Quarterly Report


 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

Commission file number: 1-11416

 

CONSUMER PORTFOLIO SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

California 33-0459135
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   

3800 Howard Hughes Parkway, Suite 1400,

Las Vegas, Nevada

89169
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including Area Code: (949) 753-6800

 

Former name, former address and former fiscal year, if changed since last report: N/A

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [_]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

  Large accelerated filer [_] Accelerated filer  [_]
  Non-accelerated filer [_] Smaller reporting company [X]
  Emerging growth company [_]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes [_]     No [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

 

As of July 26, 2017 the registrant had 22,732,017 common shares outstanding.

 

 

 

 

 

   

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarterly Period Ended June 30, 2017

 

 

    Page
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 3
  Unaudited Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2017 and 2016 4
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2017 and 2016 5
  Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2017 and 2016 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 4. Controls and Procedures 32

 

 

 

PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 6. Exhibits 34
  Signatures

35

 

 

 

  2  

 

 

PART I — FINANCIAL INFORMATION 

Item 1. Financial Statements

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

    June 30,     December 31,  
    2017     2016  
ASSETS                
Cash and cash equivalents   $ 15,810     $ 13,936  
Restricted cash and equivalents     118,298       112,754  
                 
Finance receivables     2,314,522       2,267,943  
Less: Allowance for finance credit losses     (107,315 )     (95,578 )
Finance receivables, net     2,207,207       2,172,365  
                 
Furniture and equipment, net     2,094       2,017  
Deferred tax assets, net     45,198       42,845  
Accrued interest receivable     36,952       36,233  
Other assets     22,237       30,252  
    $ 2,447,796     $ 2,410,402  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
Liabilities                
Accounts payable and accrued expenses   $ 25,204     $ 24,977  
Warehouse lines of credit     131,272       103,358  
Securitization trust debt     2,081,989       2,080,900  
Subordinated renewable notes     16,080       14,949  
      2,254,545       2,224,184  
COMMITMENTS AND CONTINGENCIES                
Shareholders' Equity                
Preferred stock, $1 par value; authorized 4,998,130 shares; none issued            
Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued            
Series B preferred stock, $1 par value; authorized 1,870 shares; none issued            
Common stock, no par value; authorized 75,000,000 shares; 22,883,867 and 23,587,126 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively     75,109       77,128  
Retained earnings     124,824       115,772  
Accumulated other comprehensive loss     (6,682 )     (6,682 )
      193,251       186,218  
                 
    $ 2,447,796     $ 2,410,402  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

  3  

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
Revenues:                        
Interest income   $ 107,485     $ 101,709     $ 212,060     $ 198,372  
Other income     2,587       3,224       5,610       7,210  
      110,072       104,933       217,670       205,582  
                                 
Expenses:                                
Employee costs     17,572       15,678       35,352       30,822  
General and administrative     6,819       6,569       13,741       11,900  
Interest     23,236       19,727       45,324       37,548  
Provision for credit losses     48,550       44,423       95,717       88,619  
Marketing     3,990       4,731       7,950       9,401  
Occupancy     1,733       1,288       3,394       2,371  
Depreciation and amortization     220       192       448       367  
      102,120       92,608       201,926       181,028  
Income before income tax expense     7,952       12,325       15,744       24,554  
Income tax expense     3,380       5,053       6,692       10,068  
Net income   $ 4,572     $ 7,272     $ 9,052     $ 14,486  
                                 
Earnings per share:                                
Basic   $ 0.20     $ 0.30     $ 0.39     $ 0.58  
Diluted     0.17       0.25       0.32       0.49  
                                 
Number of shares used in computing earnings per share:                                
Basic     23,076       24,538       23,296       24,917  
Diluted     27,602       29,111       28,024       29,632  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
                         
Net income   $ 4,572     $ 7,272     $ 9,052     $ 14,486  
                                 
Other comprehensive income/(loss); change in funded status of pension plan                        
Comprehensive income   $ 4,572     $ 7,272     $ 9,052     $ 14,486  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

  5  

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Six Months Ended  
    June 30,  
    2017     2016  
Cash flows from operating activities:                
Net income   $ 9,052     $ 14,486  
Adjustments to reconcile net income to net cash provided by operating activities:                
Accretion of deferred acquisition fees and origination costs     152       (2,114 )
Amortization of discount on securitization trust debt           20  
Depreciation and amortization     448       367  
Amortization of deferred financing costs     4,367       4,129  
Provision for credit losses     95,717       88,619  
Stock-based compensation expense     2,622       2,595  
Changes in assets and liabilities:                
Accrued interest receivable     (719 )     (2,051 )
Deferred tax assets, net     (2,353 )     (2,753 )
Other assets     5,172       1,032  
Accounts payable and accrued expenses     227       9,000  
Net cash provided by operating activities     114,685       113,330  
                 
Cash flows from investing activities:                
Purchases of finance receivables held for investment     (463,546 )     (631,412 )
Payments received on finance receivables held for investment     332,835       326,176  
Payments received on receivables portfolio at fair value     4       48  
Change in repossessions held in inventory     2,839       2,192  
Change in restricted cash and cash equivalents, net     (5,544 )     (9,214 )
Purchase of furniture and equipment     (525 )     (444 )
Net cash used in investing activities     (133,937 )     (312,654 )
                 
Cash flows from financing activities:                
Proceeds from issuance of securitization trust debt     431,490       662,150  
Proceeds from issuance of subordinated renewable notes     2,340       904  
Payments on subordinated renewable notes     (1,209 )     (785 )
Net advances of warehouse lines of credit     28,029       (29,853 )
Repayments of residual interest financing debt           (1,587 )
Repayment of securitization trust debt     (430,750 )     (424,155 )
Payment of financing costs     (4,133 )     (4,645 )
Purchase of common stock     (5,379 )     (6,323 )
Exercise of options and warrants     738       48  
Net cash provided by financing activities     21,126       195,754  
Increase (decrease) in cash and cash equivalents     1,874       (3,570 )
Cash and cash equivalents at beginning of period     13,936       19,322  
Cash and cash equivalents at end of period   $ 15,810     $ 15,752  
                 
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest   $ 40,579     $ 32,746  
Income taxes   $ 3,302     $ 3,784  

\

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Summary of Significant Accounting Policies

 

Description of Business

 

We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of loans secured by vehicles. In this report, we refer to all of such contracts and loans as "automobile contracts."

 

Basis of Presentation

 

Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the six month period ended June 30, 2017 are not necessarily indicative of the operating results to be expected for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.

 

Other Income

 

The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2017 and 2016:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
      2017       2016       2017       2016  
    (In thousands)   (In thousands)  
Direct mail revenues   $ 1,634     $ 2,378     $ 3,633     $ 5,222  
Convenience fee revenue     510       460       1,080       1,105  
Recoveries on previously charged-off contracts     138       122       324       365  
Sales tax refunds     215       202       412       401  
Other     90       62       161       117  
Other income for the period   $ 2,587     $ 3,224     $ 5,610     $ 7,210  

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Warrants

 

In connection with the amendment to and partial repayment of our residual interest financing in July 2008, we issued warrants exercisable for 2,500,000 common shares for $4,071,429. The warrants represent the right to purchase 2,500,000 CPS common shares at a nominal exercise price, at any time prior to July 10, 2018. In March 2010 we repurchased warrants for 500,000 of these shares for $1.0 million. Warrants to purchase 2,000,000 shares remain outstanding as of June 30, 2017.

 

Stock-based Compensation

 

We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”.

 

For the three and six months ended June 30, 2017, we recorded stock-based compensation costs in the amount of $1.3 million and $2.6 million, respectively. These stock-based compensation costs were $1.2 million and $2.6 million for the three and six months ended June 30, 2016. As of June 30, 2017, unrecognized stock-based compensation costs to be recognized over future periods equaled $9.0 million. This amount will be recognized as expense over a weighted-average period of 2.2 years.

