Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2024
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 001-14116
CONSUMER PORTFOLIO SERVICES, INC.
(Exact name of registrant as specified in its
charter)
California
33-0459135
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3800 Howard Hughes Pkwy, Las Vegas, NV
89169
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including
area code: (949) 753-6800
Securities registered pursuant to Section 12(b)
of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, no par value
CPSS
The Nasdaq Stock Market LLC (Global Market)
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company”, and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller
reporting company ☒
Emerging Growth Company ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its
audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements
that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during
the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The aggregate market value of the 7,202,007 shares of the registrant’s
common stock held by non-affiliates as of the date of June 30, 2024, based upon the
closing price of the registrant’s common stock
of $9.80 per share reported by Nasdaq as of that date, was approximately $70,579,669. For purposes of this
computation, a registrant sponsored
pension plan and all directors and executive officers are deemed to be affiliates. Such determination is not an admission
that such plan,
directors and executive officers are, in fact, affiliates of the registrant.
The number of shares of the registrant’s Common Stock outstanding on
March 10, 2025 was 21,443,198.
TABLE
OF CONTENTS
PART I
Item 1.
Business
1
Item 1A.
Risk Factors
16
Item 1B.
Unresolved Staff Comments (not applicable)
29
Item 1C.
Cybersecurity
29
Item 2.
Properties
30
Item 3.
Legal Proceedings
31
Item 4.
Mine Safety Disclosures
31
Information about Our Executive Officers (not applicable)
32
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
34
Item 6.
[Reserved]
34
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
49
Item 8.
Financial Statements and Supplementary Data
50
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
50
Item 9A.
Controls and Procedures
50
Item 9B.
Other Information
51
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections (not applicable)
51
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
52
Item 11.
Executive Compensation
54
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
65
Item 13.
Certain Relationships and Related Transactions, and Director Independence
67
Item 14.
Principal Accountant Fees and Services
68
PART IV
Item 15.
Exhibits, Financial Statement Schedules
70
Item 16.
Form 10-K Summary
70
i
Cautionary Note Regarding 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. You can generally
identify forward-looking statements
as statements containing the words “will,”
“would,” “believe,”
“may,” “could,”
“expect,” “anticipate,”
“intend,”
“estimate,”
“assume,” “plans,” “goals, “strategy,”
“future,” “likely,” “should” or other similar expressions.
Examples of forward-looking
statements include, among others, statements we make regarding:
·
charge-offs and recovery rates;
·
the willingness or ability of obligors to pay pursuant to contractual terms;
·
our ability to enforce rights under contracts;
·
our ability to and rates at which we plan to acquire automobile contracts;
·
the anticipated levels of recoveries upon sale of repossessed vehicles;
·
revenues or expenses;
·
provisions for credit losses;
·
expected industry and general economic trends;
·
accrued losses for legal contingencies;
·
anticipated deferred tax assets;
·
estimates of taxable income;
·
our ability to service and repay our debt;
·
the structuring of securitization transactions as secured financings and the effects of such structures
on financial items and future profitability; or
·
the effect of the change in structure on our profitability and the duration of the period in which our
profitability would be affected by the change in
securitization structure.
Our actual results, performance
and achievements may differ materially from the results, performance and achievements expressed or implied in such
forward-looking statements.
Some of the factors that might cause such a difference include, but are not limited to, the following:
·
unexpected exogenous events, such as a widespread public health emergency;
·
mandates imposed in reaction to such events, such as prohibitions of otherwise permissible activity;
·
changes in general economic conditions;
·
changes in performance of our automobile contracts;
·
increases in interest rates;
·
our ability to generate sufficient operating and financing cash flows;
·
competition;
·
the level of losses incurred on contracts in our managed portfolio;
·
adverse decisions by courts or regulators;
2
·
regulatory changes with respect to consumer finance;
·
changes in the market for used vehicles;
·
levels of cash releases from existing pools of contracts;
·
the terms on which we are able to finance contract purchases;
·
the willingness or ability of dealers to assign contracts to us on acceptable terms;
·
the terms on which we are able to complete term securitizations once contracts are acquired;
·
any breach in the security of our systems; and
·
such other factors as discussed through the “Risk Factors” section of this report.
Forward-looking statements
are neither historical facts nor guarantees of performance. Instead, they are based only on our current beliefs, expectations
and assumptions
regarding the future of our business, plans and strategies, projections, anticipated events and trends, the economy and other uncertain
conditions. Because forward-looking statements relate to the future, 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 any
documents incorporated by reference
in this report. Therefore, you should not rely on any of these forward-looking statements. 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.
iii
PART I
Item 1. Business
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 have (i) originated vehicle
purchase money loans by lending directly to consumers and have (ii) acquired
installment purchase contracts in four merger and acquisition transactions,
and (iii) 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 December 31, 2024, we have purchased a total of approximately
$23.0 billion
of automobile contracts from dealers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers
and
acquisitions in 2002, 2003, 2004 and 2011. Contract purchase volumes and managed portfolio levels for the five years ended December
31, 2024 are shown
in the table below. Managed portfolio comprises both contracts we owned and those we were servicing for third parties.
Contract Purchases and Outstanding Managed Portfolio
$ in thousands
Year
Contracts
Purchased in Period
Managed Portfolio
at Period End
2020
742,584
2,174,972
2021
1,146,321
2,249,069
2022
1,854,385
3,001,308
2023
1,357,752
3,194,623
2024
1,681,941
3,665,725
Our principal executive offices
are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and
underwriting
functions are performed primarily in our California branch with certain of these functions also performed in our Florida and Nevada branches.
We service our automobile contracts from our California, Nevada, Virginia, Florida, and Illinois branches.
Most of our contract acquisitions
volume results from our purchases of retail installment sales contracts from franchised or independent automobile
dealers. We establish
relationships with dealers through our employee sales representatives, who contact prospective dealers to explain our automobile
contract
purchase programs, and thereafter provide dealer training and support services. Our sales representatives represent us exclusively. They
may work
from our Irvine branch, our Las Vegas branch, or in the field, in which case they work remotely and support dealers in their
geographic area. Our sales
representatives present dealers with a sales package, which includes our promotional material containing the
terms offered by us for the purchase of
automobile contracts, a copy of our standard-form dealer agreement, and required documentation
relating to automobile contracts. As of December 31,
2024, we had 122 sales representatives, and in that month, we received applications
from 8,600 dealers in 47 states. As of December 31, 2024,
approximately 72% of our active dealers were franchised new car dealers that
sell both new and used vehicles, and the remainder were independent used
car dealers.
1
We have in the past solicited
credit applications directly from prospective automobile consumers through the internet under a program we refer to as our
direct lending
platform. For qualified applicants we offered terms similar to those that we offer through dealers, though without a down payment
requirement
and with more restrictive loan-to-value and credit score requirements. Applicants approved in this fashion are free to shop for and purchase
a
vehicle from a dealer of their choosing, after which we entered into a note and security agreement directly with the consumer. We terminated
our direct
lending platform in September 2023 and we do not intend to originate any such loans going forward. However, we intend to continue
servicing our existing
direct loans. As of December 31, 2024, automobile contracts under the direct lending platform represented 1.6%
of our outstanding managed portfolio.
For the year ended December
31, 2024 approximately 91% of the automobile contracts originated under our programs consisted of financing for used
cars and 9% consisted
of financing for new cars.
We generally solicit applications
with the intent of originating contracts to hold as investments in our own portfolio. However, in May 2021 we began
purchasing some contracts
for immediate sale to a third-party to whom we refer applications that do not meet our lending criteria. We service all such
contracts
on behalf of the third-party.
For contracts we originate
for our own portfolio, we generally finance them on a long-term basis through securitizations. Securitizations are transactions
in which
we sell a specified pool of automobile contracts to a special purpose subsidiary of ours. The subsidiary in turn issues (or contributes
to a trust that
issues) asset-backed securities, which are purchased by institutional investors. Since 1994, we have completed 103 term
securitizations of approximately
$20.6 billion in automobile contracts. We depend upon the availability of short-term warehouse credit
facilities as interim financing for our contract
purchases prior to the time we pool those contracts for a securitization. As of December
31, 2024, we had two such short-term warehouse facilities with a
total maximum borrowing capacity of $535 million.
Sub-Prime Auto Finance Industry
Automobile financing is the
second largest consumer finance market in the United States. The automobile finance industry can be considered a
continuum where participants
choose to provide financing to consumers in various segments of the spectrum of creditworthiness depending on each
participant’s
business strategy. We operate in a segment of the spectrum that is frequently referred to as sub-prime since we provide financing to less
credit-
worthy borrowers at higher rates of interest than more credit-worthy borrowers are likely to obtain.
Traditional automobile finance
companies, such as banks, their subsidiaries, credit unions and captive finance subsidiaries of automobile manufacturers,
generally lend
to the most creditworthy, or so-called prime borrowers, although some traditional lenders are significant participants in the sub-prime
segment in which we operate. Historically, independent companies specializing in sub-prime automobile financing and subsidiaries of larger
financial
services companies have competed in the sub-prime segment which we believe remains highly fragmented, with no single company
having a dominant
position in the market.
Our automobile financing programs
are designed to serve sub-prime customers, who generally have limited credit histories or past credit problems.
Because we serve customers
who are unable to meet certain credit standards, we incur greater risks, and generally receive interest rates higher than those
charged
in the prime credit market. We also sustain a higher level of credit losses because of the higher risk customers we serve.
2
Contract Acquisitions
When a retail automobile buyer
elects to obtain financing from a dealer, the dealer takes a credit application to submit to its financing sources. Typically,
a dealer
will submit the buyer’s application to more than one financing source for review. We believe the dealer’s decision to choose a financing
source is
based primarily on: (i) the interest rate and monthly payment made available to the dealer’s customer; (ii) any fees to be charged
to (or paid to) the dealer
by the financing source; (iii) the timeliness, consistency, and predictability of response; (iv) funding turnaround
time; (v) any conditions to purchase; and
(vi) the financial stability of the financing source. Dealers can send credit applications to
us by entering the necessary data on our website or through one of
two third-party application aggregators. For the year ended December
31, 2024, we received 3.3 million applications. Approximately 57% of all
applications came through DealerTrack (the industry leading dealership
application aggregator), 43% via another aggregator, Route One. A portion of the
DealerTrack and Route One volume are applications from
our pass-through arrangements with other lenders who send us applications from their dealers in
cases where those lenders choose not to
approve those applications. For the year ended December 31, 2024, such pass-through applications represented
41% of our total applications.
For the year ended December 31, 2024, our automated application decisioning system produced our initial decision within
seconds on approximately
99% of those applications.
Upon receipt an application,
if the application meets certain minimum criteria, we immediately order two credit reports to document the buyer’s credit
history and
an alternative data credit score provided by a major credit reporting bureau. If, upon review by our proprietary automated decisioning
system,
or in some cases, one of our credit analysts, we determine that the applicant and structure of the automobile financing contract
meets our criteria, we advise
the dealer of our decision to approve the contract and the terms under which we will purchase it. For applications
that do not meet our criteria, we may
forward them to one or more business partners who also invest in subprime automobile contracts.
In the case of one third-party partner, as described above,
we may purchase contracts they approve, followed by immediate resale to them,
after which we retain the servicing. If this third-party declines the
application, we advise the dealer that we will not purchase the
contract. Other partners to whom we refer applications may or may not choose to purchase
such contracts by working directly with the dealers
who submitted the applications. Unless otherwise notated, contract origination and managed portfolio
data discussed herein includes third-party
contracts.
Dealers with which we do business
are under no obligation to submit any automobile contracts to us, nor are we obligated to purchase any automobile
contracts from them.
During the year ended December 31, 2024, no dealer accounted for as much as 2% of the total number of automobile contracts we
purchased.
Under our direct lending platform,
the applicant submits a credit application directly to us via our website, or in some cases, through a third-party who
accepts such applications
and refers them to us for a fee. In either case, we process the application with the same automated application decisioning process
as
described above for applications from dealers. We then advise the applicant as to whether we would grant them credit and on what terms.
The following table sets forth
the geographical sources of the automobile contracts we originated (based on the addresses of the customers as stated on
our records)
during the years ended December 31, 2024 and 2023.
Contracts Purchased During the Year Ended
December 31, 2024
December 31, 2023
Number
Percent (1)
Number
Percent (1)
Texas
5,985
7.8%
4,620
7.1%
Ohio
5,643
7.3%
4,015
6.2%
California
4,583
6.0%
3,911
6.0%
Illinois
4,399
5.7%
4,482
6.9%
Florida
4,148
5.4%
3,489
5.4%
Georgia
3,432
4.5%
2,598
4.0%
Other States
48,819
63.4%
42,022
64.5%
Total
77,009
100.0%
65,137
100.0%
(1) Percentages may not total to 100.0% due to rounding.
3
The following table sets forth the geographic concentrations
of our outstanding managed portfolio as of December 31, 2024 and 2023.
Outstanding Managed Portfolio as of
December 31, 2024
December 31, 2023
Amount
Percent (1)
Amount
Percent (1)
($ in millions)
California
$
275.2
7.5%
$
274.7
8.6%
Texas
287.3
7.8%
237.6
7.4%
Ohio
265.5
7.2%
232.7
7.3%
Illinois
204.3
5.6%
173.3
5.4%
Florida
185.0
5.0%
160.2
5.0%
Pennsylvania
168.3
4.6%
152.8
4.8%
All others
2,280.1
62.2%
1,963.3
61.5%
Total
$
3,665.7
100.0%
$
3,194.6
100.0%
(1) Percentages may not total to 100.0% due to rounding.
We purchase automobile contracts
from dealers at a price generally computed as the total amount financed under the automobile contracts, adjusted for an
acquisition fee,
which may be comprised of multiple components and which may either increase or decrease the automobile contract purchase price we pay.
The amount of the acquisition fee, and whether it results in an increase or decrease to the automobile contract purchase price, is based
on the perceived
credit risk of and, in some cases, the interest rate on the automobile contract. The following table summarizes the
average net acquisition fees we charged
dealers and the weighted average annual percentage rate on contracts purchased for our own portfolio
for the periods shown:
2024
2023
2022
2021
2020
Average net acquisition fee charged (paid) to dealers (1)
$
(50) $
98 $
(150) $
(65) $
71
Average net acquisition fee as % of amount financed (1)
-0.2%
1.3%
-0.7%
-0.3%
0.4%
Weighted average annual percentage interest rate
20.4%
20.9%
18.4%
17.8%
19.3%
(1) Not applicable to direct lending platform
Our pricing strategy is driven
by our objectives for new contract purchase quantities and maximizing our risk adjusted yield. We believe that levels of
acquisition fees
are determined primarily by competition in the marketplace, which has been robust over the periods presented, and by our pricing strategy.
We make changes to our pricing algorithm based on our volume goals, our own costs for borrowing and periodic recalibration of our risk-based
scoring
models.
We have offered eight different
financing programs, and price each program according to the relative credit risk. Our programs cover a wide band of the
sub-prime credit
spectrum and are labeled as follows:
First Time Buyer
– This program accommodates an applicant who has limited significant past credit history, such as a previous auto loan. Since the
applicant has limited credit history, the contract interest rate and dealer acquisition fees tend to be higher, and the loan amount, loan-to-value
ratio, down
payment, and payment-to-income ratio requirements tend to be more restrictive compared to our other programs.
4
Mercury / Delta
– This program accommodates an applicant who may have had significant past non-performing credit including recent derogatory
credit.
As a result, the contract interest rate and dealer acquisition fees tend to be higher, and the loan amount, loan-to-value ratio, down
payment, and
payment-to-income ratio requirements tend to be more restrictive compared to our other programs.
Standard
– This program accommodates an applicant who may have significant past non-performing credit, but who has also exhibited some
performing
credit in their history. The contract interest rate and dealer acquisition fees are comparable to the First Time Buyer and Mercury/Delta
programs, but the loan amount and loan-to-value ratio requirements are somewhat less restrictive.
Alpha –
This program accommodates applicants who may have a discharged bankruptcy, but who have also exhibited performing credit. In addition,
the
program allows for homeowners who may have had other significant non-performing credit in the past. The contract interest rate and
dealer acquisition
fees are lower than the Standard program, down payment and payment-to-income ratio requirements are somewhat less restrictive.
Alpha Plus –
This program accommodates applicants with past non-performing credit, but with a stronger history of recent performing credit, such as
auto or mortgage related credit, and higher incomes than the Alpha program. Contract interest rates and dealer acquisition fees are lower
than the Alpha
program.
Super Alpha
– This program accommodates applicants with past non-performing credit, but with a somewhat stronger history of recent performing
credit, including auto or mortgage related credit, and higher incomes than the Alpha Plus program. Contract interest rates and dealer
acquisition fees are
lower, and the maximum loan amount is somewhat higher, than the Alpha Plus program.
Preferred
- This program accommodates applicants with past non-performing credit, but who demonstrate a somewhat stronger history of recent
performing
credit than the Super Alpha program. Contract interest rates and dealer acquisition fees are lower, and the maximum loan amount is somewhat
higher than the Super Alpha program.
Meta - This
program accommodates applicants with past non-performing credit, but who demonstrate a stronger history of recent performing credit than
the Preferred program. Contract interest rates and dealer acquisition fees are lower, and the maximum loan amount is somewhat higher than
the Preferred
program.
Our upper credit tier products,
which are our Meta, Preferred, Super Alpha, Alpha Plus and Alpha programs, accounted for approximately 89% of our
new contract acquisitions
for our own portfolio in 2024, 83% in 2023, and 80% in 2022, measured by aggregate amount financed.
The following table identifies
the credit program, sorted from highest to lowest credit quality, under which we originated automobile contracts during the
years ended
December 31, 2024 and 2023.
Contracts Purchased During the Year Ended (1)
December 31, 2024
December 31, 2023
(dollars in thousands)
Program
Amount Financed
Percent (1)
Amount Financed
Percent (1)
Meta
$
55,241
3.3%
$
45,319
3.3%
Preferred
278,044
16.5%
175,122
12.9%
Super Alpha
338,156
20.1%
265,385
19.5%
Alpha Plus
372,345
22.1%
179,526
13.2%
Alpha
424,433
25.2%
383,512
28.2%
Standard
116,159
6.9%
103,499
7.6%
Mercury / Delta
27,554
1.6%
52,250
3.8%
First Time Buyer
37,317
2.2%
52,313
3.9%
Third Parties
32,692
1.9%
100,826
7.4%
$
1,681,941
100.0%
$
1,357,752
100.0%
(1) Percentages may not total to 100.0% due to rounding.
5
We attempt to control misrepresentation
regarding the customer’s credit worthiness by carefully screening the automobile contracts we originate, by
establishing and maintaining
professional business relationships with dealers, and by including certain representations and warranties by the dealer in the
dealer
agreement. Pursuant to the dealer agreement, we may require the dealer to repurchase any automobile contract if the dealer breaches its
representations or warranties. There can be no assurance, however, that any dealer will have the willingness or the financial resources
to satisfy their
repurchase obligations to us.
Contract Funding
For automobile contracts that
we purchase from dealers, we require that the contract be originated by a dealer that has entered into a dealer agreement
with us. Under
our direct lending platform, we required the customer to sign a note and security agreement. In each case, the contract is secured by
a first
priority lien on a new or used automobile, light truck or passenger van and must meet our funding criteria. In addition, each
automobile contract requires
the customer to maintain physical damage insurance covering the financed vehicle and naming us as a loss
payee. We may, nonetheless, suffer a loss upon
theft or physical damage of any financed vehicle if the customer fails to maintain insurance
as required by the automobile contract and is unable to pay for
repairs to or replacement of the vehicle.
Our technology and human expertise
provides for a 360-degree evaluation of an applicant’s employment and residence stability, income level and
affordability, and creditworthiness
in relation to the desired collateral securing the automobile contract. This perspective is used to assign application and
structure allowances
and limits related to price, term, amount of down payment, monthly payment, and interest rate; type of vehicle; and principal amount
of
the automobile contract in relation to the value of the vehicle.
Specifically, our funding
guidelines generally limit the maximum principal amount of a purchased automobile contract to 125% of wholesale book value
in the case
of used vehicles or to 125% of the manufacturer’s invoice in the case of new vehicles, plus, in each case, sales tax, licensing and, when
the
customer purchases such additional items, a service contract or a product to supplement the customer’s casualty policy in the
event of a total loss of the
related vehicle. We generally do not finance vehicles that are more than 15 model years old or have more
than 200,000 miles. The maximum term of a
purchased contract is 78 months, although we consider the program, amount financed, and mileage
as significant factors in determining the maximum term
of a contract. Automobile contract purchase criteria are subject to change from
time to time as circumstances may warrant. Prior to purchasing an
automobile contract, our funding staff verify the customer’s employment,
income, residency, and credit information by contacting various parties noted on
the customer’s application, credit information bureaus
and other sources. In addition, we contact each customer by telephone to confirm that the customer
understands and agrees to the terms
of the related automobile contract. During this "welcome call,"
we also ask the customer a series of open-ended
questions about his application and the contract, which may uncover potential misrepresentations.
Credit Scoring. We
use proprietary scoring models to assign two internal "credit scores" at the time the application is received. These proprietary
scores
are used to help determine whether we want to approve the application and, if so, the program and pricing we will offer either
to the dealer, or in the case of
our direct lending platform, directly to the customer. Our internal credit scores are based on a variety
of parameters including traditional and alternative
credit history, data derived from other sources such as house/rental payment, length
of employment, residence stability and total income. When the dealer
proposes a structure for the contract, our scores consider various
deal structure parameters such as down payment amount, loan to value, payment to
income, make and model, vehicle class, and mileage. We
have developed our credit scores utilizing statistical risk management techniques and historical
performance data from our managed portfolio.
We believe this improves our allocation of credit evaluation resources, enhances our competitiveness in the
marketplace and manages the
risk inherent in the sub-prime market.
6
Characteristics of Contracts. All
the automobile contracts we purchase are fully amortizing and provide for level payments over the term of the
automobile contract. All
automobile contracts may be prepaid at any time without penalty. The table below compares certain characteristics, at the time of
origination,
of our contract purchases for the years ended December 31, 2024 and 2023:
Contracts Purchased During the Year Ended
December 31, 2024
December 31, 2023
Average Original Amount Financed
$
21,931
$
20,845
Weighted Average Original Term
71 months
67 months
Average Down Payment Percent
10.7%
10.7%
Average Vehicle Purchase Price
$
20,499
$
19,651
Average Age of Vehicle
7 years
7 years
Average Age of Customer
42 years
42 years
Average Time in Current Job
5 years
5 years
Average Household Annual Income
$
74,655
$
72,930
Dealer Compliance. The
dealer agreement and related assignment contain representations and warranties by the dealer that an application for state
registration
of each financed vehicle, naming us as secured party with respect to the vehicle, was effected by the time of sale of the related automobile
contract to us, and that all necessary steps have been taken to obtain a perfected first priority security interest in each financed vehicle
in favor of us under
the laws of the state in which the financed vehicle is registered. To the extent that we do not receive such state
registration within three months of
purchasing the automobile contract, our dealer compliance group will work with the dealer to rectify
the situation. If these efforts are unsuccessful, we
generally will require the dealer to repurchase the automobile contract.
Servicing and Collections
We currently service all automobile
contracts that we own as well as those automobile contracts we service for third parties. We organize our servicing
activities based on
the tasks performed by our personnel. Our servicing activities consist of mailing monthly billing statements; contacting obligors whose
payments are late; accounting for and posting of all payments received; responding to customer inquiries; taking all necessary action
to maintain the
security interest granted in the financed vehicle or other collateral; skip tracing; repossessing and liquidating the
collateral when necessary; collecting
deficiency balances; and generally monitoring each automobile contract and the related collateral.
For contracts that we securitize, we are typically entitled
to receive a base monthly servicing fee equal to 2.5% per annum computed as
a percentage of the declining outstanding principal balance of the non-
charged-off automobile contracts. The servicing fee is included
in interest income for contracts that are pledged to a warehouse credit facility or a
securitization transaction. For contracts we service
for third parties, we receive a base monthly servicing fee equal to 2.5%, and certain other incentive fees
tied to credit performance.
