Consumer Portfolio Services, Inc.: Form 10-Q for the period ended Sep 30, 2023

Overview

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

We were incorporated and began our operations in March 1991. From inception through September 30, 2023, we have originated a total of approximately $21.0 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

Contract Purchases and Outstanding Managed Portfolio

$ in thousands

In May 2021 we began purchasing some contracts for immediate sale to a third-party to whom we refer applications that don’t meet our lending criteria. We service all such contracts on behalf of the third-party. We earn fees for originating the receivable and also servicing fees on active accounts in the third-party portfolio. For the nine months ended September 30, 2023, we originated $92.0 million under this third-party program. As of September 30, 2023, our managed portfolio includes $238.4 million of such third-party receivables.

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

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

Securitization and Warehouse Credit Facilities

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

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, and (ii) recognize interest expense on the securities issued in the transaction. For automobile contracts acquired after 2017 we take account of estimated credit losses in our computation of a level yield used to determine recognition of interest on the contracts. For contracts acquired before 2018, we adopted CECL on January 1, 2020 and we may, as circumstances warrant, record or reverse expense provisions for credit losses.

Since 1994 we have conducted 98 term securitizations of automobile contracts that we originated. As of September 30, 2023, 18 of those securitizations are active and all are structured as secured financings. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter, resulting in four securitizations per calendar year. However, in 2020, we closed only three term securitization transactions in that calendar year rather than four.

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

Recent Asset-Backed Term Securitizations

$ in thousands

Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. We currently have short-term funding capacity of $400 million over two credit facilities. The first credit facility was established in May 2012. This facility was most recently renewed in July 2022, extending the revolving period to July 2024, with an optional amortization period through July 2025. In addition, the capacity was doubled from $100 million to $200 million at the July 2022 renewal.

In November 2015, we entered into another $100 million facility. This facility was most recently renewed in January 2022, extending the revolving period to January 2024, followed by an amortization period to January 2026. In June 2022, we doubled the capacity for this facility from $100 million to $200 million.

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

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

Receivables we originate and service for third-parties are not pledged to our warehouse facilities or included in our securitizations.

Financial Covenants

Certain of our securitization transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of September 30, 2023, we were in compliance with all such covenants.

Results of Operations

Comparison of Operating Results for the three months ended September 30, 2023 with the three months ended September 30, 2022

Revenues. During the three months ended September 30, 2023, our revenues were $92.1 million, an increase of $1.8 million, or 2.0%, from the prior year revenue of $90.3 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. Revenues for the three months ended September 30, 2023 include a $6.0 million mark up to the recorded value of the finance receivables measured at fair value. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. In the current period, our re-evaluation of the fair values of these receivables resulted in a mark up for certain older receivables and a mark down to the fair values of newer receivables. The fair value mark up on the older receivables exceeded the mark down to the newer receivables resulting in a net mark up of $6.0 million. Revenues for the prior year period include an $8.2 million mark up to the fair value portfolio.

Interest income for the three months ended September 30, 2023 increased $3.4 million, or 4.3%, to $83.3 million from $79.8 million in the prior year. The primary reason for the increase in interest income is the 10.8% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 12.1% in the prior year period to 11.3% in the current year period. The receivables measured at fair value makes up a larger portion of our total loan portfolio in the current year period is the primary reason for the decrease in total interest yield. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balance and interest yield of our loan portfolio for the three months ended September 30, 2023 and 2022:

(Dollars in thousands)

Other income was $2.8 million for the three months ended September 30, 2023 compared to $2.3 million for the comparable period in 2022. This 22.3% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $2.5 million for the quarter ended September 30, 2023 compared to $2.0 million in the prior year period.

Expenses. Our operating expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of reducing the internal rate of return or the recorded value applicable to such receivables). Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

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

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

Total operating expenses were $77.9 million for the three months ended September 30, 2023, compared to $56.0 million for the prior period, an increase of $21.9 million, or 39.1%. The increase is primarily due to increases in interest expense and general and administrative expenses.

Employee costs were $21.8 million during the three months ended September 30, 2023 compared to $20.7 million for the same quarter in the prior year. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the three-month periods ended, September 30, 2023 and 2022:

(Dollars in millions)

28

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 was $13.0 million, an increase of $3.6 million from $9.4 million in the prior year period.

