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EX-31.2 - CERTIFICATION - CONSUMER PORTFOLIO SERVICES INCcps_10q-ex3102.htm
EX-31.1 - CERTIFICATION - CONSUMER PORTFOLIO SERVICES INCcps_10q-ex3101.htm
EX-32 - CERTIFICATION - CONSUMER PORTFOLIO SERVICES INCcps_10q-ex3200.htm

 

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, 2015

 

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 or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [_]     Accelerated Filer [X]

Non-Accelerated Filer [_]    Smaller Reporting Company  [_]

 

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 21, 2015 the registrant had 26,081,055 common shares outstanding.

 

 
 

 

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarterly Period Ended June 30, 2015

 

    Page
PART I. FINANCIAL INFORMATION
     
Item 1. Financial Statements  
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 3
  Unaudited Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2015 and 2014 4
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2015 and 2014 5
  Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2015 and 2014 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 4. Controls and Procedures 43

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings 44
Item 1A. Risk Factors 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 6. Exhibits 47
  Signatures 48

 

2
 

 

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, 
   2015   2014 
ASSETS          
Cash and cash equivalents  $18,436   $17,859 
Restricted cash and equivalents   200,122    175,382 
           
Finance receivables   1,784,798    1,595,956 
Less: Allowance for finance credit losses   (74,541)   (61,460)
Finance receivables, net   1,710,257    1,534,496 
           
Finance receivables measured at fair value   316    1,664 
Furniture and equipment, net   1,692    1,161 
Deferred financing costs   13,893    12,362 
Deferred tax assets, net   42,217    42,847 
Accrued interest receivable   28,079    23,372 
Other assets   16,892    23,915 
   $2,031,904   $1,833,058 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities          
Accounts payable and accrued expenses  $22,367   $21,660 
Warehouse lines of credit   61,771    56,839 
Residual interest financing   11,274    12,327 
Debt secured by receivables measured at fair value       1,250 
Securitization trust debt   1,775,574    1,598,496 
Subordinated renewable notes   14,982    15,233 
    1,885,968    1,705,805 
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; 26,150,459 and 24,540,640 shares issued and outstanding at June 30, 2015 and December 31, 2014 respectively   82,326    80,513 
Retained earnings   68,661    51,791 
Accumulated other comprehensive loss   (5,051)   (5,051)
    145,936    127,253 
   $2,031,904   $1,833,058 

 

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, 
   2015   2014   2015   2014 
Revenues:                    
Interest income  $84,900   $68,221   $167,259   $133,217 
Servicing fees   62    367    210    880 
Other income   3,399    3,006    6,881    5,643 
    88,361    71,594    174,350    139,740 
                     
Expenses:                    
Employee costs   13,144    11,774    27,630    22,664 
General and administrative   5,108    5,075    9,944    8,678 
Interest   13,688    11,942    26,861    25,323 
Provision for credit losses   35,683    25,627    69,122    49,508 
Marketing   4,436    3,812    8,639    7,658 
Occupancy   949    908    1,904    1,595 
Depreciation and amortization   153    127    301    221 
    73,161    59,265    144,401    115,647 
Income before income tax expense   15,200    12,329    29,949    24,093 
Income tax expense   6,663    5,303    13,079    10,362 
Net income  $8,537   $7,026   $16,870   $13,731 
                     
Earnings per share:                    
Basic  $0.33   $0.28   $0.65   $0.56 
Diluted   0.27    0.22    0.53    0.43 
                     
Number of shares used in computing earnings per share:                    
Basic   26,234    25,029    25,936    24,694 
Diluted   31,917    32,002    31,955    32,009 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4
 

 

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, 
   2015   2014   2015   2014 
                 
Net income  $8,537   $7,026   $16,870   $13,731 
                     
Other comprehensive income/(loss); change in funded status of pension plan                
Comprehensive income  $8,537   $7,026   $16,870   $13,731 

 

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, 
   2015   2014 
Cash flows from operating activities:          
Net income  $16,870   $13,731 
Adjustments to reconcile net income to net cash          
Adjustments to reconcile net income to net cash provided by operating activities:          
Accretion of deferred acquisition fees   (5,318)   (8,922)
Accretion of purchase discount on receivables measured at fair value       (353)
Amortization of discount on securitization trust debt   41    76 
Amortization of discount on senior secured debt, related party       623 
Accretion of premium on debt secured by receivables measured at fair value       490 
Mark to fair value on debt secured by receivables measured at fair value       339 
Mark to fair value of receivables measured at fair value       8 
Depreciation and amortization   301    221 
Amortization of deferred financing costs   3,437    3,384 
Provision for credit losses   69,122    49,508 
Stock-based compensation expense   2,176    1,459 
Interest income on residual assets   (65)   (236)
Changes in assets and liabilities:          
Accrued interest receivable   (4,707)   (830)
Deferred tax assets, net   630    7,665 
Other assets   5,697    708 
Accounts payable and accrued expenses   707    (587)
Net cash provided by operating activities   88,891    67,284 
           
Cash flows from investing activities:          
Purchases of finance receivables held for investment   (503,791)   (401,266)
Payments received on finance receivables held for investment   264,226    216,698 
Payments received on receivables portfolio at fair value   1,348    9,135 
Proceeds received on residual interest in securitizations       830 
Change in repossessions held in inventory   1,391    (2,629)
Increases in restricted cash and cash equivalents, net   (24,740)   (22,618)
Purchase of furniture and equipment   (832)   (461)
Net cash used in investing activities   (262,398)   (200,311)
           
Cash flows from financing activities:          
Proceeds from issuance of securitization trust debt   495,000    382,500 
Proceeds from issuance of subordinated renewable notes   431    260 
Payments on subordinated renewable notes   (682)   (1,364)
Net proceeds from (repayments of) warehouse lines of credit   4,932    31,838 
Proceeds from (repayments of) residual interest financing debt   (1,053)   (5,017)
Repayment of securitization trust debt   (317,963)   (233,816)
Repayment of debt secured by receivables measured at fair value   (1,250)   (8,554)
Repayment of senior secured debt, related party       (39,182)
Payment of financing costs   (4,968)   (3,236)
Purchase of common stock   (1,773)    
Exercise of options and warrants   1,410    1,912 
Net cash provided by financing activities   174,084    125,341 
           
Increase (decrease) in cash and cash equivalents   577    (7,686)
           
Cash and cash equivalents at beginning of period   17,859    22,112 
Cash and cash equivalents at end of period  $18,436   $14,426 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Interest  $22,941   $23,289 
Income taxes  $8,455   $2,514 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

  

6
 

CONSUMER PORTFOLIO SERVICES, INC.

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 three and six month periods ended June 30, 2015 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, 2014.

 

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.

 

 

 

 

 

7
 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Other Income

 

The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2015 and 2014:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Direct mail revenues  $2,382   $2,171   $4,519   $4,023 
Convenience fee revenue   530    800    1,480    1,610 
Recoveries on previously charged-off contracts   141    48    333    83 
Sales tax refunds   144    129    150    231 
Other   202    (142)   399    (304)
Other income for the period  $3,399   $3,006   $6,881   $5,643 

 

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, 2015, we recorded stock-based compensation costs in the amount of $1.1 million and $2.2 million, respectively. These stock-based compensation costs were $0.7 million and $1.5 million for the three and six months ended June 30, 2014. As of June 30, 2015, unrecognized stock-based compensation costs to be recognized over future periods equaled $16.7 million. This amount will be recognized as expense over a weighted-average period of 3.02 years.