Collection Procedures. We
believe that our ability to monitor performance and collect payments owed from sub-prime customers is primarily a function
of our collection
approach and support systems. We believe that if payment problems are identified early and our collection staff works closely with
customers
to address these problems, it is possible to correct many problems before they deteriorate further. To this end, we utilize pro-active
collection
procedures, which include making early and frequent contact with delinquent customers; educating customers as to the importance
of making payments
according to their contract schedule; and employing a consultative and customer service approach to assist the customer
in meeting his or her obligations,
which includes attempting to identify the underlying causes of delinquency and cure them whenever possible.
In support of our collection activities, we
maintain a computerized collection system specifically designed to service automobile contracts
with sub-prime customers. We engage a nearshore third-
party call center to supplement the efforts the collectors in our five branch locations.
As of December 31, 2024, our nearshore partner had approximately 47
agents assigned to our portfolio.
7
We attempt to make telephonic
contact with delinquent customers from one to 20 days after their monthly payment due date, depending on our risk-based
assessment of
the customer’s likelihood of payment during early stages of delinquency. If a customer has authorized us to do so, we may also send
automated text message reminders at various stages of delinquency and our collectors may also choose to contact a customer via text message
instead of, or
in addition to, via telephone. Our customers can contact us via a toll-free number where they may choose to speak with
a collector or to use our automated
voice response system to access information about their account or to make a payment. They may respond
to our collector’s text messages or chat with one
of our collectors while logged into our website. Our contact priorities may be
based on the customers’ physical location, stage of delinquency, size of
balance or other parameters. Our collectors inquire of the customer
the reason for the delinquency and when we can expect to receive the payment. The
collector attempts to get the customer to make a payment
or a promise for the payment for a time generally not to exceed one week from the date of the
call. If the customer makes such a promise,
the account is routed to a promise queue and is not contacted until the outcome of the promise is known. If the
payment is made by the
promise date and the account is no longer delinquent, the account is routed out of the collection system. If the payment is not made,
or if the payment is made, but the account remains delinquent, the account is returned to a collector’s queue for subsequent contacts.
If a customer fails to make
or keep promises for payments, or if the customer is uncooperative or attempts to evade contact or hide the vehicle, a
supervisor will
review the collection activity relating to the account to determine if repossession of the vehicle is warranted. Generally, such a decision
will
occur between the 60th and 90th day past the customer’s payment due date, but could occur sooner or later, depending on the specific
circumstances.
Contracts originated since January 2018 are accounted for at fair value and the economic impact of repossessions is incorporated
into the estimated net
yield on those contracts. For contracts originated prior to January 2018, which are not accounted for at fair value,
we suspend interest accruals on contracts
where the vehicle has been repossessed and reclassify the remaining automobile contract balance
to other assets. In addition, we apply a specific reserve to
such contracts so that the net balance represents the estimated remaining
balance after the proceeds of the sale of the vehicle are applied, net of related
costs.
If we elect to repossess the
vehicle, we assign the task to an independent national repossession service. Such services are licensed and/or bonded as
required by law.
Upon repossession it is stored until it is picked up by a wholesale auction that we designate, where it is kept until sold. Prior to sale,
the
customer has the right to redeem the vehicle by paying the contract in full. In some cases, we may return the vehicle to the customer
if they pay all, or what
we deem to be a sufficient amount, of the past due amount. Financed vehicles that have been repossessed are generally
resold through unaffiliated
automobile auctions, which are attended principally by car dealers. Net liquidation proceeds are applied to
the customer’s outstanding obligation under the
automobile contract. Such proceeds usually are insufficient to pay the customer’s obligation
in full, resulting in a deficiency. In most cases we will continue
to contact our customers to recover all or a portion of this deficiency
for up to several years after charge-off. From time to time, we sell certain charged off
accounts to unaffiliated purchasers who specialize
in collecting such accounts.
Contracts originated since
January 2018 are accounted for at fair value and the economic impact of late payments is incorporated into the estimated net
yield on
those contracts. For contracts originated prior to January 2018, which are not accounted for at fair value, we suspend interest accruals
on contracts
once an automobile contract becomes greater than 90 days delinquent. We do not recognize additional interest income until
the borrower makes sufficient
payments to be less than 90 days delinquent. Any payments received by a borrower, regardless of their stage
of delinquency are first applied to outstanding
accrued interest and then to principal reduction.
We generally charge off the
balance of any contract by the earlier of the end of the month in which the automobile contract becomes five scheduled
installments past
due or, in the case of repossessions, the month after we receive the proceeds from the liquidation of the financed vehicle or if the vehicle
has been in repossession inventory for more than three months. In the case of repossession, the amount of the charge-off is the difference
between the
outstanding principal balance of the defaulted automobile contract and the net repossession sale proceeds.
Credit Experience
Our primary method of monitoring
ongoing credit quality of our portfolio is to closely review monthly delinquency, default and net charge off activity
and the related
trends. Our internal credit performance data consistently show that new receivables have lower levels of delinquency and losses early
in
their lives, with delinquencies increasing throughout their lives and incremental losses gradually increasing to a peak around 18
months, after which they
gradually decrease. The weighted average seasoning of our total owned portfolio, represented in the tables below,
was 17 months, 19 months, and 17
months as of December 31, 2024, December 31, 2023, and December 31, 2022, respectively. Our financial
results are dependent on the performance of the
automobile contracts in which we retain an ownership interest. Broad economic factors
such as recessions 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 own as of the respective dates shown.
8
Delinquency, Repossession
and Extension Experience
December 31, 2024
December 31, 2023
December 31, 2022
Number of
Number of
Number of
Contracts
Amount
Contracts
Amount
Contracts
Amount
Delinquency Experience
(Dollars in thousands)
Gross servicing portfolio (1)
201,441 $
3,490,960
179,198 $
2,970,066
170,658 $
2,795,383
Period of delinquency (2)
31-60 days
14,643
243,068
13,337
210,200
13,434
201,764
61-90 days
7,244
114,633
6,717
104,144
5,481
80,146
91+ days
4,477
65,081
3,252
50,610
2,148
31,036
Total delinquencies (2)
26,364
422,782
23,306
364,954
21,063
312,946
Amount in repossession (3)
6,227
95,620
4,653
67,182
2,904
41,401
Total delinquencies and amount in
repossession (2)
32,591 $
518,402
27,959 $
432,136
23,967 $
354,347
Delinquencies as a percentage of
gross servicing portfolio
13.1%
12.1%
13.0%
12.3%
12.3%
11.2%
Total delinquencies and amount in
repossession as a percentage of
gross servicing portfolio
16.2%
14.8%
15.6%
14.5%
14.0%
12.7%
Extension Experience
Contracts with one extension,
accruing
33,623 $
601,049
33,920 $
610,617
27,584 $
464,323
Contracts with two or more
extensions, accruing
47,227
701,158
42,462
563,308
38,714
417,682
80,850
1,302,207
76,382
1,173,925
66,298
882,005
Contracts with one extension,
non-accrual (4)
3,483
53,018
2,367
38,933
981
14,792
Contracts with two or more
extensions, non-accrual (4)
4,052
60,660
2,081
27,497
1,485
15,395
7,535
113,678
4,448
66,430
2,466
30,187
Total accounts with extensions
88,385 $
1,415,885
80,830 $
1,240,355
68,764 $
912,192
(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 purchased, including automobile contracts we 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 the contract balance on financed vehicles that have been repossessed but not yet liquidated.
(4) We do not recognize interest income on accounts past due more than 90 days.
9
Net Credit Loss Experience
(1)
Total Managed Portfolio
(Excludes Third Party Portfolio)
Year Ended December 31,
2024
2023
2022
(Dollars in thousands)
Average portfolio outstanding
$
3,209,988
$
2,913,571
$
2,539,110
Net charge-offs as a percentage of average portfolio (2)
7.6%
6.5%
4.5%
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract contracts. The information
in
the table represents all automobile contracts we service, excluding certain contracts we have serviced for third parties on which we
earn servicing
fees only, and have no credit risk.
(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 after the date of charge-off, including some recoveries which have
been classified as other
income in the accompanying financial statements.
Extensions
In certain circumstances we
will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor
will not be
permitted more than two such extensions in any 12-month period and no more than eight over the life of the contract. The only modification
of
terms is to advance the obligor’s next due date, generally by one month, though in some cases we may permit a longer extension,
and in any case an
advance in the maturity date corresponding to the advance of the due date. There are no other concessions such as a
reduction in interest rate, forgiveness of
principal or of accrued interest. Accordingly, we consider such extensions to be insignificant
delays in payments.
The basic question in deciding to grant an extension
is whether we will (a) be delaying an inevitable repossession and liquidation or (b) risk losing the
vehicle as a result of not being
able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been
repossessed
without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime
losses,
getting the obligor’s account current (or close to it) and building goodwill with the obligor so that he might prioritize
us over other creditors on future
payments. Our servicing staff are trained to identify when a past due obligor is facing a temporary
problem that may be resolved with an extension.
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 payments;
(2)
whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making
regular monthly
payments again after the extension; (3) the obligor’s past payment history, including past extensions if applicable; and
(4) the obligor’s willingness to
communicate and cooperate on resolving the delinquency. If the collector believes the obligor is
a good candidate for an extension, he must obtain approval
from his supervisor, who will review the same factors stated above prior to
offering the extension to the obligor. During 2020 we incorporated an
algorithmic extension score card which provides our staff with an
objective and quantitative assessment of whether or not a obligor is a good candidate for
an extension, based on the current circumstances
of the account. The extension score card was developed by our internal risk management team and is
derived from the post-extension performance
of accounts in our managed portfolio.
10
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 December 31, 2024, for accounts that received extensions from 2013 through 2023:
Period of
Extension
# of Extensions
Granted
Active or
Paid Off at
December 31,
2024
% Active or
Paid Off at
December 31,
2024
Charged Off
> 6 Months
After
Extension
% Charged
Off > 6
Months After
Extension
Charged Off
<= 6 Months
After
Extension
% Charged
Off <= 6
Months After
Extension
Avg Months
to Charge Off
Post
Extension
2013
23,398
11,131
47.6%
11,282
48.2%
985
4.2%
23
2014
25,773
10,423
40.4%
14,485
56.2%
865
3.4%
25
2015
53,319
21,965
41.2%
30,051
56.4%
1,303
2.4%
26
2016
80,897
35,108
43.4%
42,954
53.1%
2,835
3.5%
26
2017
133,847
55,504
41.5%
68,124
50.9%
10,219
7.6%
23
2018
121,531
57,265
47.1%
53,268
43.8%
10,998
9.0%
20
2019
71,548
42,621
59.6%
22,507
31.5%
6,420
9.0%
19
2020
83,170
56,198
67.6%
23,305
28.0%
3,667
4.4%
21
2021
47,010
33,486
71.2%
12,288
26.1%
1,236
2.6%
19
2022
56,142
39,610
70.6%
14,578
26.0%
1,954
3.5%
15
2023
83,113
65,309
78.6%
14,545
17.5%
3,259
3.9%
11
We view these results as a
confirmation of the effectiveness of our extension program. We consider accounts that have had extensions and were active or
paid off
as of December 31, 2024 to be successful. Successful extensions result in continued payments of interest and principal (including payment
in full
in many cases). Without the extension, however, the account may have defaulted, and we would have likely incurred a substantial
loss and no additional
interest revenue.
For extension accounts that
ultimately charged off, we consider accounts that charged off more than six months after the extension to be at least partially
successful.
In such cases, despite the ultimate loss, we received additional payments of principal and interest that otherwise we would not have
received.
Additional information about our extensions is provided in the tables
below:
For the Year Ended
December 31, 2024
December 31, 2023
December 31, 2022
Average number of extensions granted per month
7,540
6,926
4,689
Average number of outstanding accounts
189,460
176,438
162,264
Average monthly extensions as % of average outstandings
4.0%
3.9%
2.9%
11
December 31, 2024
December 31, 2023
December 31, 2022
Number of
Contracts
Amount
Number of
Contracts
Amount
Number of
Contracts
Amount
(Dollars in thousands)
Contracts with one extension
37,106 $
654,067
36,287 $
649,551
28,565 $
479,114
Contracts with two extensions
22,452
382,301
19,335
326,552
13,730
180,547
Contracts with three extensions
13,300
214,194
10,109
133,207
9,837
108,986
Contracts with four extensions
7,462
99,071
6,784
67,735
7,938
76,220
Contracts with five extensions
4,645
43,264
5,197
42,734
5,425
45,519
Contracts with six extensions
3,420
22,988
3,118
20,576
3,269
21,806
88,385 $
1,415,885
80,830 $
1,240,355
68,764 $
912,192
Gross servicing portfolio (Excludes Third
Party Portfolio)
201,441 $
3,490,960
179,198 $
2,970,066
170,658 $
2,795,383
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 is trained to employ a counseling approach to assist
our
customers with their cash flow management skills and help them to prioritize their payment obligations to avoid losing their vehicle
to repossession.
Through our experience, we have learned that once a contract becomes greater than 90 days past due, it is more likely
than not that the delinquency will not
be resolved and will ultimately result in a charge-off. Contracts originated since January 2018
are accounted for at fair value and the economic impact of
late payments is incorporated into the estimated net yield on those contracts.
If an obligor exceeds the
90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes equal to or
below 90 days
delinquent at the end of a subsequent period, the related contract 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).
Securitization of Automobile Contracts
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.
12
When structured to be treated
as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile
contracts and
the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize
interest and
fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record
as expense a provision for credit losses
on the contracts. Effective January 1, 2018, we adopted the fair value method of accounting for
finance receivables acquired on or after that date. For these
receivables, we recognize interest income on a level yield basis using that
internal rate of return as the applicable interest rate. We do not record an expense
for provision for credit losses on these receivables
because such credit losses are included in our computation of the appropriate level yield.
Since 1994 we have conducted
103 term securitizations of automobile contracts that we originated under our regular programs. As of December 31, 2024,
17 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.
Our recent history of term securitizations is summarized
in the table below:
Recent Asset-Backed Securitizations
$ in thousands
Period
Number of Term
Securitizations
Amount of
Receivables
2018
4
883,452
2019
4
1,014,124
2020
3
741,867
2021
4
1,145,002
2022
4
1,537,383
2023
4
1,352,114
2024
4
1,533,854
From time to time we have
also completed financings of our residual interests in other securitizations that we and our affiliates previously sponsored. On
June
30, 2021, we completed a $50.0 million securitization of residual interests from previously issued securitizations. In this residual interest
financing
transaction, qualified institutional buyers purchased $50.0 million of asset-backed notes secured by residual interests in three
CPS securitizations
consecutively conducted from January 2018 through July 2018, and an 80% interest in a CPS affiliate that owns the
residual interests in the eight CPS
securitizations conducted from October 2018 through September 2020. As of December 31, 2024, the notes
had a principal balance of $50.0 million.
On March 31, 2024, we completed
a new residual interest financing of our residual interests from previously issued securitizations in the amount of $50.0
million. In
this residual interest financing transaction, qualified institutional buyer purchased $50.0 million of asset-backed notes secured by an
80%
interest in a CPS affiliate that owns the residual interests in five CPS securitizations issued from January 2022 through January
2023. The sold notes
(“2024-1 Notes”), issued by CPS Auto Securitization Trust 2024-1, consist of a single class with a coupon
of 11.50%. As of December 31, 2024, the notes
had a principal balance of $50.0 million.
Generally, prior to a securitization
transaction we fund our automobile contract acquisitions primarily with proceeds from warehouse credit facilities. Our
current short-term
funding capacity is $535 million, comprising 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 increased from $200 million to $335 million in December 2024.
13
In November 2015, we entered
into another $100 million facility. In June 2022, we increased the capacity of our credit agreement with Ares Agent
Services, L.P. from
$100 million to $200 million. This facility was most recently renewed in March 2024, extending the revolving period to March 2026,
followed
by an amortization period to March 2028.
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 may be required 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.
Whether a securitization is
treated as a secured financing or as a sale for financial accounting purposes, 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, regardless
of whether such automobile contracts are
treated as having been sold or as having been financed.
Certain of our securitization
transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial
ratios and results.
Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition,
certain
securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default
if a default
occurred under a different facility. As of December 31, 2024, we were in compliance with all such covenants.
Competition
The automobile financing business
is highly competitive. We compete with several national, regional and local finance companies with operations similar
to ours. In addition,
competitors or potential competitors include other types of financial services companies, such as banks, leasing companies, credit
unions
providing retail loan financing and lease financing for new and used vehicles, and captive finance companies affiliated with major automobile
manufacturers. Many of our competitors and potential competitors possess substantially greater financial, sales, technical, personnel
and other resources
than we do. Moreover, our future profitability will be directly related to the availability and cost of our capital
in relation to the availability and cost of
capital to our competitors. Our competitors and potential competitors include far larger,
more established companies that have access to capital markets for
unsecured commercial paper and investment grade-rated debt instruments
and to other funding sources that may be unavailable to us. Many of these
companies also have long-standing relationships with dealers
and may provide other financing to dealers, including floor plan financing for the dealers’
purchase of automobiles from manufacturers,
which we do not offer.
We believe that the principal
competitive factors affecting a dealer’s decision to offer automobile contracts for sale to a particular financing source are the
monthly
payment amount made available to the dealer’s customer, the purchase price offered for the automobile contracts, the timeliness
of the response to
the dealer upon submission of the initial application, the amount of required documentation, the consistency and timeliness
of purchases and the financial
stability of the funding source. While we believe that we can obtain from dealers sufficient automobile
contracts for purchase at attractive prices by
consistently applying reasonable underwriting criteria and making timely purchases of qualifying
automobile contracts, there can be no assurance that we
will do so.
14
Regulation
Numerous federal and state
consumer protection laws, including the federal Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal
Fair
Debt Collection Practices Act and the Federal Trade Commission Act, regulate consumer credit transactions. These laws mandate certain
disclosures
with respect to finance charges on automobile contracts and impose certain other restrictions. In most states, a license is
required to engage in the business
of purchasing automobile contracts from dealers. In addition, laws in a number of states impose limitations
on the amount of finance charges that may be
charged by dealers on credit sales. The so-called Lemon Laws enacted by various states provide
certain rights to purchasers with respect to automobiles
that fail to satisfy express warranties. The application of Lemon Laws or violation
of such other federal and state laws may give rise to a claim or defense
of a customer against a dealer and its assignees, including us
and those who purchase automobile contracts from us. The dealer agreement contains
representations by the dealer that, as of the date
of assignment of automobile contracts, no such claims or defenses have been asserted or threatened with
respect to the automobile contracts
and that all requirements of such federal and state laws have been complied with in all material respects. Although a
dealer would be
obligated to repurchase automobile contracts that involve a breach of such warranty, there can be no assurance that the dealer will have
the
financial resources to satisfy its repurchase obligations. Certain of these laws also regulate our servicing activities, including
our methods of collection.
We are subject to supervision
and examination by the Consumer Financial Protection Bureau (the “CFPB”), a federal agency created by the Dodd-Frank
Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The CFPB has rulemaking, supervisory and enforcement authority
over “non-
banks,” including us. The CFPB is specifically authorized, among other things, to take actions to prevent companies
from engaging in “unfair, deceptive or
abusive” acts or practices in connection with consumer financial products and services,
and to issue rules requiring enhanced disclosures for consumer
financial products or services. The CFPB also has authority
to interpret, enforce and issue regulations implementing enumerated consumer laws, including
certain laws that apply to us.
The Dodd-Frank Act and related
regulations are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the
competitive
balance within our industry and market areas and could have a material adverse effect on us.
In addition to the CFPB, other
state and federal agencies have the ability to regulate aspects of our business. For example, the Dodd-Frank Act provides a
mechanism
for state Attorneys General to investigate us. In addition, the Federal Trade Commission has jurisdiction to investigate aspects of our
business.
We expect that regulatory investigation by both state and federal agencies will continue, and there can be no assurance that
the results of such
investigations will not have a material adverse effect on us.
We believe that we are currently
in material compliance with applicable statutes and regulations; however, there can be no assurance that we are correct,
nor that we will
be able to maintain such compliance. The past or future failure to comply with applicable statutes and regulations could have a material
adverse effect on us. Furthermore, the adoption of additional statutes and regulations, changes in the interpretation and enforcement
of current statutes and
regulations or the expansion of our business into jurisdictions that have adopted more stringent regulatory requirements
than those in which we currently
conduct business could have a material adverse effect on us. In addition, due to the consumer-oriented
nature of our industry and the application of certain
laws and regulations, industry participants are regularly named as defendants in
litigation involving alleged violations of federal and state laws and
regulations and consumer law torts, including fraud. Many of these
actions involve alleged violations of consumer protection laws. A significant judgment
against us or within the industry in connection
with any such litigation could have a material adverse effect on our financial condition, results of operations
or liquidity.
Human Capital
We rely on our employees for
everything we do. To make our business work, we seek to supply employees with the tools and knowledge they need to
succeed. In addition
to new hire training, we provide mentor programs and management workshops. We offer an education costs assistance program to help
with
college tuition and costs incurred to obtain job related certifications and licenses.
15
Workforce Allocation and
Diversity We had 933 employees as of December 31, 2024. Our employee population was 67% female, and 71% self-identified
as ethnically
diverse (defined as all EEOC classifications other than white). Broken out by function, our human capital was allocated thus: 14 were
senior
management personnel; 552 were servicing personnel; 195 were automobile contract origination personnel; 122 were sales personnel;
50 were various
administrative personnel including human resources, legal, accounting and systems.
Compensation and benefits
We offer a total rewards package, which includes competitive compensation, incentives, and comprehensive benefits that will
attract, retain,
and motivate talent within our organization. Our compensation and benefits package includes competitive pay, healthcare, mental health,
retirement benefits, as well as paid time off and holidays, disability benefits, and volunteer time off, along with other benefits and
employee resources. We
offer performance pay to help enhance career development.
Employee Engagement
Our means of evaluating our human capital resources include, on an individual basis, annual performance reviews and annual
meetings with
senior management on or close to the employee’s anniversary date. Most departments meet one-on-one with employees monthly
to discuss
performance, suggestions, and concerns. On an aggregate basis, we distribute new hire surveys and host department round table
meetings. The feedback
from the meetings and survey results are reviewed by senior management and used to assist in reviewing our human
capital strategies, programs, and
practices. Our COO holds town hall meetings to provide company-wide updates and conduct open Q&A
for all employees. We foster collaboration through
charity committees which plan events to raise funds and/or provide resources to various
501(c)(3) organizations in our communities. We also offer paid
community service time. Metrics used in human capital management include
average employee tenure and annual turnover rate. We believe that our
relations with our employees are good. We are not a party to any
collective bargaining agreement.
Available Information
Our internet address is www.consumerportfolio.com.
We make available free of charge on our internet web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and
Exchange Commission.
Item 1A. RISK FACTORS
We are subject to various risks that may materially harm our business,
prospects, financial condition and results of operations. An investment in our
common stock is speculative and involves risk. In evaluating
an investment in shares of our common stock, you should carefully consider the risks
described below, together with the other information
included in this Annual Report on Form 10-K.
The risks described below are not the only risks we face. If any
of the events described in the following risk factors actually occurs, or if additional risks
and uncertainties later materialize that
are not presently known to us or that we currently deem immaterial, then our business, prospects, results of
operations and financial
condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may
lose
all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may
differ
substantially from those discussed in these forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements."
16
Risks Related to Our Business
We Require a Substantial Amount of Cash to Service Our Substantial
Debt.
To service our existing substantial
indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors, including
our successful
financial and operating performance. Our financial and operational performance depends upon a number of factors, many of which are
beyond
our control. These factors include, without limitation:
·
the economic and competitive conditions in the asset-backed securities market;
·
the performance of our current and future automobile contracts;
·
the performance of our residual interests from our securitizations and warehouse credit facilities;
·
any operating difficulties or pricing pressures we may experience;
·
our ability to obtain credit enhancement for our securitizations;
·
our ability to establish and maintain dealer relationships;
·
the passage of laws or regulations that affect us adversely;
·
our ability to compete with our competitors; and
·
our ability to acquire and finance automobile contracts.
