CPS(CPSS) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Consumer Portfolio Services, Inc. and its subsidiaries, along with detailed notes on accounting policies, finance receivables, and debt structures Unaudited Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time Unaudited Condensed Consolidated Balance Sheets | ASSETS | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :----------------------------------- | :-------------------------- | :------------------------------ | | Cash and cash equivalents | 11,348 | 29,928 | | Restricted cash and equivalents | 157,021 | 146,620 | | Finance receivables measured at fair value | 2,174,133 | 1,749,098 | | Finance receivables, net | 113,338 | 176,184 | | Total Assets | 2,500,473 | 2,159,578 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable and accrued expenses | 62,415 | 43,648 | | Warehouse lines of credit | 228,906 | 105,610 | | Securitization trust debt | 1,934,156 | 1,759,972 | | Total Liabilities | 2,302,182 | 1,989,371 | | Total Shareholders' Equity | 198,291 | 170,207 | | Total Liabilities and Shareholders' Equity | 2,500,473 | 2,159,578 | Unaudited Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income over specific reporting periods, reflecting operational performance Unaudited Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2022 ($ thousands) | Three Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Revenues | 82,018 | 66,769 | 156,384 | 129,881 | | Expenses | 47,802 | 52,893 | 92,840 | 108,061 | | Income before income tax expense (benefit) | 34,216 | 13,876 | 63,544 | 21,820 | | Income tax expense (benefit) | 8,896 | 4,163 | 17,109 | 6,943 | | Net income | 25,320 | 9,713 | 46,435 | 14,877 | | Basic Earnings per share | 1.18 | 0.43 | 2.18 | 0.65 | | Diluted Earnings per share | 0.91 | 0.39 | 1.66 | 0.59 | Unaudited Condensed Consolidated Statements of Comprehensive Income This statement presents the company's net income and other comprehensive income, providing a complete view of changes in equity from non-owner sources Unaudited Condensed Consolidated Statements of Comprehensive Income | Metric | Three Months Ended June 30, 2022 ($ thousands) | Three Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :----------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net income | 25,320 | 9,713 | 46,435 | 14,877 | | Comprehensive income | 25,320 | 9,713 | 46,435 | 14,877 | Unaudited Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Unaudited Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :--------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | 119,670 | 112,406 | | Net cash provided by (used in) investing activities | (398,396) | 12,744 | | Net cash provided by (used in) financing activities | 270,547 | (70,395) | | Increase (decrease) in cash and cash equivalents | (8,179) | 54,755 | | Cash and restricted cash at end of period | 168,369 | 198,907 | Unaudited Condensed Consolidated Statements of Shareholders' Equity This statement tracks changes in the company's equity accounts, including common stock and retained earnings, over specific reporting periods Unaudited Condensed Consolidated Statements of Shareholders' Equity | Metric | Three Months Ended June 30, 2022 ($ thousands) | Three Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Common Stock (Shares Outstanding) - End of period | 21,207 | 23,055 | 21,207 | 23,055 | | Common Stock - End of period | 36,947 | 73,204 | 36,947 | 73,204 | | Retained Earnings - End of period | 162,966 | 83,884 | 162,966 | 83,884 | | Total Shareholders' Equity - End of period | 198,291 | 148,517 | 198,291 | 148,517 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the financial statements, covering accounting policies, debt, and other financial items (1) Summary of Significant Accounting Policies This section outlines the company's business model, which involves purchasing and servicing retail automobile installment sale contracts for sub-prime customers, and details key accounting policies including the fair value method for finance receivables acquired post-2017, recognition of other income, lease accounting, stock-based compensation, and financial covenants. The company was in compliance with all financial covenants as of June 30, 2022 - The company specializes in purchasing and servicing retail automobile installment sale contracts from dealers for sub-prime customers, providing indirect financing[22] - Effective January 1, 2018, the company adopted the fair value method for finance receivables acquired on or after that date, recognizing interest income on a level yield basis[26] Other Income Components (Three and Six Months Ended June 30, 2022 vs. 2021) | Component | Three Months June 30, 2022 ($ thousands) | Three Months June 30, 2021 ($ thousands) | Six Months June 30, 2022 ($ thousands) | Six Months June 30, 2021 ($ thousands) | | :---------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Origination and servicing fees from third party receivables | 1,408 | – | 2,252 | – | | Direct mail revenues | – | 890 | 774 | 1,869 | | Convenience fee revenue | 40 | 180 | 120 | 420 | | Recoveries on previously charged-off contracts | 24 | 45 | 44 | 60 | | Sales tax refunds | 159 | 118 | 303 | 289 | | Other | 17 | 96 | 61 | 127 | | Total Other Income | 1,648 | 1,329 | 3,554 | 2,765 | - Stock-based compensation costs for the three and six months ended June 30, 2022, were $1.5 million and $728,000, respectively, with $12.4 million in unrecognized costs to be expensed over a weighted-average period of 2.7 years[40] Common Stock Purchases (Six Months Ended June 30, 2022 vs. 2021) | Purchase Type | June 30, 2022 Shares | June 30, 2022 Avg. Price | June 30, 2021 Shares | June 30, 2021 Avg. Price | | :--------------------------------------- | :------------------- | :----------------------- | :------------------- | :----------------------- | | Open market purchases | 1,938,637 | $11.42 | 301,088 | $4.18 | | Shares redeemed upon net exercise of stock options | 893,153 | $13.56 | 56,983 | $4.47 | | Total stock purchases | 2,831,790 | $12.09 | 358,071 | $4.42 | - The company was in compliance with all financial covenants related to securitization transactions, warehouse credit facilities, and residual interest financing as of June 30, 2022[46] (2) Finance Receivables This note details the company's finance receivables portfolio, distinguishing between those measured at fair value and those evaluated for impairment. It provides delinquency status and outlines the methodology for the allowance for credit losses, which applies only to the legacy portfolio (pre-2018 originations) - Finance receivables measured at fair value are recorded separately and excluded from credit loss provisions, as anticipated credit losses are factored into the internal rate of return[29][50][151] Delinquency Status of Finance Receivables (June 30, 2022 vs. December 31, 2021) | Delinquency Status | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :----------------- | :-------------------------- | :------------------------------ | | Current | 115,721 | 186,625 | | 31 - 60 days | 21,866 | 30,980 | | 61 - 90 days | 9,247 | 12,070 | | 91 + days | 2,176 | 2,715 | | Total | 149,010 | 232,390 | - Finance receivables totaling $2.2 million (June 30, 2022) and $2.7 million (December 31, 2021) were on non-accrual status due to delinquency[51] Allowance for Finance Credit Losses Activity (Three and Six Months Ended June 30, 2022 vs. 2021) | Activity | Three Months June 30, 2022 ($ thousands) | Three Months June 30, 2021 ($ thousands) | Six Months June 30, 2022 ($ thousands) | Six Months June 30, 2021 ($ thousands) | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Balance at beginning of period | 45,001 | 73,497 | 56,206 | 80,790 | | Provision for credit losses | (8,000) | – | (17,400) | – | | Charge-offs | (4,446) | (6,699) | (9,805) | (18,820) | | Recoveries | 3,117 | 5,444 | 6,671 | 10,272 | | Balance at end of period | 35,672 | 72,242 | 35,672 | 72,242 | (3) Securitization Trust Debt This note details the company's securitization trust debt, which is secured by specific automobile receivables and issued through bankruptcy-remote subsidiaries. As of June 30, 2022, the company had $1,934.2 million in securitization trust debt outstanding and was in compliance with all related covenants - As of June 30, 2022, securitization trust debt outstanding was $1,934.2 million, secured by $2,151.6 million in pledged receivables[9][66] - The company was in compliance with all securitization agreement covenants as of June 30, 2022, which require meeting delinquency and credit loss criteria, and maintaining minimum liquidity and leverage levels[70] - Restricted cash accounts totaling approximately $157.0 million were held as additional collateral for borrowings under securitization agreements[9][71] (4) Debt This section summarizes the company's other debt, including warehouse lines of credit, residual interest financing, and subordinated renewable notes. Total other debt outstanding increased significantly from December 31, 2021, to June 30, 2022, primarily due to increased utilization of warehouse lines of credit Other Debt Outstanding (June 30, 2022 vs. December 31, 2021) | Description | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :------------------------------- | :-------------------------- | :------------------------------ | | Warehouse lines of credit | 228,906 | 105,610 | | Residual interest financing | 50,000 | 54,311 | | Subordinated renewable notes | 27,208 | 26,459 | | Total Other Debt Outstanding | 307,824 | 186,780 | - The company renewed