 

The following represents stock option activity for the six months ended June 30, 2015:

 

   Number of   Weighted   Weighted
Average
   Shares   Average   Remaining
   (in thousands)   Exercise Price   Contractual Term
Options outstanding at the beginning of period   10,828   $4.05   6.01 years
Granted   1,965    6.11   N/A
Exercised   (971)   1.38   N/A
Forfeited   (271)   5.12   N/A
Options outstanding at the end of period   11,551   $4.60   5.93 years
              
Options exercisable at the end of period   5,763   $3.15   5.05 years

  

At June 30, 2015, the aggregate intrinsic value of options outstanding and exercisable was $22.9 million and $19.5 million, respectively. There were 971,000 options exercised for the six months ended June 30, 2015 compared to 978,000 for the comparable period in 2014. The total intrinsic value of options exercised was $5.4 million and $6.7 million for the six-month periods ended June 30, 2015 and 2014. There were 5.4 million shares available for future stock option grants under existing plans as of June 30, 2015.

 

Purchases of Company Stock

 

During the six-month period ended June 30, 2015, we purchased 361,046 shares of our common stock, at an average price of $6.39. We purchased 285,473 shares of our stock in the open market at an average price of $6.21. The remaining purchases of 75,573 shares were related to net exercises of outstanding options and warrants. In transactions during the six-month period ended June 30, 2015, the holders of options and warrants to purchase 392,200 shares of our common stock paid the aggregate $535,000 exercise price by surrender to us of 75,573 of such 392,200 shares.

8
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the six-month period ended June 30, 2014, we purchased 73,788 shares of our common stock, at an average price of $7.91. The purchases were related to net exercises of outstanding options and warrants. In transactions during the six-month period ended June 30, 2014, the holder of options and warrants to purchase 395,000 shares of our common stock paid the aggregate $583,000 exercise price by surrender to us of 73,788 of such 395,000 shares.

 

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.

 

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, 2015, we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt agreements contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.

 

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 have recorded a liability as of June 30, 2015, which represents 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, 
   2015   2014 
Finance Receivables   (In thousands) 
           
Automobile finance receivables, net of unearned interest  $1,796,077   $1,612,246 
Less: Unearned acquisition fees and originations costs   (11,279)  (16,290)
Finance Receivables  $1,784,798   $1,595,956 

 

 

9
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings. The following table summarizes the delinquency status of finance receivables as of June 30, 2015 and December 31, 2014:

 

   June 30,   December 31, 
   2015   2014 
   (In thousands) 
Delinquency Status          
Current  $1,684,617   $1,523,020 
31 - 60 days   52,704    42,730 
61 - 90 days   27,064    23,300 
91 + days   31,692    23,196 
   $1,796,077   $1,612,246 

 

Finance receivables totaling $31.7 million and $23.2 million at June 30, 2015 and December 31, 2014, 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 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, 2015 and 2014:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Balance at beginning of period  $68,142  $44,652   $61,460   $39,626 
Provision for credit losses on finance receivables   35,683    25,627    69,122    49,508 
Charge-offs   (34,836)   (26,985)   (66,665)   (50,526)
Recoveries   5,552    10,032    10,624    14,718 
Balance at end of period  $74,541  $53,326   $74,541   $53,326 

 

10
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

   June 30,   December 31, 
   2015   2014 
   (In thousands) 
Gross balance of repossessions in inventory  $24,878   $28,234 
Allowance for losses on repossessed inventory   (15,864)   (17,829)
Net repossessed inventory included in other assets  $9,014   $10,405 

 

(3) Finance Receivables Measured at Fair Value

 

In September 2011 we purchased approximately $217.8 million of finance receivables from Fireside Bank. These receivables are recorded on our balance sheet at fair value.

 

The following table presents the components of Finance Receivables measured at fair value:

 

   June 30,   December 31, 
   2015   2014 
Finance Receivables Measured at Fair Value  (In thousands) 
           
Finance receivables and accrued interest, net of unearned interest  $316   $1,664 
Less: Fair value adjustment        
Finance receivables measured at fair value  $316   $1,664 

 

The following table summarizes the delinquency status of finance receivables measured at fair value as of June 30, 2015 and December 31, 2014:

 

   June 30,   December 31, 
   2015   2014 
   (In thousands) 
Delinquency Status          
Current  $202   $1,266 
31 - 60 days   58    262 
61 - 90 days   30    74 
91 + days   26    62 
   $316   $1,664 

 

11
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4) 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:

 

     
Final
Scheduled
 
Receivables
Pledged at
         
Outstanding
Principal at
   
Outstanding
Principal at
    Weighted
Average
Contractual
Interest Rate at
 
   Payment  June 30,   Initial   June 30,   December 31,   June 30, 
Series  Date (1)  2015 (2)   Principal   2015   2014   2015 
   (Dollars in thousands)    
CPS 2011-A  April 2018  $   $100,364   $   $8,457     
CPS 2011-B  September 2018   16,276    109,936    15,805    22,985    4.45% 
CPS 2011-C  March 2019   21,828    119,400    21,794    30,601    4.90% 
CPS 2012-A  June 2019   26,812    155,000    25,311    35,923    3.26% 
CPS 2012-B  September 2019   38,128    141,500    37,281    50,125    3.07% 
CPS 2012-C  December 2019   43,231    147,000    42,302    55,619    2.39% 
CPS 2012-D  March 2020   52,348    160,000    51,078    67,833    2.02% 
CPS 2013-A  June 2020   76,253    185,000    75,479    97,775    1.93% 
CPS 2013-B  September 2020   93,333    205,000    92,611    118,692    2.42% 
CPS 2013-C  December 2020   107,454    205,000    106,571    133,628    3.03% 
CPS 2013-D  March 2021   106,445    183,000    105,390    132,150    2.67% 
CPS 2014-A  June 2021   117,005    180,000    116,084    143,456    2.24% 
CPS 2014-B  September 2021   150,384    202,500    149,774    177,601    2.01% 
CPS 2014-C  December 2021   224,185    273,000    222,119    256,151    2.22% 
CPS 2014-D  March 2022   237,229    267,500    233,956    267,500    2.46% 
CPS 2015-A  June 2022   232,950    245,000    230,019        2.36% 
CPS 2015-B (3)  September 2022   248,347    250,000    250,000        2.47% 
      $1,792,208   $3,129,200   $1,775,574   $1,598,496      

_________________

(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 $342.7 million in 2015, $582.2 million in 2016, $426.2 million in 2017, $256.5 million in 2018, $129.4 million in 2019 and $38.6 million in 2020.
   
(2)Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.
   
 (3)Includes $94.9 million of receivables that were pledged to CPS 2015-B after June 30, 2015, on July 8, 2015.

 

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

 

The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. In addition, certain securitization and non-securitization related debt contain cross-default provisions, which would allow certain creditors to declare a default if a default were declared under a different facility. As of June 30, 2015, we were in compliance with all such covenants.

 

12
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2015, restricted cash under the various agreements totaled approximately $200.1 million, of which $94.9 million represented pre-funding proceeds. 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.