Depending upon the outcome
of one or more of these factors, we may not be able to generate sufficient cash flow from operations or obtain sufficient
funding to satisfy
all of our obligations. Such factors may result in our being unable to pay our debts timely or as agreed. If we were unable to pay our
debts, we would be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness
or selling
additional equity capital. These alternative strategies might not be feasible at the time, might prove inadequate, or could
require the prior consent of our
lenders. If executed, these strategies could reduce the earnings available to our shareholders.
We Need Substantial Liquidity to Operate Our Business.
We have historically funded
our operations principally through internally generated cash flows, sales of debt and equity securities, including through
securitizations
and warehouse credit facilities, borrowings under senior secured debt agreements and sales of subordinated notes. However, we may not
be
able to obtain sufficient funding for our future operations from such sources. During 2008, 2009 and much of 2010, our access to the
capital markets was
impaired with respect to both short-term and long-term funding. 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
January 2025. While our access to such funding has improved
since then, our results of operations, financial condition and cash flows
have been from time to time in the past and may in the future be materially and
adversely affected. We require a substantial amount of
cash liquidity to operate our business. Among other things, we use such cash liquidity to:
·
acquire automobile contracts;
·
fund overcollateralization in warehouse credit facilities and securitizations;
·
pay securitization fees and expenses;
·
fund spread accounts in connection with securitizations;
·
satisfy working capital requirements and pay operating expenses;
·
pay taxes; and
·
pay interest expense.
17
Historically we have matched our liquidity needs
to our available sources of funding by reducing our acquisition of new automobile contracts, at times to
merely nominal levels. There
can be no assurance that we will continue to be successful with that strategy.
Periods of Significant Losses.
From time to time throughout
our history we have incurred net losses, most recently over the period beginning with the quarter ended September 30,
2008 and ending
with the quarter ended September 30, 2011. We were adversely affected by the economic recession affecting the United States as a whole,
for a time by increased financing costs and decreased availability of capital to fund our purchases of automobile contracts, and by a
decrease in the overall
level of sales of automobiles and light trucks. Similar periods of losses began in the quarter ended March 31,
1999 through the quarter ended December 31,
2000 and also from the quarter ended September 30, 2003 through the quarter ended March 31,
2005.
We expect to earn quarterly
profits during 2025; however, there can be no assurance as to that expectation. Our expectation of profitability is a forward-
looking
statement. We discuss the assumptions underlying that expectation under the caption “Cautionary Note Regarding Forward-Looking Statements”
in
this report. We identify important factors that could cause actual results to differ, generally in the “Risk Factors” section
of this report, and also under the
caption “Cautionary Note Regarding Forward-Looking Statements.” One reason for our expectation
is that we have had positive net income in each of the
thirteen fiscal years ended December 31, 2024, although not in every quarter within
that period.
Our Results of Operations Will Depend on Our Ability
to Secure and Maintain Adequate Credit and Warehouse Financing on Favorable Terms.
We depend on various financing
sources, including credit facilities, our securitization program and other secured and unsecured debt issuances, to finance
our business
operations. Historically, our primary sources of day-to-day liquidity have been our warehouse credit facilities, in which we sell and
contribute
automobile contracts, as often as twice a week, to special-purpose subsidiaries, where they are "warehoused" until
they are financed on a long-term basis
through the issuance and sale of asset-backed notes. Upon sale of the notes, funds advanced under
one or more warehouse credit facilities are repaid from
the proceeds. Our current short-term funding capacity is $535 million, comprising
two credit facilities. Both warehouse credit facilities have a revolving
period during which we may receive advances secured by contributed
automobile contracts, followed by an amortization period during which no further
advances may be made, but prior to which outstanding
advances are due and payable. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations –
Liquidity and Capital Resources – Liquidity”.
Our access to financing sources
depends upon our financial position, general market conditions, availability of bank liquidity, the bank regulatory
environment, our compliance
with covenants imposed under our financing agreements, the credit quality of the collateral we can pledge to support secured
financings,
and other factors beyond our control. If we are unable to maintain warehouse or securitization financing on acceptable terms, we might
curtail
or cease our purchases of new automobile contracts, which could lead to a material adverse effect on our results of operations,
financial condition and
liquidity.
Our Substantial Indebtedness Could Adversely Affect Our Financial
Health and Prevent Us From Fulfilling Our Obligations Under Our Existing
Indebtedness
We currently have and will
continue to have a substantial amount of outstanding indebtedness. At December 31, 2024, we had approximately $3,131.0
million of debt
outstanding. Such debt consisted primarily of $2,594.4 million of securitization trust debt, and also included $410.9 million of warehouse
lines of credit, $99.2 million of residual interest financing debt and $26.5 million in subordinated renewable notes. Our ability to make
payments of
principal or interest on, or to refinance, our indebtedness will depend on our future operating performance, and our ability
to enter into additional credit
facilities and securitization transactions as well as other debt financings, which, to a certain extent,
are subject to economic, financial, competitive,
regulatory, capital markets and other factors beyond our control.
18
If we are unable to generate
sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt or
to obtain
additional financing. There can be no assurance that any refinancing will be possible or that any additional financing could be obtained
on
acceptable terms. The inability to service or refinance our existing debt or to obtain additional financing would have a material adverse
effect on our
financial position, liquidity and results of operations.
The degree to which we are leveraged creates risks,
including:
·
we may be unable to satisfy our obligations under our outstanding indebtedness;
·
we may find it more difficult to fund future credit enhancement requirements, operating costs, tax payments, capital expenditures
or general
corporate expenditures;
·
we may have to dedicate a substantial portion of our cash resources to payments on our outstanding indebtedness, thereby reducing
the funds
available for operations and future business opportunities; and
·
increasing our vulnerability to adverse general economic, industry and capital markets conditions.
·
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 would give rise to
various
remedies in favor of any unpaid creditors, and creditors’ exercise of such remedies could have a material adverse effect on our
earnings.
Our Results of Operations Will Depend on Our Ability to Securitize
Our Portfolio of Automobile Contracts.
We depend upon our ability
to obtain permanent financing for pools of automobile contracts by conducting term securitization transactions. By
"permanent financing"
we mean financing that extends to cover the full term during which the underlying automobile contracts are outstanding and
requires repayment
as the underlying automobile contracts are repaid or charged off. By contrast, our warehouse credit facilities permit us to borrow
against
the value of such receivables only for limited periods of time. Our past practice and future plan has been and is to repay loans made
to us under our
warehouse credit facilities with the proceeds of securitizations. There can be no assurance that any securitization transaction
will be available on terms
acceptable to us, or at all. The timing of any securitization transaction is affected by a number of factors
beyond our control, any of which could cause
substantial delays, including, without limitation:
·
market conditions;
·
the approval by all parties of the terms of the securitization;
·
our ability to acquire a sufficient number of automobile contracts for securitization.
During 2008 and 2009 we observed
adverse changes in the market for securitized pools of automobile contracts, which made permanent financing in the
form of securitization
transactions difficult to obtain and more costly than in prior periods. These changes included reduced liquidity and reduced demand
for
asset-backed securities, particularly for securities carrying a financial guaranty or for securities backed by sub-prime automobile receivables.
We
experienced improvements in the capital markets from 2010 through 2019, during which time we completed 36 securitizations. 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
January 2025. However, if the market conditions for asset-backed securitizations should reverse,
we would expect a material adverse effect on our results
of operations.
19
Our Results of Operations Will Depend on Cash Flows from Our Residual
Interests in Our Securitization Program and Our Warehouse Credit
Facilities.
When we finance our automobile
contracts through securitizations and warehouse credit facilities, we receive cash and retain a residual interest in the
assets financed.
Those financed assets are owned by the special-purpose subsidiary that is formed for the related securitization. This residual interest
represents the right to receive the future cash flows to be generated by the automobile contracts in excess of (i) the interest and principal
paid to investors or
lenders on the indebtedness issued in connection with the financing, (ii) the costs of servicing the automobile contracts
and (iii) certain other costs incurred
in connection with completing and maintaining the securitization or warehouse credit facility.
We sometimes refer to these future cash flows as "excess
spread cash flows."
Under the financial structures
we have used to date in our securitizations and warehouse credit facilities, excess spread cash flows that would otherwise
be paid to
the holder of the residual interest are first used to increase overcollateralization or are retained in a spread account within the securitization
trusts
or the warehouse facility to provide liquidity and credit enhancement for the related securities.
While the specific terms and
mechanics vary among transactions, our securitization and warehousing agreements generally provide that we will receive
excess spread
cash flows only if the amount of overcollateralization and spread account balances have reached specified levels and/or the delinquency,
defaults or net losses related to the automobile contracts in the automobile contract pools are below certain predetermined levels. In
the event
delinquencies, defaults or net losses on automobile contracts exceed these levels, the terms of the securitization or warehouse
credit facility:
·
may require increased credit enhancement, including an increase in the amount required to be on deposit in the spread account to be
accumulated for
the particular pool; and
·
in certain circumstances, may permit affected parties to require the transfer of servicing on some or all of the securitized or warehoused
contracts from
us to an unaffiliated servicer.
We typically retain residual
interests or use them as collateral to borrow cash. In any case, the future excess spread cash flow received in respect of the
residual
interests is integral to the financing of our operations. The amount of cash received from residual interests depends in large part on
how well our
portfolio of securitized and warehoused automobile contracts performs. If our portfolio of securitized and warehoused automobile
contracts has higher
delinquency and loss ratios than expected, then the amount of money realized from our retained residual interests,
or the amount of money we could obtain
from the sale or other financing of our residual interests, would be reduced. Such a reduction,
if it should occur, could have material adverse effects on our
future results of operations, financial condition and cash flows.
Our Results of Operations May be Affected by Changing Economic
Conditions
We are subject to changes
in general economic conditions that are beyond our control. During periods of economic slowdown or recession, delinquencies,
defaults,
repossessions and losses generally increase. These periods also may be accompanied by increased unemployment rates, inflation, decreased
demand for automobiles and declining values of automobiles securing outstanding receivables, which weakens collateral values and increases
the amount
of a loss in the event of default. Additionally, higher gasoline prices, the introductions of trade tariffs, declining stock
market values, unstable real estate
values, increasing unemployment levels, general availability of consumer credit, changes in vehicle
ownership trends and other factors that impact
consumer confidence or disposable income could increase loss frequency and decrease demand
for automobiles as well as weaken collateral values on
certain types of automobiles. In addition, during an economic slowdown or recession,
our servicing costs may increase without a corresponding increase in
our revenue. No assurance can be given that the underwriting criteria
and collection methods we employ will afford adequate protection against these risks.
Any sustained period of increased delinquencies,
defaults, repossessions or losses or increased servicing costs could adversely affect our financial position,
liquidity, results of operation
and our ability to enter into future financing transactions.
20
We sell repossessed automobiles
at wholesale auction markets located throughout the United States. Depressed wholesale prices for used automobiles
may result in, or increase,
a loss upon our disposition of repossessed vehicles and we may be unable to collect the resulting deficiency balances. Depressed
wholesale
prices for used automobiles may result from manufacturer incentives or discounts on new vehicles, financial difficulties of new vehicle
manufacturers, discontinuance of vehicle brands and models, increased used vehicle inventory resulting from significant liquidations of
rental or fleet
inventories and increased trade-ins due to promotional programs offered by new vehicle manufacturers. Additionally, higher
gasoline prices may decrease
the wholesale auction values of certain types of vehicles. Decreased auction proceeds resulting from the
depressed prices at which used automobiles may
be sold during periods of economic slowdown or low retail demand could result in higher
losses for us. Further, we are dependent on the efficient operation
of the wholesale auction markets. If the operations of the wholesale
auction markets are disrupted, we may be unable to sell our used vehicles at sufficient
volume and/or pricing.
The number of delinquencies,
defaults, losses and repossessions on sub-prime automobile receivables has historically been significantly influenced by the
employment
status of obligors on automobile loan contracts. Any general weakness in the economy may affect sub-prime obligors more strongly than
the
population as a whole.
Furthermore, the global financial
markets have at times experienced increased volatility due to uncertainty surrounding the level and sustainability of the
sovereign debt
of various countries. Concerns regarding sovereign debt may spread to other countries at any time. There can be no assurance that this
uncertainty relating to the sovereign debt of various countries will not lead to further disruption of the financial and credit markets
in the United States,
which could adversely affect our financial position, liquidity, results of operation and our ability to enter into
future financing transactions.
A deterioration in economic
conditions and certain economic factors, such as reduced business activity, high unemployment, interest rates, housing
prices, energy
prices (including the price of gasoline), increased consumer indebtedness (including of obligors on the receivables), lack of available
credit,
the rate of inflation (such as the recent increase in inflation) and consumer perceptions of the economy, as well as other factors,
such as terrorist events,
civil unrest, cyber-attacks, public health emergencies, extreme weather conditions or significant changes in
the geopolitical environment (such as the
ongoing military conflict between Ukraine and Russia and the conflict in Israel) and/or public
policy, including increased state, local or federal taxation,
could adversely affect the ability and willingness of obligors to meet their
payment obligations under the receivables we originate. Our operating results
could be adversely affected if obligors are unable to make
timely payments on their receivables.
The above described negative
economic factors, as well as others, have also historically resulted in decreased consumer demand for motor vehicles,
which may result
in an increase in the inventory of used motor vehicles and depress the price at which repossessed motor vehicles may be sold or delay
the
timing of those sales. If the default rate on our receivables increases and the price at which the vehicles may be sold at auction
declines, our financial
position, liquidity, results of operation and our ability to enter into future financing transactions may be adversely
affected.
If Interest Rates Rise, Our Results of Operations May Be Impaired.
Our principal means of financing
our portfolio of automobile contracts is to issue asset-backed notes in securitizations. The interest payable on such notes
is our largest
expense. Although such expense is fixed with respect to issued securitization trust debt, the terms of future securitizations may vary.
The credit spread between
the interest rates payable on our securitization trust debt and the rates payable on risk-free investments has varied. The Federal
Reserve
increased interest rates multiple times in 2022 and 2023. As a result, we experienced increased interest expense in 2023. In 2024, the
Federal
Reserve lowered short term interest rates. The pace and direction of additional interest rate changes remain uncertain. If interest
rates on risk-free debt
increase, or if our spread above risk-free rates increase, or both, we would expect an increase in interest expense.
If interest rates in general should rise, our
expenses would likewise rise, which could have a material adverse effect on our financial
position, liquidity, results of operation and our ability to enter
into future financing transactions.
21
If We Are Unable to Compete Successfully with our Competitors,
Our Results of Operations May Be Impaired.
The automobile financing business
is highly competitive. We compete with a number of national, regional and local finance companies. In addition,
competitors or potential
competitors include other types of financial services companies, such as commercial banks, savings and loan associations, leasing
companies,
credit unions providing retail loan financing and lease financing for new and used vehicles and captive finance companies affiliated with
major
automobile manufacturers, such as Ford Motor Credit Company, LLC and General Motors Financial Company, Inc. Many of our competitors
and potential
competitors possess substantially greater financial, sales, technical, personnel and other resources than we do, including
greater access to capital markets
for unsecured commercial paper and investment grade rated debt instruments, and to other funding sources
which may be unavailable to us. Moreover, our
future profitability will be directly related to the availability and cost of our capital
relative to that of our competitors. Many of these companies also have
long-standing relationships with automobile dealers and may provide
other financing to dealers, including floor plan financing for the dealers’ purchases of
automobiles from manufacturers, which we do not
offer. There can be no assurance that we will be able to continue to compete successfully and, as a result,
we may not be able to purchase
automobile contracts from dealers at a price acceptable to us, which could result in reductions in our revenues or the cash
flows available
to us.
If Our Dealers Do Not Submit a Sufficient Number of Suitable Automobile
Contracts to Us for Purchase, Our Results of Operations May Be
Impaired.
We are dependent upon establishing
and maintaining relationships with a large number of unaffiliated automobile dealers to supply us with automobile
contracts. During the
years ended December 31, 2024 and 2023, no single dealer accounted for as much as 2% of the automobile contracts we purchased.
The agreements
we have with dealers to purchase automobile contracts do not require dealers to submit a minimum number of automobile contracts for
purchase.
The failure of dealers to submit automobile contracts that meet our underwriting criteria could result in reductions in our revenues or
the cash
flows available to us, and, therefore, could have an adverse effect on our results of operations.
If a Significant Number of Our Automobile Contracts Experience
Defaults, Our Results of Operations May Be Impaired.
We specialize in the purchase
and servicing of automobile contracts to finance automobile purchases by sub-prime customers, those who have limited
credit history, low
income, or past credit problems. Such automobile contracts entail a higher risk of non-performance, higher delinquencies and higher
losses
than automobile contracts with more creditworthy customers. While we believe that our pricing of the automobile contracts and the underwriting
criteria and collection methods we employ enable us to control, to a degree, the higher risks inherent in automobile contracts with sub-prime
customers, no
assurance can be given that such pricing, criteria and methods will afford adequate protection against such risks.
If automobile contracts that
we purchase and hold experience defaults to a greater extent than we have anticipated, this could materially and adversely
affect our
results of operations, financial condition, cash flows and liquidity. Our results of operations, financial condition, cash flows and liquidity,
depend,
to a material extent, on the performance of automobile contracts that we purchase, warehouse and securitize. A portion of the
automobile contracts that we
acquire will default or prepay. In the event of payment default, the collateral value of the vehicle securing
an automobile contract realized by us in a
repossession will generally not cover the outstanding principal balance on that automobile
contract and the related costs of recovery.
For our receivables originated
prior to January 2018, we maintain an allowance for credit losses on automobile contracts held on our balance sheet, which
reflects our
estimates of probable credit losses that can be reasonably estimated. If the allowance is inadequate, then we would recognize the losses
in
excess of the allowance as an expense and our results of operations could be adversely affected.
Receivables originated since
January 2018 are recorded at fair value and incorporate estimates include the timing and severity of future credit losses. If
actual credit
losses were to exceed our estimates, we might be required to change our estimates, which could result in a fair value adjustment to those
receivables or reduced interest income for those receivables in subsequent periods.
22
In addition, under the terms
of our warehouse credit facilities, we are not able to borrow against defaulted automobile contracts, including automobile
contracts that
are, at the time of default, funded under our warehouse credit facilities, which will reduce the overcollateralization of those warehouse
credit
facilities and possibly reduce the amount of cash flows available to us.
If We Lose Servicing Rights on Our Portfolio of Automobile Contracts,
Our Results of Operations Would Be Impaired.
We are entitled to receive
servicing fees only while we act as servicer under the applicable sale and servicing agreements governing our warehouse credit
facilities
and securitizations. Under such agreements, we may be terminated as servicer upon the occurrence of certain events, including:
·
our failure generally to observe and perform our responsibilities and other covenants;
·
certain bankruptcy events; or
·
the occurrence of certain events of default under the documents governing the facilities.
The loss of our servicing
rights could materially and adversely affect our results of operations, financial condition and cash flows. Our results of
operations,
financial condition and cash flow, would be materially and adversely affected if we were to be terminated as servicer with respect to
a material
portion of our managed portfolio.
If We Lose Key Personnel, Our Results of Operations May Be Impaired.
Our senior management team
averages over 20 years of service with us. Our future operating results depend in significant part upon the continued service
of
our key senior management personnel, none of whom is bound by an employment agreement. Our future operating results also depend in part
upon our
ability to attract and retain qualified management, technical, sales and support personnel for our operations. Competition for
such personnel is intense. We
cannot assure you that we will be successful in attracting or retaining such personnel. Conversely, adverse
general economic conditions may have had a
countervailing effect. The loss of any key employee, the failure of any key employee to perform
in his or her current position or our inability to attract and
retain skilled employees, as needed, could materially and adversely affect
our results of operations, financial condition and cash flow.
If We Fail to Comply with Regulations, Our Results of Operations
May Be Impaired.
Failure to materially comply
with all laws and regulations applicable to us could materially and adversely affect our ability to operate our business. Our
business
is subject to numerous federal and state consumer protection laws and regulations, which, among other things:
·
require us to obtain and maintain certain licenses and qualifications;
·
limit the interest rates, fees and other charges we are allowed to charge;
·
limit or prescribe certain other terms of our automobile contracts;
·
require specific disclosures to our customers;
·
define our rights to repossess and sell collateral; and
·
maintain safeguards designed to protect the security and confidentiality of customer information.
Our industry is also at times
investigated by regulators and offices of state attorneys general, which could lead to enforcement actions, fines and penalties,
or the
assertion of private claims and lawsuits against us. The Consumer Financial Protection Bureau (“CFPB”) and the Federal Trade
Commission
(“FTC”) have the authority to investigate consumer complaints against us, to conduct inquiries at their own instance,
and to recommend enforcement
actions and seek monetary penalties. The FTC has conducted and concluded an inquiry into our practices, and
proposed remedial action against us in 2014,
to which we consented. The CFPB has adopted regulations that place us and other companies
similar to us under its supervision. A host of state and local
governmental agencies have jurisdiction over material portions of our business,
and might take action adverse to us. No assurance can be given as to
whether any of such hypothetical proceedings might materially and
adversely affect us.
23
If we fail to comply with
applicable laws and regulations, such failure could result in penalties, litigation losses and expenses, damage to our reputation,
or
the suspension or termination of our licenses to conduct business, which would materially adversely affect our results of operations,
financial condition
and stock price. In addition, new federal and state laws or regulations or changes in the ways that existing rules
or laws are interpreted or enforced could
limit our activities in the future or significantly increase the cost of compliance. Furthermore,
judges or regulatory bodies could interpret current rules or
laws differently than the way we do, leading to such adverse consequences
as described above. The resolution of such matters may require considerable
time and expense, and if not resolved in our favor, may result
in fines or damages, and possibly an adverse effect on our financial condition.
We believe that we are in
compliance in all material respects with all such laws and regulations, and that such laws and regulations have had no material
adverse
effect on our ability to operate our business. However, we may be materially and adversely affected if we fail to comply with:
·
applicable laws and regulations;
·
changes in existing laws or regulations;
·
changes in the interpretation of existing laws or regulations; or
·
any additional laws or regulations that may be enacted in the future.
Changes in Law and Regulations May Have
an Adverse Effect on Our Business.
Existing law, regulations and
interpretations may change in ways that increase our costs of compliance.
In addition to direct costs,
such compliance requires forms, processes, procedures, controls and in the infrastructure to support these requirements.
Compliance may
create operational constraints and place limits on pricing. Laws in the financial services industry are designed primarily for the protection
of consumers. The failure to comply could result in significant statutory civil and criminal penalties, monetary damages, attorneys’
fees and costs, possible
revocation of licenses and damage to reputation, brand and valued customer relationships.
At this time, it is difficult
to predict the extent to which new regulations or amendments will affect our business. However, compliance with these new
laws and regulations
may result in additional cost and expenses, which may adversely affect our results of operations, financial condition or liquidity. For
example, as governments, investors and other stakeholders face pressures to accelerate actions to address climate change and other environmental,
governance and social topics, governments may implement regulations or investors and other stakeholders may adopt new investment policies
or otherwise
impose new expectations that cause significant shifts in disclosure, commerce and consumption behaviors, any or all of which
may have negative effects on
our business and/or reputation.
Risk Retention Rules May Limit Our Liquidity
and Increase Our Capital Requirements.
Securitizations of automobile
receivables executed after December 2016 have been and will be subject to risk retention requirements, which generally
require that sponsors
of asset-backed securities (ABS), such as us, retain not less than five percent of the credit risk of the assets collateralizing the ABS
issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain. Similar
but not identical risk
retention requirements are applicable after December 2018 to securitization transactions where purchasers of the
ABS have sufficient contacts with the
European Union. Because the rules place an upper limit on the degree to which we may use financial
leverage, our securitization structures may require
more capital of us, or may release less cash to us, than might be the case in the
absence of such rules.
24
If We Experience Unfavorable Litigation Results, Our Results of
Operations May Be Impaired.
We operate in a litigious
society and currently are, and may in the future be, named as defendants in litigation, including individual and class action
lawsuits
under consumer credit, consumer protection, theft, privacy, data security, automated dialing equipment, debt collections and other laws.
Many of
these cases present novel issues on which there is no clear legal precedent, which increases the difficulty in predicting both
the potential outcomes and
costs of defending these cases. We are subject to regulatory examinations, investigations, inquiries, litigation,
and other actions by licensing authorities,
state attorneys general, the FTC, the CFPB and other governmental bodies relating to our activities.