its two-year revolving credit agreement with Ares Agent Services, L.P. on February 2, 2022, and increased its capacity from $100 million to $200 million on June 28, 2022[75] (5) Interest Income and Interest Expense This note details the components of interest income and interest expense for the three and six months ended June 30, 2022 and 2021. Interest income saw a significant increase, primarily driven by finance receivables measured at fair value, while interest expense decreased for securitization trust debt but increased for warehouse lines and residual interest financing Interest Income Components (Three and Six Months Ended June 30, 2022 vs. 2021) | Component | Three Months June 30, 2022 ($ thousands) | Three Months June 30, 2021 ($ thousands) | Six Months June 30, 2022 ($ thousands) | Six Months June 30, 2021 ($ thousands) | | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Interest on finance receivables | 9,832 | 18,491 | 21,146 | 40,590 | | Interest on finance receivables at fair value | 65,730 | 46,943 | 124,470 | 90,931 | | Other interest income | 108 | 6 | 114 | 12 | | Total Interest Income | 75,670 | 65,440 | 145,730 | 131,533 | Interest Expense Components (Three and Six Months Ended June 30, 2022 vs. 2021) | Component | Three Months June 30, 2022 ($ thousands) | Three Months June 30, 2021 ($ thousands) | Six Months June 30, 2022 ($ thousands) | Six Months June 30, 2021 ($ thousands) | | :------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Securitization trust debt | 15,745 | 16,823 | 29,273 | 35,276 | | Warehouse lines of credit | 1,386 | 1,021 | 2,544 | 2,335 | | Residual interest financing | 1,050 | 467 | 2,144 | 1,033 | | Subordinated renewable notes | 590 | 669 | 1,210 | 1,281 | | Total Interest Expense | 18,771 | 18,980 | 35,171 | 39,925 | (6) Earnings Per Share This note provides the reconciliation of basic and diluted earnings per share calculations, highlighting the weighted average number of common shares outstanding and the incremental shares attributable to options and warrants Shares Used in EPS Calculation (Three and Six Months Ended June 30, 2022 vs. 2021) | Metric | Three Months June 30, 2022 (thousands) | Three Months June 30, 2021 (thousands) | Six Months June 30, 2022 (thousands) | Six Months June 30, 2021 (thousands) | | :----------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | :----------------------------------- | | Basic shares outstanding | 21,370 | 22,842 | 21,296 | 22,791 | | Incremental shares (options/warrants) | 6,317 | 2,288 | 6,647 | 2,257 | | Diluted shares outstanding | 27,687 | 25,130 | 27,943 | 25,048 | (7) Income Taxes This note details the company's income tax accounting, including the asset and liability method for deferred taxes and the effective tax rates. The company reported a net deferred tax asset of $17.5 million as of June 30, 2022, and effective tax rates of 26% and 27% for the three and six months ended June 30, 2022, respectively - The company had a net deferred tax asset of $17.5 million as of June 30, 2022, consisting of $10.5 million federal and $7.0 million state deferred tax assets[84] Effective Income Tax Rates (Three and Six Months Ended June 30, 2022 vs. 2021) | Period | Effective Tax Rate 2022 | Effective Tax Rate 2021 | | :----------------------------------- | :---------------------- | :---------------------- | | Three months ended June 30 | 26% | 30% | | Six months ended June 30 | 27% | 32% | (8) Legal Proceedings This note describes ongoing legal proceedings, including consumer litigation and a wage and hour claim, and a civil investigative demand from Massachusetts. The company estimates probable incurred losses for legal contingencies at $3.4 million as of June 30, 2022, with a reasonably possible loss range not exceeding $11.3 million - The company is involved in consumer litigation, including a class action cross-claim in Connecticut regarding deficiency notices, and a wage and hour lawsuit in California[86][88][89] - A civil investigative demand from the Massachusetts Attorney General's Office is ongoing, related to communications and repossession notices[90] - Probable incurred losses for legal contingencies are estimated at $3.4 million as of June 30, 2022, with a reasonably possible loss range not exceeding $11.3 million[92] (9) Fair Value Measurements This note explains the company's fair value measurement policies, particularly for finance receivables acquired after 2017, which are valued using Level 3 unobservable inputs. It provides a reconciliation of changes in fair value receivables and compares fair values to contractual balances - The company uses the fair value method for finance receivables acquired after January 2018, utilizing Level 3 unobservable inputs such as discount rate and cumulative net