Interest expense for the three months ended September 30, 2023 was $37.9 million and represented 48.7% of total operating expenses, compared to $23.5 million in the previous year, when it was 42.0% of total operating expenses.

Interest on securitization trust debt increased by $13.2 million for the three months ended September 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,349.7 million for the three months ended September 30, 2023 compared to $2,032.5 million for the three months ended September 30, 2022. The annualized average rate on our securitization trust debt was 5.4% for the three months ended September 30, 2023 compared to 3.6% in the prior year period. The blended interest rates on new term securitizations have been increasing since 2022. For each quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table below:

Interest expense on warehouse credit line debt increased by $1.4 million to $4.7 million for the three months ended September 30, 2023 compared to $3.3 million in the prior year period. The increase was due to the higher rates on credit line debt during the quarter compared to last year. The average balance of our warehouse debt was $170.9 million during the three months ended September 30, 2023 compared to $172.9 million for the same period in 2022. The annualized average rate on our credit line debt was 10.9% for the three months ended September 30, 2023 compared to 7.7% in the prior year period.

Interest expense on subordinated renewable notes was $440,000 for the three months ended September 30, 2023. The average balance of the outstanding subordinated debt decreased by $7.6 million to $19.9 million for the three months ended September 30, 2023 compared to $27.5 million for the prior year. The average yield of subordinated notes increased to 8.8% compared to 8.3% in the prior period.

In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on this residual interest financing was $1.1 million for the three months ended September 30, 2023 and 2022.

The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended September 30, 2023 and 2022:

(Dollars in thousands)

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

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

(In thousands)

30

For the three months ended September 30, 2023, we recorded a reduction to provision for credit losses on finance receivables in the amount of $2.0 million. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance as our previous estimates for future losses exceeded actual incurred losses. This compares to $6.0 million in reductions to provision for credit losses for the three months ended September 30, 2022.

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of September 30, 2023.

The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

Sales expenses consist primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers. Sales expense decreased to $5.3 million during the three months ended September 30, 2023 from $6.0 million in the same quarter in 2022. We purchased $322.4 million of new contracts during the three months ended September 30, 2023 compared to $468.2 million in the prior year period.

Occupancy expenses was $1.6 million for the three months ending September 30, 2023, which is down from the $2.0 million in the third quarter of 2022.

Depreciation and amortization expenses decreased to $199,000 compared to $406,000 in the previous year.

For the three months ended September 30, 2023, we recorded income tax expense of $3.8 million, representing a 27% effective tax rate. In the prior period, our income tax expense was $8.9 million, representing a 26% effective tax rate.

Comparison of Operating Results for the nine months ended September 30, 2023 with the nine months ended September 30, 2022

Revenues. During the nine months ended September 30, 2023, our revenues were $260.0 million, an increase of $13.3 million, or 5.4%, from the prior year revenue of $246.7 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. In addition, mark ups to the finance receivables measured at fair value also contributed to the increase in revenues during the period. Revenues for the nine months ended September 30, 2023 include a $6.0 million mark up to the recorded value of the finance receivables measured at fair value. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. For the nine months ended September 30, 2023, our re-evaluation of the fair values of these receivables resulted in a mark up for certain older receivables and a mark down to the fair values of newer receivables. The fair value mark up on the older receivables exceeded the mark down to the newer receivables resulting in a net mark up of $6.0 million. Revenues for the prior year period include a $15.3 million mark up to the fair value portfolio.

Interest income for the nine months ended September 30, 2023 increased $20.4 million, or 9.1%, to $246.0 million from $225.5 million in the prior year. The primary reason for the increase in interest income is the 17.6% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 12.2% in the prior year period to 11.3% in the current year period. The receivables measured at fair value makes up a larger portion of our total loan portfolio in the current year period is the primary reason for the decrease in total interest yield. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balance and interest yield of our loan portfolio for the nine months ended September 30, 2023 and 2022:

(Dollars in thousands)

Other income was $8.1 million for the nine months ended September 30, 2023 compared to $5.9 million for the comparable period in 2022. This 37.8% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables. These fees were $7.2 million for the nine months ended September 30, 2023 compared to $4.3 million in the prior year period.