The litigation and regulatory actions to which we are or
may become subject involve or may involve potential compensatory or punitive
damage claims, fines, sanctions or injunctive relief that, if granted, could
require us to pay damages or make other expenditures in amounts
that could have a material adverse effect on our financial position and our results of
operations. We have recorded loss contingencies
in our financial statements only for matters on which losses are probable and can be reasonably estimated.
Our assessments of these matters
involve significant judgments, and may change from time to time. Actual losses incurred by us in connection with
judgments or settlements
of these matters may be more than our associated reserves. Furthermore, defending lawsuits and responding to governmental
inquiries or
investigations, regardless of their merit, could be costly and divert management’s attention from the operation of our business.
Unfavorable
outcomes in any such current or future proceedings could materially and adversely affect our results of operations, financial
conditions and cash flows. As
a consumer finance company, we are subject to various consumer claims and litigation seeking damages and
statutory penalties based upon, among other
things, disclosure inaccuracies and wrongful repossession, which could take the form of a
plaintiff’s class action complaint. We, as the assignee of finance
contracts originated by dealers, may also be named as a co-defendant
in lawsuits filed by consumers principally against dealers. We are also subject to other
litigation common to the automobile industry
and to businesses in general. The damages and penalties claimed by consumers and others in these types of
matters can be substantial.
The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages.
While we intend to vigorously
defend ourselves against such proceedings, there is a chance that our results of operations, financial condition and cash
flows could
be materially and adversely affected by unfavorable outcomes.
Negative Publicity Associated with Litigation, Governmental Investigations,
Regulatory Actions, and other Public Statements Could Damage Our
Reputation.
From time to time there are
negative news stories about the “sub-prime” credit industry. Such stories may follow the announcements of litigation or
regulatory
actions involving us or others in our industry. Negative publicity about our alleged or actual practices or about our industry generally
could
adversely affect our stock price and our ability to retain and attract employees, which could in turn negatively affect our results
of operations or cashflows.
If We Experience Problems with Our Originations, Accounting or
Collection Systems, Our Results of Operations May Be Impaired.
We are dependent on our receivables
originations, accounting and collection systems to service our portfolio of automobile contracts. We also rely on
third-party service
providers to facilitate certain aspects of our business. Our systems and the systems of our third-party service providers are vulnerable
to
damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, cyberattacks, computer viruses
and other events. A
significant number of our systems are not redundant, and our disaster recovery planning is not sufficient for every
eventuality. Our systems are also subject
to break-ins, sabotage and intentional acts of vandalism by internal employees and contractors
as well as third parties. Our third-party service providers
face similar threats. Despite any precautions we may take, such problems could
result in interruptions in our services, litigation, and regulatory exposure,
which could harm our reputation and financial condition.
We do not carry business interruption insurance sufficient to compensate us for losses that may
result from interruptions in our service
as a result of system failures. Such systems problems could materially and adversely affect our results of operations,
financial conditions
and cash flows.
25
A Breach in the Security of Our Systems Could Result in the Disclosure
of Confidential Information, Subject us to Liability.
We hold in our systems confidential
financial and other personal data with respect to our customers, which may be of value to identity thieves and others
if revealed. Although
we endeavor to protect the security of our computer systems and the confidentiality of customer information entrusted to us, there can
be no assurance that our security measures will provide adequate security.
It is possible that we may
not be able to anticipate, detect or recognize threats to our systems or to implement effective preventive measures against all
security
breaches, especially because the techniques used change frequently, or are not recognized until launched, because of the rising use of
artificial
intelligence, and because cyberattacks can originate from a wide variety of sources, including third parties outside the Company
such as persons who are
associated with external service providers or who are or may be involved in organized crime or linked to terrorist
organizations.
Such persons may also attempt
to fraudulently induce employees or other users of our systems to disclose sensitive information in order to gain access to
our data or
that of our customers.
These risks may increase in
the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our use of
web or cloud-based
products and applications.
A successful penetration of
the security of our systems could cause serious negative consequences, including disruption of our operations,
misappropriation of confidential
information, or damage to our computers or systems, and could result in violations of applicable privacy and other laws,
financial loss
to us or to our customers, customer dissatisfaction, significant litigation and regulatory exposure and harm to our reputation, any or
all of
which could have a material adverse effect on us.
Because We Are Subject to Many Restrictions in Our Existing Credit
Facilities and Securitization Transactions, Our Ability to Pay Dividends or
Engage in Specified Transactions May Be Impaired.
The terms of our existing
credit facilities, term securitizations and our other outstanding debt impose significant operating and financial restrictions on us
and
our subsidiaries and require us to meet certain financial tests. These restrictions may have an adverse effect on our business activities,
results of
operations and financial condition. These restrictions may also significantly limit or prohibit us from engaging in certain
transactions, including the
following:
·
incurring or guaranteeing additional indebtedness;
·
making capital expenditures in excess of agreed upon amounts;
·
paying dividends or other distributions to our shareholders or redeeming, repurchasing or retiring our capital stock or subordinated
obligations;
·
making investments;
·
creating or permitting liens on our assets or the assets of our subsidiaries;
·
issuing or selling capital stock of our subsidiaries;
·
transferring or selling our assets;
·
engaging in mergers or consolidations;
·
permitting a change of control of our company;
·
liquidating, winding up or dissolving our company;
·
changing our name or the nature of our business, or the names or nature of the business of our subsidiaries; and
·
engaging in transactions with our affiliates outside the normal course of business.
26
These restrictions may limit
our ability to obtain additional sources of capital, which may limit our ability to generate earnings. In addition, the failure to
comply
with any of the covenants of one or more of our debt agreements could cause a default under other debt agreements that may be outstanding
from
time to time. A default, if not waived, could result in acceleration of the related indebtedness, in which case such debt would become
immediately due and
payable. A continuing default or acceleration of one or more of our credit facilities or any other debt agreement,
would likely cause a default under other
debt agreements that otherwise would not be in default, in which case all such related indebtedness
could be accelerated. If this occurs, we may not be able
to repay our debt or borrow sufficient funds to refinance our indebtedness. Even
if any new financing is available, it may not be on terms that are
acceptable to us or it may not be sufficient to refinance all of our
indebtedness as it becomes due.
In addition, the transaction
documents for our securitizations restrict our securitization subsidiaries from declaring or making payment to us of (i) any
dividend
or other distribution on or in respect of any shares of their capital stock, or (ii) any payment on account of the purchase, redemption,
retirement or
acquisition of any option, warrant or other right to acquire shares of their capital stock unless (in each case) at the
time of such declaration or payment (and
after giving effect thereto) no amount payable under any transaction document with respect to
the related securitization is then due and owing, but unpaid.
These restrictions may limit our ability to receive distributions in respect
of the residual interests from our securitization facilities, which may limit our
ability to generate earnings.
Risks Related to Fair Value Accounting
Receivables we’ve
acquired since January 1, 2018 are accounted for based on the fair value method of accounting. The risks described below are risks
related
to fair value accounting.
If Actual Results for Our Receivables Materially Deviate from
Our Estimates, We May Be Required to Reduce the Interest Income We Recognize
for Some or All of the Receivables Measured at Fair Value.
We
recognize interest income on receivables accounted under fair value based on a level yield internal rate of return that we calculate based
the terms of
the receivables and our estimates at the time of acquisition of the future performance of those receivables. Such estimates
include the timing and severity of
future credit losses and the rates of amortization and of prepayments. If actual credit losses were
to exceed our estimates, or if the actual amortization and
prepayments of the receivables were to be materially different from our estimates,
we might be required to change our estimates, which could result in a
reduced interest income for those receivables in subsequent periods.
If Actual Results for Our Receivables Materially Deviate from
Our Estimates, We May Be Required to Reduce the Recorded Value for Some or
All of the Receivables Measured at Fair Value.
We
re-evaluate the recorded value of receivables measured at fair value at the close of each quarter. If the re-evaluation were to yield
a value materially
different from the previous recorded value, an adjustment would be required. If actual credit losses were to exceed
our estimates, or if the actual
amortization and prepayments of the receivables were to be materially different from our estimates, we
might be required to adjust the recorded value of
such receivables. A downward readjustment in recorded value would correspondingly reduce
our income and book value for and as of the end of the related
quarter.
If Actual Market Conditions Indicate That the Amount a Market
Participant Would Pay for Our Receivables is Materially Lower Than Our
Recorded Value, We May Be Required to Reduce the Recorded Value
for Some or All of the Receivables Measured at Fair Value.
The
fair value of an asset is, by definition, the exchange price in an orderly transaction between market participants. Receivables such as
ours are not
regularly traded on exchanges where we can observe prices for exchanges of similar assets. We may therefore rely on estimates
of what a market
participant would pay for our receivables. If such estimated value were to be materially different from our recorded
value, we might be required to adjust
the recorded value of our receivables. A downward readjustment in recorded value would correspondingly
reduce our income and book value.
27
Risks Related to General Factors
If The Economy of All or Certain Regions of the United States
Falls into Recession, Our Results of Operations May Be Impaired.
Our business is directly related
to sales of new and used automobiles, which are sensitive to employment rates, prevailing interest rates and other
domestic economic conditions.
Delinquencies, repossessions and losses generally increase during economic slowdowns or recessions. Because of our focus
on sub-prime
customers, the actual rates of delinquencies, repossessions and losses on our automobile contracts could be higher under adverse economic
conditions than those experienced in the automobile finance industry in general, particularly in the states of California, Texas, Ohio,
Illinois and Florida,
states in which our automobile contracts are geographically concentrated. Any sustained period of economic slowdown
or recession could adversely affect
our ability to acquire suitable automobile contracts, or to securitize pools of such automobile contracts.
The timing of any economic changes is uncertain,
and weakness in the economy could have an adverse effect on our business and that of
the dealers from which we purchase automobile contracts and result
in reductions in our revenues or the cash flows available to us.
A Pandemic or Other Public Health Emergency Could Have Adverse Effects
The extent to which obligors on our automobile
contracts may be adversely affected by a pandemic or other public health emergency, by loss of
employment, and by related efforts of governments
to slow the spread of a disease outbreak throughout the nation and world cannot be predicted. These
occurrences could have a material
adverse effect on the ability of obligors to make timely payments to us.
Depending on the extent to which a pandemic or
other public health emergency adversely affects the United States economy, it may also have the effect
of heightening many of the other
risks described in this “Risk Factors” section, such as those related to our business or operations, the ability or willingness
of our customers to make timely payments, and risks of geographic concentrations.
Our Results of Operations May Be Impaired as a Result of Natural
Disasters.
Our automobile contracts are
geographically concentrated in the states of California, Florida, and Texas. Such states may be particularly susceptible to
natural disasters:
earthquake in the case of California, and hurricanes and flooding in Florida and Texas. Natural disasters, in those states or others,
could
cause a material number of our vehicle purchasers to lose their jobs, or could damage or destroy vehicles that secure our automobile
contracts. In either
case, such events could result in our receiving reduced collections on our automobile contracts, and could thus result
in reductions in our revenues or the
cash flows available to us.
Effect of Social, Economic and Other Factors on Losses.
The ability of our customers to make payments
on automobile contracts will be affected by a variety of social and economic factors, most notably the
extent to which our customers remain
gainfully employed. Other economic factors include interest rates, general unemployment levels, the rate of inflation,
adjustments in
monthly mortgage payments and consumer perceptions of economic conditions generally and the effect of any government stimulus
programs
and consumer protection/payment relief efforts. Social factors include changes in consumer confidence levels, consumer attitudes toward
bankruptcy and the repayment of indebtedness and consumer perceptions of political events and shifts, which may be affected by the pandemic.
We are
generally unable to determine whether or to what extent economic or social factors will affect the performance of our portfolio
of automobile contracts, but
caution that a recession or depression in local, regional or national economies would be expected to increase
delinquencies and losses, which would
adversely affect our financial condition and results of operations.
28
If an Increase in Interest Rates Results in a Decrease in Our
Cash Flows from Excess Spread, Our Results of Operations May Be Impaired.
Our profitability is largely
determined by the difference, or "spread," between the effective interest rate we receive on the automobile contracts that we
acquire and the interest rates payable under warehouse credit facilities and on the asset-backed securities issued in our securitizations.
In the past,
disruptions in the market for asset-backed securities resulted in an increase in the interest rates we paid on asset-backed
securities. Should similar
disruptions take place in the future, we may pay higher interest rates on asset-backed securities issued in
the future. Although we have the ability to
partially offset increases in our cost of funds by increasing fees we charge to dealers when
purchasing automobile contracts, or by demanding higher
interest rates on automobile contracts we purchase, there is no assurance that
such actions will materially offset increases in interest we pay to finance our
managed portfolio. As a result, an increase in prevailing
interest rates could cause us to receive less excess spread cash flows on automobile contracts, and
thus could adversely affect our earnings
and cash flows. See “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”
Risks Related to Our Common Stock
Our Common Stock Is Thinly-Traded.
Our stock is thinly-traded,
which means investors will have limited opportunities to sell their shares of common stock in the open market. Limited trading
of our
common stock also contributes to more volatile price fluctuations. Because there historically has been low trading volume in our common
stock,
there can be no assurance that our stock price will not decline as additional shares are sold in the public market. As of December
31, 2024, our directors
and executive officers collectively owned 13.0 million shares of our common stock, or approximately 61% of total
shares outstanding.
We Do Not Intend to Pay Dividends on Our Common Stock.
We have never declared or
paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any
dividends
in the foreseeable future.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 1C. Cybersecurity
Risk Management and Strategy
Our information security policies
and processes are designed to assess, identify, and manage material risks from cybersecurity threats, including
protecting the security
and confidentiality of consumer information. We use various tools and strategies to identify and assess material risks from
cybersecurity
threats. We conduct ongoing cybersecurity gap analysis and risks assessments, vulnerability testing, and penetration testing. The
cybersecurity
risk assessments, vulnerability testing, and penetration testing are designed to identify internal and external risks to the security
of our
information systems.
We also actively monitor our
systems and connections for abnormal activity, including malicious phishing attempts. This includes the use of intrusion
detection systems,
log analysis, and real-time monitoring of critical systems. We have an incident reporting portal available to all employees to submit
any
issues they suspect may pose a risk to our information technology (“IT”) systems and security.
29
We use the results of the
above-described tools and strategies to assess the sufficiency of the safeguards in place to manage material risks from
cybersecurity
threats, to enhance such safeguards, or implement new safeguards, as necessary. We have several safeguards in place to manage material
risks
from cybersecurity threats. We have security awareness training for our employees, including ongoing simulated phishing email campaigns.
We utilize
firewalls, anti-virus software, encryption on stored data and communication channels, secure web portals for remote access
to our systems, password
security, and two-factor authentication. We continuously update our software and security patches. We restrict
inbound email attachments, certain websites,
and cloud-based drives. We monitor and restrict information transfers to and from unauthorized
IP addresses. We also have physical security safeguards for
our locations and data centers. We back up our systems and data regularly.
In addition, we have a disaster recovery program designed to help us respond to
and recover from an interruption of critical IT services.
As part of our overall risk
management processes, we engage in a multi-departmental strategy to assess and incorporate the above processes and involve
other departments
as needed, including IT, Systems, Risk Management, and Legal. We engage assessors, consultants, auditors, or other third parties to
assist
with some of the processes above, including conducting risk and gap assessments, IT audits and consulting, system monitoring, vulnerability
testing,
and penetration testing. To oversee and identify material cybersecurity risks associated with our use of third-party service
providers, we limit data access
for third-party service providers to only the data that is necessary for the given function and conduct
due diligence on our service providers including their
information security practices. We require our service providers to maintain appropriate
safeguards for the security of consumer information.
We cannot assure that our
information security policies and processes will be effective in protecting us from cybersecurity threats. Risks from
cybersecurity threats
have not materially affected us. However, if we experience a material cybersecurity incident it is reasonably likely to materially affect
us, including our business strategy, results of operations, or financial condition. For more information, please see Item 1A. Risk Factors
of this Report,
including the risk factors titled “If We Experience Problems with Our Originations, Accounting or Collection Systems,
Our Results of Operations May Be
Impaired” and “A Breach in the Security of Our Systems Could Result in the Disclosure of
Confidential Information, or Subject us to Liability.”
Governance
The Senior Vice President
of Systems and the Vice President of IT are responsible for assessing and managing material risks from cybersecurity threats
through the
implementation of the Company’s information security policies and processes. The Senior Vice President of Systems has over 20 years
in IT
and cybersecurity experience with the Company. The Vice of President IT has over 15 years in IT and cybersecurity experience with
the Company and has
earned industry certifications in IT. The Senior Vice President of Systems and the Vice President of IT report to
the Executive Vice President of Risk,
Systems, and IT.
The Senior Vice President
of Systems and the Vice President of IT work directly with the internal and external IT personnel to implement our information
security
policies and processes, including those described in the “Risk Management and Strategy” above. They are informed about and
monitor the
prevention, detection, mitigation, and remediation or prevention of cybersecurity incidents through those processes. They
regularly report on the status of
these matters to the Executive Vice President of Risk, Systems, and IT.
The Board, as a whole, is
responsible for risk oversight, including cybersecurity risk. As part of this oversight, the Executive Vice President of Risk,
Systems,
and IT reports to the Board annually on the status of and developments in the Company’s information security policies and processes.
Item 2. Properties
Our principal executive offices
are located in Las Vegas, Nevada, where we currently lease approximately 45,000 square feet of general office space from
an unaffiliated
lessor. The annual base rent is approximately $1.6 million through 2029.
Our operating headquarters
are located in Irvine, California, where we currently lease approximately 69,000 square feet of general office space from an
unaffiliated
lessor. The annual base rent is approximately $2.5 million through 2029.
30
The remaining three regional
servicing centers occupy a total of approximately 65,000 square feet of leased space in Chesapeake, Virginia; Maitland,
Florida; and Oak
Brook, Illinois. The termination dates of such leases range from 2025 to 2031. The annual base rent for these facilities total approximately
$1.4 million.
Item 3. Legal Proceedings
Consumer Litigation.
We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing
and
discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of receivables, and
such lawsuits
sometimes allege that resolution as a class action is appropriate. For the most part, we have legal and factual defenses
to consumer claims, which we
routinely contest or settle (for immaterial amounts) depending on the particular circumstances of each case.
Following our filing of a
complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim on
October 16,
2019 alleging that our deficiency notices were not compliant with Connecticut law, and seeking relief on behalf of a class of Connecticut
obligors whose vehicles we had repossessed. The complaint seeks primarily damages, injunctive relief, waiver of contract deficiencies,
and attorney fees
and interest. The defendant’s contract provided for resolution of disputes exclusively by arbitration, and exclusively
on an individual basis, not a class
basis. Nevertheless, in August 2021, the court denied our motion to compel arbitration, without opinion.
In April 2024 a motion for certification of a class
was filed. Prior to the motion being ruled upon, summary judgment was granted in our
favor, disposing of the claims against CPS. An appeal of the
summary judgment ruling was filed on October 25, 2024 and a cross appeal
of the denial of the motion to compel arbitration was filed on October 31,
2024.
Wage and Hour Claim.
On September 24, 2018, a former employee filed a lawsuit against us in the Superior Court of Orange County, California, alleging
that
we incorrectly classified our sales representatives as outside salespersons exempt from overtime wages, mandatory break periods and certain
other
employee protective provisions of California and federal law. The complaint sought injunctive relief, an award of unpaid wages,
liquidated damages, and
attorney fees and interest. The plaintiff purported to act on behalf of a class of similarly situated employees
and ex-employees. We believe that our
compensation practices with respect to our sales representatives are compliant with applicable law.
In August 2023, the parties settled by agreement the
claims of the plaintiff and a California settlement class for $1.1 million. The settlement
was approved by the court on October 9, 2024. Under the
settlement, the Company paid, after September 30, 2024, $1.1 million to the settlement
administrator.
In General. There can
be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most
recently as
of December 31, 2024, our best estimate of probable incurred losses for legal contingencies, including the matters identified above. The
amount
of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available
to us, we believe that the
range of reasonably possible losses for the legal proceedings and contingencies we face, including those described
or identified above, as of December 31,
2024 does not exceed $3.2 million.
Accordingly, we believe that
the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our
consolidated financial
condition. We note, however, that in light of the uncertainties inherent in contested proceedings there can be no assurance that the
ultimate
resolution of these matters will not be material to our operating results for a particular period, depending on, among other factors,
the size of the
loss or liability imposed and the level of our income for that period.
Item 4. Mine Safety Disclosures
Not applicable.
31
Information about Our Executive Officers
Set forth below are the names, ages, offices held, tenure, and certain
biographical information of each of our executive officers as of the filing of this
report:
Charles E. Bradley, Jr.,
65, has been our Chief Executive Officer since January 1992, a director since our formation in March 1991, and was elected
Chairman of
the Board of Directors in July 2001. Prior to that he was our President from March 1991 to December 2022. From April 1989 to November
1990, he served as Chief Operating Officer of Barnard and Company, a private investment firm. From September 1987 to March 1989, Mr. Bradley,
Jr. was
an associate of The Harding Group, a private investment banking firm. Mr. Bradley does not currently serve on the board of
directors of any other publicly-
traded companies.
Michael T. Lavin,
52, has been President since December 2022, Chief Operating Officer since February 2019, and our Chief Legal Officer since March
2014.
Prior to that, he was our Executive Vice President since March 2014, Senior Vice President – General Counsel since March 2013,
Senior Vice
President and Corporate Counsel since May 2009 and our Vice President- Legal since joining the Company in November of 2001.
Mr. Lavin was
previously engaged as an associate at a large law firm and a spin off start up law firm.
Danny Bharwani, 57,
has been Chief Financial Officer since September 2022 and Executive Vice President – Finance since December 2022. Previously,
he
was our Senior Vice President – Finance from April 2016 to December 2022 and Vice President – Finance from June 2002 to April
2016. He joined us
as Assistant Controller in August 1997. Mr. Bharwani was previously employed as Assistant Controller at The Todd-AO
Corporation, from 1989 to 1997.
Christopher Terry,
57, has been Executive Vice President of Risk Management, Systems, and IT since December 2022. Prior to that he was our Senior
Vice President
of Risk Management, Systems, and IT from October 2018 to December 2022, and Senior Vice President of Risk Management from May
2017 to
October 2018. Prior to that, he was our Senior Vice President of Servicing from May 2005 to August 2013. He was Senior Vice President
of Asset
Recovery from August 2013 to May 2017 and from January 2003 to May 2005. He joined us in January 1995 as a loan officer, held
a series of successively
more responsible positions, and was promoted to Vice President - Asset Recovery in June 1999. Mr. Terry
was previously a branch manager with Norwest
Financial from 1990 to October 1994.
Teri L. Robinson, 62,
has been Executive Vice President of Sales and Originations since December 2022. Prior to that she was Senior Vice President of
Sales
and Originations from June 2020 to December 2022 and Senior Vice President of Originations from April 2007 to June 2020. Prior to that,
she held
the position of Vice President of Originations since August 1998. She joined the Company in June 1991 as an Operations Specialist,
and held a series of
successively more responsible positions. Previously, Ms. Robinson held an administrative position at Greco &
Associates.
Michele Baumeister,
58, has been Senior Vice President of Originations since June 2023. Prior to that she was the Vice President of Originations from
March
2017 to June 2023. She started with the Company in March 1997 as a Loan Processor and held a series of more senior positions within the
Originations Department. Ms. Baumeister was previously a personal banker with Western Financial.
April Crisp, 38, has been the Senior Vice
President of Compliance and Regulatory Affairs since June 2023. Prior to that, she was the Vice President of
Legal from August 2016 to
June 2023, and the Assistant Vice President of Legal from November 2013 to August 2016. Ms. Crisp is a California barred
attorney.
Charles Gonel, 44,
has been Senior Vice President of Servicing since June 2023. Prior to that he was the Vice President of Collections from March 2015
to
June 2023. He joined the Company in March 2008 as a Collections Analyst and transferred into the Risk Management Department in 2010
where he
held a sequence of increasingly more responsible positions. Prior to joining CPS, he was a Quality Assurance Analyst with AT&T
Wireless.