 

The following represents stock option activity for the six months ended June 30, 2017:

 

                Weighted
    Number of     Weighted     Average
    Shares     Average     Remaining
    (in thousands)     Exercise Price     Contractual Term
Options outstanding at the beginning of period     12,595     $ 4.56     N/A
Granted     1,470       4.35     N/A
Exercised     (429 )     1.72     N/A
Forfeited     (178 )     5.67     N/A
Options outstanding at the end of period     13,458     $ 4.61     4.85 years
                     
Options exercisable at the end of period     8,475     $ 4.36     4.37 years

 

At June 30, 2017, the aggregate intrinsic value of options outstanding and exercisable was $13.4 million and $11.6 million, respectively. There were 429,300 options exercised for the six months ended June 30, 2017 compared to 29,200 for the comparable period in 2016. The total intrinsic value of options exercised was $1.3 million and $91,000 for the six-month periods ended June 30, 2017 and 2016. There were 2.4 million shares available for future stock option grants under existing plans as of June 30, 2017.

 

Purchases of Company Stock

 

During the six-month period ended June 30, 2017, we purchased 1.1 million shares of our common stock, at an average price of $4.75. We purchased 1,102,410 shares of our stock in the open market at an average price of $4.74. The remaining purchases of 30,149 shares were related to net exercises of outstanding options. In transactions during the six-month period ended June 30, 2017, the holders of options to purchase 60,000 shares of our common stock paid the aggregate $149,000 exercise price by surrender to us of 30,149 of such 60,000 shares.

 

During the six-month period ended June 30, 2016, we purchased 1.6 million shares of our stock in the open market at an average price of $4.06.

 

Reclassifications

 

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or total shareholders’ equity.

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Financial Covenants

 

Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of June 30, 2017, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness.

 

Provision for Contingent Liabilities

 

We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined.

 

We record at each measurement date, most recently as of June 30, 2017, our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.

 

(2) Finance Receivables

 

Our portfolio of finance receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first applied to accrued interest and then to principal reduction.

 

The following table presents the components of Finance Receivables, net of unearned interest:

 

    June 30,     December 31,  
    2017     2016  
Finance receivables   (In thousands)  
             
Automobile finance receivables, net of unearned interest   $ 2,310,103     $ 2,266,619  
Unearned acquisition fees and originations costs     4,419       1,324  
Finance receivables   $ 2,314,522     $ 2,267,943  

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings. The following table summarizes the delinquency status of finance receivables as of June 30, 2017 and December 31, 2016:

 

    June 30,     December 31,  
    2017     2016  
    (In thousands)  
Delinquency Status                
Current   $ 2,115,708     $ 2,053,759  
31 - 60 days     121,354       116,073  
61 - 90 days     49,094       52,404  
91 + days     23,947       44,383  
    $ 2,310,103     $ 2,266,619  

 

Finance receivables totaling $23.9 million and $44.4 million at June 30, 2017 and December 31, 2016, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.

 

We use a loss allowance methodology commonly referred to as " static pooling, " which stratifies our finance receivable portfolio into separately identified pools based on the period of origination. Using analytical and formula driven techniques, we estimate an allowance for finance credit losses, which we believe is adequate for probable incurred credit losses that can be reasonably estimated in our portfolio of automobile contracts. The estimate for probable incurred credit losses is reduced by our estimate for future recoveries on previously incurred losses. Provision for credit losses is charged to our consolidated statement of operations. Net losses incurred on finance receivables are charged to the allowance. We establish the allowance for new receivables over the 12-month period following their acquisition.

 

The following table presents a summary of the activity for the allowance for finance credit losses for the three-month and six-month periods ended June 30, 2017 and 2016:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
      2017       2016       2017       2016  
      (In thousands)       (In thousands)  
Balance at beginning of period   $ 99,255     $ 79,867     $ 95,578     $ 75,603  
Provision for credit losses on finance receivables     48,550       44,423       95,717       88,619  
Charge-offs     (48,474 )     (41,901 )     (98,773 )     (87,834 )
Recoveries     7,984       7,779       14,793       13,780  
Balance at end of period   $ 107,315     $ 90,168     $ 107,315     $ 90,168  

 

Excluded from finance receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses:

 

    June 30,     December 31,  
    2017     2016  
    (In thousands)  
Gross balance of repossessions in inventory   $ 31,382     $ 40,069  
Allowance for losses on repossessed inventory     (23,076 )     (28,924 )
Net repossessed inventory included in other assets   $ 8,306     $ 11,145  

 

 

 

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CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(3) Securitization Trust Debt

 

We have completed many securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table:

 

                                  Weighted  
                                  Average  
      Final   Receivables           Outstanding     Outstanding     Contractual  
      Scheduled   Pledged at           Principal at     Principal at     Interest Rate at  
      Payment   June 30,     Initial     June 30,     December 31,     June 30,  
Series     Date (1)   2017 (2)     Principal     2017     2016     2017  
      (Dollars in thousands)      
  CPS 2012-C     December 2019   $     $ 147,000     $     $ 14,421        
  CPS 2012-D     March 2020           160,000             17,865        
  CPS 2013-A     June 2020     21,277       185,000       19,482       28,661       1.72%  
  CPS 2013-B     September 2020     29,141       205,000       26,540       37,570       2.15%  
  CPS 2013-C     December 2020     35,387       205,000       34,653       46,830       5.23%  
  CPS 2013-D     March 2021     35,962       183,000       34,333       46,345       4.52%  
  CPS 2014-A     June 2021     43,308       180,000       41,114       54,988       3.83%  
  CPS 2014-B     September 2021     59,344       202,500       58,167       75,140       3.35%  
  CPS 2014-C     December 2021     93,080       273,000       91,285       116,280       3.53%  
  CPS 2014-D     March 2022     101,294       267,500       100,325       127,307       3.74%  
  CPS 2015-A     June 2022     109,649       245,000       108,821       134,466       3.29%  
  CPS 2015-B     September 2022     126,623       250,000       125,584       153,893       3.27%  
  CPS 2015-C     December 2022     172,332       300,000       171,144       207,636       3.74%  
  CPS 2016-A     March 2023     220,103       329,460       218,351       262,260       4.07%  
  CPS 2016-B     June 2023     247,067       332,690       240,209       284,752       4.11%  
  CPS 2016-C     September 2023     250,358       318,500       244,183       285,618       3.65%  
  CPS 2016-D     December 2023     180,742       206,325       175,822       200,221       2.90%  
  CPS 2017-A     April 2024     193,575       206,320       187,641             3.08%  
  CPS 2017-B     September 2024     223,593       225,170       217,340             2.74%  
            $ 2,142,835     $ 4,421,465     $ 2,094,994     $ 2,094,253          

_________________

(1) The Final Scheduled Payment Date represents final legal maturity of the securitization trust debt. Securitization trust debt is expected to become due and to be paid prior to those dates, based on amortization of the finance receivables pledged to the trusts. Expected payments, which will depend on the performance of such receivables, as to which there can be no assurance, are $445.5 million in 2017, $740.9 million in 2018, $479.2 million in 2019, $272.5 million in 2020, $127.2 million in 2021, $16.7 million in 2022.

 

(2) Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.

 

Debt issuance costs of $13.0 million and $13.4 million as of June 30, 2017 and December 31, 2016, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the securitization trust debt on our Unaudited Condensed Consolidated Balance Sheets.

 

All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets.

 

 

 

  11  

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. As of June 30, 2017, we were in compliance with all such covenants.

 

We are responsible for the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of June 30, 2017, restricted cash under the various agreements totaled approximately $118.3 million. Interest expense on the securitization trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost of the securitization trust debt is greater than the contractual rate of interest disclosed above.

 

Our wholly-owned bankruptcy remote subsidiaries were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our credit facilities. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors.

 

(4) Debt

 

The terms and amounts of our other debt outstanding at June 30, 2017 and December 31, 2016 are summarized below:

 

            Amount Outstanding at  
            June 30,     December 31,  
            2017     2016  
            (In thousands)  
Description   Interest Rate   Revolving Maturity            
                     
Warehouse lines of credit   5.50% over one month Libor (Minimum 6.50%)   April 2019   $ 60,602     $ 64,352  
                         
    5.50% over one month Libor (Minimum 6.25%)   August 2018     41,539       26,445  
                         
    6.75% over a commercial paper rate (Minimum 7.75%)   November 2017     30,853       14,168  
                         
Subordinated renewable notes   Weighted average rate of 7.55% and 7.50% at June 30, 2017 and December 31, 2016 , respectively   Weighted average maturity of July 2019 and January 2019 at June 30, 2017 and December 31, 2016, respectively     16,080       14,949  
                         
            $ 149,074     $ 119,914  

 

Debt issuance costs of $1.7 million and $1.6 million as of June 30, 2017 and December 31, 2016, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the Warehouse lines of credit on our Unaudited Condensed Consolidated Balance Sheets.

