
|
(3,833
|
)
|
|
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/spread
|
|
$
|
(6,997
|
)
|
|
$
|
(11,325
|
)
|
|
$
|
4,328
|
|
The reduction in the annualized yield on our finance
receivables for the three months ended March 31, 2021 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 $1,687.2 million for the
three months ended March 31, 2021 compared to $1,580.5 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. The Company recorded an addition to its allowance for finance credit losses
of $127.0 million at the adoption of CECL in January 2020. 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 $3.6 million for
the three months ended March 31, 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. There were no additional provisions for credit losses for the three
months ended March 31, 2021.
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 $444,000 to $4.0 million during the three months ended March
31, 2021 and represented 7.2% of total operating expenses. We purchased $205.5 million of new contracts during the three months ended
March 31, 2021 compared to $266.0 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. Since then, our contract purchase volumes increased but
have not recovered to pre-pandemic levels.
Occupancy expenses was $1.9
million for the three months ending March 31, 2021 compared to $1.7 million in the prior year period.
Depreciation and amortization
expenses increased to $428,000 compared to $419,000 in the previous year and represented 0.8% of total operating expenses.
For the three months ended March 31, 2021 we recorded
income tax expense of $2.8 million, representing a 35% effective tax rate. For the three months ended March 31, 2020, we recorded a net
income tax benefit of $7.7 million. 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 $1.1 million, representing an effective income tax rate of 36%.
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
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
March
31, 2020
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
Contracts
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
Delinquency Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross servicing portfolio (1)
|
|
|
158,933
|
|
|
$
|
2,119,073
|
|
|
|
163,117
|
|
|
$
|
2,174,972
|
|
|
|
179,253
|
|
|
$
|
2,435,074
|
|
Period of delinquency (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
7,108
|
|
|
$
|
94,067
|
|
|
|
11,357
|
|
|
$
|
152,868
|
|
|
|
10,465
|
|
|
$
|
143,749
|
|
61-90 days
|
|
|
2,496
|
|
|
|
31,797
|
|
|
|
4,525
|
|
|
|
59,096
|
|
|
|
5,077
|
|
|
|
69,364
|
|
91+ days
|
|
|
822
|
|
|
|
8,416
|
|
|
|
1,290
|
|
|
|
14,989
|
|
|
|
2,929
|
|
|
|
34,816
|
|
Total delinquencies (2)
|
|
|
10,426
|
|
|
|
134,280
|
|
|
|
17,172
|
|
|
|
226,953
|
|
|
|
18,471
|
|
|
|
247,929
|
|
Amount in repossession (3)
|
|
|
2,448
|
|
|
|
30,353
|
|
|
|
2,979
|
|
|
|
35,839
|
|
|
|
4,511
|
|
|
|
54,349
|
|
Total delinquencies
and amount in repossession (2)
|
|
|
12,874
|
|
|
$
|
164,633
|
|
|
|
20,151
|
|
|
$
|
262,792
|
|
|
|
22,982
|
|
|
$
|
302,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of gross servicing portfolio
|
|
|
6.6%
|
|
|
|
6.3%
|
|
|
|
10.5%
|
|
|
|
10.4%
|
|
|
|
10.3%
|
|
|
|
10.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies and amount in repossession as a percentage of gross
servicing portfolio
|
|
|
8.1%
|
|
|
|
7.8%
|
|
|
|
12.4%
|
|
|
|
12.1%
|
|
|
|
12.8%
|
|
|
|
12.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, accruing
|
|
|
28,384
|
|
|
$
|
388,637
|
#
|
|
|
29,709
|
|
|
$
|
417,347
|
|
|
|
29,683
|
|
|
$
|
397,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with two or more extensions, accruing
|
|
|
54,882
|
|
|
|
640,154
|
#
|
|
|
55,885
|
|
|
|
665,572
|
|
|
|
58,254
|
|
|
|
794,789
|
|
|
|
|
83,266
|
|
|
|
1,028,791
|
|
|
|
85,594
|
|
|
|
1,082,919
|
|
|
|
87,937
|
|
|
|
1,192,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension, non-accrual (4)
|
|
|
130
|
|
|
|
1,510
|
|
|
|
915
|
|
|
|
12,408
|
|
|
|
833
|
|
|
|
9,958
|
|
Contracts with two or more extensions, non-accrual
(4)
|
|
|
488
|
|
|
|
5,328
|
|
|
|
2,502
|
|
|
|
28,189
|
|
|
|
2,558
|
|
|
|
33,133
|
|
|
|
|
618
|
|
|
|
6,838
|
|
|
|
3,417
|
|
|