32
John P. Harton, 60,
has been Senior Vice President – Business Development since June 2020. Prior to that he was Senior Vice President – Program
Development from March 2019 to June 2020, Senior Vice President – Marketing from March 2014 to March 2019 , and Vice President –
Marketing from
April 2010 to March 2014. He joined the Company in April 1996 as a loan officer, held a series of successively more responsible
positions, and was
promoted to Vice President - Originations in June 2007. Mr. Harton was previously a branch manager with American General
Finance from 1990 to March
1996.
Catrina Ralston, 49,
has been Senior Vice President of Human Resources since December 2022. Prior to that, she was Vice President - Human Resources
since March
2016. She joined the Company in 1997 as an Operations Clerk and transferred into the Human Resources Department in 2001 where she held
a series of successively more responsible positions. Prior to joining CPS, Ms. Ralston worked as a customer service representative for
the City of Virginia
Beach Parks & Recreation Department.
Lisette Reynoso, 37,
has been Senior Vice President and General Counsel since June 2023. Prior to that she was the Vice President of Legal from January
2020
to June 2023, the Assistant Vice President of Legal/Corporate Counsel from December 2018 to January 2020, and Corporate Counsel from December
2015 to December 2018. Ms. Reynoso is a California barred attorney.
Susan Ryan, 53, has
been Senior Vice President of Servicing since June 2023. Prior to that she was the Vice President of Collections from March 2015 to
June
2023. She started with the Company in 2003 as a Deficiency Supervisor where she took on more responsibility over time. Prior to joining
CPS, she
was a Deficiency Supervisor with The Finance Company.
Steve Schween, 62,
has been Senior Vice President of Systems since December 2022. Previously, he was Vice President of Systems from February 2014.
He joined
in the Company in 2000 as a Systems Analyst and took on more responsibility over time. Mr. Schween was previously a Systems Analyst with
Jeunique International.
33
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s Common Stock is traded on the
Nasdaq Global Market, under the symbol "CPSS."
As of January 1, 2025, there were 28 holders of
record of the Company’s Common Stock.
To date, we have not declared
or paid any dividends on our Common Stock. The payment of future dividends, if any, on our Common Stock is within the
discretion of the
Board of Directors and will depend upon our income, capital requirements and financial condition, and other relevant factors. The
instruments
governing our outstanding debt place certain restrictions on the payment of dividends. We do not intend to declare any dividends on our
Common Stock in the foreseeable future, but instead intend to retain any cash flow for use in our operations.
Issuer Purchases of Equity Securities in the
Fourth Quarter
Total Number of
Average
Total Number of
Shares Purchased
as Part of Publicly
Approximate Dollar
Value of Shares that
May Yet be
Purchased
Shares
Price Paid
Announced Plans or
Under the Plans or
Period(1)
Purchased
per Share
Programs(2)
Programs
October 2024
–
$
–
–
$
6,259,660
November 2024
–
–
–
6,259,660
December 2024
–
–
–
6,259,660
Total
–
$
–
–
(1) Each monthly period is the calendar month.
(2) Through December 31, 2024, our board of directors had authorized the purchase of up to $123.2 million
of our outstanding securities, which
program was first announced in our annual report for the year 2002, filed on March 26, 2003.
All purchases described in the table above were
under the plan announced in March 2003, which has no fixed expiration date.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion
of our financial condition and results of operations for the years ended December 31, 2024 and 2023 should be read in
conjunction with
our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K.
Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans,
objectives,
expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a
result of a number of factors. We use words such as anticipate, estimate, plan, project, continuing, ongoing,
expect, believe, intend, may, will, should, could,
and similar expressions to identify forward-looking statements. See "Cautionary
Note Regarding Forward-Looking Statements."
34
Discussions of 2022 items
and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s
Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s Annual Report on Form 10-K for the
fiscal year
ended December 31, 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 have (i) originated vehicle
purchase money loans by lending directly to consumers, (ii) acquired installment
purchase contracts in four merger and acquisition transactions, and (iii)
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 December 31, 2024, we have purchased a total of approximately
$23.0 billion
of automobile contracts from dealers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers
and
acquisitions in 2002, 2003, 2004 and 2011. Contract purchase volumes and managed portfolio levels for the five years ended December
31, 2024 are shown
in the table below. Managed portfolio comprises both contracts we owned and those we were servicing for third parties.
Contract Purchases and Outstanding Managed Portfolio
$ in thousands
Year
Contracts
Purchased in Period
Managed Portfolio
at Period End
2020
742,584
2,174,972
2021
1,146,321
2,249,069
2022
1,854,385
3,001,308
2023
1,357,752
3,194,623
2024
1,681,941
3,665,725
Our principal executive offices
are in Las Vegas, Nevada. Most of our operational and administrative functions take place in Irvine, California. Credit and
underwriting
functions are performed primarily in our California branch with certain of these functions also performed in our Florida and Nevada branches.
We service our automobile contracts from our California, Nevada, Virginia, Florida, and Illinois branches.
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.
35
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 before
2018,
we also periodically record as expense a provision for credit losses on the contracts; 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.
Since 1994 we have conducted
103 term securitizations of automobile contracts that we originated under our regular programs. As of December 31, 2024,
17 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.
Our recent history of term securitizations is summarized
in the table below:
Recent Asset-Backed Securitizations
$ in thousands
Period
Number of Term
Securitizations
Amount of
Receivables
2018
4
883,452
2019
4
1,014,124
2020
3
741,867
2021
4
1,145,002
2022
4
1,537,383
2023
4
1,352,114
2024
4
1,533,854
Generally, prior to a securitization
transaction we fund our automobile contract acquisitions primarily with proceeds from warehouse credit facilities. Our
current short-term
funding capacity is $535 million, comprising 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 increased to $335 million in December 2024.
In November 2015, we entered
into another $100 million facility. In June 2022, we doubled the capacity for this facility from $100 million to $200
million. This facility
was most recently renewed in March 2024, extending the revolving period to March 2026, followed by an amortization period to
March 2028.
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.
36
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.
Critical Accounting Estimates
We believe that our accounting
policies related to (a) Finance Receivables at Fair Value, (b) Allowance for Finance Credit Losses, (c) Term
Securitizations, (d) Accrual
for Contingent Liabilities and (e) Income Taxes are the most critical to understanding and evaluating our reported financial
results.
Such policies are described below.
Finance Receivables Measured at Fair Value
Effective January 1, 2018,
we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance
receivable acquired
after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received
in
the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute
the internal rate of
return that results in the present value of those estimated cash receipts being equal to the purchase date fair value.
Thereafter, we recognize interest income
on such receivables on a level yield basis using that internal rate of return as the applicable
interest rate. Cash received with respect to such receivables is
applied first against such interest income, and then to reduce the recorded
value of the receivables.
We re-evaluate the fair value
of such receivables at the close of each measurement period. If the re-evaluation were to yield a value materially different
from the
recorded value, an adjustment, which we also refer to as a mark, would be required. Results for the years ended December 31, 2024 and
2023
include marks of $21.0 and $12.0 million, respectively, to the carrying value of the portion of the receivables portfolio accounted
for 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.
Anticipated credit losses are included in our
estimation of cash to be received with respect to receivables. In accordance with the fair value accounting
standards, credit losses are
included in our computation of the appropriate level yield, therefore we do not thereafter make periodic provision for credit
losses,
as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also, because we include anticipated
credit
losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable
to the receivables.
Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual
principal balance, we do not record
acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of
acquiring the receivables. Rather we recognize the costs of
acquisition as expenses in the period incurred.
Term Securitizations
Our term securitization structure has generally
been as follows:
We sell automobile contracts
we acquire to a wholly-owned special purpose subsidiary, which has been established for the limited purpose of buying and
reselling our
automobile contracts. The special-purpose subsidiary then transfers the same automobile contracts to another entity, typically a statutory
trust.
The trust issues interest-bearing asset-backed securities, in a principal amount equal to or less than the aggregate principal
balance of the automobile
contracts. We typically sell these automobile contracts to the trust at face value and without recourse, except
that representations and warranties similar to
those provided by the dealer to us are provided by us to the trust. One or more investors
purchase the asset-backed securities issued by the trust; the
proceeds from the sale of the asset-backed securities are then used to purchase
the automobile contracts from us. We may retain or sell subordinated asset-
backed securities issued by the trust or by a related entity.
37
We structure our securitizations
to include internal credit enhancement for the benefit the investors (i) in the form of an initial cash deposit to an account
("spread
account") held by the trust, (ii) in the form of overcollateralization
of the senior asset-backed securities, where the principal balance of the senior
asset-backed securities issued is less than the principal
balance of the automobile contracts, (iii) in the form of subordinated asset-backed securities, or (iv)
some combination of such internal
credit enhancements. The agreements governing the securitization transactions require that the initial level of internal
credit enhancement
be supplemented by a portion of collections from the automobile contracts until the level of internal credit enhancement reaches
specified
levels, which are then maintained. The specified levels are generally computed as a percentage of the principal amount remaining unpaid
under
the related automobile contracts. The specified levels at which the internal credit enhancement is to be maintained will vary depending
on the performance
of the portfolios of automobile contracts held by the trusts and on other conditions, and may also be varied by agreement
among us, our special purpose
subsidiary, the insurance company, if any, and the trustee. Such levels have increased and decreased from
time to time based on performance of the various
portfolios, and have also varied from one transaction to another. The agreements governing
the securitizations generally grant us the option to repurchase
the sold automobile contracts from the trust when the aggregate outstanding
balance of the automobile contracts has amortized to a specified percentage of
the initial aggregate balance.
Upon each transfer of automobile
contracts in a transaction structured as a secured financing for financial accounting purposes, we retain on our
consolidated balance
sheet the related automobile contracts as assets and record the asset-backed notes or loans issued in the transaction as indebtedness.
We receive periodic base servicing
fees for the servicing and collection of the automobile contracts. Under our securitization structures treated as secured
financings for
financial accounting purposes, such servicing fees are included in interest income from the automobile contracts. In addition, we are
entitled
to the cash flows from the trusts that represent collections on the automobile contracts in excess of the amounts required to
pay principal and interest on the
asset-backed securities, base servicing fees, and certain other fees and expenses (such as trustee and
custodial fees). Required principal payments on the
asset-backed notes are generally defined as the payments sufficient to keep the principal
balance of such notes equal to the aggregate principal balance of
the related automobile contracts (excluding those automobile contracts
that have been charged off), or a pre-determined percentage of such balance. Where
that percentage is less than 100%, the related securitization
agreements require accelerated payment of principal until the principal balance of the asset-
backed securities is reduced to the specified
percentage. Such accelerated principal payment is said to create overcollateralization of the asset-backed notes.
If the amount of cash required
for payment of fees, expenses, interest and principal on the senior asset-backed notes exceeds the amount collected during
the collection
period, the shortfall is withdrawn from the spread account, if any. If the cash collected during the period exceeds the amount necessary
for the
above allocations plus required principal payments on the subordinated asset-backed notes, and there is no shortfall in the related
spread account or the
required overcollateralization level, the excess is released to us. If the spread account and overcollateralization
is not at the required level, then the excess
cash collected is retained in the trust until the specified level is achieved. Although
spread account balances are held by the trusts on behalf of our special-
purpose subsidiaries as the owner of the residual interests (in
the case of securitization transactions structured as sales for financial accounting purposes) or
the trusts (in the case of securitization
transactions structured as secured financings for financial accounting purposes), we are restricted in use of the cash
in the spread accounts.
Cash held in the various spread accounts is invested in high quality, liquid investment securities, as specified in the securitization
agreements. The interest rate payable on the automobile contracts is significantly greater than the interest rate on the asset-backed
notes. As a result, the
residual interests described above historically have been a significant asset of ours.
In all of our term securitizations
and warehouse credit facilities, whether treated as secured financings or as sales, we have sold the automobile contracts
(through a subsidiary)
to the securitization entity. The difference between the two structures is that in securitizations that are treated as secured financings
we report the assets and liabilities of the securitization trust on our consolidated balance sheet. Under both structures, recourse to
us by holders of the asset-
backed securities and by the trust, for failure of the automobile contract obligors to make payments on a timely
basis, is limited to the automobile contracts
included in the securitizations or warehouse credit facilities, the spread accounts and
our retained interests in the respective trusts.
38
Accrual for Contingent Liabilities
We are routinely involved
in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued.
Our legal
counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it
is both
probable that a liability has been incurred and the amount of the loss can be reasonably determined.
We have recorded a liability
as of December 31, 2024, which represents our best estimate of probable incurred losses for legal contingencies at that date.
The amount
of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available to us,
we
believe that the range of reasonably possible losses for the legal proceedings and contingencies described or referenced above, as
of December 31, 2024
does not exceed $3.2 million.
Accordingly, we believe that
the ultimate resolution of such legal proceedings and contingencies, after taking into account our current litigation reserves,
should
not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the uncertainties inherent
in contested
proceedings, there can be no assurance that the ultimate resolution of these matters will not significantly exceed the reserves
we have accrued; as a result,
the outcome of a particular matter may be material to our operating results for a particular period, depending
on, among other factors, the size of the loss or
liability imposed and the level of our income for that period.
Income Taxes
We account for income taxes
under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected
future tax
consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are
determined
based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that
includes the enactment date.
Deferred tax assets are recognized
subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a
deferred tax
asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not
be realized.
In making such judgements, significant weight is given to evidence that can be objectively verified.
In determining the possible
future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of
taxable
temporary differences; and (b) forecasted future net earnings from operations. Based upon those considerations, we have concluded that
it is more
likely than not that the U.S. and state net operating loss carryforward periods provide enough time to utilize the deferred
tax assets pertaining to the existing
net operating loss carryforwards and any net operating loss that would be created by the reversal
of the future net deductions which have not yet been taken
on a tax return. Our estimates of taxable income are forward-looking statements,
and there can be no assurance that our estimates of such taxable income
will be correct. Factors discussed under "Risk Factors,"
and under the heading “Cautionary Note Regarding Forward-Looking Statements." may affect
whether such projections prove to
be correct.
We recognize interest and
penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements
of operations.
Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
39
Uncertainty of Capital Markets and General Economic Conditions
We depend upon the availability
of warehouse credit facilities and access to long-term financing through the issuance of asset-backed securities
collateralized by our
automobile contracts. Since 1994, we have completed 103 term securitizations of approximately $20.6 billion in contracts. 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 January 2025.
Financial Covenants
Certain of our securitization
transactions and our warehouse credit facilities contain various financial covenants requiring certain minimum financial
ratios and results.
Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition,
certain
securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors to declare a default
if a default
occurred under a different facility. As of December 31, 2024 we were in compliance with all such financial covenants.
Results of Operations
Comparison of Operating Results for the year ended December 31,
2024 with the year ended December 31, 2023
Revenues. During the year ended
December 31, 2024, our revenues were $393.5 million, an increase of $41.5 million, or 11.8%, from the prior year
revenues of $352.0 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 years ended December 31, 2024 and 2023 include fair value marks
of
$21.0 and $12.0 million, respectively, to the carrying value of the portion of the receivables portfolio accounted for 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. The fair value mark in the current
period also includes an increase in our estimates of cash
receipts from interest and fees compared to our estimates at the time of acquisition.
For the year ended December 31, 2024, 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 $21.0 million.
Interest income for the year
ended December 31, 2024 increased $34.7 million, or 10.6%, to $364.0 million from $329.2 million in the prior year. The
primary reason
for the increase in interest income is the 10.2% increase in the average balance of our loan portfolio over the prior year period. The
interest
yield on our total loan portfolio stayed the same at 11.3% in the prior year period to 11.3% in the current year period. The
table below shows the average
balance and interest yield of our loan portfolio for the years ended December 31, 2024 and 2023:
Year Ended December 31,
2024
2023
(Dollars in thousands)
Average
Interest
Average
Interest
Balance
Interest
Yield
Balance
Interest
Yield
Interest Earning Assets
Loan portfolio
$
3,209,988 $
363,962
11.3% $
2,913,571 $
329,219
11.3%
40
Other income was $8.5 million
for the year ended December 31, 2024 compared to $10.8 million for the year ended December 31, 2023. This 20.8%
decrease was primarily
driven by the decrease in origination and servicing fees we earned from third party receivables. These fees were $7.3 million for the
year ended December 31, 2024 and $9.3 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 interest rate applicable
to such receivables).
Interest expense is 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 and, more significantly, on the interest
rates on these facilities. Employee costs and general and
administrative expenses are incurred as applications and automobile contracts
are received, processed and serviced. Factors that affect margins and net
income include changes in the automobile and automobile finance
market environments, and macroeconomic factors such as interest rates and changes in
the unemployment level.
Employee costs include base
salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of
outstanding stock options,
and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally
fluctuate with
the level of applications and automobile contracts processed and serviced, which can be measured by our managed portfolio outstanding.
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
$366.1 million for the year ended December 31, 2024, compared to $290.9 million for the prior year, an increase of $75.2
million, or 25.8%.
The increase is primarily due to increases in interest expense, employee costs and the amount of reductions to provision for credit losses
expenses.
Employee costs increased by
$8.0 million or 9.1%, to $96.2 million during the year ended December 31, 2024, representing 26.3% of total operating
expenses. Employee
costs were $88.1 million in the prior year, or 30.3% of total operating expenses. The increase in employee costs can be attributed to
the increase in our outstanding managed portfolio.
The table below summarizes
our employees by category as well as contract purchases and units in our managed portfolio as of, and for the years ended,
December 31,
2024 and 2023:
December 31, 2024
December 31, 2023
Amount
Amount
($ in millions)
Contracts purchased (dollars)
$
1,681.9
$
1,357.8
Contracts purchased (units)
77,009
65,137
Managed portfolio outstanding (dollars)
$
3,491.0
$
2,970.1
Managed portfolio outstanding (units)
201,441
179,198
Number of Originations staff
195
185
Number of Sales staff
122
105
Number of Servicing staff
552
529
Number of other staff
64
71
Total number of employees
933
890
41
General and administrative expenses
include costs associated with purchasing and servicing our portfolio of finance receivables, including expenses for
facilities, credit
services, and telecommunications. General and administrative expenses were $54.7 million, an increase of $4.7 million, or 9.4%, compared
to the previous year and represented 14.9% of total operating expenses.
Interest expense for the year
ended December 31, 2024 increased by $44.6 million to $191.3 million, or 30.4%, compared to $146.6 million in the
previous year. Interest
expense represented 52.3% of total operating expenses in 2023.
Interest on securitization
trust debt increased by $39.6 million, or 32.6%, for the year ended December 31, 2024 compared to the prior year. The average
balance
of securitization trust debt increased 11.3% to $2,596.6 million for the year ended December 31, 2024 compared to $2,333.5 million for
the year
ended December 31, 2023. The annualized average rate on our securitization trust debt was 6.2% for the year ended December 31,
2024 compared to 5.2%
in the prior year period. 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
Period
Blended Cost of
Funds
January 2021
1.11%
April 2021
1.65%
July 2021
1.55%
October 2021
2.09%
January 2022
2.54%
April 2022
4.83%
July 2022
6.02%
October 2022
8.48%
January 2023
6.48%
April 2023
7.17%
July 2023
7.13%
October 2023
7.89%
January 2024
6.51%
April 2024
6.69%
June 2024
6.56%
September 2024
5.52%
Interest expense on warehouse
lines of credit was $19.3 million for the year ended December 31, 2024 compared to $19.2 million in the prior year. The
increase was due
to higher rates of our credit lines during 2024 compared to 2023. The average yield of our warehouse debt was 10.8% during 2024
compared
to 10.6% million in 2023.
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 residual interest financing was $8.7 million for the year ended December 31, 2024 compared to $4.2
million in the prior year.
42
Interest expense on our subordinated
renewable notes was $2.2 million in 2024 compared to $1.8 million in the prior year. The average balance of the
notes increased from $20.9
million in the prior year to $22.9 million for the year ended December 31, 2024. The average interest rate on our subordinated
notes was
9.8% during 2024 compared to 8.7% million in 2023.
The following table presents
the components of interest income and interest expense and a net interest yield analysis for the years ended December 31,
2024 and 2023:
Year Ended December 31,
2024
2023
(Dollars in thousands)
Annualized
Annualized
Average
Average
Average
Average
Balance (1)
Interest
Yield/Rate
Balance (1)
Interest
Yield/Rate
Interest Earning Assets
Loan portfolio
$
3,209,988 $
363,962
11.3% $
2,913,571 $
329,219
11.3%
Interest Bearing Liabilities
Warehouse lines of credit
$
178,518
19,292
10.8% $
181,742
19,192
10.6%
Residual interest financing
91,803
8,702
9.5%
50,000
4,199
8.4%
Securitization trust debt
2,596,554
161,014
6.2%
2,333,472
121,408
5.2%
Subordinated renewable notes
22,886
2,249
9.8%
20,936
1,832
8.7%
$
2,889,761
191,257
6.6% $
2,586,150
146,631
5.7%
Net interest income/spread
$
172,705
$
182,588
Net interest margin (3)
5.4%
6.3%
Ratio of average interest earning assets to
average interest bearing liabilities
111%
113%
(1) Average balances are based on month end balances except for
warehouse lines of credit, which are based on daily balances.
(2) Net of deferred fees and direct costs.
(3) Net interest income divided by average interest earning assets.
43
Year Ended December 31, 2024
Compared to December 31, 2023
Total Change
Change Due to
Volume
Change Due to Rate
Interest Earning Assets
(In thousands)
Loan portfolio
$
34,743
$
33,494
$
1,249
Interest Bearing Liabilities
Warehouse lines of credit
100
(340)
440
Residual interest financing
4,503
3,511
992
Securitization trust debt
39,606
13,688
25,918
Subordinated renewable notes
417
170
247
44,626
17,029
27,597
Net interest income/spread
$
(9,883)
$
16,465
$
(26,348)
For our receivables originated
prior to January 2018, we maintain an allowance for credit losses on automobile contracts held on our balance sheet,
which reflects our
estimates of probable credit losses that can be reasonably estimated. For the year ended December 31, 2024, we recorded a reduction to
provision for credit losses on finance receivables in the amount of $5.3 million. In the prior year period, we recorded similar reductions
to provision for
credit losses in the amount of $22.3 million. The adjustments recorded to reduce provisions for credit losses in both
periods were primarily due to better
than expected credit performance for these receivables. The allowance applies only to our finance
receivables originated through December 2017, which
we refer to as our legacy portfolio. The legacy portfolio balance decreased
from $27.6 million on December 31, 2023 to $5.4 million on December 31,
2024. 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 expense increased
by
$1.5 million to $22.8 million during the year ended December 31, 2024 and represented 6.2% of total operating expenses. We purchased
$1,681.9 million
of new contracts during the year ended December 31, 2024 compared to $1,357.8 million in the prior year period.
Occupancy expenses were $5.6
million in 2024 which is down from $6.4 million in 2023.
Depreciation and amortization
expenses increased to $862,000 compared to $847,000 in the prior year.
For the year ended December
31, 2024, we recorded income tax expense of $8.2 million, representing a 30% effective tax rate. In the prior period, our
income tax expense
was $15.6 million, also representing a 26% effective tax rate.
44
Liquidity and Capital Resources
Liquidity
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 years ended December 31, 2024, 2023 and 2022 was $233.8 million, $238.0 million and $215.9 million,
respectively. 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 interest accretion on fair value receivables.
Net cash used in investing
activities for the year ended December 31, 2024, 2023 and 2022 was $769.7 million, $359.5 million and $713.9 million,
respectively. Cash
used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables were $1,653.0
million
(includes acquisition fees paid), $1,251.0 million and $1,673.2 million in 2024, 2023 and 2022, respectively. Cash provided by investing
activities
primarily results from principal payments and other proceeds received on finance receivables.
Net cash provided by financing
activities were $547.9 million and $84.2 million in 2024 and 2023, respectively. Net cash used in financing activities for
the year ended
December 31, 2022 was $484.2 million. Cash used or 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.
We issued $1,453.9 million in new securitization trust debt in 2024 compared to $1,235.5 million in 2023 and $1,411.0
million in 2022. Repayments of
securitization debt were $1,124.1 million, $1,078.4 million and $1,060.1 million in 2024, 2023 and 2022,
respectively.
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.