 

(5) Debt

 

The terms and amounts of our other debt outstanding at June 30, 2015 and December 31, 2014 are summarized below:

 

         Amount Outstanding at 
         June 30,   December 31, 
         2015   2014 
         (In thousands) 
Description  Interest Rate  Maturity        
               
Warehouse lines of credit  5.50% over one month Libor (Minimum 6.50%)  April 2019  $29,477   $23,581 
                 
   5.50% over one month Libor (Minimum 6.25%)  August 2017   32,294    33,258 
                 
Residual interest financing  11.75% over one month Libor  April 2018   11,274    12,327 
                 
Debt secured by receivables measured at fair value  n/a  Repayment is based on payments from underlying receivables.  Final payment of the 8.00% loan was made in September 2013, while final residual payment was made in January 2015       1,250 
                 
Subordinated renewable notes  Weighted average rate of 9.80% and 10.7% at June 30, 2015 and December 31, 2014, respectively  Weighted average maturity of January 2017 and October 2016 at June 30, 2015 and December 31, 2014, respectively   14,982    15,233 
                 
         $88,027   $85,649 

 

13
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2015 we entered into a new $100 million warehouse credit line with affiliates of Fortress Investment Group. The facility is structured to allow us to fund a portion of the purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary Page Six Funding LLC. The facility, which replaces a revolving credit facility that we have used since December 2010, provides for advances up to 88% of eligible finance receivables and the loans under it accrue interest at a rate of one-month LIBOR plus 5.50% per annum, with a minimum rate of 6.50% per annum. There was $29.5 million outstanding under this new facility at June 30, 2015 which has a revolving period through April 2017 and an amortization period through April 2019 for any receivables pledged to the facility at the end of the revolving period.

 

(6) Interest Income and Interest Expense

 

The following table presents the components of interest income:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
                 
Interest on finance receivables  $84,872  $68,098   $167,193   $132,980 
Residual interest income   28    123    65    236 
Other interest income           1    1 
Interest income  $84,900   $68,221   $167,259   $133,217 

 

The following table presents the components of interest expense:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
                 
Securitization trust debt  $11,670   $9,381   $22,546   $18,697 
Warehouse lines of credit   1,259    1,238    2,732    2,115 
Senior secured debt, related party               1,651 
Debt secured by receivables at fair value       205        533 
Residual interest financing   351    504    773    1,083 
Subordinated renewable notes   408    614    810    1,244 
Interest expense  $13,688   $11,942   $26,861   $25,323 

 

 

14
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(7) Earnings Per Share

 

Earnings per share for the three-month and six-month periods ended June 30, 2015 and 2014 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, 2015 and 2014:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Weighted average number of common shares outstanding during the period used to compute basic earnings per share   26,234    25,029    25,936    24,694 
                     
Incremental common shares attributable to exercise of outstanding options and warrants   5,683    6,973    6,019    7,315 
                    
Weighted average number of common shares used to compute diluted earnings per share   31,917    32,002    31,955    32,009 

 

 

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, 2015 would have included an additional 5.7 million and 5.3 million shares, respectively attributable to the exercise of outstanding options and warrants. For the three-month and six-month periods ended June 30, 2014, an additional 2.6 million shares would be included in the diluted earnings per share calculation.

 

(8) 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 2011.

 

As of June 30, 2015 and December 31, 2014, 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 $42.2 million as of June 30, 2015 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $42.2 million consists of approximately $32.0 million of net U.S. federal deferred tax assets and $10.2 million of net state deferred tax assets. We estimate that we would need to generate approximately $97 million of taxable income during the applicable carryforward periods to realize fully our federal and state net deferred tax assets.

 

Income tax expense was $6.7 million and $13.1 million for the three months and six months ended June 30, 2015 and represents an effective income tax rate of 44%, compared to income tax expense of $5.3 million and $10.4 million for the three and six months ended June 30, 2014, and represents an effective income tax rate of and 43%.

 

15
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(9) 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. We are currently defending two such purported class actions.

 

The first of those two has been settled by agreement with the plaintiffs, with the settlement remaining subject to approval by the court. In the second, the California court of appeals ruled in March 2015 that the plaintiff may assert his claim only in arbitration, on an individual basis and not on a class basis. However, the California supreme court has accepted the plaintiff’s petition for review (which vacates the decision of the court of appeals), and has ordered the matter held pending that court’s decision in a case to which we are not a party, which decision is expected to address some of the same issues relating to arbitrability that are raised in our case. There can be no assurance as to the outcome.

 

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. We have recorded a liability as of June 30, 2015 with respect to such matters, in the aggregate.

 

FTC Action. In July 2013, the staff of the U.S. Federal Trade Commission (“FTC”) advised us that they were prepared to recommend that the FTC initiate a lawsuit against us relating to allegedly unfair trade practices, and simultaneously advised that settlement of such issues by consent decree might be achieved. On May 29, 2014, the FTC announced its agreement to settle the matter by filing a lawsuit against us, and requesting, with our consent, that the court enter an agreed judgment against us. The lawsuit arose out of the FTC’s inquiry into our business practices. Under the agreed settlement, we made approximately $1.9 million of restitutionary payments and $1.6 million of account adjustments to our customers in September 2014, paid a $2 million penalty to the federal government in June 2014, and implemented procedural changes, all pursuant to a consent decree that was entered by the court in June 2014.

 

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. Among other matters, the subpoena requests 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. We are investigating these matters internally and are cooperating with the request. Such investigation could in the future result in the imposition of damages, fines or civil or criminal claims and/or penalties. No assurance can be given as to the ultimate outcome of the investigation or any resulting proceeding(s), which might materially and adversely affect us.

 

In General. There can be no assurance as to the outcomes of the matters referenced above. We have recorded a liability as of June 30, 2015, which represents our best estimate of probable incurred losses for legal contingencies, including all 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, 2015, and in excess of the liability we have recorded, is from $0 to $2,000,000.

 

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 significantly exceed the reserves we have accrued; as a result, the outcome of a particular matter may 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.

 

16
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(10) 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, 2015 and 2014.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (In thousands)   (In thousands) 
Components of net periodic cost (benefit)                
Service cost  $   $   $   $ 
Interest cost   211    220    422    440 
Expected return on assets   (377)   (432)   (754)   (864)
Amortization of transition (asset)/obligation                
Amortization of net (gain) / loss   87        174     
Net periodic cost (benefit)  $(79)  $(212)  $(158)  $(424)

 

We did not make any contributions to the Plan during the six-month period ended June 30, 2015 and we do not anticipate making any contributions for the remainder of 2015. We contributed $112,000 during the six-month period ended June 30, 2014.

 

(11) 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.

 

In September 2011, we acquired $217.8 million of finance receivables from Fireside Bank for a purchase price of $199.6 million. The receivables were acquired by our wholly-owned special purpose subsidiary, CPS Fender Receivables, LLC, which issued a note for $197.3 million, with a fair value of $196.5 million. Since the Fireside receivables were originated by another entity with its own underwriting guidelines and procedures, we have elected to account for the Fireside receivables and the related debt secured by those receivables at their estimated fair values so that changes in fair value will be reflected in our results of operations as they occur. Interest income from the receivables and interest expense on the note are included in interest income and interest expense, respectively. Changes to the fair value of the receivables and debt are included in other income. Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and debt, and are based on the best information available in the circumstances. They include such inputs as estimated net charge-offs and timing of the amortization of the portfolio of finance receivables. Our estimate of the fair value of the Fireside receivables is performed on a pool basis, rather than separately on each individual receivable. The table below presents a reconciliation of the acquired finance receivables and related debt measured at fair value on a recurring basis using significant unobservable inputs:

 

17
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (in thousands)   (in thousands) 
Finance Receivables Measured at Fair Value:                    
Balance at beginning of period  $743  $9,058   $1,664   $14,476 
Payments on finance receivables at fair value   (427)   (3,766)   (1,348)   (7,873)
Charge-offs on finance receivables at fair value       (213)       (556)
Discount accretion       592        (353)
Mark to fair value       15        (8)
Balance at end of period  $316   $5,686   $316   $5,686 
                     