Expenses. Our operating expenses consist largely of interest expense, provision for credit losses, employee costs, sales and general and administrative expenses. Provision for credit losses is affected by the balance and credit performance of our portfolio of finance receivables (other than our portfolio of finance receivables measured at fair value, as to which expected credit losses have the effect of reducing the internal rate of return or the recorded value applicable to such receivables). Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

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

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

Total operating expenses were $208.8 million for the nine months ended September 30, 2023, compared to $148.8 million for the prior period, an increase of $60.0 million, or 40.3%. The increase is primarily due to increases in interest expense and general and administrative expenses.

Employee costs were $65.0 million during the nine months ended September 30, 2023 compared to $63.4 million for the same period in the prior year. The table below summarizes our employees by category as well as contract purchases and units in our managed portfolio as of, and for the nine-month periods ended, September 30, 2023 and 2022:

(Dollars in millions)

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 was $36.2 million for the nine months ended September 30, 2023, an increase of $10.3 million from $25.9 million in the prior year period.

Interest expense for the nine months ended September 30, 2023 was $106.4 million, compared to $58.7 million in the previous year, an increase of $47.7 million.

Interest on securitization trust debt increased by $39.5 million for the nine months ended September 30, 2023 compared to the prior period. The average balance of securitization trust debt increased to $2,322.0 million for the nine months ended September 30, 2023 compared to $1,959.5 million for the nine months ended September 30, 2022. The annualized average rate on our securitization trust debt was 5.0% for the nine months ended September 30, 2023 compared to 3.3% in the prior year period. The blended interest rates on new term securitizations have been increasing since 2022. For each quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing to accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in fluctuations in our securitization trust debt interest costs. The blended interest rates of our recent securitizations are summarized in the table below:

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

33

Interest expense on warehouse credit line debt increased by $8.6 million to $14.5 million for the nine months ended September 30, 2023 compared to $5.9 million in the prior year period. The increase was due to the higher rates and the higher utilization of our credit lines and on the debt during the nine month period compared to last year. The average balance of our warehouse debt was $186.3 million during the nine months ended September 30, 2023 compared to $108.7 million for the same period in 2022. The annualized average rate on our credit line debt was 10.4% for the nine months ended September 30, 2023 compared to 7.2% in the prior year period.

Interest expense on subordinated renewable notes was $1.4 million for the nine months ended September 30, 2023. The average balance of the outstanding subordinated debt decreased by $4.8 million to $22.1 million for the nine months ended September 30, 2023 compared to $26.9 million for the prior year. The average yield of subordinated notes decreased to 8.6% compared to 8.8% in the prior period.

In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on this residual interest financing was $3.2 million for the nine months ended September 30, 2023 and 2022.

The following table presents the components of interest income and interest expense and a net interest yield analysis for the nine-month periods ended September 30, 2023 and 2022:

(Dollars in thousands)

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

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

(In thousands)

For the nine months ended September 30, 2023, we recorded a reduction to provision for credit losses on finance receivables in the amount of $20.7 million. The reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from improved credit performance as our previous estimates for future losses exceeded actual incurred losses. This compares to $23.4 million in reductions to provision for credit losses for the nine months ended September 30, 2022.

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of September 30, 2023.

The allowance applies only to our finance receivables originated through December 2017, which we refer to as our legacy portfolio. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

Sales expense consists primarily of commission-based compensation paid to our employee sales representatives. Our sales representatives earn a salary plus commissions based on volume of contract purchases and sales of ancillary products and services that we offer our dealers. Sales expenses were $16.5 million for the nine months ended September 30, 2023, and represented 7.9% of total operating expenses. This compares to $17.2 million in the previous year. We purchased $1,056.0 million of new contracts during the nine months ended September 30, 2023 compared to $1,426.3 million in the prior year period.

Occupancy expenses was $4.8 million for the nine months ending September 30, 2023, which is down from $5.8 million for the same period in 2022.

Depreciation and amortization expenses decreased to $642,000 compared to $1.2 million in the previous year.

For the nine months ended September 30, 2023, we recorded income tax expense of $13.1 million, representing a 26% effective tax rate. In the prior period, our income tax expense was $26.0 million, representing a 27% effective 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.

Delinquency, Repossession and Extension Experience (1)

Total Owned Portfolio

(Dollars in thousands)

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

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

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

(4) Amount in repossession and accounts past due more than 90 days are on non-accrual.

Net Charge-Off Experience (1)

Total Owned Portfolio

(Dollars in thousands)

(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract.