 

 

 

  12  

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

In April 2017, we renewed our $100 million warehouse credit line that was first established in May 2012. There was $60.6 million outstanding under this facility at June 30, 2017. The revolving period for this facility was extended to April 2019 followed by an amortization period through April 2021 for any receivables pledged at the end of the revolving period.

 

(5) Interest Income and Interest Expense

 

The following table presents the components of interest income:

 

    Three Months Ended     Six Months Ended
    June 30,     June 30,
      2017       2016       2017     2016
      (In thousands)     (In thousands)
             
Interest on finance receivables   $ 107,344     $ 101,624     $ 211,840     $198,252
Other interest income     141       85       220     120
Interest income   $ 107,485     $ 101,709     $ 212,060     $198,372

 

 

The following table presents the components of interest expense:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
      2017       2016       2017       2016  
      (In thousands)     (In thousands)  
               
Securitization trust debt   $ 20,537     $ 16,875     $ 40,617     $ 31,639  
Warehouse lines of credit     2,379       2,244       4,087       4,666  
Residual interest financing           245             516  
Subordinated renewable notes     320       363       620       727  
Interest expense   $ 23,236     $ 19,727     $ 45,324     $ 37,548  

 

 

(6) Earnings Per Share

 

Earnings per share for the three-month and six-month periods ended June 30, 2017 and 2016 were calculated using the weighted average number of shares outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2017 and 2016:

 

    Three Months Ended     Six Months Ended
    June 30,     June 30,
    2017     2016     2017     2016
    (In thousands)     (In thousands)
Weighted average number of common shares outstanding during the period used to compute basic earnings per share     23,076       24,538       23,296     24,917
Incremental common shares attributable to exercise of outstanding options and warrants     4,526       4,573       4,728     4,715
Weighted average number of common shares used to compute diluted earnings per share     27,602       29,111       28,024     29,632

 

If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month and six-month periods ended June 30, 2017 would have included an additional 8.7 million and 7.0 million shares, respectively attributable to the exercise of outstanding options and warrants. For the three-month and six-month periods ended June 30, 2016, an additional 7.9 million and 7.4 million shares, respectively, would be included in the diluted earnings per share calculation.

 

 

 

  13  

 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(7) Income Taxes

 

We file numerous consolidated and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2013.

 

As of June 30, 2017 and December 31, 2016, we had no unrecognized tax benefits for uncertain tax positions. We do not anticipate that total unrecognized tax benefits will significantly change due to any settlements of audits or expirations of statutes of limitations over the next 12 months.

 

The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $45.2 million as of June 30, 2017 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $45.2 million consists of approximately $38.4 million of net U.S. federal deferred tax assets and $6.8 million of net state deferred tax assets.

 

Income tax expense was $3.4 million and $6.7 million for the three months and six months ended June 30, 2017 and represents an effective income tax rate of 43%, compared to income tax expense of $5.1 million and $10.1 million for the three and six months ended June 30, 2016, and represents an effective income tax rate of and 41%.

 

(8) Legal Proceedings

 

Consumer Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of receivables, and such lawsuits sometimes allege that resolution as a class action is appropriate.

 

For the most part, we have legal and factual defenses to consumer claims, which we routinely contest or settle (for immaterial amounts) depending on the particular circumstances of each case.

 

Department of Justice Subpoena. In January 2015, we were served with a subpoena by the U.S. Department of Justice directing us to produce certain documents relating to our and our subsidiaries’ and affiliates’ origination and securitization of sub-prime automobile contracts since 2005, in connection with an investigation by the U.S. Department of Justice in contemplation of a civil proceeding for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. We are among several other securitizers of sub-prime automobile receivables who received such subpoenas in 2014 and 2015. Among other matters, the subpoena requested information relating to the underwriting criteria used to originate these automobile contracts and the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile contracts. In response to the January 2015 subpoena we produced documents in March 2015, September 2016 and July 2017. We are unaware of any material developments in the government’s investigation subsequent to its initiation. The investigation could in the future result in the imposition of damages, fines or civil or criminal claims and/or penalties. No assurance can be given as to the ultimate outcome of the investigation or any resulting proceeding(s), which might materially and adversely affect us.

 

 

 

  14  

 

 

In General . There can be no assurance as to the outcomes of the matters referenced above. We record at each measurement date, most recently as of June 30, 2017, our best estimate of probable incurred losses for legal contingencies, including each of the matters described or referenced above. The amount of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available to us, we believe that the range of reasonably possible losses for the legal proceedings and contingencies we face, including those described or referenced above, as of June 30, 2017 does not exceed $1 million.

 

Accordingly, we believe that the ultimate resolution of such legal proceedings and contingencies, after taking into account our current litigation reserves, should not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the uncertainties inherent in contested proceedings, the wide discretion vested in the U.S. Department of Justice and other government agencies, and the deference that courts may give to assertions made by government litigants, there can be no assurance that the ultimate resolution of these matters will not be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our income for that period.

 

(9) Employee Benefits

 

On March 8, 2002 we acquired MFN Financial Corporation and its subsidiaries in a merger. We sponsor the MFN Financial Corporation Benefit Plan (the “Plan”). Plan benefits were frozen June 30, 2001. The table below sets forth the Plan’s net periodic benefit cost for the three-month and six-month periods ended June 30, 2017 and 2016.

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
    (In thousands)     (In thousands)  
Components of net periodic cost (benefit)                                
Service cost   $     $     $     $  
Interest cost     214       221       428       442  
Expected return on assets     (287 )     (300 )     (574 )     (600 )
Amortization of transition (asset)/obligation                        
Amortization of net (gain) / loss     101       138       202       276  
   Net periodic cost (benefit)   $ 28     $ 59     $ 56     $ 118  

 

We did not make any contributions to the Plan during the six-month periods ended June 30, 2017 and 2016. We do not anticipate making any contributions for the remainder of 2017.

 

(10) Fair Value Measurements

 

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

 

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

 

 

 

  15  

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At June 30, 2017 the finance receivables related to the repossessed vehicles in inventory totaled $31.4 million. We have applied a valuation adjustment, or loss allowance, of $23.1 million, which is based on a recovery rate of approximately 26%, resulting in an estimated fair value and carrying amount of $8.3 million. The fair value and carrying amount of the repossessed inventory at December 31, 2016 was $11.1 million after applying a valuation adjustment of $28.9 million.

 

There were no transfers in or out of level 1 or level 2 assets and liabilities for the three months ended June 30, 2017 and 2016. We have no material level 3 assets that are measured at fair value on a non-recurring basis.

 

The estimated fair values of financial assets and liabilities at June 30, 2017 and December 31, 2016, were as follows:

 

    As of June 30, 2017  
Financial Instrument   (In thousands)  
    Carrying     Fair Value Measurements Using:        
    Value     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 15,810     $ 15,810     $     $     $ 15,810  
Restricted cash and equivalents     118,298       118,298                   118,298  
Finance receivables, net     2,207,207                   2,155,855       2,155,855  
Accrued interest receivable     36,952                   36,952       36,952  
Liabilities:                                        
Warehouse lines of credit   $ 131,272     $     $     $ 131,272     $ 131,272  
Accrued interest payable     4,094                   4,094       4,094  
Securitization trust debt     2,081,989                   2,098,115       2,098,115  
Subordinated renewable notes     16,080                   16,080       16,080  

 

    As of December 31, 2016  
Financial Instrument   (In thousands)  
    Carrying     Fair Value Measurements Using:        
    Value     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 13,936     $ 13,936     $     $     $ 13,936  
Restricted cash and equivalents     112,754       112,754                   112,754  
Finance receivables, net     2,172,365                   2,104,503       2,104,503  
Accrued interest receivable     36,233                   36,233       36,233  
Liabilities:                                        
Warehouse lines of credit   $ 103,358     $     $     $ 103,358     $ 103,358  
Accrued interest payable     3,715                   3,715       3,715  
Securitization trust debt     2,080,900                   2,138,892       2,138,892  
Subordinated renewable notes     14,949                   14,949       14,949  

 

The following summary presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of our financial instruments, active markets do not exist. Therefore , significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of June 30, 2017 and December 31, 2016, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

 

Cash, Cash Equivalents and Restricted Cash and Equivalents

 

The carrying value equals fair value.