losses[96][98][101] Reconciliation of Finance Receivables Measured at Fair Value (Three and Six Months Ended June 30, 2022 vs. 2021) | Activity | Three Months June 30, 2022 ($ thousands) | Three Months June 30, 2021 ($ thousands) | Six Months June 30, 2022 ($ thousands) | Six Months June 30, 2021 ($ thousands) | | :--------------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Balance at beginning of period | 1,903,857 | 1,533,723 | 1,749,098 | 1,523,726 | | Finance receivables acquired | 511,068 | 279,658 | 904,475 | 485,117 | | Payments received | (215,930) | (199,419) | (425,774) | (355,439) | | Net interest income accretion | (29,562) | (31,787) | (60,766) | (66,812) | | Mark to fair value | 4,700 | – | 7,100 | (4,417) | | Balance at end of period | 2,174,133 | 1,582,175 | 2,174,133 | 1,582,175 | Fair Value vs. Contractual Balance of Finance Receivables (June 30, 2022 vs. December 31, 2021) | Metric | June 30, 2022 Contractual Balance ($ thousands) | June 30, 2022 Fair Value ($ thousands) | December 31, 2021 Contractual Balance ($ thousands) | December 31, 2021 Fair Value ($ thousands) | | :----------------------------------- | :---------------------------------------------- | :------------------------------------- | :-------------------------------------------------- | :----------------------------------------- | | Finance receivables measured at fair value | 2,402,830 | 2,174,133 | 1,972,699 | 1,749,098 | (10) Subsequent Events This note reports on significant events occurring after the reporting period, including the renewal and increased capacity of a revolving credit agreement with Citibank, N.A., and the execution of a $391.6 million asset-backed securitization in August 2022 - On July 15, 2022, the company renewed its two-year revolving credit agreement with Citibank, N.A., doubling its capacity from $100 million to $200 million[107] - On August 3, 2022, the company completed a $391.6 million asset-backed securitization (CPS Auto Receivables Trust 2022-C) secured by $440.0 million in automobile receivables, with a weighted average yield of approximately 6.02%[108] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial condition and operational results, covering its business overview, financing strategies (securitization and warehouse credit facilities), detailed comparison of operating results for the three and six months ended June 30, 2022, credit experience, liquidity, capital resources, and forward-looking statements Overview This section provides a business overview, detailing the company's focus on purchasing and servicing retail automobile contracts for sub-prime customers - The company specializes in indirect financing for sub-prime customers through automobile contract purchases from dealers[111] - Since inception through June 30, 2022, the company has originated approximately $19.1 billion of automobile contracts[111] Contract Purchase Volumes and Managed Portfolio Levels (2016-H1 2022) | Period | Contracts Purchased in Period ($ thousands) | Managed Portfolio at Period End ($ thousands) | | :------------------------- | :------------------------------------------ | :-------------------------------------------- | | 2016 | 1,088,785 | 2,308,070 | | 2017 | 859,069 | 2,333,530 | | 2018 | 902,416 | 2,380,847 | | 2019 | 1,002,782 | 2,416,042 | | 2020 | 742,584 | 2,174,972 | | 2021 | 1,146,321 | 2,249,069 | | Six months ended June 30, 2022 | 958,088 | 2,650,906 | - The company began purchasing contracts for immediate sale to a third-party in May 2021, servicing these contracts for fees. For the six months ended June 30, 2022, $63.6 million was originated under this program, with $96.1 million of such receivables in the managed portfolio[112] Securitization and Warehouse Credit Facilities This section describes the company's financing strategies, including term securitizations and interim warehouse credit facilities - The company finances automobile contracts through term securitizations (long-term) and warehouse credit facilities (interim), with all active securitizations structured as secured financings[116] Term Securitizations History (2016-H1 2022) | Period | Number of Term Securitizations | Receivables Pledged in Term Securitizations ($ thousands) | | :------------------------- | :----------------------------- | :-------------------------------------------------------- | | 2016 | 4 | 1,214,997 | | 2017 | 4 | 870,000 | | 2018 | 4 | 883,452 | | 2019 | 4 | 1,014,124 | | 2020 | 3 | 741,867 | | 2021 | 4 | 1,145,002 | | Six months ended June 30, 2022 | 2 | 760,000 | - The company currently has a short-term funding capacity of $400 million across two warehouse credit facilities, with recent renewals extending revolving periods and increasing capacity[119][120][125] - As of June 30, 2022, the company was