CONSUMER PORTFOLIO SERVICES INC

Previous wording

We were incorporated and began our operations in March 1991. From inception through March 31, 2024, we have originated a total of approximately $21.5 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:

Current wording

We were incorporated and began our operations in March 1991. From inception through June 30, 2024, we have originated a total of approximately $22.1 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:

Previous wording

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 three months ended March 31, 2024, we originated $16.1 million under this third-party program. As of March 31, 2024, our managed portfolio includes $222.2 million of such third-party receivables.

Current wording

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 six months ended June 30, 2024, we originated $23.4 million under this third-party program. As of June 30, 2024, our managed portfolio includes $205.6 million of such third-party receivables.

Previous wording

Since 1994 we have conducted 100 term securitizations of automobile contracts that we originated. As of March 31, 2024, 18 of those securitizations are active and all are structured as secured financings. We generally conduct our securitizations on a quarterly basis, near the beginning of each calendar quarter, resulting in four securitizations per calendar year. However, we completed only three securitizations in 2020. In April 2020 we postponed our planned securitization due to the onset of the pandemic and the effective closure of the capital markets in which our securitizations are executed. Subsequently we successfully completed securitizations in June and September 2020, and then on a regular quarterly schedule from January 2021 through April 2024.

Current wording

Since 1994 we have conducted 102 term securitizations of automobile contracts that we originated. As of June 30, 2024, 18 of those securitizations are active and all are structured as secured financings. We generally conduct our securitizations on a quarterly basis, near the beginning of each calendar quarter, resulting in four securitizations per calendar year. However, we completed only three securitizations in 2020. In April 2020 we postponed our planned securitization due to the onset of the pandemic and the effective closure of the capital markets in which our securitizations are executed. Subsequently we successfully completed securitizations in June and September 2020, and then on a regular quarterly schedule from January 2021 through June 2024.

Previous wording

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.

Current wording

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 2024, extending the revolving period to July 2026, with an optional amortization period through July 2027. In addition, the capacity was doubled from $100 million to $200 million in July 2022.

Previous wording

Revenues. During the three months ended March 31, 2024, our revenues were $91.7 million, an increase of $8.6 million, or 10.4%, from the prior year revenue of $83.1 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 March 31, 2024 include a $5.0 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 $5.0 million. Based on this evaluation, there was no mark up or mark down to the fair value portfolio in the prior year period.

Current wording

Revenues. During the three months ended June 30, 2024, our revenues were $95.9 million, an increase of $11.0 million, or 13.0%, from the prior year revenue of $84.9 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 June 30, 2024 include a $5.5 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 $5.5 million. There was no mark up or mark down to the fair value portfolio in the prior year period.

Previous wording

Interest income for the three months ended March 31, 2024 increased $4.2 million, or 5.3%, to $84.3 million from $80.1 million in the prior year. The primary reason for the increase in interest income is the 4.8% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio increased from 11.2% in the prior year period to 11.3% in the current year period. The receivables measured at fair value make up a larger portion of our total loan portfolio in the current year period. 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 March 31, 2024 and 2023:

Current wording

Interest income for the three months ended June 30, 2024 increased $5.7 million, or 6.9%, to $88.4 million from $82.6 million in the prior year. The primary reason for the increase in interest income is the 7.5% increase in the average balance of our loan portfolio over the prior year period. The interest yield on our total loan portfolio decreased from 11.4% in the prior year period to 11.3% in the current year period. 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 June 30, 2024 and 2023:

Previous wording

Other income was $2.5 million forthe three months ended March 31, 2024 compared to $3.0 million for the comparable period in 2023. This 19.2% decrease was primarily driven by the decrease in origination and servicing fees we earned from third party receivables. These fees were $2.1 million for the quarter ended March 31, 2024 compared to $2.7 million in the prior year period.

Current wording

Other income was $2.0 million forthe three months ended June 30, 2024 compared to $2.2 million for the comparable period in 2023. This 9.4% decrease was primarily driven by the decrease in origination and servicing fees we earned from third party receivables. These fees were $1.7 million for the quarter ended June 30, 2024 compared to $1.9 million in the prior year period.

Previous wording

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.

Current wording

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 profit 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.

Previous wording

Total operating expenses were $85.2 million for the three months ended March 31, 2024, compared to $64.7 million for the prior period, an increase of $20.5 million, or 31.7%. The increase is primarily due to increases in interest expense and general and administrative expenses.

Current wording

Total operating expenses were $89.2 million for the three months ended June 30, 2024, compared to $66.3 million for the prior period, an increase of $22.9 million, or 34.6%. The increase is primarily due to increases in interest expense and a decrease in the reduction to provision for credit losses. To a lesser extent, increases to employee costs and general and administrative expenses also contributed to the increase in operating expenses during the period.