(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying interim consolidated financial statements. September 30, 2023 and September 30, 2022 percentages represent three months ended September 30, 2023 and September 30, 2022 annualized. December 31, 2022 represents 12 months ended December 31, 2022.

Extensions

In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, we are bound by our securitization agreements to refrain from agreeing to more than two such extensions in any 12-month period and to more than six over the life of the contract. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In some cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest.

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

The credit assessment for granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history, including past extensions if applicable; (4) the obligor’s willingness to communicate and cooperate on resolving the delinquency; and (5) a numeric score from our internal risk assessment system that indicating the likelihood that the extension will prove beneficial. If the collector believes the obligor is a good candidate for an extension, an approval is obtained from a supervisor, who will review the same factors stated above prior to offering the extension to the obligor. After receiving an extension, an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.

We believe that a prudent extension program is an integral component to mitigating losses in our portfolio of sub-prime automobile receivables. The table below summarizes the status, as of September 30, 2023, for accounts that received extensions from 2010 through 2022:

Note: Table excludes extensions on portfolios serviced for third parties

We view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2019, 69.1% were either paid in full or active and performing as of September 30, 2023. Each of these successful accounts represent continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred a substantial loss and no interest revenue after the extension.

For the extension accounts that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially successful. For example, of the accounts granted extensions in 2012 that subsequently charged off, such charge offs occurred, on average, 18 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account with additional payments of principal and interest.

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

Note: Table excludes portfolios originated and owned by third parties

(Dollars in thousands)

Note: Table excludes portfolios originated and owned by third parties

Since 2019, we have been able to reduce extensions by working with our servicing staff to be more selective in granting extensions including, where appropriate, to exhaust all possibilities of payment by the customer before granting an extension. However, as delinquency rates have risen, so has the average number of extensions granted.

Non-Accrual Receivables

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

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

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

Liquidity and Capital Resources

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

Net cash provided by operating activities for the nine-month period ended September 30, 2023 was $181.9 million, a decrease of $17.2 million, compared to net cash provided by operating activities for the nine-month period ended September 30, 2022 of $164.7 million. Net cash from operating activities is generally provided by net income from operations adjusted for significant non-cash items such as our provision for credit losses and marks to finance receivables measured at fair value.

Net cash used in investing activities was $275.8 million for the nine months ended September 30, 2023 compared to $566.5 million in the prior year period. Net cash used in investing activities generally relates to new purchases of automobile contracts net of principal payments and other proceeds received during the period. Purchases of finance receivables excluding acquisition fees were $958.6 million and $1,311.7 million during the first nine months of 2023 and 2022, respectively.

Net cash provided by financing activities for the nine months ended September 30, 2023 was $73.1 million compared to $397.9 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first nine months of 2023, we issued $949.4 million in new securitization trust debt compared to $1,104.0 million for the same period in 2022. We repaid $814.5 million in securitization trust debt in the nine months ended September 30, 2023 compared to repayments of securitization trust debt of $804.8 million in the prior year period. In the nine months ended September 30, 2023, we had net repayments on warehouse lines of credit of $46.4 million, compared to net advances from warehouse lines of credit of $139.5 million in the prior year’s period.

We purchase automobile contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over a period of years. We have been dependent on warehouse credit facilities to purchase automobile contracts and our securitization transactions for long term financing of our contracts. In addition, we have accessed other sources, such as residual financings and subordinated debt in order to finance our continuing operations.

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

We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of September 30, 2023, we had unrestricted cash of $8.3 million and $159.6 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of September 30, 2023, we had approximately $19.6 million of such eligible collateral. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available capital, and, as appropriate, minimizing our operating costs. During the nine-month period ended September 30, 2023, we completed three securitizations aggregating $949.4 million of notes sold.

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

Our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of September 30, 2023, we were in compliance with all such financial covenants.

We have and will continue to have a substantial amount of indebtedness. At September 30, 2023, we had approximately $2,552.6 million of debt outstanding. Such debt consisted primarily of $2,243.3 million of securitization trust debt and $240.4 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $134.5 million while our warehouse lines of credit debt has decreased by $44.9 million since December 31, 2022 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $19.2 million and $25.3 million in subordinated renewable notes outstanding at September 30, 2023 and December 31, 2022, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. As of September 30, 2023, all $50.0 million of this debt remains outstanding.