in compliance with all financial covenants related to its securitization transactions and warehouse credit facilities[129] Results of Operations - Three Months Ended June 30, 2022 with the three months ended June 30, 2021 For the three months ended June 30, 2022, revenues increased by 22.8% to $82.0 million, primarily due to a $4.7 million mark-up on fair value finance receivables and a 31.8% increase in their average balance. Total operating expenses decreased by 9.6% to $47.8 million, mainly driven by a reduction in the provision for credit losses. Net income significantly increased to $25.3 million from $9.7 million in the prior year Key Financial Highlights (Three Months Ended June 30, 2022 vs. 2021) | Metric | June 30, 2022 ($ millions) | June 30, 2021 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------------- | :------------------------- | :------------------ | :--------- | | Revenues | 82.0 | 66.8 | 15.2 | 22.8% | | Interest income | 75.7 | 65.4 | 10.3 | 15.7% | | Mark to finance receivables at fair value | 4.7 | 0.0 | 4.7 | N/A | | Other income | 1.6 | 1.3 | 0.3 | 23.1% | | Total operating expenses | 47.8 | 52.9 | (5.1) | (9.6%) | | Provision for credit losses | (8.0) | 0.0 | (8.0) | N/A | | Net income | 25.3 | 9.7 | 15.6 | 160.8% | - The increase in revenues was primarily driven by a $4.7 million mark-up to finance receivables measured at fair value and a 31.8% increase in their average outstanding balance[130][132] - The decrease in total operating expenses was primarily due to an $8.0 million reduction in the provision for credit losses, reflecting improved credit performance[135][148] Interest Earning Assets and Yields (Three Months Ended June 30, 2022 vs. 2021) | Asset Type | Average Balance 2022 ($ thousands) | Interest 2022 ($ thousands) | Yield 2022 | Average Balance 2021 ($ thousands) | Interest 2021 ($ thousands) | Yield 2021 | | :----------------------------------- | :--------------------------------- | :-------------------------- | :--------- | :--------------------------------- | :-------------------------- | :--------- | | Finance receivables | 164,380 | 9,940 | 24.2% | 371,718 | 18,497 | 19.9% | | Finance receivables measured at fair value | 2,305,575 | 65,730 | 11.4% | 1,748,991 | 46,943 | 10.7% | | Total | 2,469,955 | 75,670 | 12.3% | 2,120,709 | 65,440 | 12.3% | Employee and Portfolio Metrics (Three Months Ended June 30, 2022 vs. 2021) | Metric | June 30, 2022 | June 30, 2021 | | :----------------------------------- | :------------ | :------------ | | Contracts purchased (dollars, $ millions) | 548.1 | 286.0 | | Contracts purchased (units) | 23,261 | 14,452 | | Managed portfolio outstanding (dollars, $ millions) | 2,650.9 | 2,120.7 | | Managed portfolio outstanding (units) | 167,146 | 156,995 | | Total number of employees | 799 | 761 | Results of Operations - Six Months Ended June 30, 2022 with the six months ended June 30, 2021 For the six months ended June 30, 2022, revenues increased by 20.4% to $156.4 million, driven by a $7.1 million mark-up on fair value finance receivables and a 27.3% increase in their average balance. Total operating expenses decreased by 14.1% to $92.8 million, primarily due to a $17.4 million reduction in the provision for credit losses. Net income significantly increased to $46.4 million from $14.9 million in the prior year Key Financial Highlights (Six Months Ended June 30, 2022 vs. 2021) | Metric | June 30, 2022 ($ millions) | June 30, 2021 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------------- | :------------------------- | :------------------ | :--------- | | Revenues | 156.4 | 129.9 | 26.5 | 20.4% | | Interest income | 145.7 | 131.5 | 14.2 | 10.8% | | Mark to finance receivables at fair value | 7.1 | (4.4) | 11.5 | N/A | | Other income | 3.6 | 2.8 | 0.8 | 28.6% | | Total operating expenses | 92.8 | 108.1 | (15.3) | (14.1%) | | Provision for credit losses | (17.4) | 0.0 | (17.4) | N/A | | Net income | 46.4 | 14.9 | 31.5 | 211.4% | - The increase in revenues was primarily driven by a $7.1 million mark-up on fair value finance receivables (compared to a $4.4 million mark-down in the prior year) and a 27.3% increase in their average outstanding balance[155][157] - The decrease in total operating expenses was primarily due to a $17.4 million reduction in the provision for credit losses, reflecting improved credit performance[160][173] Interest Earning Assets and Yields (Six Months Ended June 30, 2022 vs. 2021) | Asset Type | Average Balance 2022 ($ thousands) | Interest 2022 ($ thousands) | Yield 2022 | Average Balance 2021 ($ thousands) | Interest 2021 ($ thousands) | Yield 2021 | | :----------------------------------- | :--------------------------------- | :-------------------------- | :--------- | :--------------------------------- | :-------------------------- | :--------- | | Finance