Debt Secured by Finance Receivables Measured at Fair Value:               
Balance at beginning of period  $  $8,576   $1,250   $13,117 
Principal payments on debt at fair value       (3,515)   (1,250)   (8,554)
Premium accretion       186        490 
Mark to fair value       145        339 
Balance at end of period       5,392        5,392 
Reduction for payments collected and payable       (878)       (878)
Adjusted balance at end of period  $   $4,514   $   $4,514 

 

The table below compares the fair values of the Fireside receivables and the related secured debt to their contractual balances for the periods shown:

 

   June 30, 2015   December 31, 2014 
   Contractual   Fair   Contractual   Fair 
   Balance   Value   Balance   Value 
   (In thousands) 
                 
Fireside receivables portfolio  $316   $316   $1,664   $1,664 
                     
Debt secured by Fireside receivables portfolio               1,250 

 

18
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value of the debt secured by the Fireside receivables portfolio represents the discounted value of future cash flows that we estimate will become due to the lender in accordance with the terms of our financing for the Fireside portfolio. The terms of the debt provide for the lenders to receive a share of residual cash flows from the underlying receivables after the contractual balance of the debt is repaid and the Company’s investment in the Fireside portfolio is returned. The final residual payment was made in January 2015.

 

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, 2015, the finance receivables related to the repossessed vehicles in inventory totaled $24.9 million. We have applied a valuation adjustment, or loss allowance, of $15.9 million, which is based on a recovery rate of approximately 36%, resulting in an estimated fair value and carrying amount of $9.0 million. The fair value and carrying amount of the repossessed inventory at December 31, 2014 was $10.4 million after applying a valuation adjustment of $17.8 million.

 

There were no transfers in or out of level 1 or level 2 assets and liabilities for the six months ended June 30, 2015 and 2014. We have no level 3 assets that are measured at fair value on a non-recurring basis.

 

The following table provides certain qualitative information about our level 3 fair value measurements for assets and liabilities carried at fair value:

 

Financial Instrument  Fair Values as of         Inputs as of 
   June 30,   December 31,   Valuation  Unobservable  June 30,   December 31, 
   2015   2014   Techniques  Inputs  2015   2014 
   (In thousands)                 
Assets:                          
                           
Finance receivables measured at fair value  $316   $1,664   Discounted cash flows  Discount rate   15.4%    15.4% 
               Cumulative net losses   5.0%    5.0% 
                Monthly average prepayments   0.5%    0.5% 
Liabilities:                          
                           
Debt secured by receivables measured at fair value       1,250   Discounted cash flows  Discount rate   n/a    12.2% 

 

 

19
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The estimated fair values of financial assets and liabilities at June 30, 2015 and December 31, 2014, were as follows:

 

   As of June 30, 2015 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                         
Cash and cash equivalents  $18,436   $18,436   $   $   $18,436 
Restricted cash and equivalents   200,122    200,122            200,122 
Finance receivables, net   1,710,257            1,687,552    1,687,552 
Finance receivables measured at fair value   316            316    316 
Residual interest in securitizations   20            20    20 
Accrued interest receivable   28,079            28,079    28,079 
Liabilities:                         
Warehouse lines of credit  $61,771   $   $   $61,771   $61,771 
Accrued interest payable   3,055            3,055    3,055 
Residual interest financing   11,274            11,274    11,274 
Securitization trust debt   1,775,574            1,788,334    1,788,334 
Subordinated renewable notes   14,982            14,982    14,982 

 

   As of December 31, 2014 
Financial Instrument  (In thousands) 
   Carrying   Fair Value Measurements Using:     
   Value   Level 1   Level 2   Level 3   Total 
Assets:                         
Cash and cash equivalents  $17,859   $17,859   $   $   $17,859 
Restricted cash and equivalents   175,382    175,382            175,382 
Finance receivables, net   1,534,496            1,512,567    1,512,567 
Finance receivables measured at fair value   1,664            1,664    1,664 
Residual interest in securitizations   68            68    68 
Accrued interest receivable   23,372            23,372    23,372 
Liabilities:                         
Warehouse lines of credit  $56,839   $   $   $56,839   $56,839 
Accrued interest payable   2,613            2,613    2,613 
Residual interest financing   12,327            12,327    12,327 
Debt secured by receivables measured at fair value   1,250            1,250    1,250 
Securitization trust debt   1,598,496            1,619,742    1,619,742 
Subordinated renewable notes   15,233            15,233    15,233 

 

20
 

 

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following summary presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of our financial instruments, active markets do not exist. Therefore, significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of June 30, 2015 and December 31, 2014, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

 

Cash, Cash Equivalents and Restricted Cash and Equivalents

 

The carrying value equals fair value.

 

Finance Receivables, net

 

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

 

Finance Receivables Measured at Fair Value and Debt Secured by Receivables Measured at Fair Value

 

The carrying value equals fair value.

 

Residual Interest in Securitizations

 

The fair value is estimated by discounting future cash flows using credit and discount rates that we believe reflect the estimated credit, interest rate and prepayment risks associated with similar types of instruments.

 

Accrued Interest Receivable and Payable

 

The carrying value approximates fair value.

 

Warehouse Lines of Credit, Residual Interest Financing, 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.

 

21
 

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

 

Overview

 

We are a specialty finance company focused on consumers who have limited credit histories or past credit problems, whom we refer to as sub-prime customers. 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 sub-prime customers of dealers. 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) 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."

 

We were incorporated and began our operations in March 1991. From inception through June 30, 2015, we have purchased a total of approximately $11.8 billion of automobile contracts from dealers. In addition, we obtained a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and owned by non-affiliated entities. Beginning in 2008 through the third quarter of 2011, our managed portfolio decreased each year due to our strategy of limiting contract purchases in 2008 and 2009 to conserve our liquidity, as discussed further below. However, since October 2009 we have gradually increased contract purchases, which, in turn has resulted in recent increases to our managed portfolio. 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 
Six months ended June 30, 2015   503,791    1,822,183 

 

 

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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 our 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.

 

We purchase contracts in our own name (“CPS”) and, until July 2008, also in the name of our wholly-owned subsidiary, TFC. Programs marketed under the CPS name are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. Our TFC program served vehicle purchasers enlisted in the U.S. Armed Forces, primarily through independent used car dealers. In July 2008, we suspended contract purchases under our TFC program. We purchase automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

 

Securitization and Warehouse Credit Facilities

 

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to fund the transactions. 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 unaudited condensed 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 67 term securitizations (generally quarterly) of automobile contracts that we purchased from dealers under our regular programs. As of June 30, 2015, 17 of those securitizations are active and all but one are structured as secured financings. Our September 2010 transaction is our only active securitization that is structured as a sale of the related contracts. 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.

 

Our recent history of term securitizations is summarized in the table below:

 

Recent Asset-Backed Term Securitizations
   $ in thousands 
Period  Number of Term Securitizations   Amount of 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 
Six months ended June 30, 2015   2    495,000 

 

Our 2010 securitization was, in substance, a re-securitization of the receivables from our second securitization of 2008, which allowed us to take advantage of a lower interest rate environment at that time. Our 2012 securitizations included $58.2 million in contracts that were repurchased in 2012 from securitizations closed in 2006 and 2007. Our 2013 securitizations included $7.4 million in contracts that were repurchased from a securitization closed in 2008.

 

From time to time we have also completed financings of our residual interests in other securitizations that we and our affiliates previously sponsored. As of June 30, 2015 we have one such residual interest financing outstanding.