45
We are and may in the future
be limited in our ability to purchase automobile contracts due to limits on our capital. As of December 31, 2024, we had
unrestricted
cash of $11.7 million and $124.1 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability
of
sufficient eligible collateral). As of December 31, 2024, we had approximately $23.0 million of such eligible collateral. During 2024,
we completed four
securitizations aggregating $1,453.9 million of notes sold. In January 2025, we completed another securitization with
$442.4 million of notes sold. Cash
proceeds from this securitization were used to pay down the outstanding balance on our two warehouse
credit facilities thus increasing the amounts
available for borrowing under these facilities. Our plans to manage our liquidity include
maintaining our rate of automobile contract purchases at a level
that matches our available capital, and, as appropriate, minimizing our
operating costs. If we are unable to complete such securitizations, we may be unable
to increase our rate of automobile contract purchases,
in which case our interest income and other portfolio related income could decrease.
Our liquidity will also be
affected by releases of cash from the trusts established with our securitizations. While the specific terms and mechanics of each
spread
account vary among transactions, our securitization agreements generally provide that we will receive excess cash flows, if any, only
if the amount
of credit enhancement has reached specified levels and the delinquency or net losses related to the automobile contracts
in the pool are below certain
predetermined levels. In the event delinquencies or net losses on the automobile contracts exceed such levels,
the terms of the securitization may require
increased credit enhancement to be accumulated for the particular pool. There can be no assurance
that collections from the related trusts will continue to
generate sufficient cash.
Our warehouse credit facilities
contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include
maintaining minimum
levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than
our
term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a
default if an event
of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be
accompanied by acceleration of such other
indebtedness. As of December 31, 2024, we were in compliance with all such financial covenants.
We currently have and will
continue to have a substantial amount of outstanding indebtedness. At December 31, 2024, we had approximately $3,130.9
million of debt
outstanding. Such debt consisted primarily of $2,594.4 million of securitization trust debt, and also included $410.9 million of warehouse
lines of credit, $99.2 million of residual interest financing debt and $26.5 million in subordinated renewable notes.
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.
Contractual Obligations
The following table summarizes
our material contractual obligations as of December 31, 2024 (dollars in thousands):
Payment Due by Period (1)
Less than
2 to 3
4 to 5
More than
Total
1 Year
Years
Years
5 Years
Long Term Debt (2)
$
26,489 $
8,445 $
5,284 $
6,911 $
5,849
Operating and Finance Leases
$
22,544 $
4,857 $
4,804 $
4,792 $
8,091
(1) Securitization trust debt, in the aggregate amount of $2,594.4 million as of December 31, 2024, is omitted
from this table because it becomes due
as and when the related receivables balance is reduced by payments and charge-offs. Expected payments,
which will depend on the performance
of such receivables, as to which there can be no assurance, are $987.8 million in 2025, $696.4 million
in 2026, $470.5 million in 2027, $275.1
million in 2028, $126.6 million in 2029, and $38.0 million in 2030.
(2) Long-term debt represents subordinated renewable notes.
46
We anticipate
repaying debt due in 2025 with a combination of cash flows from operations and the potential issuance of new debt.
Warehouse Credit Facilities
The terms on which credit
has been available to us for purchase of automobile contracts have varied in recent years, as shown in the following summary
of our warehouse
credit facilities:
Facility Established in
May 2012. On May 11, 2012, we entered into a $100 million one-year warehouse credit line with Citibank, N.A. The facility is
structured
to allow us to fund a portion of the purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary
Page Eight Funding, LLC. On July 15, 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity
from
$100 million to $200 million. In July 2024, we renewed our two-year revolving credit agreement to extend the revolving period to
July 2026 and to include
an amortization period through July 2027 for any receivables pledged to the facility at the end of the revolving
period. The Class A loans under the facility
generally accrue interest during the revolving period at a per annum rate equal to the CP
Cost of Funds Rate plus 2.85% per annum, with a minimum rate
of 3.60% per annum and during the amortization period at a per annum rate
equal to the CP Cost of Funds Rate plus 3.85% per annum, with a minimum
rate of 4.60% per annum. On November 1, 2024, we closed a revolving
credit agreement with Oaktree Capital Management, which was subordinate to the
credit agreement with Citibank, N.A., and with a $25 million
credit capacity. The addition of the subordinate Class B lender for this facility increased the
effective advances up to 95.00% of eligible
finance receivables. The Class B loans under the facility generally accrue interest during the revolving period at
a per annum rate equal
to the Adjusted Term SOFR plus 6.40% per annum, with a minimum rate of 7.15% per annum and during the amortization period at
a per annum
rate equal to the Adjusted Term SOFR plus 7.40% per annum, with a minimum rate of 8.15% per annum. In December 2024, we increased the
capacity from $225 million to $335 million. At December 31, 2024 there was $269.6 million outstanding under this facility.
Facility Established in
November 2015. On November 24, 2015, we entered into an additional $100 million one-year warehouse credit line with affiliates
of
Credit Suisse Group and Ares Management LP. The facility is structured to allow us to fund a portion of the purchase price of automobile
contracts by
borrowing from a credit facility to our consolidated subsidiary Page Nine Funding, LLC. The facility provides for effective
advances up to 85.25% of
eligible finance receivables. The loans under the facility accrue interest at a commercial paper rate plus 4.50%
per annum, with a minimum rate of 7.50%
per annum. On February 2, 2022, we renewed our two-year revolving credit agreement with Ares Agent
Services, L.P. In June 2022, we increased the
capacity of our credit agreement with Ares Agent Services, L.P. from $100 million to $200
million. This facility was most recently renewed in March 2024,
extending the revolving period to March 2026 followed by an amortization
period through March 2028 for any receivables pledged to the facility at the end
of the revolving period. At December 31, 2024 there was
$145.6 million outstanding under this facility.
Capital Resources
Securitization trust debt
is repaid from collections on the related receivables, and becomes due in accordance with its terms as the principal amount of the
related
receivables is reduced. Although the securitization trust debt also has alternative final maturity dates, those dates are significantly
later than the
dates at which repayment of the related receivables is anticipated, and at no time in our history have any of our sponsored
asset-backed securities reached
those alternative final maturities.
The acquisition of automobile
contracts for subsequent transfer in securitization transactions, and the need to fund spread accounts and initial
overcollateralization,
if any, 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
trusts and related spread accounts either release cash to us or capture cash from collections on securitized automobile contracts.
We plan to adjust our levels
of automobile contract purchases and the related capital requirements to match anticipated releases of cash
from the trusts and related spread accounts.
47
Capitalization
Over the period from January
1, 2022 through December 31, 2024 we have managed our capitalization by issuing and refinancing debt as summarized in
the following table:
Year Ended December 31,
2024
2023
2022
(Dollars in thousands)
RESIDUAL INTEREST FINANCING:
Beginning balance
$
49,875
$
49,623
$
53,682
Issuances
50,000
–
–
Payments
–
–
(4,311)
Capitalization of deferred financing costs
(970)
–
–
Amortization of deferred financing costs
271
252
252
Ending balance
$
99,176
$
49,875
$
49,623
SECURITIZATION TRUST DEBT:
Beginning balance
$
2,265,446
$
2,108,744
$
1,759,972
Issuances
1,492,017
1,235,534
1,411,018
Payments
(1,162,184)
(1,078,432)
(1,060,052)
Capitalization of deferred financing costs
(9,316)
(7,888)
(8,681)
Amortization of deferred financing costs
8,421
7,488
6,487
Ending balance
$
2,594,384
$
2,265,446
$
2,108,744
SUBORDINATED RENEWABLE NOTES:
Beginning balance
$
17,188
$
25,263
$
26,459
Issuances
12,589
586
4,004
Payments
(3,288)
(8,661)
(5,200)
Ending balance
$
26,489
$
17,188
$
25,263
Residual Interest Financing. On
May 16, 2018, we completed a $40.0 million securitization of residual interests from previously issued securitizations.
In this residual
interest financing transaction, qualified institutional buyers purchased $40.0 million of asset-backed notes secured by residual interests
in
thirteen CPS securitizations consecutively conducted from September 2013 through December 2016, and an 80% interest in a CPS affiliate
that owns the
residual interests in the four CPS securitizations conducted in 2017. The sold notes (“2018-1 Notes”), issued
by CPS Auto Securitization Trust 2018-1,
consist of a single class with a coupon of 8.595%. The notes were paid off in February 2022.
On June 30, 2021, we completed
a $50 million securitization of residual interests from other previously issued securitizations. In this residual interest
financing transaction,
qualified institutional buyers purchased $50.0 million of asset-backed notes secured by residual interests in eleven CPS
securitizations
consecutively issued from January 2018 and September 2020. The sold notes (“2021-1 Notes”), issued by CPS Auto Securitization
Trust
2021-1, consist of a single class with a coupon of 7.86%. At December 31, 2024 there was $50.0 million outstanding under this facility.
On March 22, 2024, we completed
a $50 million securitization of residual interests from previously issued securitizations. In the transaction, a qualified
institutional
buyer purchased $50.0 million of asset-backed notes secured by an 80% interest in a CPS affiliate that owns the residual interests in
five CPS
securitizations issued from January 2022 through January 2023. The sold notes (“2024-1 Notes”), issued by CPS Auto
Securitization Trust 2024-1, consist
of a single class with a coupon of 11.50%. At December 31, 2024 there was $50.0 million outstanding
under this facility.
48
The agreed valuation of the
collateral for the 2021-1 and 2024-1 Notes is the sum of the amounts on deposit in the underlying spread accounts for each
related securitization
and the over-collateralization of each related securitization, which is the difference between the outstanding principal balances of the
related receivables less the principal balance of the outstanding notes issued in the related securitization. On each monthly payment
date, the 2021-1 and
2024-1 Notes are entitled to interest at the coupon rate and, if necessary, a principal payment necessary to maintain
a specified minimum collateral ratio.
Securitization Trust Debt.
Since 2011, we treated all 53 of our securitizations of automobile contracts as secured financings for financial accounting
purposes,
and the asset-backed securities issued in such securitizations remain on our consolidated balance sheet as securitization trust debt.
We had
$2,594.4 million of securitization trust debt outstanding at December 31, 2024.
Subordinated Renewable
Notes Debt. In June 2005, we began issuing registered subordinated renewable notes in an ongoing offering to the public.
Upon maturity, the notes are automatically renewed for the same term as the maturing notes, unless we repay the notes or the investor
notifies us within 15
days after the maturity date of his note that he wants it repaid. Renewed notes bear interest at the rate we are
offering at that time to other investors with
similar note maturities. Based on the terms of the individual notes, interest payments may
be required monthly, quarterly, annually or upon maturity. At
December 31, 2024 there were $26.5 million of such notes outstanding.
We must comply with certain
affirmative and negative covenants related to debt facilities, which require, among other things, that we maintain certain
financial ratios
related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. In
addition,
certain securitization and non-securitization related debt contain cross-default provisions that would allow certain creditors
to declare default if a default
occurred under a different facility. As of December 31, 2024, we were in compliance with all such covenants.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate Risk
We are subject to interest
rate risk during the period between when contracts are purchased from dealers and when such contracts become part of a term
securitization.
Specifically, the interest rate due on our warehouse credit facilities are adjustable while the interest rates on the contracts are fixed.
Therefore, if interest rates increase, the interest we must pay to our lenders under warehouse credit facilities is likely to increase
while the interest we
receive from warehoused automobile contracts remains the same. As a result, excess spread cash flow would likely
decrease during the warehousing
period. Additionally, automobile contracts warehoused and then securitized during a rising interest rate
environment may result in less excess spread cash
flow to us. Historically, our securitization facilities have paid fixed rate interest
to security holders set at prevailing interest rates at the time of the closing
of the securitization, which may not take place until
several months after we purchased those contracts. Our customers, on the other hand, pay fixed rates of
interest on the automobile contracts,
set at the time they purchase the underlying vehicles. A decrease in excess spread cash flow could adversely affect our
earnings and cash
flow.
To mitigate, but not eliminate,
the short-term risk relating to interest rates payable under the warehouse facilities, we have historically held automobile
contracts
in the warehouse credit facilities for less than four months. To mitigate, but not eliminate, the long-term risk relating to interest
rates payable by
us in securitizations, we have usually structured our term securitization transactions to include pre-funding structures,
whereby the amount of notes issued
exceeds the amount of contracts initially sold to the trusts. We may continue to use pre-funding structures
in our securitizations. In pre-funding, the
proceeds from the pre-funded portion are held in an escrow account until we sell the additional
contracts to the trust. In pre-funded securitizations, we lock
in the borrowing costs with respect to the contracts we subsequently deliver
to the securitization trust. However, we incur an expense in pre-funded
securitizations equal to the difference between the money market
yields earned on the proceeds held in escrow prior to subsequent delivery of contracts and
the interest rate paid on the notes outstanding.
The amount of such expense may vary. Despite these mitigation strategies, an increase in prevailing interest
rates would cause us to receive
less excess spread cash flows on automobile contracts, and thus could adversely affect our earnings and cash flows.
49
Item 8. Financial Statements and Supplementary Data
This report includes Consolidated Financial Statements,
notes thereto and an Independent Auditors’ Report, at the pages indicated below, in the "Index
to
Financial Statements."
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and
Procedures. Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company’s disclosure controls
and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act") as of December 31, 2024 (the "Evaluation
Date"). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s
disclosure controls and procedures are effective
(i) to ensure that information required to be disclosed by us in reports that the Company files or submits
under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange
Commission; and (ii) to ensure that information required to be disclosed in the reports that the Company files or submits under the
Exchange Act
is accumulated and communicated to our management, including the Company’s Chief Executive Officer and Chief Financial
Officer, to allow timely
decisions regarding required disclosures. The certifications of our Chief Executive Officer and Chief Financial
Officer required under Section 302 of the
Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Internal Control. Management’s
Report on Internal Control over Financial Reporting is included in this Annual Report, immediately below. During the
fiscal quarter
ended December 31, 2024, there were no changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report
on Internal Control over Financial Reporting. We are responsible for establishing and maintaining adequate internal control
over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to
provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation
of published financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective
can only provide reasonable assurance with respect to financial statement preparation and presentation.
Management, with the participation
of the Chief Executive and Chief Financial Officers, assessed the effectiveness of our internal control over financial
reporting as of
December 31, 2024. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway
Commission (COSO) in the 2013 Internal Control — Integrated Framework. Based on this assessment, management, with the
participation of
the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2024, our internal control over financial
reporting is effective based on
those criteria.
Our internal control over
financial reporting as of December 31, 2024, has been audited by Crowe LLP, an independent registered public accounting firm,
as stated
in their report which is included herein.
50
Item 9B. Other Information
During the quarter ended December 31, 2024, no
director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1
trading arrangement, as each term is
defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent
Inspections
Not Applicable.
51
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
The names of the Company’s directors, their principal occupations,
and certain other information regarding them are set forth below.
Charles E. Bradley, Jr., 65, has been the
Company’s Chief Executive Officer since January 1992, a director since the Company’s formation in March
1991, and was elected
Chairman of the Board in July 2001. Prior to that he was President of the Company from March 1991 to December 2022. From April
1989 to
November 1990, he served as Chief Operating Officer of Barnard and Company, a private investment firm. From September 1987 to March 1989,
Mr. Bradley was an associate of The Harding Group, a private investment banking firm. Having been with the Company since its inception,
Mr. Bradley
brings comprehensive knowledge of the Company’s business, structure, history and culture to the Board and the Chairman
position.
Stephen H. Deckoff, 59, has been a director
of the Company since August 2022. Mr. Deckoff has been the Managing Principal of Black Diamond, Capital
Management, L.L.C., (“Black
Diamond”), a privately held alternative asset management firm, since its founding in 1995. In that capacity, he is responsible
for all portfolio management and business operations. Prior to 1995, Mr. Deckoff was a Senior Vice President of Kidder, Peabody &
Co. Inc. (“Kidder”)
and head of its Structured Finance Group. Prior to joining Kidder, Mr. Deckoff was a Managing Director
in the Structured Finance Group at Bear Stearns &
Co., Inc. (“Bear Stearns”). Before joining Bear Stearns, Mr. Deckoff
worked in the Structured Finance Department of Chemical Securities, Inc. and the
Fixed Income Research Department at Drexel Burnham Lambert.
In June 2023, Mr. Deckoff joined the Board of KVH Industries, Inc., a publicly traded
company providing connectivity solutions to primarily
maritime customers globally. Mr. Deckoff brings to the Board his extensive financial experience and
expertise.
Louis M. Grasso, 78, has been a director
of the Company since October 2019. Mr. Grasso was the founder and majority owner of PFC Corporation
(“PFC”) until his retirement
in November 2011, upon sale of PFC’s portfolio of assets to Capstone Realty Advisors. Over a period of 35 years, PFC
Corporation
originated over $1.8 billion of mortgage loans, and issued $1.8 billion of mortgage-backed securities. He brings to the Board knowledge
and
experience bearing in particular on the Company’s strategies for meeting its capital requirements, and broad organizational
and management skills.
William W. Grounds, 69, has been a director
of the Company since December 2021. From 2008 to 2021, he was the President and COO of Infinity World
Development Corp., which is a subsidiary
of a sovereign wealth fund in the United Arab Emirates. The principal business of Infinity World Development
Corp. was a $5 billion investment
in the CityCenter mixed use integrated resort property located in Las Vegas, Nevada. Mr. Grounds served on the board of
MGM Resorts International,
a hospitality and entertainment company, from 2013 to 2021 and of Remark Holdings Inc., a technology company, from 2013
to 2019. Mr.
Grounds joined the Board of PointsBet Holdings Limited, an Australian sports wagering operator and iGaming provider, in December 2022.
In
June 2023, Mr. Grounds was appointed to the Board of the GCGRA, the national gaming regulator of the UAE. During his career he has
held senior
executive positions in major real estate private equity investment, development and construction entities. Mr. Grounds brings
to the Board experience as a
director of publicly-traded companies, and skills in investment and general management.
Brian J. Rayhill, 62, has been a director
of the Company since August 2006. Mr. Rayhill has been a practicing attorney in New York State since 1988 and
the managing attorney of
the Law Office of Brian Rayhill since 2017. As an experienced advocate, counselor and litigator, Mr. Rayhill brings legal
knowledge and
perspective to the Company’s Board.
William B. Roberts, 87, has been a director
of the Company since its formation in March 1991. From 1981 until his retirement at the end of 2020, he was
the President of Monmouth
Capital Corp., an investment firm that specializes in management buyouts. Having spent decades in the business of finance, Mr.
Roberts
brings to the Company’s Board his perspective and judgment regarding means of financing its business.
52
James E. Walker III, 62, has been a director
of the Company since August 2022. Mr. Walker is President and Senior Managing Director of Black
Diamond Capital Management, where he
oversees general management, drives strategic growth, and identifies new investment opportunities. A co-founder
of Black Diamond in 1996,
Mr. Walker rejoined the firm as President in September 2023, bringing extensive leadership and investment experience. Prior to
his return
to Black Diamond, Mr. Walker served as Managing Partner of Vinson Ventures, LLC, a boutique investment firm. From 2008 until 2017, Mr.
Walker was a Managing Partner at Fir Tree Partners, where he co-founded the firm’s distressed real estate funds and chaired the
Risk Committee.
Following his tenure at Fir Tree, he was a Strategic Partner at Jadian Capital, an alternative investment firm from 2017
to 2021. Throughout his career, Mr.
Walker has held numerous board positions. Since November 2017, he has been a board member of Starwood
Real Estate Trust, a private real estate
investment firm. In June 2023, he joined the board of Emeco, an Australian mining equipment
rental company. He previously served on the Board of
Clarus Corporation, a global company catering to outdoor and consumer enthusiast
markets. Mr. Walker began his career in investment banking at Kidder
Peabody and Bear Stearns. Mr. Walker brings to the Board his extensive
investment management experience.
Gregory S. Washer, 63, has been a director
of the Company since June 2007. He was the President and owner of Clean Fun Promotional Marketing
(“Clean Fun”), a promotional
marketing company, from its founding in 1986 through its sale in September 2014. He continued to act as a consultant to
Clean Fun through
August 2017, and is now retired. Mr. Washer contributes to the Board significant organizational and operational management skills,
combined
with a wealth of experience in promotion and marketing of services.
Daniel S. Wood, 66, has been a director
of the Company since July 2001. Mr. Wood was President of Carclo Technical Plastics (“Carclo”), a manufacturer
of custom injection
moldings, from September 2000 until his retirement in April 2007. Previously, from 1988 to September 2000, he was the Chief
Operating
Officer and co-owner of Carrera Corporation, the predecessor to the business of Carclo. As President of Carclo, Mr. Wood was responsible
for
the overall operation of that company and for the quality and integrity of its financial statements. He brings to the Board the knowledge
and perspective
useful in evaluating the Company’s financial statements, and broad organizational and management skills.
Executive Officers
The information regarding the Company’s
executive officers set forth in Part I of this report under the caption “Information about Our Executive Officers”
is incorporated
herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics for Senior
Financial Officers, which applies to the Company’s chief executive officer, chief financial officer,
controller and others. A copy of
the Code of Ethics may be obtained at no charge by written request to the Corporate Secretary at the Company’s principal
executive offices.
Audit and Other Committees
The Board of Directors (the “Board”)
has established an Audit Committee, a Compensation Committee, and a Nominating Committee. Each of these three
committees operates under
a written charter, adopted by the Board of Directors. The charters are available on the Company’s website,
https://ir.consumerportfolio.com/corporate-governance.
The Board of Directors has concluded that each member of these three committees (and every
director other than Mr. Bradley, the Company’s
chief executive officer), is independent in accordance with the director independence standards prescribed
by Nasdaq, and has determined
that none of them have a material relationship with the Company that would impair their independence from management
or otherwise compromise
the ability to act as an independent director.
53
The members of the Audit Committee are Mr. Rayhill
(chairman), Mr. Grasso, Mr. Washer, and Mr. Wood. The Board has determined that each Audit
Committee member is independent as defined
under Nasdaq Listing Rules and Rule 10A-3(b)(1) of the Exchange Act.
The Audit Committee is empowered by the Board
of Directors to review the financial books and records of the Company in consultation with the
Company’s accounting and auditing staff
and its independent auditors and to review with the accounting staff and independent auditors any questions that
may arise with respect
to accounting and auditing policy and procedure.
The Board of Directors has further determined
that Mr. Wood has the qualifications and experience necessary to serve as an "audit committee financial
expert" as such term
is defined in Item 407 of Regulation S-K promulgated by the SEC. Mr. Wood, as president of Carclo, was responsible for the
preparation
and evaluation of the audited financial statements of that company.
Insider Trading Policy
The Company has adopted an insider trading policy
that governs the purchase, sale, and/or other transactions of our securities by our directors, officers and
employees that we believe
is reasonably designed to promote compliance with insider trading laws, rules and regulations, and the applicable exchange
listing standards.
A copy of our insider trading policy is filed as Exhibit 19 to this Annual Report on Form 10-K for the fiscal year ended December 31,
2024. In addition, with regard to the Company’s trading in its own securities, it is the Company’s policy to comply with the
federal securities laws and the
applicable exchange listing standards.
Item 11. Executive Compensation.
Compensation Committee
Interlocks and Insider Participation
The members of the Compensation Committee are
Mr. Wood (chairman), Mr. Grounds, and Mr. Roberts.
Compensation Committee Report
The Compensation Committee has reviewed and discussed
with the Company’s management the Compensation Discussion and Analysis contained in this
report. Based on such review and discussions
and relying thereon, the Compensation Committee has recommended to the Company’s Board of Directors
that the Compensation Discussion and
Analysis set forth below be included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2024.
THE COMPENSATION COMMITTEE
Daniel S. Wood (chairman) William
W. Grounds William B. Roberts
Compensation Discussion
and Analysis
2024 Say-on-Pay Advisory Vote Outcome
The Compensation Committee annually considers
the results of the most recent advisory vote by shareholders to approve executive officer compensation.
In the 2024 advisory vote, a majority
of the voted shares (92%) approved of the compensation of our named executive officers. The Compensation
Committee interprets
that vote as a reason to retain the existing design, purposes and structure of our executive compensation programs. The Compensation
Committee will continue to consider the results from future shareholder advisory votes regarding executive officer compensation in its
future
administration of executive compensation.