receivables | 185,288 | 21,260 | 22.9% | 411,571 | 40,602 | 19.7% | | Finance receivables measured at fair value | 2,186,431 | 124,470 | 11.4% | 1,718,112 | 90,931 | 10.6% | | Total | 2,371,719 | 145,730 | 12.3% | 2,129,683 | 131,533 | 12.4% | Employee and Portfolio Metrics (Six Months Ended June 30, 2022 vs. 2021) | Metric | June 30, 2022 | June 30, 2021 | | :----------------------------------- | :------------ | :------------ | | Contracts purchased (dollars, $ millions) | 958.1 | 491.5 | | Contracts purchased (units) | 41,059 | 25,188 | | Managed portfolio outstanding (dollars, $ millions) | 2,650.9 | 2,120.7 | | Managed portfolio outstanding (units) | 167,146 | 156,995 | | Total number of employees | 799 | 761 | Credit Experience This section analyzes the credit performance of the company's automobile contracts, including delinquency, repossession, net charge-off rates, and the effectiveness of its extension program. Delinquency and repossession amounts increased, while net charge-off rates varied between finance receivables and fair value receivables Delinquency, Repossession and Extension Experience This section analyzes the company's credit portfolio performance, focusing on delinquency rates, repossessions, and the impact of payment extensions Delinquency and Repossession Experience (June 30, 2022 vs. June 30, 2021 vs. December 31, 2021) | Metric | June 30, 2022 Amount ($ thousands) | June 30, 2021 Amount ($ thousands) | December 31, 2021 Amount ($ thousands) | | :----------------------------------- | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Gross servicing portfolio | 2,554,855 | 2,115,612 | 2,209,430 | | Total delinquencies | 221,021 | 155,384 | 212,253 | | Amount in repossession | 26,988 | 19,928 | 22,912 | | Total delinquencies and amount in repossession | 248,009 | 175,312 | 235,165 | | Delinquencies as % of gross servicing portfolio | 8.7% | 7.3% | 9.6% | | Total delinquencies and amount in repossession as % of gross servicing portfolio | 9.7% | 8.3% | 10.6% | Extension Experience (June 30, 2022 vs. June 30, 2021 vs. December 31, 2021) | Metric | June 30, 2022 Amount ($ thousands) | June 30, 2021 Amount ($ thousands) | December 31, 2021 Amount ($ thousands) | | :----------------------------------- | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Total contracts with extensions | 811,588 | 940,320 | 864,175 | Net Charge-Off Experience This section details the company's net charge-off rates for different finance receivable portfolios, reflecting credit loss trends Annualized Net Charge-Offs as % of Average Servicing Portfolio (Three Months Ended June 30, 2022 vs. 2021, and Year Ended December 31, 2021) | Portfolio Type | June 30, 2022 | June 30, 2021 | December 31, 2021 | | :----------------------------------- | :------------ | :------------ | :---------------- | | Finance Receivables | 4.2% | 5.1% | 7.7% | | Fair Value Receivables | 3.5% | 2.3% | 3.1% | | Total Owned Portfolio | 3.6% | 2.8% | 4.7% | Extensions The company's extension program is a key component of its loss mitigation strategy, allowing temporary payment deferrals under specific conditions. The program has shown effectiveness, with a significant portion of extended accounts remaining active or paid off, and even charged-off accounts showing extended payment periods - The company grants one- or two-month payment extensions to obligors facing temporary cash flow problems, adhering to limits specified in securitization agreements[188] - The extension program is considered effective in mitigating losses; for 2018 extensions, 56.4% of accounts were active or paid off by June 30, 2022[192] Average Monthly Extensions (Three Months Ended June 30, 2022 vs. Year Ended December 31, 2021 vs. Six Months Ended June 30, 2021) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :----------------------------------- | :------------ | :---------------- | :------------ | | Average number of extensions granted per month | 4,164 | 3,918 | 3,371 | | Average monthly extensions as % of average outstandings | 2.6% | 2.5% | 2.1% | Non-Accrual Receivables The company places contracts on non-accrual status when they are more than 90 days past due, as collectability is deemed unlikely. Accounts can be restored to full accrual if delinquency is reduced below the 90-day threshold - The company does not recognize interest income for contracts greater than 90 days past due, placing them on non-accrual status[197] - A contract can be restored to full accrual status if the obligor makes sufficient payments to reduce delinquency to less than or equal to 90 days[198] Liquidity and Capital Resources This section analyzes the company's cash flows, debt structure, and available capital, highlighting compliance with financial