 

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Since December 2011, our securitizations have included a pre-funding feature in which a portion of the receivables to be sold to the trust were not delivered until after the initial closing. As a result, our restricted cash balance at June 30, 2015 included $94.9 million from the proceeds of the sale of the asset-backed notes that were held by the trustee pending delivery of the remaining receivables. In July 2015, the requisite additional receivables were delivered to the trust and we received the related restricted cash, most of which was used to repay amounts owed under our warehouse credit facilities.

 

Our current short-term funding capacity is $200 million, comprising two credit facilities. The first $100 million credit facility was established in December 2010. This facility was renewed in March 2013, extending the revolving period to March 2015, and extended again in March 2015 to April 2015, when it was repaid in full. Our second $100 million credit facility was established in May 2012. This facility was renewed in August 2014, extending the revolving period to August 2016, and adding an amortization period through August 2017. In April 2015, we entered into a new $100 million facility with a revolving period extending to April 2017 followed by an amortization period to April 2019.

 

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 securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility. As of June 30, 2015 we were in compliance with all such covenants.

 

Results of Operations

 

Comparison of Operating Results for the three months ended June 30, 2015 with the three months ended June 30, 2014

 

Revenues.  During the three months ended June 30, 2015, our revenues were $88.4 million, an increase of $16.8 million, or 23.4%, from the prior year revenue of $71.6 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended June 30, 2015 increased $16.7 million, or 24.4%, to $84.9 million from $68.2 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries, which increased from $1,369.6 million at June 30, 2014 to $1,822.2 million at June 30, 2015. The table below shows the average balances of our portfolio held by consolidated subsidiaries for the three months ended June 30, 2015 and 2014:

 

   Average Balances for the Three Months Ended 
   June 30, 2015   June 30, 2014 
   Amount   Amount 
Finance Receivables Owned by  ($ in millions) 
Consolidated Subsidiaries        
CPS Originated Receivables  $1,772.9   $1,333.6 
Fireside   0.4    6.7 
Total  $1,773.3   $1,340.3 

 

Servicing fees totaling $62,000 for the three months ended June 30, 2015 decreased $305,000, or 83.1%, from $367,000 in the prior year. We earn base servicing fees on three portfolios and incentive servicing fees on one of those three portfolios. All three of these portfolios are decreasing in size as we receive customer payments and, consequently, base servicing and incentive servicing fees are decreasing also. As of June 30, 2015 and 2014, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

 

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   June 30, 2015   June 30, 2014 
   Amount (1)   % (2)   Amount (1)   % (2) 
Total Managed Portfolio  ($ in millions) 
Owned by Consolidated Subsidiaries                    
CPS Originated Receivables  $1,821.0    99.9%   $1,363.9    99.3% 
Fireside   0.3    0.0%    5.7    0.4% 
Owned by Non-Consolidated Subsidiaries   0.1    0.0%    1.4    0.1% 
Third-Party Servicing Portfolios   0.8    0.0%    2.6    0.2% 
Total  $1,822.2    100.0%   $1,373.6    100.0% 

 

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.

 

At June 30, 2015, we were generating income and fees on a managed portfolio with an outstanding principal balance of $1,822.2 million (this amount includes $111,000 of automobile contracts on which we earn servicing fees and own a residual interest and also includes another $800,000 of automobile contracts on which we earn base and incentive servicing fees), compared to a managed portfolio with an outstanding principal balance of $1,373.6 million as of June 30, 2014. At June 30, 2015 and 2014, the managed portfolio composition was as follows:

 

   June 30, 2015   June 30, 2014 
   Amount (1)   % (2)   Amount (1)   % (2) 
Originating Entity   ($ in millions) 
CPS  $1,821.7    100.0%   $1,365.3    99.4% 
Fireside   0.3    0.0%    5.7    0.4% 
Third Party Portfolio   0.2    0.0%    2.6    0.2% 
Total  $1,822.2    100.0%   $1,373.6    100.0% 

 

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.

 

In the three months ended June 30, 2015, other income of $3.4 million increased by $393,000, or 13.1% compared to the prior year. The three-month period ended June 30, 2015 includes an increase of $210,000 in revenue associated with direct mail and other related products and services that we offer to our dealers, a net increase of $278,000 on payments to us for our interest in certain sold charge off portfolios and acquired third-party portfolios and an increase of $15,000 in sales tax refunds. In addition, in the prior year period, we incurred a markdown of $160,000 in the fair value of the principal balance and related debt of the Fireside portfolio. The increases were somewhat offset by a decrease of $270,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments.

 

Expenses.  Our operating expenses consist largely of 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.

 

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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 $73.2 million for the three months ended June 30, 2015, compared to $59.3 million for the prior year, an increase of $13.9 million, or 23.4%. The increase is primarily due to costs associated with the increase in the amount of new contracts we purchased, the resulting increase in our consolidated portfolio and associated servicing costs, and the related increase in our provision for credit losses. Increases in core operating expenses and provision for credit losses were partially offset by decreases in interest expense.

 

Employee costs increased by $1.4 million or 11.6%, to $13.1 million during the three months ended June 30, 2015, representing 18.0% of total operating expenses, from $11.8 million for the prior year, or 19.9% of total operating expenses. Since 2010, we have added employees in our Originations and Marketing departments in conjunction with the increase in contract purchases. More recently, we have also added Servicing staff to accommodate the increase in the number of accounts in our managed portfolio. 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, 2015 and 2014:

 

   June 30, 2015   June 30, 2014 
   Amount   Amount 
   ($ in millions) 
Contracts purchased (dollars)  $269.9   $211.4 
Contracts purchased (units)   16,339    13,132 
Managed portfolio outstanding (dollars)  $1,822.2   $1,373.6 
Managed portfolio outstanding (units)   135,954    107,670 
           
Number of Originations staff   222    163 
Number of Marketing staff   135    120 
Number of Servicing staff   462    369 
Number of other staff   78    77 
Total number of employees   897    729 

 

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 $5.1 million, an increase of $33,000, or 0.6% compared to the previous year and represented 7.0% of total operating expenses.

 

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Interest expense for the three months ended June 30, 2015 increased by $1.7 million to $13.7 million, or 18.7% of total operating expenses, compared to $11.9 million in the previous year.

 

The debt on the Fireside portfolio was repaid in full in January 2015. As a result, we incurred no interest expense on that debt compared to $204,000 in the prior year period.

 

Interest on securitization trust debt increased by $2.3 million, or 24.4%, for the three months ended June 30, 2015 compared to the prior year. The average balance of securitization trust debt increased 35.2% to $1,665.4 million at June 30, 2015 compared to $1,231.5 million at June 30, 2014. However, the blended interest rates on term securitizations completed since 2012 are significantly less than the blended interest rates on securitization trust debt incurred prior to 2012. As a result, the cost of securitization debt during the three month period ended June 30, 2015 was 2.8%, compared to 3.0% in the prior year period.

 

Interest expense on subordinated renewable notes decreased by $205,000. The decrease is due to a decrease in the average balance from $18.1 million to $15.1 million and a decrease in the average cost from 13.5% to 10.8%. Interest expense on residual interest financing decreased $154,000 in the three months ended June 30, 2015 compared to the prior year. The decrease is due to repayments of $2.8 million during the twelve months ended June 30, 2015.

 

Interest expense on warehouse debt increased by $21,000 for the three months ended June 30, 2015 compared to the prior year. We increased our contract purchases to $269.9 million for the three months ended June 30, 2015 compared to $211.4 million in the prior period. However, when possible, we hold contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.