54
Compensation Objectives
The Company’s objectives with respect to compensation
are several. The significant objectives are to cause compensation (i) to be sufficient in total
amount to provide reasonable
assurance of retaining key executives, (ii) to include a significant contingent component, so as to provide strong incentives to
meet
designated Company objectives, and (iii) to include a significant component tied to the price of the common stock, so as to align management’s
incentives with shareholder interests. The Compensation Committee ("Committee") of the Company’s Board of Directors
is charged with administering the
Company’s compensation plans to meet those objectives. To the extent that elements
of compensation would not advance such objectives, or would do so
less effectively than would other elements, the Committee seeks to
avoid paying compensation in those forms.
Role of the Compensation
Committee and the Chief Executive Officer
Our Board has authorized the Compensation Committee,
which is composed solely of independent directors, to make all decisions regarding executive
compensation, including administration of
our compensation plans. In that regard, the Compensation Committee:
·
Reviews and discusses with management the factors underlying our compensation policies and decisions, including overall compensation
objectives;
·
Reviews and approves all Company goals and objectives (both financial and non-financial) relevant to the compensation of the Chief Executive
Officer;
·
Evaluates, together with the other independent directors, the performance of the Chief Executive Officer in light of these goals and objectives and
that individual’s overall effectiveness;
·
Fixes and approves each element of the compensation of the Chief Executive Officer;
·
Reviews the performance evaluations of all other members of executive management (the Chief Executive Officer prepares and presents to the
Compensation Committee the performance evaluations of the other executive officers);
·
Reviews and approves each element of compensation, as well as the terms and conditions of employment, of those other executive officers;
·
Grants awards under our equity compensation plans and oversees the administration of those plans; and
·
Reviews the costs and structure of our key employee benefit and fringe-benefit plans and programs.
The Compensation Committee is authorized to form subcommittee(s) and to retain experts and consultants to assist in the discharge of its
responsibilities.
To date it has not done so.
The Chief Executive Officer, who attends meetings
of the Compensation Committee by invitation of the Committee’s chairman, assists the Committee in
determining the compensation of
our other executive officers by, among other things:
·
Proposing annual merit increases to the base salaries of the other executive officers;
·
Establishing annual individual performance objectives for the other executive officers and evaluating their performance against such objectives
(the Committee reviews these performance evaluations); and
·
Making recommendations, from time to time, for special stock option and restricted stock grants (e.g., for motivational or retention purposes) to
other executive officers.
The other executive officers do not have a role
in determining their own compensation, other than to discuss their annual individual performance objectives
and results achieved with
the chief executive officer.
Our Overall Approach
The Committee has put into place a compensation
system consisting of three key components: base salary, an annual cash bonus pursuant to an incentive
plan, and long-term equity incentives
in the form of stock options.
55
The table below provides comparative information
regarding the components of our year 2024 executive compensation program. We are applying the same
elements in our executive compensation
program for the year 2025.
Element
Form
Objectives and Basis
Base Salary
Cash
·
Attract and retain high quality personnel
·
Targeted to be superior to compensation offered by our competitors
Annual Incentive Bonus
Cash
·
Achieve objectives set annually
·
Annual bonus amount is set and computed as a percentage of base salary
·
Actual payout determined by Company and individual performance
·
Target total cash (base salary + target bonus) designed to be superior to compensation offered
by our competitors
Long-Term Incentive
Stock options
·
Align interests of executives with those of shareholders;
Compensation
·
Target long-term incentive award size designed to retain executives through long-term vesting
and the potential for wealth accumulation, contingent on benefit to the shareholders
The Committee has from time to time considered
providing additional elements of executive compensation. It has considered elements such as restricted
stock awards, restricted stock
units, compensation contingent on a change in control, defined benefit pension plans, deferred cash compensation, and
supplemental retirement
plans (supplemental in the sense that they exceed the limits for tax advantaged treatment). To date, the Committee has elected not
to
pay compensation in such forms, having determined that the Company’s objectives are better met by one or more of the elements of compensation
that it
does pay.
Regarding restricted stock and restricted stock
units, the Committee has noted that any form of equity equivalent to or closely tied to common stock does
serve to meet the objective
of aligning officers’ personal interest with that of the shareholders generally. The Committee believes, however, that the
objective is
better met by grants of stock options than by grants of share equivalents, because recipients of the grants will face the same degree
of variance
in results at a lesser cost to the Company, when option grants are compared to grants of restricted stock units. Further,
unlike restricted stock, option grants
will not provide a reward to the holder absent an improvement over time in the Company’s
stock price. The Committee has elected not to provide material
perquisites as compensation, having determined that cash is a better medium
of exchange.
Regarding compensation that would be payable contingent
on a change in control of the Company, the Committee believes that there are certain legitimate
objectives to be met by such contingent
compensation. As of the date of this report, however, no such contingent compensation plans are in place.
Regarding defined benefit pension
plans, deferred cash compensation and supplemental retirement plans, the Committee believes that the Company’s
retention objective is
better met by straight cash payments, whether in the form of base salary or in the form of bonus compensation. In particular with
respect
to plans for deferred compensation, the Committee believes those make sense for the Company and for the recipient only on the basis of
assumptions regarding future tax rates payable by each. Having no assurance that such assumptions would be correct, the Committee has
chosen not to put
into place any special deferred compensation programs for the company’s executive officers. Those officers do
participate in a Company-sponsored tax-
deferred savings plan, commonly known as a 401(k) plan, on the same terms available to Company
employees generally.
The Committee may in the future revisit its conclusions
as to any of the components discussed above, or may consider other forms of compensation.
The Base Salary Element
With respect to the retention objective, the Committee
considers an executive’s base salary to be the most critical component. Acting primarily on the basis
of recommendations of the Chief
Executive Officer, the Committee adjusts other officers’ base salaries annually, with the adjustment generally consisting
of a 2% to 10%
increase from the prior year’s rate. Where exceptional circumstances apply, such as recruitment of a new executive officer, a promotion
to
executive officer status or a special need to retain an individual officer, the chief executive officer may recommend, and the Committee
may approve, a
larger increase.
56
The Company’s general approach in setting
the annual compensation of its named executive officers is to set those officers’ base compensation by
reference to their base rates
for the preceding year. During the year ended December 2024, the Company’s chief executive officer, Charles E. Bradley, Jr.,
received
$995,000 in base salary. In setting that rate in 2024, the Committee considered the base salary rate that the Company had paid in the
prior year
($995,000), the desirability of providing an annual increase, the desirability of ensuring retention of the services of the
Company’s incumbent chief
executive officer, the Company’s financial performance, and the levels of chief executive officer
compensation prevailing among other financial services
companies. The Committee considered whether to adjust officers’ base compensation
for 2024, and determined to increase the base rate for the President
and Chief Financial Officer by 4%.
The Annual Incentive
Bonus (Executive Management Bonus Plan) Element
To encourage executive officers and key management
personnel to exercise their best efforts and management skills toward causing the Company to meet
its overall objective, and toward achieving
designated specific individual objectives, the Company has implemented an Executive Management Bonus Plan,
with annual payouts. Under
the Company’s bonus plan as applied to the year ended December 2024, the Company’s president is eligible to receive a cash
bonus
of up to 170% of his base salary and the executive vice presidents are eligible to receive a cash bonus of up to 140% of their base salaries.
The chief
executive officer is eligible to receive a cash bonus of up to 600% of his base salary. The Committee is expected to evaluate
each named executive officer’s
performance and determine the amount of the Executive Management Bonus Plan award earned by the
end of June 2025.
The Long-Term Incentive
Compensation Element
The Committee may also award incentive and non-qualified
stock options under the Company’s stock option plans. Such awards are designed to assist in
the retention of key executives and management
personnel and to create an incentive to create shareholder value over a sustained period of time. The
Company believes that stock options
are a valuable tool in compensating and retaining employees. Because the exercise price of all options granted is equal
to or above the
fair market value of the Company’s common stock on the date of grant, the option holders may realize value only if the stock price
appreciates from the price on the date the options were granted. This design is intended to focus executives on the enhancement of shareholder
value over
the long term.
During the year ended December 31, 2024, the
Committee did not grant stock options to the Company’s executive officers.
Other Elements
The Company also maintains certain broad-based
employee benefit plans, such as medical and dental insurance, and a qualified defined contribution
retirement savings plan (401(k) plan),
in which executive officers are permitted to participate. Such officers participate on the same terms as non-executive
personnel who meet
applicable eligibility criteria, and are subject to any legal limitations on the amounts that may be contributed or the benefits that
may
be payable under the plans. The Company does not maintain any form of defined benefit pension or retirement plan in which
executive officers may
participate, nor does it maintain any form of supplemental retirement savings or supplemental deferred compensation
plan.
Exercise of Discretion
In exercising its discretion as to the level of
executive compensation and its components, the Committee considers a number of factors. Members of the
Committee conduct informal surveys
of compensation paid to comparable executives within and without the consumer finance industry. The Committee
finds these data useful
primarily in evaluating the overall level of compensation paid or to be paid to the Company’s executive officers. Financial factors
considered include earnings, revenue, originations, and budget attainment. Operational factors considered include individual and group
management goals;
indicators of the performance and credit quality of the Company’s servicing portfolio, including levels of delinquencies
and charge-offs; and indicators of
successful management of personnel, including employee stability. All of such factors are assessed
with reference to the judgment of the Committee as to
the degree of difficulty of achieving desired outcomes. With respect to payment
of annual bonuses and grants of stock options, the Committee also takes
note of factors relating to the degree of the Company’s success
over the most recent year.
57
Specific Objectives
and Evaluation
In 2024, the Committee
designated specific objectives with respect to the chief executive officer to be accomplished within the year 2024, and fixed
weights
to be associated with each such objective. The chief executive officer proposed to the Committee specific annual objectives with respect
to each
other executive officer of the Company, which the Committee approved. The Committee anticipates determining the amount of the
Executive Management
Bonus Plan award earned by each named executive officer by the end of June 2025.
Grants of Options
The Committee did not award stock options to the
Company’s officers in 2024.
The
Committee does not have a policy or practice on when to grant option awards. The Committee does
not have a policy or practice of taking into account
material nonpublic information when determining the timing and
terms of option awards, however if a public announcement of material information is
anticipated, the grant date of such options may
be deferred at the discretion of the Committee, until after the release
of such information. The
Company
does
not time the disclosure of material nonpublic information for the purpose of affecting the value of executive
compensation.
Stock Ownership, Hedging and Pledging
Our Board of Directors and Compensation Committee
have considered whether to establish a minimum stock ownership goal for members of our senior
management. We have elected not to do so,
considering that such a policy would either be strict and mandatory, in which case it would undermine the
compensatory objectives of our
equity compensation plans, or would be merely hortatory, in which case it could be expected to have little effect. We’ve
also noted
that the multiyear vesting terms of the equity incentives granted under our plans have the effect of aligning our executives’ individual
personal
financial incentives with the future price performance of the Company’s stock.
As part of our comprehensive compliance policy,
we remind all Company executive officers of the mandatory legal prohibition on selling short company
shares and the implications of the
SEC’s short-swing profit rule. We also prohibit Company executive officers from entering into transactions that would
have the
effect of causing those individuals to benefit from a decline in the price of the Company stock, such as the purchase of “put”
options. We prohibit
such “hedging” transactions but we do not find it appropriate to prohibit our executive officers from
pledging their shares of Company stock as security for
a loan. We believe that the beneficial incentives of owning Company stock remain
substantially the same with or without such a pledge.
Summary of Compensation
The following table summarizes all compensation
earned during the three fiscal years ended December 31, 2024 by the Company’s chief executive officer,
its chief financial officer, and
the other three most highly compensated individuals (such five individuals, the “named executive officers”) who were
serving
in such position or as executive officers at any time in 2024. It lists their names, their principal positions in which they served in
those years, and
each component of compensation paid with respect to those years.
58
Summary Compensation Table
Name and Principal Position (1)
Year
Salary
Non-Equity
Incentive Plan
Compensation
(2)
Option
Awards (3)
All Other
Compen-
sation (4)
Total
Charles E. Bradley, Jr.
2024
$
995,000 $
– $
– $
40,611 $
1,035,611
Chief Executive Officer
2023
995,000
3,005,000
–
342
4,000,342
2022
995,000
3,980,000
5,885,850
351
10,861,201
Michael T. Lavin
2024
470,000
–
–
47,158
517,158
President
2023
452,000
582,063
–
342
1,034,405
& Chief Operating Officer
2022
411,000
575,000
448,200
351
1,434,551
Danny Bharwani
2024
386,000
–
–
44,871
430,871
Executive Vice President
2023
371,000
385,655
–
342
756,997
& Chief Financial Officer
2022
331,000
324,000
298,800
351
954,151
Teri L. Robinson
2024
386,000
–
–
2,342
388,342
Executive Vice President
2023
386,000
413,406
–
342
799,748
- Sales & Originations
2022
368,000
401,000
298,800
351
1,068,151
Christopher Terry
2024
374,000
–
–
9,534
383,534
Executive Vice President
- Risk, Systems & IT
(1) Mr. Terry qualified as a named executive officer pursuant to Item 402 of Regulation S-K beginning for the year 2024.
(2) The amount of the Non-Equity Incentive Plan Compensation
award for 2024 is expected to be determined by the end of June 2025. Such amount,
when finally determined, will be disclosed in a
filing under Item 5.02(f) of Form 8-K.
(3) Represents the dollar value accrued for financial accounting purposes in connection with the grant of such options, computed in accordance with
Financial Accounting Standards Board Accounting Standards Codification Topic 718 and SFAS 123R. Value was estimated using a Black-Scholes
model for 2022. For the options granted on January 24, 2022, (comprising 750,000 options granted to Mr. Bradley), the weighted average fair
value per option was $5.8558, based on assumptions of 4.11 years expected life, expected volatility of 75.26%, and a risk-free rate of 1.43%. For
the options granted on June 24, 2022, (comprising all of the other options granted to named executive officers in 2022), the weighted average fair
value per option was $4.98, based on assumptions of 4.11 years expected life, expected volatility of 75.15%, and a risk-free rate of 3.13%.
(4) For 2024, includes premiums paid by the Company for group life insurance and employer matching contributions under the Company’s defined
contribution plan. Additionally, the amounts include a (i) cash-out of accrued vacation time of $38,269, $26,423 and $22,269 to Messrs. Bradley,
Lavin, and Bharwani and (ii) a car allowance of $16,077 and $20,260 for Messrs. Lavin and Bharwani and (iii) gym membership fees of $2,316
for Mr. Lavin.
59
Grants of Plan-Based Awards in Last Fiscal
Year
In the year ended December 31, 2024, we did not
grant any options, stock awards, or stock appreciation rights to any of our named executive officers.
Our named executive officers are eligible for
awards under our Executive Management Bonus Plan, which are expected to be determined by the end of
June 2025. The table below provides
information regarding the awards for which the named executive officers are eligible for the year 2024.
Grants of Plan-Based Awards
Estimated future payouts under non-equity incentive plan awards
Name
Threshold
Target
Maximum
Mr. Bradley
$
–
$
5,970,000
$
5,970,000
Mr. Lavin
–
799,000
799,000
Mr. Bharwani
–
540,400
540,400
Ms. Robinson
–
540,400
540,400
Mr. Terry
–
523,600
523,600
The “target” and “maximum”
figures appearing in the table above represent the maximum cash payout under the individual executives’ Executive
Management
Bonus Plan awards as of the date the incentive was fixed. The chief executive officer, Mr. Bradley, is eligible to receive a cash bonus
of up to
600% of his base salary. The Company’s president, Mr. Lavin, is eligible to receive a cash bonus of up to 170% of his base
salary. The other named
executive officers, as executive vice presidents, are eligible to receive a cash bonus of up to 140% of their
base salaries. The actual payout to each
individual named in the table above has not been determined as of the date of this report.
Outstanding Equity Awards at Fiscal Year-end
The following table sets forth as of December
31, 2024 the number of unexercised options held by each of the named executive officers, the number of
shares subject to then exercisable
and unexercisable options held by such persons and the exercise price and expiration date of each such option. Each
option
referred to in the table was granted at an option price per share no less than the fair market value per share on the date of grant.
None of such
individuals holds a stock award; accordingly, only information concerning option awards is presented.
60
Name
Number of securities
underlying
unexercised options
(exercisable)
Number of securities
underlying
unexercised options
(unexercisable)
Option exercise price
Option expiration
date
Charles E. Bradley, Jr.
300,000
–
$
3.48
5/9/2025
300,000
–
$
3.53
8/8/2026
240,000
–
$
2.47
6/1/2027
225,000
75,000 (1)
$
4.95
8/3/2028
375,000
375,000 (2)
$
10.32
1/24/2029
150,000
150,000 (3)
$
10.25
6/24/2029
Michael T. Lavin
90,000
–
$
3.48
5/9/2025
90,000
–
$
3.53
8/8/2026
150,000
–
$
2.47
6/1/2027
67,500
22,500 (1)
$
4.95
8/3/2028
45,000
45,000 (3)
$
10.25
6/24/2029
Danny Bharwani
60,000
–
$
3.48
5/9/2025
60,000
–
$
3.53
8/8/2026
60,000
–
$
2.47
6/1/2027
45,000
15,000 (1)
$
4.95
8/3/2028
30,000
30,000 (3)
$
10.25
6/24/2029
Teri L. Robinson
60,000
–
$
3.48
5/9/2025
60,000
–
$
3.53
8/8/2026
80,000
–
$
2.47
6/1/2027
45,000
15,000 (1)
$
4.95
8/3/2028
30,000
30,000 (3)
$
10.25
6/24/2029
Christopher Terry
60,000
–
$
3.48
5/9/2025
60,000
–
$
3.53
8/8/2026
60,000
–
$
2.47
6/1/2027
45,000
15,000 (1)
$
4.95
8/3/2028
30,000
30,000 (3)
$
10.25
6/24/2029
(1) Becomes exercisable on August 3, 2025.
(2) Becomes exercisable as to increments of one-half of the unexercisable portion on January 24, 2025 and 2026.
(3) Becomes exercisable as to increments of one-half of the unexercisable portion on June 24, 2025 and 2026.
61
Option Exercises in Last Fiscal Year
All of the five named executive officers exercised
stock options during 2024. The table below shows the realized value and the number of options exercised
for those individuals. None of
our officers hold stock awards; accordingly, no stock awards vested during 2024.
Option Exercises and Stock Vested
Value realized on
exercise (1)
Number of shares
acquired on exercise
Mr. Bradley
$
1,275,000
300,000
Mr. Lavin
382,500
90,000
Mr. Bharwani
255,000
60,000
Ms. Robinson
255,000
60,000
Mr. Terry
233,400
60,000
(1) The value realized is the difference between the fair market value of the Company’s common
stock on the date of exercise (the closing price
reported by Nasdaq) and the exercise price of the option.
Executive Management Bonus Plan (Non-equity
Incentive Plan)
The salary and cash bonus of the named
executive officers are determined by the Compensation Committee. The compensation appearing in the Summary
Compensation Table above
under the caption "Non-Equity Incentive Plan Compensation" is paid pursuant to an Executive Management Bonus Plan (the
“EMB Plan”). The EMB Plan is administered by the Compensation Committee. Among other things, the Compensation Committee
selects participants in
the EMB Plan from among the Company’s executive officers and determines the performance goals, target
amounts and other terms and conditions of
awards under the EMB Plan. With respect to officers other than the chief executive
officer, determinations of base salary and of criteria relating to the EMB
Plan are based in part on evaluations of such officers
prepared by the Chief Executive Officer, which are furnished to and discussed with the Compensation
Committee.
Pension Plans
The Company’s officers do not participate in any
pension or retirement plan, other than a tax-qualified defined contribution plan (commonly known as a
401(k) plan).
Potential Payments Upon Termination or Change
of Control
This section provides information regarding payments
and benefits to the named executive officers that would be triggered by termination of the officer’s
employment (including resignation,
or voluntary termination; severance, or involuntary termination; and retirement) or a change of control of the Company.
Each of the named executive officers is an at-will
employee and, as such, does not have an employment contract. In addition, if the officer’s employment
terminates for any reason
other than a change of control of the Company, any unvested stock options are terminated, and vested options become subject to
accelerated
expiration: ordinarily three months following separation from service, or twelve months in the case of disability, retirement or death.
Accordingly, there are no payments or benefits that are triggered by any termination event (including resignation and severance) other
than in connection
with a change of control of the Company.
62
Benefits Triggered by Change of Control or
Termination after Change of Control
Our stock option plans provide that each employee
of ours who holds outstanding unexpired options under our stock option may have the right to exercise
such options following a change
of control of the Company, without regard to the date such option would first be exercisable. Each of the named executive
officers holds
such options. The “acceleration” of options is mandatory following certain changes of control, and subject to the discretion
of the
Compensation Committee following certain others. Acceleration is mandatory in the event of (i) the sale, or other disposition
of substantially all of the
Company’s assets, or (ii) a merger or similar transaction in which shareholders of the Company hold
less than 50% of the shares of the surviving entity;
provided, however, that acceleration following a merger or similar transaction is
mandatory only if the holder suffers a Qualifying Termination (defined
below) within one year following the transaction, or if the surviving
entity does not provide the holder with an equivalent award. Acceleration is also
mandatory if a holder suffers a Qualifying Termination
within one year following (iii) a change within a three-year period in the membership of a majority
of the Board of Directors (excluding
changes recommended by the board), or (iv) a person’s acquisition of outstanding voting securities of the Company,
other than directly
from the Company and without approval of the board, resulting in that person’s having beneficial ownership of greater than 25% of
the
Company.
Under our stock option plans, the Compensation
Committee may exercise its discretion to provide for acceleration under other circumstances than those
described above with respect to
any particular stock option or class of stock options. The committee would expect to exercise its discretion with the
intention of preserving
the value of the stock option award. To date, such discretion has not been exercised. A “Qualifying Termination” is a termination
of
the holder’s employment by the Company other than for cause, disability or death, or by the holder for “good reason”
(principally relating to a material
diminution in the holder’s authority, compensation or responsibilities, or a relocation of greater
than 50 miles). The preceding description applies to options
held by officers and employees. Options issued to non-employee directors
accelerate without the exercise of discretion upon any of the four categories of
change of control described above.
As of December 31, 2024, each of the named executive
officers would realize a benefit if unvested stock options were to become immediately exercisable
upon a change in control, based on
the value of the shares underlying such options at the closing market price on December 31, 2024, which was $10.86
per share. The respective
amounts of such possible benefit are set forth in the following table:
Potential Value Upon
Acceleration
Mr. Bradley
$
737,250
Mr. Lavin
160,425
Mr. Bharwani
106,950
Ms. Robinson
106,950
Mr. Terry
106,950
Management Structure
The Board is responsible for overseeing the management
of the Company. Its oversight is aimed at seeing to it that the Company’s business is managed to
meet our goals, and that the interests
of the shareholders are served.
Charles E. Bradley, Jr. currently serves as both
the Chairman of the Board and our Chief Executive Officer, and is the only member of our Board who is not
independent of the Company.
The Nominating Committee has determined that the remaining directors and director nominees are “independent” under
applicable
independence standards of the Nasdaq Stock Market. Our Board has chosen not to designate any individual formally as the lead independent
director. Each director retains his full oversight responsibility.
63
Our Board structure supports the independence
of our non-management directors. Our Audit Committee, Compensation Committee and Nominating
Committee are each composed solely of independent
directors. Our bylaws provide that any two directors have the authority to call meetings of the Board
of Directors, as do specified officers,
including the president and the secretary. To enhance the possible use of that authority by independent directors, the
corporate secretary
is under standing instructions to call a meeting at the instance of any one director.
The board believes that combining the Chairman
and Chief Executive Officer positions is currently the most effective leadership structure given Mr.
Bradley’s in-depth knowledge
of our business and industry and his demonstrated ability to formulate and implement strategic initiatives. Mr. Bradley is
continuously
involved in developing and implementing our strategies, working closely with the company’s other senior executives to seek continued
disciplined growth and excellence in operations. His close involvement in management places Mr. Bradley in the best position to decide
which business
issues require consideration by the independent directors of the board. In addition, having a combined Chairman and Chief
Executive Officer enables us to
speak with a unified voice to shareholders, customers and others concerned with our company. The Board
believes that combining the Chief Executive and
Chairman roles, as part of a governance structure that includes oversight of management
responsibilities by independent directors, provides the preferred
system for meeting the requirement that the Company be managed in the
best interest of our shareholders.