|
40,597
|
|
|
|
3,391
|
|
|
|
43,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contracts with extensions
|
|
|
83,884
|
|
|
$
|
1,035,629
|
|
|
|
89,011
|
|
|
$
|
1,123,516
|
|
|
|
91,328
|
|
|
$
|
1,235,502
|
|
____________________________________
(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
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Average servicing portfolio outstanding
|
|
$
|
451,425
|
|
|
$
|
684,259
|
|
|
$
|
845,727
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
12.6%
|
|
|
|
11.7%
|
|
|
|
10.3%
|
|
|
|
Fair Value Receivables Portfolio
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Average servicing portfolio outstanding
|
|
$
|
1,687,232
|
|
|
$
|
1,631,491
|
|
|
$
|
1,580,468
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
4.6%
|
|
|
|
4.3%
|
|
|
|
5.2%
|
|
|
|
Total Managed Portfolio
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Average servicing portfolio outstanding
|
|
$
|
2,138,657
|
|
|
$
|
2,315,750
|
|
|
$
|
2,426,195
|
|
Annualized net charge-offs as a percentage of average servicing portfolio (2)
|
|
|
6.3%
|
|
|
|
6.5%
|
|
|
|
7.0%
|
|
_________________________
(1) All amounts and percentages are based on
the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts.
(2) Net charge-offs include the remaining principal
balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts
collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying
interim consolidated financial statements. March 31, 2021 and March 31, 2020 percentages represent three months ended March 31, 2021 and
March 31, 2020 annualized. December 31, 2020 represents 12 months ended December 31, 2020.
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 so that the obligor 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 some cases, the extension will be granted
in conjunction with our receiving all or a portion of a past due 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; (4) the obligor’s willingness to communicate and cooperate on resolving the delinquency;
and (5) a numeric score from our internal risk assessment system that indicating the likelihood that the extension will prove beneficial.
If the collector believes the obligor is a good candidate for an extension, an approval is obtained from a 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 March 31, 2021, 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 March 31, 2021
|
|
% Active or Paid Off at March 31, 2021
|
|
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%
|
|
6,881
|
|
36.6%
|
|
932
|
|
5.0%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
18,783
|
|
11,321
|
|
60.3%
|
|
6,666
|
|
35.5%
|
|
796
|
|
4.2%
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
23,398
|
|
11,176
|
|
47.8%
|
|
11,246
|
|
48.1%
|
|
976
|
|
4.2%
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
25,773
|
|
10,606
|
|
41.2%
|
|
14,341
|
|
55.6%
|
|
826
|
|
3.2%
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
53,319
|
|
23,037
|
|
43.2%
|
|
29,200
|
|
54.8%
|
|
1,082
|
|
2.0%
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
80,897
|
|
39,135
|
|
48.4%
|
|
39,829
|
|
49.2%
|
|
1,933
|
|
2.4%
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
133,881
|
|
67,456
|
|
50.4%
|
|
59,465
|
|
44.4%
|
|
6,926
|
|
5.2%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
121,531
|
|
73,767
|
|
60.7%
|
|
41,757
|
|
34.4%
|
|
6,007
|
|
4.9%
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
71,548
|
|
57,433
|
|
80.3%
|
|
12,173
|
|
17.0%
|
|
1,942
|
|
2.7%
|
|
12
|
______________________
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
2018, 60.7% were either paid in full or active and performing at March 31, 2021. 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 after 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:
|
|
Three Months Ended
March 31,
|
|
Year
Ended
December 31,
|
|
Three Months
Ended
March 31,
|
|
|
|
2021
|
|
2020
|
|
2020
|
|
|
|
|
|
|
|
|
|
Average number of extensions granted per month
|
|
3,535
|
|
6,931
|
|
7,118
|
|
|
|
|
|
|
|
|
|
Average number of outstanding accounts
|
|
160,448
|
|
172,129
|
|
178,570
|
|
|
|
|
|
|
|
|
|
Average monthly extensions as % of average outstandings
|
|
2.2%
|
|
4.0%