Previous wording

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 $13.8 million, an increase of $2.4 million from $11.4 million in the prior year period.

Current wording

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 $13.3 million, an increase of $1.5 million from $11.8 million in the prior year period.

Previous wording

Interest expense for the three months ended March 31, 2024 was $42.0 million and represented 49.3% of total operating expenses, compared to $32.8 million in the previous year, when it was 50.7% of total operating expenses.

Current wording

Interest expense for the three months ended June 30, 2024 was $46.7 million and represented 52.4% of total operating expenses, compared to $35.7 million in the previous year, when it was 53.9% of total operating expenses.

Previous wording

Interest on securitization trust debt increased by $9.6 million for the three months ended March 31, 2024 compared to the prior period. The average balance of securitization trust debt increased to $2,388.1 million for the three months ended March 31, 2024 compared to $2,283.3 million for the three months ended March 31, 2023. The annualized average rate on our securitization trust debt was 6.0% for the three months ended March 31, 2024 compared to 4.6% 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:

Current wording

Interest on securitization trust debt increased by $8.8 million for the three months ended June 30, 2024 compared to the prior period. The average balance of securitization trust debt increased to $2,555.2 million for the three months ended June 30, 2024 compared to $2,333.0 million for the three months ended June 30, 2023. The annualized average rate on our securitization trust debt was 5.9% for the three months ended June 30, 2024 compared to 5.0% 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:

Previous wording

Interest expense on warehouse credit line debt decreased by $528,000 to $4.3 million for the three months ended March 31, 2024 compared to $4.8 million in the prior year period. The decrease was due to the lower utilization of our credit lines during the quarter compared to last year. The average balance of our warehouse debt was $164.9 million during the three months ended March 31, 2024 compared to $194.9 million for the same period in 2023. The annualized average rate on our credit line debt was 10.5% for the three months ended March 31, 2024 compared to 9.9% in the prior year period.

Current wording

Interest expense on warehouse credit line debt increased by $694,000 to $5.7 million for the three months ended June 30, 2024 compared to $5.0 million in the prior year period. The increase was primarily due to the higher utilization of our credit lines during the quarter compared to last year. The average balance of our warehouse debt was $215.4 million during the three months ended June 30, 2024 compared to $193.4 million for the same period in 2023. The annualized average rate on our credit line debt was 10.6% for the three months ended June 30, 2024 compared to 10.4% in the prior year period.

Previous wording

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.

Current wording

Our evaluation of the allowance for credit losses indicated that the reserves against future losses are adequate as of June 30, 2024. 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.

Previous wording

For the three months ended March 31, 2024, we recorded a reduction to provision for credit losses on finance receivables in the amount of $1.6 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 $9.0 million in reductions to provision for credit losses for the three months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024, 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 better than expected recovery rates and 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 $9.7 million in reductions to provision for credit losses for the three months ended June 30, 2023.

Previous wording

Occupancy expenses was $1.6 million for the three months ending March 31, 2024, which is up from the $1.5 million in the first quarter of 2023.

Current wording

Occupancy expenses was $1.4 million for the three months ending June 30, 2024, which is down from the $1.6 million in the second quarter of 2023.

Previous wording

Employee costs were $24.4 million during the three months ended March 31, 2024 compared to $22.0 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, March 31, 2024 and 2023:

Current wording

Employee costs were $48.1 million during the six months ended June 30, 2024 compared to $43.2 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 six-month periods ended, June 30, 2024 and 2023:

Previous wording

Interest expense on subordinated renewable notes was $506,000 for the three months ended March 31, 2024. The average balance of the outstanding subordinated debt decreased by $3.3 million to $20.8 million for the three months ended March 31, 2024 compared to $24.1 million for the prior year. The average yield of subordinated notes increased to 9.7% compared to 8.4% in the prior period.

Current wording

Interest expense on subordinated renewable notes was $1.0 million for the six months ended June 30, 2024. The average balance of the outstanding subordinated debt decreased by $1.6 million to $21.6 million for the six months ended June 30, 2024 compared to $23.2 million for the prior year. The average yield of subordinated notes increased to 9.7% compared to 8.5% in the prior period.

Previous wording

In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. In March 2024, we completed a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on the residual interest financing was $1.2 million for the three months ended March 31, 2024 compared to $1.1 for the same period in 2023.

Current wording

In June 2021, we completed a residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. In March 2024, we completed a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. Interest expense on the residual interest financing was $3.7 million for the six months ended June 30, 2024 compared to $2.1 million for the same period in 2023.