 

 

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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, 2015 and 2014:

 

   Three Months Ended June 30, 
   2015   2014 
   (Dollars in thousands) 
           Annualized           Annualized 
   Average       Average   Average       Average 
   Balance (1)   Interest   Yield/Rate   Balance (1)   Interest   Yield/Rate 
Interest Earning Assets                              
Finance receivables gross (2)  $1,742,420   $84,816    19.5%   $1,303,900   $67,750    20.8% 
Finance receivables measured at fair value   441    84    76.2%    6,730    471    28.0% 
   $1,742,861    84,900    19.5%   $1,310,630    68,221    20.8% 
    $                          
Interest Bearing Liabilities                              
Warehouse lines of credit (3)  $44,810    1,259    11.2%   $43,812    1,239    11.3% 
Residual interest financing   11,441    351    12.3%    14,486    504    13.9% 
Debt secured by receivables measured at fair value           0.0%    6,319    204    12.9% 
Securitization trust debt   1,665,435    11,670    2.8%    1,231,507    9,381    3.0% 
Subordinated renewable notes   15,075    408    10.8%    18,142    613    13.5% 
   $1,736,761    13,688    3.2%   $1,314,266    11,941    3.6% 
                               
Net interest income/spread       $71,212           $56,280     
Net interest yield (4)             16.3%              17.2% 
Ratio of average interest earning assets to average interest bearing liabilities   100%     
     
    100%     
     
 

 

 

 (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, 2015 
   Compared to June 30 2014 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
Interest Earning Assets  (In thousands) 
Finance receivables gross  $17,066   $22,785   $(5,719)
Finance receivables measured at fair value   (387)   (440)   53 
    16,679    22,345    (5,666)
Interest Bearing Liabilities               
Warehouse lines of credit   20    28    (8)
Residual interest financing   (153)   (106)   (47)
Debt secured by receivables measured at fair value   (204)   (204)    
Securitization trust debt   2,289    3,305    (1,016)
Subordinated renewable notes   (205)   (104)   (101)
    1,747    2,919    (1,172)
                
Net interest income/spread  $14,932   $19,426   $(4,494)

 

The reduction in the annualized yield on our finance receivables for the three months ended June 30, 2015 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.

 

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Provision for credit losses was $35.7 million for the three months ended June 30, 2015, an increase of $10.1 million, or 39.2% compared to the prior year and represented 48.8% 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. Consequently, the increase in provision expense is the result of the increase in contract purchases during the last year and the larger portfolio owned by our consolidated subsidiaries 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 increased by $624,000, or 16.4%, to $4.4 million during the three months ended June 30, 2015, compared to $3.8 million in the prior year period, and represented 6.1% of total operating expenses. For the three months ended June 30, 2015, we purchased 16,339 contracts representing $269.9 million in receivables compared to 13,132 contracts representing $211.4 million in receivables in the prior year.

 

Occupancy expenses increased by $42,000 or 4.6%, to $949,000 compared to $908,000 in the previous year and represented 1.3% of total operating expenses.

 

Depreciation and amortization expenses increased by $26,000 or 20.7%, to $153,000 compared to $127,000 in the previous year and represented 0.2% of total operating expenses.

 

For the three months ended June 30, 2015, we recorded income tax expense of $6.7 million, representing a 43.8% effective income tax rate. In the prior year period, we recorded $5.3 million in income tax expense, representing a 43.0% effective income tax rate.

 

Comparison of Operating Results for the six months ended June 30, 2015 with the six months ended June 30, 2014

 

Revenues.  During the six months ended June 30, 2015, our revenues were $174.4 million, an increase of $34.6 million, or 24.8%, from the prior year revenue of $139.7 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the six months ended June 30, 2015 increased $34.0 million, or 25.6%, to $167.3 million from $133.2 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries, which increased from $1,369.6 million at June 30, 2014 to $1,822.2 million at June 30, 2015. The table below shows the average balances of our portfolio held by consolidated subsidiaries for the six months ended June 30, 2015 and 2014:

 

  

Average Balances for the Six Months Ended

 
   June 30, 2015   June 30, 2014 
   Amount   Amount 
Finance Receivables Owned by  ($ in millions) 
Consolidated Subsidiaries          
CPS Originated Receivables  $1,738.1   $1,296.2 
Fireside   0.7    8.8 
Total  $1,738.8   $1,305.0 

 

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Servicing fees totaling $210,000 for the six months ended June 30, 2015 decreased $672,000, or 76.2%, from $881,000 in the prior year. We earn base servicing fees on three portfolios and incentive servicing fees on one of those three portfolios. All three of these portfolios are decreasing in size as we receive customer payments and, consequently, base servicing and incentive servicing fees are decreasing also. As of June 30, 2015 and 2014, our managed portfolio owned by consolidated vs. non-consolidated subsidiaries and other third parties was as follows:

 

   June 30, 2015   June 30, 2014 
   Amount (1)   %   (2)   Amount (1)   %   (2) 
Total Managed Portfolio  ($ in millions) 
Owned by Consolidated Subsidiaries                    
   CPS Originated Receivables  $1,821.0    99.9%   $1,363.9    99.3% 
   Fireside   0.3    0.0%    5.7    0.4% 
Owned by Non-Consolidated Subsidiaries   0.1    0.0%    1.4    0.1% 
Third-Party Servicing Portfolios…   0.8    0.0%    2.6    0.2% 
Total  $1,822.2    100.0%   $1,373.6    100.0% 

 

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.  

 

At June 30, 2015, we were generating income and fees on a managed portfolio with an outstanding principal balance of $1,822.2 million (this amount includes $111,000 of automobile contracts on which we earn servicing fees and own a residual interest and also includes another $800,000 of automobile contracts on which we earn base and incentive servicing fees), compared to a managed portfolio with an outstanding principal balance of $1,373.6 million as of June 30, 2014. At June 30, 2015 and 2014, the managed portfolio composition was as follows:

 

   June 30, 2015   June 30, 2014 
   Amount (1)   % (2)   Amount (1)   % (2) 
Originating Entity  ($ in millions) 
CPS  $1,821.7    100.0%   $1,365.3    99.4% 
Fireside   0.3    0.0%    5.7    0.4% 
Third Party Portfolio   0.2    0.0%    2.6    0.2% 
Total  $1,822.2    100.0%   $1,373.6    100.0% 

 

(1) Contractual balances.

(2) Percentages may not add up to 100% due to rounding.  

 

In the six months ended June 30, 2015 other income of $6.9 million increased by $1.2 million, or 22.0% compared to the prior year. The six-month period ended June 30, 2015 includes an increase of $496,000 in revenue associated with direct mail and other related products and services that we offer to our dealers, a net increase of $529,000 on payments to us for our interest in certain sold charge off portfolios and acquired third-party portfolios and an increase of $63,000 in sales tax refunds. In addition, in the prior year period, we incurred a markdown of $347,000 in the fair value of the principal balance and related debt of the Fireside portfolio. The increases were somewhat offset by a decrease of $130,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments.

 

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

 

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

 

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

 

Total operating expenses were $144.4 million for the six months ended June 30, 2015, compared to $115.6 million for the prior year, an increase of $28.8 million, or 24.9%. The increase is primarily due to costs associated with the increase in the amount of new contracts we purchased, the resulting increase in our consolidated portfolio and associated servicing costs, and the related increase in our provision for credit losses. Increases in core operating expenses and provision for credit losses were partially offset by decreases in interest expense.