covenants - Net cash provided by operating activities increased by $7.3 million to $119.7 million for the six months ended June 30, 2022[201] - Net cash used in investing activities was $398.4 million for the six months ended June 30, 2022, primarily due to $904.5 million in purchases of finance receivables[202] - Net cash provided by financing activities was $270.5 million for the six months ended June 30, 2022, driven by $712.4 million in new securitization trust debt issuance[204] - As of June 30, 2022, the company had $11.3 million in unrestricted cash and $171.1 million in available borrowings under warehouse credit facilities[207] - Total debt outstanding was approximately $2,239.8 million at June 30, 2022, primarily consisting of $1,934.2 million in securitization trust debt and $228.9 million in warehouse lines of credit[210] - The company was in compliance with all financial covenants of its warehouse credit facilities as of June 30, 2022[209] Forward Looking Statements This section cautions that forward-looking statements are subject to various risks and uncertainties, including economic conditions and regulatory changes - Forward-looking statements include provisions for credit losses, valuation of receivables at fair value, and estimates of future cash flows and losses[213][224] - Key factors that could affect actual results include changes in general economic conditions, ability to obtain financing, interest rate fluctuations, competition, and regulatory requirements[213][223] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of June 30, 2022[214] - No material changes to internal controls over financial reporting occurred during the most recently completed fiscal quarter[214] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity security sales, and exhibits Item 1. Legal Proceedings This section incorporates by reference the detailed discussion of legal proceedings from Note 8 of the Unaudited Condensed Consolidated Financial Statements - Information on legal proceedings is incorporated by reference from Note 8 of the financial statements[217] Item 1A. Risk Factors This section updates previously disclosed risk factors, emphasizing the substantial indebtedness of the company and the inherent uncertainties in forward-looking statements Substantial Indebtedness This section highlights the company's significant debt levels and their potential impact on financial condition and operational flexibility - As of June 30, 2022, the company had approximately $2,239.8 million of debt outstanding, primarily securitization trust debt ($1,934.2 million) and warehouse lines of credit ($228.9 million)[219] - Substantial indebtedness increases vulnerability to adverse economic conditions, reduces cash flow for operations, limits business flexibility, and places the company at a competitive disadvantage[220] Forward-Looking Statements This section cautions that forward-looking statements are subject to various risks and uncertainties, including economic conditions and regulatory changes - Forward-looking statements in the report are subject to risks and uncertainties, including changes in economic conditions, financing availability, interest rates, competition, and regulatory requirements[223] - The accuracy of estimates for credit losses and fair value measurements can be affected by factors such as increased delinquencies, repossessions, consumer bankruptcy filings, and declines in used vehicle market prices[224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchase of equity securities under a publicly announced program during the reporting period Issuer Purchases of Equity Securities (Three Months Ended June 30, 2022) | Period | Total Number of Shares Purchased | Average Price per Share | | :--------- | :------------------------------- | :---------------------- | | April 2022 | 432,654 | $11.45 | | May 2022 | 188,907 | $13.23 | | June 2022 | 394,713 | $11.04 | | Total | 1,016,274 | $11.62 | - The board of directors authorized additional purchases of $5.0 million, $10.0 million, and $20 million in January, March, and July 2022, respectively, under a program with no fixed expiration date[229] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q report, including debt instruments and certifications from executive officers - Exhibits include instruments defining rights of long-term debt holders (omitted per Regulation S-K exclusion) and Rule 13a-14(a) and Section 1350 certifications from the CEO and CFO[231] Signatures This section contains the official signatures of the registrant's authorized officers, certifying the accuracy and completeness of the report - The report is signed by Charles E. Bradley, Jr., President and CEO, and Jeffrey P. Fritz, Executive Vice President and CFO, on August 8, 2022[235][236]