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

Forward Looking Statements

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

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

We remind the reader that risk factors are set forth in Item 1A of our report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 15, 2023. Where we are aware of material changes to such risk factors as previously disclosed, we set forth below an updated discussion of such risks. The reader should note that the other risks identified in our report on Form 10-K remain applicable.

We have substantial indebtedness.

We have and will continue to have a substantial amount of indebtedness. At September 30, 2023, we had approximately $2,552.6 million of debt outstanding. Such debt consisted primarily of $2,243.3 million of securitization trust debt and $240.4 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $134.5 million while our warehouse lines of credit debt has decreased by $44.9 million since December 31, 2022 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $19.2 million and $25.3 million in subordinated renewable notes outstanding at September 30, 2023 and December 31, 2022, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. As of September 30, 2023, all $50.0 million of this debt remains outstanding.

Our substantial indebtedness could adversely affect our financial condition by, among other things:

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

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

We may have rescission liability in connection with sales of our subordinated renewable notes to certain purchasers.

We filed a registration statement on Form S-3 with respect to various securities, including our renewable unsecured subordinated notes, on May 28, 2015, and filed amendments to the registration statement on June 26, 2015, and July 27, 2015 (such registration statement, as so amended, the “Former Registration Statement”). The Former Registration Statement was declared effective on August 26, 2015 (the “Former Registration Statement Effective Date”). Rule 415(a)(5) under the Securities Act of 1933, as amended (the “Securities Act”), provides that a shelf registration statement such as the Former Registration Statement expires three years after the official effective date. The Former Registration Statement expired on August 26, 2018; however, the Company continued to conduct offers and sales and renewals after that date. Additionally, with respect to the Former Registration Statement, the Company failed to file certain prospectus supplements relating to certain sales. Lastly, offers and sales of Renewable Notes and renewals of outstanding notes were made for amounts beyond the amount of securities covered by the registration statement. These activities may result in certain of these purchasers having a statutory right to rescind their purchases. As a result, we could be required to repurchase some or all of such notes at the original sale price plus statutory interest, less the amount of any income received by the purchasers. As of October 31, 2023, there were approximately $5.3 million of such notes outstanding and sold within the preceding twelve months. That figure includes renewals of previously sold notes, but excludes notes that we have repaid, and excludes notes that we sold or renewed pursuant to the registration statement to which this prospectus relates.

Our results of operations, financial condition and cash flows could be materially and adversely affected if a substantial number of purchasers of such notes were to successfully assert rescission rights or if we were to be assessed substantial penalties by regulatory authorities. If holders of sufficient amounts of such notes were to demand rescission and to prevail in that demand, the adverse effect on our liquidity could be material, which could in turn impair our ability to conduct our business as otherwise planned.

Forward-Looking Statements

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

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

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Forward-looking statements in this report also include our recorded figures representing allowances for remaining expected lifetime credit losses, our markdown of the recorded value for the portion of our portfolio accounted for at fair value, our charge to the provision for credit losses for the our legacy portfolio, our estimates of fair value (most significantly for our receivables accounted for at fair value), our entries offsetting the preceding, and figures derived from any of the preceding. In each case, such figures are forward-looking statements because they are dependent on our estimates of cash to be received and losses to be incurred in the future. The accuracy of such estimates may be adversely affected by various factors, which include (in addition to risks relating to the COVD-19 pandemic and to the economy generally) the following: possible increased delinquencies; repossessions and losses on retail installment contracts; incorrect prepayment speed and/or discount rate assumptions; possible unavailability of qualified personnel, which could adversely affect our ability to service our portfolio; possible increases in the rate of consumer bankruptcy filings, which could adversely affect our rights to collect payments from our portfolio; other changes in government regulations affecting consumer credit; possible declines in the market price for used vehicles, which could adversely affect our realization upon repossessed vehicles; and economic conditions in geographic areas in which the Company's business is concentrated. The accuracy of such estimates may also be affected by the effects of the COVID-19 pandemic and of governmental responses to said pandemic, which have included prohibitions on certain means of enforcement of receivables, and may include additional restrictions, as yet unknown, in the future. Any or all of such factors also may affect our future financial results, as to which there can be no assurance. Any implication that past results or past consecutive earnings are indicative of future results or future earnings is disclaimed, and the reader should draw no such inference. Factors such as those identified above in relation to losses to be incurred in the future may affect future performance.

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

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