 

Employee costs increased by $4.9 million or 21.9%, to $27.6 million during the six months ended June 30, 2015, representing 19.1% of total operating expenses, from $22.7 million for the prior year, or 19.6% of total operating expenses. Since 2010, we have added employees in our Originations and Marketing departments in conjunction with the increase in contract purchases. More recently, we have also added Servicing staff to accommodate the increase in the number of accounts in our managed portfolio. 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, 2015 and 2014:

 

   June 30, 2015   June 30, 2014 
   Amount   Amount 
   ($ in millions) 
Contracts purchased (dollars)  $503.8   $401.3 
Contracts purchased (units)   31,027    25,986 
Managed portfolio outstanding (dollars)  $1,822.2   $1,373.6 
Managed portfolio outstanding (units)   135,954    107,670 
           
Number of Originations staff   222    163 
Number of Marketing staff   135    120 
Number of Servicing staff   462    369 
Number of other staff   78    77 
Total number of employees   897    729 

 

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 $9.9 million, an increase of $1.3 million, or 14.6% compared to the previous year and represented 6.9% of total operating expenses.

 

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Interest expense for the six months ended June 30, 2015 increased by $1.5 million to $26.9 million, or 18.6% of total operating expenses, compared to $25.3 million in the previous year.

 

The debt on the Fireside portfolio was repaid in full in January 2015. As a result, we incurred no interest expense on that debt compared to $533,000 in the prior year period.

 

Interest on securitization trust debt increased by $3.8 million, or 20.6%, for the six months ended June 30, 2015 compared to the prior year. The average balance of securitization trust debt increased 35.6% to $1,624.2 million at June 30, 2015 compared to $1,198.0 million at June 30, 2014. However, the blended interest rates on term securitizations completed since 2012 are significantly less than the blended interest rates on securitization trust debt incurred prior to 2012. As a result, the cost of securitization debt during the six month period ended June 30, 2015 was 2.8%, compared to 3.0% in the prior year period.

 

Interest expense on senior secured debt decreased to zero from $1.7 million in the prior period as a result of our repayment in full of senior secured debt in March 2014. Interest expense on subordinated renewable notes decreased by $435,000. The decrease is due to a decrease in the average balance from $18.4 million to $15.1 million and a decrease in the average cost from 13.5% to 10.7%. Interest expense on residual interest financing decreased $310,000 in the six months ended June 30, 2015 compared to the prior year. The decrease is due to repayments of $2.8 million during the twelve months ended June 30, 2015.

 

Interest expense on warehouse debt increased by $617,000 for the six months ended June 30, 2015 compared to the prior year. We increased our contract purchases to $503.8 million for the six months ended June 30, 2015 compared to $401.3 million in the prior period. However, when possible, we hold contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.

 

32
 

 

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, 2015 and 2014:

 

   Six Months Ended June 30, 
   2015   2014 
   (Dollars in thousands) 
           Annualized           Annualized 
   Average       Average   Average       Average 
   Balance (1)   Interest   Yield/Rate   Balance (1)   Interest   Yield/Rate 
Interest Earning Assets                        
Finance receivables gross (2)  $1,710,515   $167,021    19.5%   $1,266,199   $132,053    20.9% 
Finance receivables measured at fair value   725    238    65.7%    8,807    1,164    26.4% 
   $1,711,240    167,259    19.5%   $1,275,006    133,217    20.9% 
                               
Interest Bearing Liabilities                              
Warehouse lines of credit (3)  $54,540    2,732    10.0%   $33,147    2,115    12.8% 
Residual interest financing   11,816    773    13.1%    15,632    1,083    13.9% 
Debt secured by receivables measured at fair value           0.0%    8,209    533    13.0% 
Securitization trust debt   1,624,184    22,546    2.8%    1,197,988    18,697    3.1% 
Senior secured debt, related party           0.0%    14,206    1,651    23.2% 
Subordinated renewable notes   15,101    809    10.7%    18,442    1,244    13.5% 
   $1,705,641    26,860    3.1%   $1,287,624    25,323    3.9% 
                               
Net interest income/spread   $   $140,399             $107,894      
Net interest yield (4)             16.4%              16.9% 
Ratio of average interest earning assets to average interest bearing liabilities  
 
 
 
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
99%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

(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, 2015 
   Compared to June 30 2014 
   Total   Change Due   Change Due 
   Change   to Volume   to Rate 
Interest Earning Assets   (In thousands) 
Finance receivables gross  $34,968   $46,338   $(11,370)
Finance receivables measured at fair value   (926)   (1,068)   142 
    34,042    45,270    (11,228)
Interest Bearing Liabilities               
Warehouse lines of credit   617    1,365    (748)
Residual interest financing   (310)   (264)   (46)
Debt secured by receivables measured at fair value   (533)   (533)    
Securitization trust debt   3,849    6,652    (2,803)
Senior secured debt, related party   (1,651)   (1,651)    
Subordinated renewable notes   (435)   (225)   (210)
    1,537    5,344    (3,807)
                
Net interest income/spread  $32,505   $39,926   $(7,421)

 

The reduction in the annualized yield on our finance receivables for the six months ended June 30, 2015 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.

 

33
 

 

Provision for credit losses was $69.1 million for the six months ended June 30, 2015, an increase of $19.6 million, or 39.6% compared to the prior year and represented 47.9% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. Consequently, the increase in provision expense is the result of the increase in contract purchases during the last year and the larger portfolio owned by our consolidated subsidiaries 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 increased by $981,000, or 12.8%, to $8.6 million during the six months ended June 30, 2015, compared to $7.7 million in the prior year period, and represented 6.0% of total operating expenses. For the six months ended June 30, 2015, we purchased 31,027 contracts representing $503.8 million in receivables compared to 25,986 contracts representing $401.3 million in receivables in the prior year.

 

Occupancy expenses increased by $308,000 or 19.3%, to $1.9 million compared to $1.6 million in the previous year and represented 1.3% of total operating expenses. The increase is due primarily to the establishment of our Nevada branch in April 2014.

 

Depreciation and amortization expenses increased by $80,000 or 36.1%, to $301,000 compared to $221,000 in the previous year and represented 0.2% of total operating expenses.

 

For the six months ended June 30, 2015, we recorded income tax expense of $13.1 million, representing a 43.7% effective income tax rate. In the prior year period, we recorded $10.4 million in income tax expense, representing a 43.0% 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. 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.

 

 

34
 

 

Delinquency, Repossession and Extension Experience (1)

Total Originated Portfolio Excluding Fireside

 

   June 30, 2015   June 30, 2014   December 31, 2014 
   Number of       Number of       Number of     
   Contracts   Amount   Contracts   Amount   Contracts   Amount 
  

(Dollars in thousands)

 
Delinquency Experience                              
Gross servicing portfolio (1)   135,702   $1,821,676    104,957   $1,366,649    123,033   $1,641,807 
Period of delinquency (2)                              
   31-60 days   4,262   $52,709    2,787   $31,151    3,571   $42,823 
   61-90 days   2,129    27,070    1,511    17,109    1,813    23,334 
   91+ days   2,531    31,702    676    7,318    1,890    23,239 
Total delinquencies (2)   8,922    111,481    4,974    55,578    7,274    89,396 
Amount in repossession (3)   2,072    24,908    3,240    28,927    2,664    28,249 
Total delinquencies and amount in repossession (2)   10,994   $136,389    8,214   $84,505    9,938   $117,645 
                               
Delinquencies as a percentage of gross servicing portfolio   6.6%    6.1%    4.7%    4.1%    5.9%    5.4% 
                               
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio   8.1%    7.5%    7.8%    6.2%    8.1%    7.2% 
                               