 

 

 

  16  

 

 

Finance Receivables, net

 

The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar receivables could be originated.

 

Accrued Interest Receivable and Payable

 

The carrying value approximates fair value.

 

Warehouse Lines of Credit and Subordinated Renewable Notes

 

The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions for similar types of secured instruments.

 

Securitization Trust Debt

 

The fair value is estimated by discounting future cash flows using interest rates that we believe reflect the current market rates.

 

 

 

 

  17  

 

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a specialty finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories, low incomes or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) directly originated an immaterial amount of vehicle purchase money loans by lending money directly to consumers. In this report, we refer to all of such contracts and loans as "automobile contracts."

 

We were incorporated and began our operations in March 1991. From inception through June 30, 2017, we have originated a total of approximately $13.9 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and, most recently, in September 2011. The September 2011 acquisition consisted of approximately $217.8 million of automobile contracts that we purchased from Fireside Bank of Pleasanton, California. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile contracts originated and owned by non-affiliated entities. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

 

Contract Purchases and Outstanding Managed Portfolio
    $ in thousands  
Period   Contracts
Purchased
in Period
    Managed
Portfolio at
Period End
 
2008   $ 296,817     $ 1,664,122  
2009     8,599       1,194,722  
2010     113,023       756,203  
2011     284,236       794,649  
2012     551,742       897,575  
2013     764,087       1,231,422  
2014     944,944       1,643,920  
2015     1,060,538       2,031,136  
2016     1,088,785       2,308,070  
Six months ended June 30, 2017     463,546       2,343,303  

 

Our principal executive offices are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and underwriting functions are performed primarily in that California branch with certain of these functions also performed in our Florida and Nevada branches. We service our automobile contracts from our California, Nevada, Virginia, Florida and Illinois branches.

 

The programs we offer to dealers and consumers are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. We originate automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

 

 

  18  

 

 

Securitization and Warehouse Credit Facilities

 

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

 

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record as expense a provision for credit losses on the contracts.

 

Since 1994 we have conducted 74 term securitizations of automobile contracts that we originated. As of June 30, 2017, 17 of those securitizations are active and all are structured as secured financings. From 1994 through April 2008 we generally utilized financial guarantees for the senior asset-backed notes issued in the securitization. Since September 2010 we have utilized senior subordinated structures without any financial guarantees. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter, resulting in four securitizations per calendar year. However, in 2015, we elected to defer what would have been our December securitization in favor of a securitization in January 2016, and since that time have generally conducted our securitizations near the beginning of each calendar quarter.

 

Our history of term securitizations, over the most recent ten years, is summarized in the table below:

 

Recent Asset-Backed Term Securitizations
    $ in thousands  
Period   Number of Term
Securitizations
    Receivables
Pledged in Term
Securitizations
 
2006   4     $ 957,681  
2007   3       1,118,097  
2008   2       509,022  
2009   0        
2010   1       103,772  
2011   3       335,593  
2012   4       603,500  
2013   4       778,000  
2014   4       923,000  
2015   3       795,000  
2016   4       1,214,997  
Six months ended June 30, 2017   2       440,000  

 

Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. Our current short-term funding capacity is $300 million, comprising three credit facilities. The first $100 million credit facility was established in May 2012. This facility was renewed in August 2016, extending the revolving period to August 2018, and adding an amortization period through August 2019. In April 2015, we entered into a $100 million facility, with a revolving period extending to April 2017, followed by an amortization period to April 2019. That facility was renewed in April 2017, extending the revolving period to April 2019, followed by an amortization period to April 2021. In November 2015, we entered into a third $100 million facility, with a revolving period extending to November 2017, followed by an amortization period to November 2019.

 

 

 

  19  

 

 

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

 

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

 

Financial Covenants

 

Certain of our securitization transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of June 30, 2017, we were in compliance with all such covenants.

 

Results of Operations

 

Comparison of Operating Results for the three months ended June 30, 2017 with the three months ended June 30, 2016

 

Revenues .  During the three months ended June 30, 2017, our revenues were $110.1 million, an increase of $5.1 million, or 4.9%, from the prior year revenue of $104.9 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended June 30, 2017 increased $5.7 million, or 5.7%, to $107.5 million from $101.7 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries. The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the three months ended June 30, 2017 and 2016:

 

    June 30, 2017     June 30, 2016  
    Amount     Amount  
Finance Receivables Owned by   ($ in millions)  
Consolidated Subsidiaries                
Average balance for the three-month period   $ 2,340.2     $ 2,216.6  
                 
Ending balance for the period   $ 2,343.3     $ 2,253.7  

 

In the three months ended June 30, 2017, other income of $2.6 million decreased by $637,000, or 19.8% compared to the prior year. The three-month period ended June 30, 2017 includes a decrease of $744,000 in revenue associated with direct mail and other related products and services that we offer to our dealers. That decrease was somewhat offset by an increase of $50,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments, an increase of $44,000 on payments to us for our interest in certain sold charge offs and acquired third-party portfolios and an increase of $13,000 on sales tax refunds.

 

Expenses .  Our operating expenses consist largely of provision for credit losses, interest expense, employee costs, marketing and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

 

 

 

  20  

 

 

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

 

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

 

Total operating expenses were $102.1 million for the three months ended June 30, 2017, compared to $92.6 million for the prior period, an increase of $9.5 million, or 10.3%. The increase is primarily due to the increase in our consolidated portfolio and associated servicing costs, and the related increases in interest expense and in our provision for credit losses.

 

Employee costs increased by $1.9 million or 12.1%, to $17.6 million during the three months ended June 30, 2017, representing 17.2% of total operating expenses, from $15.7 million for the prior year, or 16.9% of total operating expenses. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, June 30, 2017 and 2016:

    June 30, 2017     June 30, 2016  
    Amount     Amount  
    ($ in millions)  
Contracts purchased (dollars)   $ 233.9     $ 319.1  
Contracts purchased (units)     14,244       19,316  
Managed portfolio outstanding (dollars)   $ 2,343.3     $ 2,253.7  
Managed portfolio outstanding (units)     173,598       164,403  
                 
Number of Originations staff     209       231  
Number of Marketing staff     117       106  
Number of Servicing staff     565       530  
Number of other staff     93       90  
Total number of employees     984       957  

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $6.8 million, an increase of $251,000, or 3.8% compared to the previous year and represented 6.7% of total operating expenses.

 

Interest expense for the three months ended June 30, 2017 increased by $3.5 million to $23.2 million, or 17.8% and represented 22.8% of total operating expenses, compared to $19.7 million in the previous year, when it was 21.3% of total operating expenses.

 

Interest on securitization trust debt increased by $3.7 million, or 21.7%, for the three months ended June 30, 2017 compared to the prior period. The average balance of securitization trust debt increased 5.9% to $2,168.0 million for the three months ended June 30, 2017 compared to $2,047.6 million for the three months ended June 30, 2016. In addition, the blended interest rates on new term securitizations have generally increased since June 2014. As a result, the cost of securitization debt during the three-month period ended June 30, 2017 was 3.8%, compared to 3.3% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward higher securitization trust debt interest costs since June 2014, although that trend has reversed somewhat since July 2016. The blended interest rates of our recent securitizations are summarized in the table below:

 

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

 

Period   Blended Cost of Funds
June 2014   2.37%
September 2014   2.71%
December 2014   3.07%
March 2015   3.04%
June 2015   3.18%
September 2015   3.78%
January 2016   4.34%
April 2016   4.65%
July 2016   4.48%
October 2016   3.66%
January 2017   3.90%
April 2017   3.45%

 

 

  21  

 

 

Interest expense on subordinated renewable notes decreased by $42,000, or 11.7%. The decrease is due to a decrease in the average yield on our subordinated renewable notes to 7.9% for the three-month period ended June 30, 2017 compared to the prior year when the average yield on our subordinated renewable notes was 9.5%. The decrease in the average yield on our subordinated renewable notes offset an increase in the average balance of $859,000, or 5.6%, for the three months ended June 30, 2017 compared to the prior period.

 

Interest expense on warehouse debt increased by $135,000, or 6.0%, for the three months ended June 30, 2017 compared to the prior period. When possible, we hold contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.