|
|
4.0%
|
|
______________________
Note: Table excludes portfolios originated
and owned by third parties
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
March 31, 2020
|
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
Number of Contracts
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with one extension
|
|
|
28,514
|
|
|
$
|
390,146
|
|
|
|
30,624
|
|
|
$
|
429,754
|
|
|
|
30,516
|
|
|
$
|
407,580
|
|
Contracts with two extensions
|
|
|
18,664
|
|
|
|
247,272
|
|
|
|
19,381
|
|
|
|
259,236
|
|
|
|
22,794
|
|
|
|
310,711
|
|
Contracts with three extensions
|
|
|
12,720
|
|
|
|
152,871
|
|
|
|
13,117
|
|
|
|
159,447
|
|
|
|
17,058
|
|
|
|
235,319
|
|
Contracts with four extensions
|
|
|
10,235
|
|
|
|
111,789
|
|
|
|
10,868
|
|
|
|
122,469
|
|
|
|
11,282
|
|
|
|
155,514
|
|
Contracts with five extensions
|
|
|
7,827
|
|
|
|
79,510
|
|
|
|
8,548
|
|
|
|
90,322
|
|
|
|
6,332
|
|
|
|
84,695
|
|
Contracts with six extensions
|
|
|
5,924
|
|
|
|
54,040
|
|
|
|
6,473
|
|
|
|
62,288
|
|
|
|
3,346
|
|
|
|
41,682
|
|
|
|
|
83,884
|
|
|
$
|
1,035,628
|
|
|
|
89,011
|
|
|
$
|
1,123,516
|
|
|
|
91,328
|
|
|
$
|
1,235,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed portfolio (excluding originated and owned by 3rd parties)
|
|
|
158,933
|
|
|
$
|
2,119,073
|
|
|
|
163,117
|
|
|
$
|
2,174,972
|
|
|
|
179,253
|
|
|
$
|
2,435,074
|
|
______________________
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 several 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.
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 three-month period ended March 31, 2021 was $65.4 million, an increase of $1.3 million, compared to net cash provided
by operating activities for the three-month period ended March 31, 2020 of $64.1 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 three-month period ended March 31, 2021 was $23.9 million compared to net cash used in investing activities of $61.1
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 $205.5 million and $266.0 million during the first three months of 2021 and 2020, respectively.
Net cash used in financing activities
for the three months ended March 31, 2021 was $64.8 million compared to $1.7 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 three months of 2021, we issued $230.5
million in new securitization trust debt compared to $260.0 million in the same period of 2020. We repaid $242.5 million in securitization
trust debt in the three months ended March 31, 2021 compared to repayments of securitization trust debt of $266.1 million in the prior
year period. In the three months ended March 31, 2021, we had net repayments on warehouse lines of credit of $48.3 million, compared to
net advances of $6.8 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 March 31, 2021, we had unrestricted cash
of $9.2 million and $128.9 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability
of sufficient eligible collateral). As of March 31, 2021, we had approximately $61.3 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 three-month period ended March 31, 2021, we completed one securitization aggregating
$230.5 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.
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 March 31, 2021, we were in compliance with all such financial covenants.
We have and will continue
to have a substantial amount of indebtedness. At March 31, 2021, we had approximately $1,907.0 million of debt outstanding. Such debt
consisted primarily of $1,791.6 million of securitization trust debt and $71.1 million of debt from warehouse lines of credit. Our securitization
trust debt has decreased by $12.1 million while our warehouse lines of credit debt has decreased by $47.9 million since December 31, 2020
(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 $23.7 million and $21.3 million in subordinated renewable
notes outstanding at March 31, 2021 and December 31, 2020, respectively. On May 16, 2018, we completed a $40.0 million securitization
of residual interests from previously issued securitizations. At March 31, 2021, $20.6 million of this residual interest financing debt
remains outstanding ($20.5 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.