Previous wording

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 $4.9 million during the three months ended March 31, 2024 from $5.7 million in the same quarter in 2023. We purchased $346.3 million of new contracts during the three months ended March 31, 2024 compared to $415.2 million in the prior year period.

Current wording

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 $10.8 million during the six months ended June 30, 2024 from $11.2 million in the same period in 2023. We purchased $778.2 million of new contracts during the six months ended June 30, 2024 compared to $733.5 million in the prior year period.

Previous wording

Depreciation and amortization expenses decreased to $215,000 compared to $231,000 in the previous year.

Current wording

Depreciation and amortization expenses decreased to $436,000 compared to $442,000 in the previous year.

Previous wording

Net cash provided by operating activities for the three-month period ended March 31, 2024 was $52.7 million, a decrease of $12.4 million, compared to net cash provided by operating activities for the three-month period ended March 31, 2023 of $65.1 million. Net cash from operating activities is generally provided by net income from operations adjusted for significant non-cash items such as our provision for credit losses and marks to finance receivables measured at fair value.

Current wording

Net cash provided by operating activities for the six-month period ended June 30, 2024 was $96.0 million, a decrease of $24.7 million, compared to net cash provided by operating activities for the six-month period ended June 30, 2023 of $120.7 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.

Previous wording

Net cash used in investing activities was $108.6 million for the three months ended March 31, 2024 compared to $121.2 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 $353.9 million and $353.9 million during the first three months of 2024 and 2023, respectively.

Current wording

Net cash used in investing activities was $317.8 million for the six months ended June 30, 2024 compared to $193.1 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 $753.8 million and $658.0 million during the first six months of 2024 and 2023, respectively.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2024 was $81.5 million compared to $62.3 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first three months of 2024, we issued $280.9 million in new securitization trust debt compared to $324.8 million for the same period in 2023. We repaid $268.7 million in securitization trust debt in the three months ended March 31, 2024 compared to repayments of securitization trust debt of $258.2 million in the prior year period. In the three months ended March 31, 2024, we had net repayments on warehouse lines of credit of $17.2 million, compared to net proceeds from warehouse lines of credit of $7,000 in the prior year’s period.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $363.0 million compared to $64.8 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first six months of 2024, we issued $1,307.1 million in new securitization trust debt compared to $657.7 million for the same period in 2023. We repaid $564.0 million in securitization trust debt in the six months ended June 30, 2024 compared to repayments of securitization trust debt of $541.0 million in the prior year period. In the six months ended June 30, 2024, we had net repayments on warehouse lines of credit of $150.7 million, compared to net advances from warehouse lines of credit of $41.0 million in the prior year’s period.

Previous wording

We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of March 31, 2024, we had unrestricted cash of $13.2 million and $150.5 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of March 31, 2024, we had approximately $39.5 million of such eligible collateral. Our plans to manage our liquidity include maintaining our rate of automobile contract purchases at a level that matches our available capital, and, as appropriate, minimizing our operating costs. During the three-month period ended March 31, 2024, we completed one securitization aggregating $280.9 million of notes sold.

Current wording

We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of June 30, 2024, we had unrestricted cash of $9.8 million and $7.1 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of June 30, 2024, we had approximately $33.8 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 six-month period ended June 30, 2024, we completed three securitizations aggregating $1,307.1 million of notes sold.

Previous wording

We have and will continue to have a substantial amount of indebtedness. At March 31, 2024, we had approximately $2,648.3 million of debt outstanding. Such debt consisted primarily of $2,277.7 million of securitization trust debt and $249.5 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $12.2 million while our warehouse lines of credit debt has increased by $15.5 million since December 31, 2023 (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 $22.1 million and $17.2 million in subordinated renewable notes outstanding at March 31, 2024 and December 31, 2023, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. On March 2024, we completed a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. As of March 31, 2024, all $100.0 million of this debt remains outstanding.

Current wording

We have and will continue to have a substantial amount of indebtedness. At June 30, 2024, we had approximately $2,939.8 million of debt outstanding. Such debt consisted primarily of $2,736.2 million of securitization trust debt and $82.2 million of debt from warehouse lines of credit. Our securitization trust debt has increased by $470.8 million while our warehouse lines of credit debt has decreased by $151.9 million since December 31, 2023 (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 $22.4 million and $17.2 million in subordinated renewable notes outstanding at June 30, 2024 and December 31, 2023, respectively. On June 30, 2021, we completed a $50.0 million securitization of residual interests from other previously issued securitizations. On March 2024, we completed a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0 million. As of June 30, 2024, all $100.0 million of this debt remains outstanding.