 

The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended June 30, 2017 and 2016:

 

  Three Months Ended June 30,  
    2017     2016  
  (Dollars in thousands)  
            Annualized                 Annualized  
  Average           Average     Average           Average  
  Balance (1)     Interest     Yield/Rate     Balance (1)     Interest     Yield/Rate  
Interest Earning Assets                                                
Finance receivables gross (2)   $ 2,306,632     $ 107,485       18.6%     $ 2,182,203     $ 101,709       18.7%  
                                              $  
Interest Bearing Liabilities     $                                          
Warehouse lines of credit (3)   $ 72,404       2,379       13.2%     $ 84,564       2,244       10.6%  
Residual interest financing                       7,770       246       12.7%  
Securitization trust debt     2,167,971       20,537       3.8%       2,047,621       16,874       3.3%  
Subordinated renewable notes     16,180       320       7.9%       15,321       363       9.5%  
    $ 2,256,555       23,236       4.1%     $ 2,155,276       19,727       3.7%  
                                              $  
Net interest income/spread     $     $ 84,249                   $ 81,982          
Net interest yield (4)     $             14.5%                       15.0%  
                                               
Ratio of average interest earning assets to average interest bearing liabilities     $             102%                       101%  

____________________________________

(1)  Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.

(2)  Net of deferred fees and direct costs.

(3)  Interest expense includes deferred financing costs and non-utilization fees.

(4)  Annualized net interest income divided by average interest earning assets.

 

  Three Months Ended June 30, 2017  
    Compared to June 30, 2016  
$   Total     Change Due     Change Due  
$   Change     to Volume     to Rate  
  (In thousands)  
Interest Earning Assets     $                  
Finance receivables gross   $ 5,776   $ 6,353     $ (577 )
                         
Interest Bearing Liabilities     $                  
Warehouse lines of credit     135       (329 )     464  
Residual interest financing     (246 )     (246 )      
Securitization trust debt     3,663       992       2,671  
Subordinated renewable notes     (43 )     20       (63 )
      3,509       437       3,072  
Net interest income/spread   $ 2,267     $ 5,916     $ (3,649 )

 

The reduction in the annualized yield on our finance receivables for the three months ended June 30, 2017 compared to the prior year period is the result of our decision to offer dealers slightly lower acquisition fees and also to require slightly lower contract interest rates on a portion of the contracts we purchase.

 

 

 

  22  

 

 

Provision for credit losses was $48.6 million for the three months ended June 30, 2017, an increase of $4.1 million, or 9.3% compared to the prior year and represented 47.5% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance credit losses. Consequently, the increase in provision expense is the result of the increase in contract purchases, the larger portfolio owned by our consolidated subsidiaries, and somewhat higher delinquency and charge off rates compared to the prior year.

 

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs, internet lead sales, and direct mail products. Marketing expenses decreased by $741,000, or 15.7%, to $4.0 million during the three months ended June 30, 2017, compared to $4.7 million in the prior year period, and represented 3.9% of total operating expenses. For the three months ended June 30, 2017, we purchased 14,244 contracts representing $233.9 million in receivables compared to 19,316 contracts representing $319.1 million in receivables in the prior period.

 

Occupancy expenses increased by $444,000 or 34.5%, to $1.7 million compared to $1.3 million in the previous year and represented 1.7% of total operating expenses. In July 2015, we entered into a lease for additional office space in Irvine, California. We then occupied that space, and incurred incremental occupancy expense, in phases. The first phase was in July 2015 and the second and final phase was in April 2016. In May 2017, we acquired additional office space in Las Vegas, Nevada.

 

Depreciation and amortization expenses increased by $29,000 or 15.1%, to $220,000 compared to $192,000 in the previous year and represented 0.2% of total operating expenses.

 

For the three months ended June 30, 2017, we recorded income tax expense of $3.4 million, representing a 42.5% effective income tax rate. In the prior year period, we recorded $5.1 million in income tax expense, representing a 41.0% effective income tax rate.

 

Comparison of Operating Results for the six months ended June 30, 2017 with the six months ended June 30, 2016

 

Revenues .  During the six months ended June 30, 2017, our revenues were $217.7 million, an increase of $12.1 million, or 5.9%, from the prior year revenue of $205.6 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the six months ended June 30, 2017 increased $13.7 million, or 6.9%, to $212.1 million from $198.4 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries. The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the six months ended June 30, 2017 and 2016:

 

    June 30, 2017     June 30, 2016  
    Amount     Amount  
Finance Receivables Owned by   ($ in millions)  
Consolidated Subsidiaries                
Average balance for the six-month period   $ 2,326.0     $ 2,157.3  
                 
Ending balance for the period   $ 2,343.3     $ 2,253.7  

 

In the six months ended June 30, 2017, other income of $5.6 million decreased by $1.6 million, or 22.2% compared to the prior year. The six-month period ended June 30, 2017 includes a decrease of $1.6 million in revenue associated with direct mail and other related products and services that we offer to our dealers. We also incurred a decrease of $25,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments, an increase of $14,000 on payments to us for our interest in certain sold charge offs and acquired third-party portfolios and an increase of $11,000 on sales tax refunds.

 

Expenses.  Our operating expenses consist largely of provision for credit losses, interest expense, employee costs, marketing and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated subsidiaries. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

 

 

 

  23  

 

 

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

 

Other operating expenses consist largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.

 

Total operating expenses were $201.9 million for the six months ended June 30, 2017, compared to $181.0 million for the prior period, an increase of $20.9 million, or 11.5%. The increase is primarily due to the increase in our consolidated portfolio and associated servicing costs, and the related increases in interest expense and in our provision for credit losses.

 

Employee costs increased by $4.5 million or 14.7%, to $35.4 million during the six months ended June 30, 2017, representing 17.5% of total operating expenses, from $30.8 million for the prior year, or 17.0% of total operating expenses. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the six-month periods ended, June 30, 2017 and 2016:

 

    June 30, 2017     June 30, 2016  
    Amount     Amount  
    ($ in millions)  
Contracts purchased (dollars)   $ 463.5     $ 631.4  
Contracts purchased (units)     28,548       38,538  
Managed portfolio outstanding (dollars)   $ 2,343.3     $ 2,253.7  
Managed portfolio outstanding (units)     173,598       164,403  
                 
Number of Originations staff     209       231  
Number of Marketing staff     117       106  
Number of Servicing staff     565       530  
Number of other staff     93       90  
Total number of employees     984       957  

General and administrative expenses include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for facilities, credit services, and telecommunications. General and administrative expenses were $13.7 million, an increase of $1.8 million, or 15.5% compared to the previous year and represented 6.8% of total operating expenses.

 

Interest expense for the six months ended June 30, 2017 increased by $7.8 million to $45.3 million, or 20.7% and represented 22.4% of total operating expenses, compared to $37.5 million in the previous year, when it was 20.7% of total operating expenses.

 

Interest on securitization trust debt increased by $9.0 million, or 28.4%, for the six months ended June 30, 2017 compared to the prior period. The average balance of securitization trust debt increased 8.8% to $2,168.0 million for the six months ended June 30, 2017 compared to $1,993.0 million for the six months ended June 30, 2016. In addition, the blended interest rates on new term securitizations have generally increased since June 2014. As a result, the cost of securitization debt during the six-month period ended June 30, 2017 was 3.7%, compared to 3.2% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward higher securitization trust debt interest costs since June 2014, although that trend has reversed somewhat since July 2016. The blended interest rates of our recent securitizations are summarized in the table below:

  

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

 

Period   Blended Cost of Funds
June 2014   2.37%
September 2014   2.71%
December 2014   3.07%
March 2015   3.04%
June 2015   3.18%
September 2015   3.78%
January 2016   4.34%
April 2016   4.65%
July 2016   4.48%
October 2016   3.66%
January 2017   3.90%
April 2017   3.45%

 

 

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Interest expense on subordinated renewable notes decreased by $106,000, or 14.6%. The decrease is due to a decrease in the average yield on our subordinated renewable notes to 7.9% for the six-month period ended June 30, 2017 compared to the prior year when the average yield on our subordinated renewable notes was 9.5%. The decrease in the average yield on our subordinated renewable notes offset an increase in the average balance of $382,000, or 2.5%, for the six months ended June 30, 2017 compared to the prior period.

 

Interest expense on warehouse debt decreased by $579,000, or 12.4%, for the six months ended June 30, 2017 compared to the prior period. When possible, we hold contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.