Extension Experience                              
Contracts with one extension, accruing (4)   21,898   $292,594    15,947   $210,632    18,165   $238,267 
Contracts with two or more extensions, accruing (4)   11,905    154,351    5,735    61,374    7,537    93,220 
    33,803    446,945    21,682    272,006    25,702    331,487 
                               
Contracts with one extension, non-accrual (4)   1,264    15,620    981    9,270    1,268    14,701 
Contracts with two or more extensions, non-accrual (4)   732    9,079    456    3,388    594    6,468 
    1,996    24,699    1,437    12,658    1,862    21,169 
                               
Total contracts with extensions   35,799   $471,644    23,119   $284,664    27,564   $352,656 

 

 

35
 

 

Delinquency, Repossession and Extension Experience (1)

Fireside Portfolio

  

   June 30, 2015   June 30, 2014   December 31, 2014 
   Number of
Contracts
    
Amount
   Number of
Contracts
    
Amount
   Number of
Contracts
    
Amount
 
   (Dollars in thousands) 
Delinquency Experience                              
Gross servicing portfolio (1)   190   $316    2,346   $5,651    911   $1,664 
Period of delinquency (2)                              
   31-60 days   37   $58    194   $425    113   $262 
   61-90 days   21    30    88    177    53    74 
   91+ days   21    25    45    50    45    62 
Total delinquencies (2)   79    113    327    652    211    398 
Amount in repossession (3)   5    19    11    37    1    1 
Total delinquencies and amount in repossession (2)   84   $132    338   $689    212   $399 
                               
Delinquencies as a percentage of gross servicing portfolio   41.6%    35.8%    13.9%    11.5%    23.2%    23.9% 
                               
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio   44.2%    41.8%    14.4%    12.2%    23.3%    24.0% 
                               
Extension Experience                              
Contracts with one extension, accruing (4)   36   $31    612   $1,511    212   $376 
Contracts with two or more extensions, accruing (4)   99    204    555    1,804    303    815 
    135    235    1,167    3,315    515    1,191 
                               
Contracts with one extension, non-accrual (4)   5    6    24    39    17    22 
Contracts with two or more extensions, non-accrual (4)   17    37    19    38    18    30 
    22    43    43    77    35    52 
                               
Total contracts with extensions   157   $278    1,210   $3,392    550   $1,243 

 

36
 

 

Delinquency, Repossession and Extension Experience (1)

Total Originated and Fireside Portfolio

 

   June 30, 2015   June 30, 2014   December 31, 2014 
   Number of       Number of       Number of     
   Contracts   Amount   Contracts   Amount   Contracts   Amount 
   (Dollars in thousands) 
Delinquency Experience                    
Gross servicing portfolio (1)   135,892   $1,821,992    107,303   $1,372,300    123,944   $1,643,471 
Period of delinquency (2)                              
   31-60 days   4,299   $52,768    2,981   $31,576    3,684   $43,085 
   61-90 days   2,150    27,100    1,599    17,286    1,866    23,407 
   91+ days   2,552    31,728    721    7,368    1,935    23,301 
Total delinquencies (2)   9,001    111,596    5,301    56,230    7,485    89,793 
Amount in repossession (3)   2,077    24,927    3,251    28,964    2,665    28,250 
Total delinquencies and amount in repossession (2)   11,078   $136,523    8,552   $85,194    10,150   $118,043 
                               
Delinquencies as a percentage of gross servicing portfolio   6.6%    6.1%    4.9%    4.1%    6.0%    5.5% 
                               
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio   8.2%    7.5%    8.0%    6.2%    8.2%    7.2% 
                               
Extension Experience                              
Contracts with one extension, accruing (4)   21,934   $292,625    16,559   $212,143    18,377   $238,643 
Contracts with two or more extensions, accruing (4)   12,004    154,555    6,290    63,178    7,840    94,035 
    33,938    447,180    22,849    275,321    26,217    332,678 
                               
Contracts with one extension, non-accrual (4)   1,269    15,626    1,005    9,309    1,285    14,723 
                               
Contracts with two or more extensions, non-accrual (4)   749    9,116    475    3,426    612    6,498 
    2,018    24,742    1,480    12,735    1,897    21,221 
                               
Total contracts with extensions   35,956   $471,922    24,329   $288,056    28,114   $353,899 

____________________________________

 

(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.

 

37
 

 

Net Charge-Off Experience (1)

Total Owned Portfolio Excluding Fireside

 

   June 30,   June 30,   December 31, 
   2015   2014   2014 
   (Dollars in thousands) 
Average servicing portfolio outstanding  $1,743,233   $1,335,275   $1,415,667 
Annualized net charge-offs as a percentage of average servicing portfolio (2)   6.6%    5.0%    5.9% 

 

Net Charge-Off Experience (1)  

Fireside Portfolio

 

   June 30,   June 30,   December 31, 
   2015   2014   2014 
   (Dollars in thousands) 
Average servicing portfolio outstanding  $725   $6,730   $5,919 
Annualized net charge-offs as a percentage of average servicing portfolio (2)   (37.8%)   (1.2%)   0.6% 

 

Net Charge-Off Experience (1)

Total Owned Portfolio Including Fireside

 

   June 30,   June 30,   December 31, 
   2015   2014   2014 
   (Dollars in thousands) 
Average servicing portfolio outstanding  $1,743,958   $1,342,005   $1,421,586 
Annualized net charge-offs as a percentage of average servicing portfolio (2)   6.6%    5.0%    5.8% 

_________________________

 

(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, 2015 and June 30, 2014 percentage represents six months ended June 30, 2015 and June 30, 2014 annualized. December 31, 2014 represents 12 months ended December 31, 2014.

 

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) from the obligor, thereby indicating an additional monetary and psychological commitment to the contract on the obligor’s part.

 

38
 

 

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

 

We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table below summarizes the status, as of June 30, 2015, for accounts that received extensions from 2008 through 2013 (2014 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, 2015   % Active or Paid Off at June 30, 2015   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    10,756    30.2%    20,008    56.2%    4,819    13.5%   19
                                       
2009   32,226    10,338    32.1%    16,105    50.0%    5,783    17.9%   17
                                       
2010   26,167    12,256    46.8%    11,912    45.5%    1,999    7.6%   19
                                       
2011   18,786    11,132    59.3%    6,722    35.8%    932    5.0%   18
                                       
2012   18,783    12,044    64.1%    5,943    31.6%    796    4.2%   15
                                       
2013   23,398    16,030    68.5%    6,392    27.3%    976    4.2%   13

 

Table excludes extensions on portfolios serviced for third parties.

 

We view these results as a confirmation of the effectiveness of our extension program. For the accounts receiving extensions in 2008, 2009, 2010, 2011, 2012 and 2013, 30.2%, 32.1%, 46.8%, 59.3%, 64.1% and 68.5%, respectively, were either paid in full or active and performing at June 30, 2015. 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 the 2008, 2009, 2010, 2011, 2012 and 2013 extensions, of the accounts that charged off, the charge off was incurred, on average, 19, 17, 19, 18, 15 and 13 months, respectively, 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.

 

39
 

 

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

 

   Six Months Ended June 30,   Year Ended December 31, 
   2015   2014   2014 
             
Average number of extensions granted per month   3,893    1,911    2,148 
                
Average number of outstanding accounts   130,727    103,682    110,356 
                
Average monthly extensions as % of average outstandings   3.0%    1.8%    1.9% 

 

Table excludes portfolios originated and owned by third parties.

 

   June 30, 2015   June 30, 2014   December 31, 2014 
   Number of Contracts   Amount   Number of Contracts   Amount   Number of Contracts   Amount 
           (Dollars in thousands)         
                         
Contracts with one extension