 

The following table presents the components of interest income and interest expense and a net interest yield analysis for the six-month periods ended June 30, 2017 and 2016:

 

  Six Months Ended June 30,  
    2017     2016  
  (Dollars in thousands)  
            Annualized                 Annualized  
  Average           Average     Average           Average  
  Balance (1)     Interest     Yield/Rate     Balance (1)     Interest     Yield/Rate  
Interest Earning Assets                                                
Finance receivables gross (2)   $ 2,289,285     $ 212,060       18.5%     $ 2,119,581     $ 198,372       18.7%  
                                              $  
Interest Bearing Liabilities     $                                          
Warehouse lines of credit (3)   $ 62,462       4,087       13.2%     $ 91,415       4,666       10.2%  
Residual interest financing                       8,188       516       12.6%  
Securitization trust debt     2,167,966       40,617       3.7%       1,993,009       31,639       3.2%  
Subordinated renewable notes     15,746       620       7.9%       15,364       727       9.5%  
    $ 2,246,174       45,324       4.0%     $ 2,107,976       37,548       3.6%  
                                              $  
Net interest income/spread     $     $ 166,736                   $ 160,824          
Net interest yield (4)     $             14.5%                       15.2%  
                                               
Ratio of average interest earning assets to average interest bearing liabilities     $             102%                       101%  

____________________________________

(1)  Average balances are based on month end balances except for warehouse lines of credit, which are based on daily balances.

(2)  Net of deferred fees and direct costs.

(3)  Interest expense includes deferred financing costs and non-utilization fees.

(4)  Annualized net interest income divided by average interest earning assets.

 

  Six Months Ended June 30, 2017  
    Compared to June 30, 2016  
$   Total     Change Due     Change Due  
$   Change     to Volume     to Rate  
  (In thousands)  
Interest Earning Assets     $                  
Finance receivables gross   $ 13,688      $ 15,977     $ (2,289 )
                         
Interest Bearing Liabilities     $                  
Warehouse lines of credit     (579 )     (1,512 )     933  
Residual interest financing     (516 )     (516 )      
Securitization trust debt     8,978       2,777       6,201  
Subordinated renewable notes     (107 )     18       (125 )
      7,776       767       7,009  
Net interest income/spread   $ 5,912     $ 15,210     $ (9,298 )

 

The reduction in the annualized yield on our finance receivables for the six months ended June 30, 2017 compared to the prior year period is the result of our decision to offer dealers slightly lower acquisition fees and also to require slightly lower contract interest rates on a portion of the contracts we purchase.

 

 

 

  25  

 

 

Provision for credit losses was $95.7 million for the six months ended June 30, 2017, an increase of $7.1 million, or 8.0% compared to the prior year and represented 47.4% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance credit losses. Consequently, the increase in provision expense is the result of the increase in contract purchases, the larger portfolio owned by our consolidated subsidiaries, and somewhat higher delinquency and charge off rates compared to the prior year.

 

Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives. Our marketing representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers, such as training programs, internet lead sales, and direct mail products. Marketing expenses decreased by $1.5 million, or 15.4%, to $8.0 million during the six months ended June 30, 2017, compared to $9.4 million in the prior year period, and represented 3.9% of total operating expenses. For the six months ended June 30, 2017, we purchased 28,548 contracts representing $463.5 million in receivables compared to 38,538 contracts representing $631.4 million in receivables in the prior period.

 

Occupancy expenses increased by $1.0 million or 43.1%, to $3.4 million compared to $2.4 million in the previous year and represented 1.7% of total operating expenses. In July 2015, we entered into a lease for additional office space in Irvine, California. We then occupied that space, and incurred incremental occupancy expense, in phases. The first phase was in July 2015 and the second and final phase was in April 2016. In May 2017, we acquired additional office space in Las Vegas, Nevada.

 

Depreciation and amortization expenses increased by $81,000 or 22.2%, to $448,000 compared to $367,000 in the previous year and represented 0.2% of total operating expenses.

 

For the six months ended June 30, 2017, we recorded income tax expense of $6.7 million, representing a 42.5% effective income tax rate. In the prior year period, we recorded $10.1 million in income tax expense, representing a 41.0% effective income tax rate.

 

Credit Experience

 

Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. In addition, in June 2014 we entered into a consent decree with the FTC that required us to make certain procedural changes in our servicing practices, which we believe have contributed to somewhat higher delinquencies and extensions compared to prior periods. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we originated or own an interest in as of the respective dates shown. The tables do not include the experience of third party originated and owned portfolios.

 

 

 

 

  26  

 

 

Delinquency, Repossession and Extension Experience (1)

 

Total Owned Portfolio

 

      June 30, 2017     June 30, 2016     December 31, 2016  
        Number of           Number of           Number of        
      Contracts     Amount     Contracts     Amount     Contracts     Amount  
      (Dollars in thousands)  
Delinquency Experience                                                    
Gross servicing portfolio (1)         173,597     $ 2,343,297       164,392     $ 2,141,601       169,720     $ 2,308,058  
Period of delinquency (2)                                                    
   31-60 days         8,877     $ 121,354       6,710     $ 89,126       8,673     $ 116,073  
   61-90 days         3,722       49,094       2,961       32,817       3,998       52,403  
   91+ days         1,907       23,947       2,577       31,231       3,407       44,384  
Total delinquencies (2)         14,506       194,395       12,248       153,174       16,078       212,860  
Amount in repossession (3)         2,465       31,383       2,690       38,836       3,162       40,125  
Total delinquencies and amount in repossession (2)         16,971     $ 225,778       14,938     $ 192,010       19,240     $ 252,985  
                                                     
                                                   
Delinquencies as a percentage of gross servicing portfolio         8.4%       8.3%       7.5%       7.2%       9.5%       9.2%  
                                                     
                                                     
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio          9.8%       9.6%        9.1%       9.0%       11.3%       11.0%  
                                                     
Extension Experience                                                    
Contracts with one extension, accruing (4)         32,871     $ 449,931       28,330     $ 385,978       34,354     $ 479,237  
                                                   
Contracts with two or more extensions, accruing (4)         42,732       583,364       22,001       291,921       30,450       407,631  
          75,603       1,033,295       50,331       677,899       64,804       886,868  
                                                     
Contracts with one extension, non-accrual (4)         1,184       14,863       1,463       18,519       1,676       22,335  
Contracts with two or more extensions, non-accrual (4)         1,671       21,896       1,463       18,808       1,999       25,617  
          2,855       36,759       2,926       37,327       3,675       47,952  
Total contracts with extensions         78,458     $ 1,070,054       53,257     $ 715,226       68,479     $ 934,820  

____________________________________

(1) All amounts and percentages are based on the amount remaining to be repaid on each automobile contract, including, for pre-computed automobile contracts, any unearned interest. The information in the table represents the gross principal amount of all automobile contracts we have purchased, including automobile contracts subsequently sold in securitization transactions that we continue to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees only and have no credit risk.

 

(2) We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the Servicing Agreements. The period of delinquency is based on the number of days payments are contractually past due. Automobile contracts less than 31 days delinquent are not included. The delinquency aging categories shown in the tables reflect the effect of extensions.

 

(3) Amount in repossession represents financed vehicles that have been repossessed but not yet liquidated.

 

(4) Accounts past due more than 90 days are on non-accrual.

 

 

  27  

 

 

Net Charge-Off Experience (1)

Total Owned Portfolio

                       

 

    June 30,     June 30,     December 31,  
    2017     2016     2016  
    (Dollars in thousands)  
Average servicing portfolio outstanding   $ 2,326,008     $ 2,157,554     $ 2,226,056  
Annualized net charge-offs as a percentage of average servicing portfolio (2)     7.8%       7.2%       7.0%  

 

_________________________

(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts.

 

(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying interim consolidated financial statements. June 30, 2017 and June 30, 2016 percentages represent six months ended June 30, 2017 and June 30, 2016 annualized. December 31, 2016 represents 12 months ended December 31, 2016.

 

Extensions

 

In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor would not be entitled to more than two such extensions in any 12-month period and no more than six over the life of the contract. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In some cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings.

 

The basic question in deciding to grant an extension is whether or not we will (a) be delaying the inevitable repossession and liquidation or (b) risk losing the vehicle as a result of not being able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been repossessed without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime losses, getting the obligor’s account current (or close to it) and building goodwill with the obligor so that he might prioritize us over other creditors on future payments. Our servicing staff are trained to identify when a past due obligor is facing a temporary problem that may be resolved with an extension. In most cases, the extension will be granted in conjunction with our receiving a past due payment (and where allowed by law, a nominal fee, applied to the loan as a partial payment) from the obligor, thereby indicating an additional monetary and psychological commitment to the contract on the obligor’s part.

 

The credit assessment for granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history, including past extensions if applicable; and (4) the obligor’s willingness to communicate and cooperate on resolving the delinquency. If the collector believes the obligor is a good candidate for an extension, he must obtain approval from his supervisor, who will review the same factors stated above prior to offering the extension to the obligor. After receiving an extension, an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.

 

 

 

  28  

 

 

We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table below summarizes the status, as of June 30, 2017, for accounts that received extensions from 2008 through 2015 (2016 and 2017 extension data are not included at this time due to insufficient passage of time for meaningful evaluation of results):

 

Period of Extension   # Extensions Granted   Active or Paid Off at June 30, 2017   % Active or Paid Off at June 30, 2017   Charged Off > 6 Months After Extension   % Charged Off > 6 Months After Extension   Charged Off <= 6 Months After Extension   % Charged Off <= 6 Months After Extension   Avg Months to Charge Off Post Extension
                                 
2008    35,588    10,710   30.1%    20,059   56.4%    4,819   13.5%   19
                                 
2009    32,226    10,278   31.9%    16,165   50.2%    5,783   17.9%   17
                                 
2010    26,167    12,169   46.5%    11,999   45.9%    1,999   7.6%   19
                                 
2011    18,786    10,989   58.5%    6,865   36.5%    932   5.0%   19
                                 
2012    18,783    11,455   61.0%    6,532   34.8%    796   4.2%   17
                                 
2013    23,398    12,476   53.3%    9,946   42.5%    976   4.2%   19
                                 
2014    25,773    14,023   54.4%    10,924   42.4%    826   3.2%   17
                                 
2015    53,319    36,584   68.6%    15,653   29.4%    1,082   2.0%   13

______________________

Note: Table excludes extensions on portfolios serviced for third parties

 

We view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2012, 61.0% were either paid in full or active and performing at June 30, 2017. Each of these successful accounts represent continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred a substantial loss and no interest revenue subsequent to the extension.

 

For the extension accounts that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on average, 17 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account with additional payments of principal and interest.

 

Additional information about our extensions is provided in the tables below:

 

    Six Months Ended June 30,     Year Ended
December 31,
 
    2017     2016     2016  
                         
Average number of extensions granted per month     9,598       5,274       6,741  
                         
Average number of outstanding accounts     172,121       158,035       163,050  
                         
Average monthly extensions as % of average outstandings     5.6%       3.3%       4.1%  

______________________

Note: Table excludes portfolios originated and owned by third parties

 

 

  29  

 

 

    June 30, 2017     June 30, 2016     December 31, 2016  
    Number of Contracts     Amount     Number of Contracts     Amount     Number of Contracts     Amount  
                (Dollars in thousands)              
                                     
Contracts with one extension     34,055     $ 464,795       29,793     $ 404,497       36,030     $ 501,572  
Contracts with two extensions     22,108       307,357       13,942       187,305       17,800       242,216  
Contracts with three extensions     12,130       165,846       6,267       82,626       8,794       116,929  
Contracts with four extensions     6,247       83,349       2,423       30,826       4,032       52,368  
Contracts with five extensions     2,846       36,404       693       8,346       1,426       17,190  
Contracts with six extensions     1,072       12,303       139       1,626       397       4,545  
      78,458     $ 1,070,054       53,257     $ 715,226       68,479     $ 934,820  
                                                 
Managed portfolio (excluding originated and owned by 3rd parties)     173,597     $ 2,343,297       164,392     $ 2,253,686       169,720     $ 2,308,058  

________________________

Note: Table excludes portfolios originated and owned by third parties

 

Non-Accrual Receivables

 

It is not uncommon for our obligors to fall behind in their payments. However, with the diligent efforts of our Servicing staff and systems for managing our collection efforts, we regularly work with our customers to resolve delinquencies. Our staff are trained to employ a counseling approach to assist our customers with their cash flow management skills and help them to prioritize their payment obligations in order to avoid losing their vehicle to repossession. Through our experience, we have learned that once a customer becomes greater than 90 days past due, it is not likely that the delinquency will be resolved and will ultimately result in a charge-off. As a result, we do not recognize any interest income for contracts that are greater than 90 days past due.

 

If a contract exceeds the 90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes less than or equal to 90 days delinquent at the end of a subsequent period, it would be restored to full accrual status for our financial reporting purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance that full repayment of interest and principal will ultimately be made. However, we monitor each obligor’s payment performance and are aware of the severity of his delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold is a positive indicator. Should the contract again exceed the 90-day delinquency level at the end of any reporting period, it would again be reflected as a non-accrual account.

 

Our policy for placing a contract on non-accrual status is independent of our policy to grant an extension. In practice, it would be an uncommon circumstance where an extension was granted and the account remained in a non-accrual status, since the goal of the extension is to bring the contract current (or nearly current).

 

Liquidity and Capital Resources

 

Our business requires substantial cash to support our purchases of automobile contracts and other operating activities. Our primary sources of cash have been cash flows from the proceeds from term securitization transactions and other sales of automobile contracts, amounts borrowed under various revolving credit facilities (also sometimes known as warehouse credit facilities), customer payments of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash from securitization transactions and their related spread accounts. Our primary uses of cash have been the purchases of automobile contracts, repayment of amounts borrowed under lines of credit, securitization transactions and otherwise, operating expenses such as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of spread accounts and initial overcollateralization, if any, the increase of credit enhancement to required levels in securitization transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of securitized pools (which determines the level of releases from those pools and their related spread accounts), the rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to acquire and borrow against automobile contracts.

 

 

 

  30  

 

 

Net cash provided by operating activities for the six-month period ended June 30, 2017 was $114.7 million, an increase of $1.4 million, compared to net cash provided by operating activities for the six-month period ended June 30, 2016 of $113.3 million. Cash provided by operating activities is significantly affected by our net income before provisions for credit losses. For the six months ended June 30, 2017, our net income excluding provisions for credit losses was $104.8 million, or $1.7 million more than our net income excluding provisions for credit losses for the six months ended June 30, 2016.

 

Net cash used in investing activities for the six-month period ended June 30, 2017 was $133.9 million compared to net cash used in investing activities of $312.7 million in the prior year period. Cash provided by investing activities primarily results from principal payments and other proceeds received on finance receivables held for investment. Cash used in investing activities generally relates to originations of automobile contracts. Originations of finance receivables held for investment were $463.5 million and $631.4 million during the first six months of 2017 and 2016, respectively.

 

Net cash provided by financing activities for the six months ended June 30, 2017 was $21.1 million compared to net cash provided by financing activities of $195.8 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first six months of 2017, we issued $431.5 million in new securitization trust debt compared to $662.2 million in the same period of 2016. In addition, we repaid $430.8 million in securitization trust debt in the six months ended June 30, 2017 compared to repayments of securitization trust debt of $424.2 million in the prior year period. In the six months ended June 30, 2017, we had net advances on warehouse lines of credit of $28.0 million, compared to net repayments of $29.9 million in the prior year’s period.

 

We purchase automobile contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed under revolving warehouse credit facilities.

 

The acquisition of automobile contracts for subsequent financing in securitization transactions, and the need to fund spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in securitizations, and the extent to which the previously established trusts and their related spread accounts either release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most subject to our control is the rate at which we purchase automobile contracts.

 

We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of June 30, 2017, we had unrestricted cash of $15.8 million and $167.0 million aggregate available borrowings under our three warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of June 30, 2017, we had approximately $19.2 million of such eligible collateral. During the six-month period ended June 30, 2017, we completed two securitizations aggregating $431.5 million of notes sold. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available capital, and, as appropriate, minimizing our operating costs. If we are unable to complete such securitizations, we may be unable to increase our rate of automobile contract purchases, in which case our interest income and other portfolio related income could decrease.

 

Our liquidity will also be affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics of each spread account vary among transactions, our securitization agreements generally provide that we will receive excess cash flows, if any, only if the amount of credit enhancement has reached specified levels and the delinquency or net losses related to the automobile contracts in the pool are below certain predetermined levels. In the event delinquencies or net losses on the automobile contracts exceed such levels, the terms of the securitization may require increased credit enhancement to be accumulated for the particular pool. There can be no assurance that collections from the related trusts will continue to generate sufficient cash.

 

Our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of June 30, 2017, we were in compliance with all such financial covenants.

 

 

 

  31  

 

 

We have and will continue to have a substantial amount of indebtedness. At June 30, 2017, we had approximately $2,229.3 million of debt outstanding. Such debt consisted primarily of $2,082.0 million of securitization trust debt and $131.3 million of warehouse lines of credit. Our securitization trust debt has increased by $125.4 million while our warehouse lines of credit have decreased by $33.8 million since June 30, 2016 (each net of deferred financing costs). As of June 30, 2016, our debt included $8.3 million of residual interest financing which was repaid in full in November 2016. Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $16.1 million and $15.3 million in subordinated renewable notes outstanding at June 30, 2017 and 2016, respectively.

 

Our recent operating results include pre-tax earnings of $15.7 million for the six months ended June 30, 2017 and $49.7 million, $61.4 million, $52.2 million, $37.2 million and $9.2 for the years ended December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Those periods were preceded by pre-tax losses of $14.5 million and $16.2 million in 2011 and 2010, respectively. We believe that our 2011 and 2010 results were materially and adversely affected by the disruption in the capital markets that began in the fourth quarter of 2007, by the recession that began in December 2007, and by related high levels of unemployment.

 

Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt or equity securities.

 

Forward Looking Statements

 

This report on Form 10-Q includes certain “forward-looking statements.” Forward-looking statements may be identified by the use of words such as “anticipates,” “expects,” “plans,” “estimates,” or words of like meaning. Our provision for credit losses is a forward-looking statement, as it is dependent on our estimates as to future chargeoffs and recovery rates. Factors that could affect charge-offs and recovery rates include changes in the general economic climate, which could affect the willingness or ability of obligors to pay pursuant to the terms of automobile contracts, changes in laws respecting consumer finance, which could affect our ability to enforce rights under automobile contracts, and changes in the market for used vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current year include the levels of cash releases from existing pools of automobile contracts, which would affect our ability to purchase automobile contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell automobile contracts to us on the terms that we offer, and the terms on which and whether we are able to complete term securitizations once automobile contracts are acquired. Factors that could affect our expenses in the current year include competitive conditions in the market for qualified personnel and interest rates (which affect the rates that we pay on notes issued in our securitizations).

 

Item 4. Controls and Procedures

 

We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of such disclosure controls and procedures. Based upon that evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the principal financial officer (Jeffrey P. Fritz) concluded that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, material information relating to us that is required to be included in our reports filed under the Securities Exchange Act of 1934. There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

  32  

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The information provided under the caption “Legal Proceedings,” Note 8 to the Unaudited Condensed Consolidated Financial Statements, included in Part I of this report, is incorporated herein by reference.

 

Item 1A. Risk Factors

 

We remind the reader that risk factors are set forth in Item 1A of our report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 7, 2017. Where we are aware of material changes to such risk factors as previously disclosed, we set forth below an updated discussion of such risks. The reader should note that the other risks identified in our report on Form 10-K remain applicable.

 

We have substantial indebtedness.

 

We have and will continue to have a substantial amount of indebtedness. At June 30, 2017, we had approximately $2,229.3 million of debt outstanding. Such debt consisted primarily of $2,082.0 million of securitization trust debt and $131.3 million of warehouse lines of credit. Our securitization trust debt has increased by $125.4 million while our warehouse lines of credit have decreased by $33.8 million since June 30, 2016 (each net of deferred financing costs). As of June 30, 2016, our debt included $8.3 million of residual interest financing which was repaid in full in November 2016. Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $16.1 million and $15.3 million in subordinated renewable notes outstanding at June 30, 2017 and 2016, respectively. Our substantial indebtedness could adversely affect our financial condition by, among other things:

 

· increasing our vulnerability to general adverse economic and industry conditions;
· requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing amounts available for working capital, capital expenditures and other general corporate purposes;
· limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
· placing us at a competitive disadvantage compared to our competitors that have less debt; and
· limiting our ability to borrow additional funds.

 

Although we believe we are able to service and repay such debt, there is no assurance that we will be able to do so. If we do not generate sufficient operating profits, our ability to make required payments on our debt would be impaired. Failure to pay our indebtedness when due could have a material adverse effect.

 

Forward-Looking Statements

 

Discussions of certain matters contained in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. You can generally identify forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such a difference, including the following:

 

· changes in general economic conditions;
· our ability or inability to obtain necessary financing, and the terms of any such financing;
· changes in interest rates, especially as applicable to securitization trust debt;
· our ability to generate sufficient operating and financing cash flows;
· competition;
· level of future provisioning for receivables losses;
· the levels of actual losses on receivables; and

  · regulatory requirements.

 

 

 

 

  33  

 

 

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Actual results may differ from expectations due to many factors beyond our ability to control or predict, including those described herein, and in documents incorporated by reference in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

We undertake no obligation to publicly update any forward-looking information. You are advised to consult any additional disclosure we make in our periodic reports filed with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended June 30, 2017, we repurchased 540,793 shares from existing shareholders, as reflected in the table below.

 

Issuer Purchases of Equity Securities

 

Period(1)    Total
Number of
Shares Purchased
      Average
Price Paid
per Share
        Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
        Approximate
Dollar Value
of Shares
that May Yet
be Purchased
Under the
Plans or
Programs (2)
  
                         
April 2017     142,500     $ 4.65       142,500     $ 1,262,068  
May 2017     179,600     $ 4.62       179,600     $ 10,432,825  
June 2017     218,693     $ 4.42       218,693     $ 9,467,096  
Total     540,793     $ 4.54       540,793          

____________________

 

(1) Each monthly period is the calendar month.
(2) Through June 30, 2017, our board of directors had authorized the purchase of up to $64.5 million of our outstanding securities, under a program first announced in our annual report for the year 2002, filed on March 26, 2003. All purchases described in the table above were under the program announced in March 2003, which has no fixed expiration date. Our board of directors in May 2017 increased the aggregate authorization by $10 million from $54.5 million to $64.5 million.

 

Item 6. Exhibits

 

The Exhibits listed below are filed with this report.

 

4.14 Instruments defining the rights of holders of long-term debt of certain consolidated subsidiaries of the registrant are omitted pursuant to the exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation S-K (17 CFR 229.601). The registrant agrees to provide copies of such instruments to the United States Securities and Exchange Commission upon request.
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer of the registrant.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer of the registrant.
32 Section 1350 Certifications. *

 

101.INS XBRL Instances Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

* These Certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These Certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registration statement specifically states that such Certifications are incorporated therein.

 

 

 

  34  

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CONSUMER PORTFOLIO SERVICES, INC.
  (Registrant)
   
Date: July 31, 2017  
  By:   /s/   CHARLES E. BRADLEY, JR.
  Charles E. Bradley, Jr.
  President and Chief Executive Officer
  (Principal Executive Officer)
   
Date: July 31, 2017  
   
  By:   /s/   JEFFREY P. FRITZ
  Jeffrey P. Fritz
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)

 

 

 

 

  35  

Exhibit 31.1

 

CERTIFICATION

 

I, Charles E. Bradley, Jr., certify that:

 

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2017 of Consumer Portfolio Services, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 31, 2017    


/s/ CHARLES E. BRADLEY, JR.          

Charles E. Bradley, Jr. Chief Executive Officer

   

Exhibit 31.2

 

CERTIFICATION

 

I, Jeffrey P. Fritz, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2017 of Consumer Portfolio Services, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 31, 2017    


/s/  JEFFREY P. FRITZ          

Jeffrey P. Fritz, Chief Financial Officer

   

Exhibit 32


 

Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act Of 2002

 

In connection with the Quarterly Report on Form 10-Q of Consumer Portfolio Services, Inc. (the “Company”) for the quarterly period ended June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Charles E. Bradley, Jr., as Chief Executive Officer of the Company, and Jeffrey P. Fritz, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

        (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: July 31, 2017

 

 

/s/  CHARLES E. BRADLEY, JR.      

Charles E. Bradley, Jr.
Chief Executive Officer
___________________

   


/s/  JEFFREY P. FRITZ      

Jeffrey P. Fritz
Chief Financial Officer
__________________

   

 

This certification accompanies each Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.