Risk Oversight
The board’s overall responsibility for
directing the management of the Company includes risk oversight. The risk oversight function is performed at the
board level, and by
the Audit and Compensation Committees.
The Board of Directors as a whole in its regular
meetings discusses and considers the risk inherent in the existing business of the Company and in proposed
initiatives. Because the Company’s
business consists of extending consumer credit to individuals believed to be of higher risk than others (sub-prime
credit), the assessment
of the risk assumed in such extensions of credit is a primary consideration on the part of the board. Risk oversight is also a key
function
of the Audit Committee and Compensation Committee.
The principal risk management function performed
by the Audit Committee is the ongoing assessment of the credit estimates and allowances periodically
recorded in the Company’s
books. The Audit Committee reviews that assessment regularly. Other risk assessments performed by the Audit Committee
include assessments
of contingent liabilities, and of other reserves and allowances.
The principal risk management functions performed
by the Compensation Committee are its setting and evaluation of objectives for the chief executive
officer, in connection with its administration
of the Executive Management Bonus Plan. The Compensation Committee recognizes that the Company’s
business of extending subprime
credit inherently includes a conflict between growing the business and managing the risk of credit losses: one means to
increase the Company’s
business is to offer credit on terms that are priced too low for the risk assumed. The Compensation Committee manages that risk by
insisting
that objectives to grow the business are qualified by a mandate that credit quality be maintained at appropriate levels. To some extent,
such risk
management is shared with the Audit Committee, which performs the primary oversight of whether credit risk assumed is reflected
with adequate
allowances in the Company’s financial statements.
64
Chief Executive Officer Pay Ratio
The Dodd-Frank Reform and Consumer Protection
Act includes a mandate that public companies disclose the ratio of the compensation of their chief
executive officer to their median
employee (“CEO Pay Ratio”). The CEO Pay Ratio for 2024 is not calculable at this time because Mr. Bradley’s 2024
Non-Equity
Incentive Plan Compensation award has not yet been determined. The 2024 Non-Equity Incentive Plan Compensation award is expected to be
determined by the end of June 2025. Such amount, when finally determined, and the CEO Pay Ratio for 2024, will be disclosed in a filing
under Item
5.02(f) of Form 8-K.
Director Compensation
Throughout 2024, we paid our non-employee directors a retainer of
$6,000 per month, with an additional fee of $700 per month for service on a board
committee ($1,200 for a committee chairman). Non-employee
directors also received per diem fees of $1,000 for attendance in person at meetings of the
Board of Directors, or $500 for attendance
by telephone. No per diem fees are paid for attendance at committee meetings. The following table summarizes
compensation received
by our directors for the year 2024:
Name of Director
Fees Earned
or Paid in Cash (1)
Total
Charles E. Bradley, Jr. (2)
$
–
$
–
Stephen H. Deckoff
74,000
74,000
Louis M. Grasso
84,400
84,400
William W. Grounds
91,300
91,300
Brian J. Rayhill
106,700
106,700
William B. Roberts
81,900
81,900
James E. Walker III
74,500
74,500
Gregory S. Washer
98,800
98,800
Daniel S. Wood
107,200
107,200
(1) This column reports cash compensation earned in 2024 for Board and committee service.
(2) Mr. Bradley’s compensation as chief executive officer of the Company is described elsewhere in this report. He received no additional
compensation for service on the Company’s Board of Directors.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
The table below sets forth the number and percentage
of shares of our common stock (our only class of voting securities) owned beneficially as of March
10, 2025 (the latest practicable date)
by (i) each person known to us to own beneficially more than 5% of the outstanding common stock, (ii) each director
and each named executive
officer, and (iii) all of our directors and executive officers, as a group. Except as otherwise indicated, and subject to applicable
community
property and similar laws, each of the persons named has sole voting and investment power with respect to the shares shown as beneficially
owned by such persons. Percent of class is calculated by reference to 21,443,198 shares outstanding on March 10, 2025. Except as otherwise
noted, each
person named in the table has a mailing address at 3800 Howard Hughes Parkway, Suite 1400, Las Vegas, Nevada 89169.
65
Name and Address of Beneficial Owner
Amount and Nature
of Beneficial
Ownership (1)
Percent of Class
Charles E. Bradley, Jr.
5,697,181
24.5%
Stephen H. Deckoff
5,127,165 (2)
23.9%
Louis M. Grasso
100,300
*
William W. Grounds
34,600
*
Brian J. Rayhill
368,236
1.7%
William B. Roberts
760,078
3.5%
James E. Walker III
0
*
Gregory S. Washer
521,803
2.4%
Daniel S. Wood
351,910
1.6%
Danny Bharwani
608,384
2.8%
Michael T. Lavin
847,834
3.9%
Teri L. Robinson
731,302
3.4%
Christopher Terry
458,985
2.1%
All directors and executive officers combined (21 persons)
17,081,795 (3)
65.6%
Black Diamond Capital Management, L.L.C. 2187 Atlantic Street, 9th Floor, Stamford, CT 06902
5,127,165 (2)
23.9%
Dimensional Fund Advisors LP, Building One, 6300 Bee Cave Road, Austin, Texas, 78746
1,623,488 (4)
7.6%
*Less than 1%
(1) Includes certain shares that may be acquired within 60 days after
March 10, 2025 from the Company upon exercise of options, as follows: Mr.
Bradley, 1,777,500 shares; Mr. Grasso, 90,000 shares;
Mr. Grounds, 30,000 shares; Mr. Rayhill, 165,000 shares; Mr. Roberts, 60,000 shares; Mr.
Washer, 150,000 shares; Mr. Wood, 165,000
shares; Mr. Bharwani, 255,000 shares; Mr. Lavin, 442,500 shares; Ms. Robinson, 275,000 shares; and
Mr. Terry, 255,000 shares. Of Mr.
Bradley’s shares, 1,685,878 are pledged to secure loan(s) to him. The calculation of beneficial ownership also
includes, in
the case of the executive officers, an approximate number of shares each executive officer could be deemed to hold through
contributions made to the Company’s Employee 401(k) Plan (the "401(k) Plan"). The 401(k) Plan provides an option for all
participating
employees to purchase stock in the Company indirectly by buying units in a mutual fund. Each "unit" in the
mutual fund represents an interest in
Company stock, cash and cash equivalents.
(2) These shares are held directly by certain Black Diamond investment vehicles ("Black Diamond vehicles"). Black Diamond Capital Management,
L.L.C. ("Black Diamond") exercises investment discretion on behalf of investment advisory affiliates that serve as investment advisers to the
Black Diamond vehicles. Mr. Deckoff is the Managing Principal of Black Diamond. Mr. Deckoff disclaims beneficial ownership over the shares,
except to the extent of his pecuniary interest therein.
(3) Includes a total of 4,587,440 shares that are not outstanding as of the date
of this report, but which may be acquired within 60 days after March 10,
2025 upon exercise of options, and includes an estimate
of 401(k) Plan shares. 1,751 shares are pledged as security by an executive officer.
(4) Based on a report on Schedule 13G/A filed by the named person on February 9, 2024.
66
Equity Compensation Plan Information
The table below presents information regarding
securities authorized for issuance under equity compensation plans, including the CPS 2006 Long-Term
Equity Incentive Plan, as of December
31, 2024.
Plan Category
Outstanding
Options
Weighted average
exercise price of
Outstanding
Options
Number of
securities remaining
available for future
issuance under
equity
compensation plans
Plans approved by shareholders
6,097,440
$
5.39
2,983,830
Plans not approved by shareholders
None
N/A
N/A
Total
6,097,440
$
5.39
2,983,830
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Subordinated Notes. The Company has offered
and sold its subordinated notes in a continuous public offering. Executive officer Teri L. Robinson has
purchased such notes directly
from the Company in the offering, in each case on the same terms then offered to the public generally. The largest aggregate
amount of
principal outstanding on Ms. Robinson’s notes in 2024 was $459,351. The amount of principal outstanding on Ms. Robinson’s
notes as of March
10, 2025 was $212,801. In 2024, the Company paid $496,663 of principal on Ms. Robinson’s notes, which includes
principal paid more than once due to
the renewal of matured notes during the year. In 2024, the Company paid $23,125 of interest at rates
fixed at the time of purchase of each note. The interest
rate on Ms. Robinson’s notes ranges from 4.9% to 8.9%.
Executive officer Steve Schween purchased such
subordinated notes from the Company before he became an executive officer. The largest aggregate
amount of principal outstanding on Mr.
Schween’s note in 2024 was $665,460. The amount of principal outstanding as of March 10, 2025 was $665,460. In
2024, the Company
paid $148,013 in interest at a rate fixed at the time of purchase of the note. The interest rate on the note is 12.25%.
Employment. Ms. Noel Jackson, the Company’s
Vice President of Servicing, is the sister of Mr. Bradley, the Company’s chief executive officer and
chairman of the board. For
fiscal year 2024, Ms. Jackson received annual compensation of a base salary of $181,000 and is also eligible for an award under
the Executive
Management Bonus Plan described above. Ms. Jackson’s employment with the Company was authorized by the Board of Directors and her
base salary and Executive Management Bonus Plan award is reviewed and approved by the Compensation Committee on an annual basis.
Other Transactions.. On June 14, 2024,
and as part of the Company’s stock repurchase program, the Company purchased directly from the Company’s
chief executive officer,
Charles E. Bradley, Jr., 50,000 shares of CPS common stock at the previous day’s market closing price of $8.98. The dollar amount
involved in the transaction and Mr. Bradley’s interest in the transaction was $449,000. On September 10, 2024, the Company purchased
an additional
70,000 shares of CPS common stock at the market closing price of $9.85 per share from Mr. Bradley, and Mr. Bradley’s
interest in the transaction was
$689,500.
67
Policy on Related Party Transactions and Director
Independence. It is the Company’s policy that transactions with related parties having a control or
fiduciary relationship with the
Company who personally benefit from such transactions may take place only if approved by the Audit Committee or by the
members of the
Company’s Board of Directors who are disinterested with respect to the transaction, and independent in accordance with the standards for
director independence prescribed by Nasdaq. Such policy is maintained in writing in the charter of the Audit Committee. The Audit Committee
has given
general approval to executive officer purchases of subordinated notes that are on terms and rates then available to the public,
including the purchases by
Ms. Robinson. The transactions with Mr. Schween were not subject to approval because they were entered into
before Mr. Schween was an executive
officer. The repurchases by the Company from Mr. Bradley were made pursuant to the Company’s stock
repurchase program but were not preapproved.
The Audit Committee subsequently ratified the Company’s transactions with Mr. Bradley.
The nine directors of the Company are Charles
E. Bradley, Jr., Stephen H. Deckoff, Louis M. Grasso, William W. Grounds, Brian J. Rayhill, William B.
Roberts, James E. Walker III,
Gregory S. Washer, and Daniel S. Wood, of whom Messrs. Rayhill, Grasso, Washer, and Wood compose the Audit
Committee. The Board of Directors
has concluded that other than Mr. Bradley (who is the Company’s chief executive officer), each of the other eight
directors is independent
in accordance with the director independence standards prescribed by Nasdaq, and has determined that none of them has a material
relationship
with the Company that would impair his independence from management or otherwise compromise his ability to act as an independent
director.
Item 14. Principal Accounting Fees and Services
Fees Paid to Auditors
The following table sets forth the fees accrued
or paid to the Company’s independent registered public accounting firms for the years ended December 31,
2024 and 2023. Crowe LLP
has served as the Company’s independent registered public accounting firm since February 2009, and has reported on the
Company’s
financial statements for the years ended December 31, 2008 through 2024.
Audit and Non-Audit Fees
2023
2024
Audit Fees (1)
$
960,000
$
1,000,000
Audit-Related Fees (2)
240,850
169,300
Tax Fees (3)
296,000
304,000
All Other Fees
–
–
TOTAL
$
1,496,850
$
1,473,300
(1) Audit fees relate to professional services rendered in connection with the audit of the Company’s annual financial statements and
internal control
over financial reporting, quarterly review of financial statements included in the Company’s Quarterly Reports
on Form 10-Q, and audit services
provided in connection with other statutory and regulatory filings.
(2) Audit-related fees comprise fees for professional services that are reasonably related to the performance of the audit or review of the
Company’s
financial statements.
(3) The 2023 and 2024 tax fees represent services rendered in connection with preparation of state and federal tax returns for the Company
and its
subsidiaries.
68
Audit Committee Supervision of Principal Accountant
The Audit Committee acts pursuant to a written
charter adopted by the Board of Directors. Pursuant to the charter, the Audit Committee pre-approves the
audit and permitted non-audit
fees to be paid to the independent auditor, and authorizes on behalf of the Company the payment of such fees, or refuses such
authorization.
The Audit Committee is also empowered to delegate such authority to one or more of its members. The Audit Committee has delegated to its
chairman the authority to approve performance of services on an interim basis. In the fiscal years ended December 31, 2024 and December
31, 2023, all
services for which audit fees or audit related fees were paid were preapproved by the Audit Committee as a whole, or pursuant
to such delegated authority.
In the course of its meetings, the Audit Committee
has considered whether the provision of the non-audit fees outlined above is compatible with
maintaining the independence of the audit
firm, and has concluded that such independence is not and was not impaired.
69
PART IV
Item
15. Exhibits, Financial Statement Schedules
The financial statements listed below under the
caption "Index to Financial Statements"
are filed as a part of this report. No financial statement schedules
are filed as the required information is inapplicable or the information
is presented in the Consolidated Financial Statements or the related notes. Separate
financial statements of the Company have been omitted
as the Company is primarily an operating company and its subsidiaries are wholly owned and do
not have minority equity interests held
by any person other than the Company in amounts that together exceed 5% of the total consolidated assets as shown
by the most recent year-end
Consolidated Balance Sheet.
The exhibits listed below are filed as part of
this report, whether filed herewith or incorporated by reference to an exhibit filed with the report identified in
the parentheses following
the description of such exhibit. Unless otherwise indicated, each such identified report was filed by or with respect to the
registrant.
Exhibit
Number
Description
(“**” indicates compensatory plan or agreement.)
3.1
Restated Articles of Incorporation (Exhibit 3.1 to Form 10-K filed
March 31, 2009)
3.1.1
Certificate of Designation re Series B Preferred (Exhibit 3.1.1 to Form 8-K filed by the registrant on December 30, 2010)
3.2
Amended and Restated Bylaws (Exhibit 3.2 to Form 8-K filed December 3, 2021)
4.
Instruments defining the rights of holders of long-term debt of certain consolidated subsidiaries of the registrant are omitted pursuant to the
exclusion set forth in subdivisions (b)(iv)(iii)(A) and (b)(v) of Item 601 of Regulation S-K (17 CFR 229.601). The registrant agrees to
provide copies of such instruments to the United States Securities and Exchange Commission upon request.
4.1
Form of Indenture re Renewable Unsecured Subordinated Notes
(“RUS Notes”). (Exhibit 4.1 to Form S-1, no. 333-168976)
4.2
Form of RUS Notes (Exhibit 4.2 to Form S-1, no.
333-168976)
4.3
Supplement No. 1 dated December 7, 2010 to Indenture re RUS Notes (Exhibit 4.3 to Form S-1, no. 333-168976)
4.4
Supplement No. 2 dated January 22, 2014 to Indenture re RUS Notes (Exhibit 4.4 to Form S-1, no. 333-190766)
4.5
Supplement No. 3 dated June 14, 2023 to Indenture re RUS Notes (Exhibit 4.5 to Form S-3, no. 333-272653)
10.2
1997 Long-Term Incentive Stock Plan (“1997 Plan”) (Exhibit 10.20 to Form S-2, no. 333-121913) **
10.2.1
Form of Option Agreement under 1997 Plan (Exhibit 10.2.1 to Form 10-K
filed March 13, 2006) **
10.14
2006 Long-Term Equity Incentive Plan as amended May 18, 2015 (Incorporated by reference to pages A-1 through A-10 of the definitive
proxy statement filed by the registrant on April 27, 2015)**
10.14.1
Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 10.14.1 to registrant’s Form 10-K filed March 9,
2007)**
10.14.2
Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 99.(D)(2) to registrant’s Schedule TO filed
November 12, 2009)**
10.14.3
Form of Option Agreement under the 2006 Long-Term Equity Incentive Plan (Exhibit 99.(D)(3) to registrant’s Schedule TO filed
November 12, 2009)**
14
Registrant’s Code of Ethics for Senior Financial Officers (Exhibit 14 to Form 10-K filed March 13, 2006)
19
Insider Trading Policy (filed herewith)
21
List of subsidiaries of the registrant (filed herewith)
23.1
Consent of Crowe LLP (filed herewith)
31.1
Rule 13a-14(a) certification by Chief Executive Officer (filed herewith)
31.2
Rule 13a-14(a) certification by Chief Financial Officer (filed herewith)
32
Section 1350 certification (filed herewith)
97
Policy Relating to Recovery of Erroneously Awarded Compensation (Exhibit 97 to Form 10-K filed March 15, 2024)
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Item
16. Form 10-K Summary
None.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto
duly authorized.
CONSUMER PORTFOLIO SERVICES, INC. (registrant)
March 12, 2025
By:
/s/ CHARLES E. BRADLEY, JR.
Charles E. Bradley, Jr., Director and Chief Executive Officer
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and
on the dates indicated.
March 12, 2025
/s/ CHARLES E. BRADLEY, JR.
Charles E. Bradley, Jr., Director
and Chief Executive Officer
(Principal Executive Officer)
March 12, 2025
/s/ STEPHEN H. DECKOFF
Stephen H. Deckoff, Director
March 12, 2025
/s/ LOUIS M. GRASSO
Lou Grasso, Director
March 12, 2025
/s/ WILLIAM W. GROUNDS
William W. Grounds, Director
March 12, 2025
/s/ BRIAN J. RAYHILL
Brian J. Rayhill, Director
March 12, 2025
/s/ WILLIAM B. ROBERTS
William B. Roberts, Director
March 12, 2025
/s/ JAMES E. WALKER
James E. Walker, Director
March 12, 2025
/s/ GREGORY S. WASHER
Gregory S. Washer, Director
March 12, 2025
/s/ DANIEL S. WOOD
Daniel S. Wood, Director
March 12, 2025
/s/ DENESH BHARWANI
Denesh Bharwani, Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)
71
INDEX TO FINANCIAL STATEMENTS
Page
Reference
Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID: 173)
F-2
Consolidated Balance Sheets as of December 31, 2024 and 2023
F-4
Consolidated Statements of Income for the years ended December 31, 2024, 2023 and 2022
F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2024, 2023 and 2022
F-6
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2024, 2023 and 2022
F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
F-8
Notes to Consolidated Financial Statements
F-9
F-1
Crowe
LLP
Independent
Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Shareholders and the Board of Directors of
Consumer
Portfolio Services, Inc. and Subsidiaries
Las Vegas, Nevada
Opinions
on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated
balance sheets of Consumer Portfolio Services, Inc. and Subsidiaries (the "Company") as of December 31,
2024 and 2023, the related
consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the
three-
year period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). We also
have audited the
Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal
Control – Integrated Framework:
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).”
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2024 and 2023, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects,
effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control
– Integrated Framework:
(2013) issued by COSO.
Basis for Opinions
The Company’s management is
responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Controls over
Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion
on the Company’s internal control
over financial reporting based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control
over
financial reporting was maintained in all material respects.
Our audits of the financial statements
included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by
management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial
reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal
Control Over Financial Reporting
A company’s internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial
statements.
F-2
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated
below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated
to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved
our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way
our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing
a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Loans at Fair Value
As described in Notes 1 and 12 to
the consolidated financial statements, the Company carries all finance receivables acquired after 2017 at fair value on a
recurring basis.
The Company had $3.3 billion in finance receivables that are carried at fair value, all of which are classified as level 3 fair values
as they
contain one or more inputs which are unobservable and significant to the fair value measurement. With assistance from an outside
valuation expert, the
Company used a level 3 fair value methodology for the fair value of finance receivables. The significant assumptions
used by the Company to calculate the
fair value of these financial receivables include the magnitude and timing of net charge-offs and
the rate of amortization of the portfolio of finance
receivables. These significant assumptions were based on the factors that market
participants use in pricing similar receivables and are based on the best
information available in the circumstances.
We identified the valuation of finance
receivables carried at fair value as a critical audit matter as this estimate requires subjective auditor judgment. Our
principal considerations
in making this determination are (i) there was significant judgment and estimation by the Company in determining the assumptions
to estimate
fair value, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures related to the fair
value of
these finance receivables, and (ii) the audit effort involved professionals with specialized skill and knowledge to assist in
evaluating the audit evidence
obtained from these procedures.
Testing the design and operating effectiveness
of controls over the application of the assumptions used to support the estimate of loans at fair value
included addressing:
·
The
completeness and accuracy of data
·
Third-party
model review
·
Review
of management’s judgments and significant assumptions over inputs
Substantively testing management's process, including
evaluating management’s judgments and assumptions, for developing the estimate of loans at fair
value included:
·
Using
an auditor employed valuation specialist to assist in testing the Company’s estimate of fair value of the finance receivables. Testing
included evaluation of certain management significant assumptions and, evaluating the appropriateness of the methodology including a
recalculation
of the model.
·
Testing
the completeness and accuracy of the underlying data used in the fair value of finance receivables estimate.
Crowe LLP
We have served as the Company’s auditor since 2008.
Dallas, Texas
March 12, 2025
F-3
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
December 31,
2024
2023
ASSETS
Cash and cash equivalents
$
11,713
$
6,174
Restricted cash and equivalents
125,684
119,257
Finance receivables measured at fair value
3,313,767
2,722,662
Finance receivables
5,420
27,553
Less: Allowance for finance credit losses
(433)
(2,869)
Finance receivables, net
4,987
24,684
Furniture and equipment, net
943
1,372
Deferred tax assets, net
1,010
3,736
Other assets
35,764
25,861
$
3,493,868
$
2,903,746
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses
$
70,151
$
62,544
Warehouse lines of credit
410,898
234,025
Residual interest financing
99,176
49,875
Securitization trust debt
2,594,384
2,265,446
Subordinated renewable notes
26,489
17,188
3,201,098
2,629,078
COMMITMENTS AND CONTINGENCIES
Shareholders’ Equity
Preferred stock, $1 par value; authorized 4,998,130 shares; none issued
–
–
Series A preferred stock, $1 par value; authorized 5,000,000 shares; none issued
–
–
Series B preferred stock, $1 par value; authorized 1,870 shares; none issued
–
–
Common stock, no par value; authorized 75,000,000 shares; 21,432,698 and 21,174,856 shares
issued and outstanding at December 31, 2024 and December 31, 2023, respectively
25,720
28,678
Retained earnings
267,060
247,857
Accumulated other comprehensive loss
(10)
(1,867)
292,770
274,668
$
3,493,868
$
2,903,746
See accompanying Notes to Consolidated Financial
Statements.
F-4
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
2024
2023
2022
Revenues:
Interest income
$
363,962
$
329,219
$
305,237
Mark to finance receivables measured at fair value
21,000
12,000
15,283
Other income
8,544
10,795
9,189
393,506
352,014
329,709
Expenses:
Employee costs
96,192
88,148
84,282
General and administrative
54,710
50,001
37,618
Interest
191,257
146,631
87,524
Provision for credit losses
(5,307)
(22,300)
(28,100)
Sales
22,752
21,216
23,039
Occupancy
5,609
6,374
7,535
Depreciation and amortization
862
847
1,618
366,075
290,917
213,516
Income before income tax expense (benefit)
27,431
61,097
116,193
Income tax expense (benefit)
8,228
15,754
30,210
Net income
$
19,203
$
45,343
$
85,983
Earnings per share:
Basic
$
0.90
$
2.17
$
4.10
Diluted
0.79
1.80
3.23
Number of shares used in computing earnings per share:
Basic
21,292
20,896
20,958
Diluted
24,325
25,218
26,589
See accompanying Notes to Consolidated Financial
Statements.
F-5
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands)
Year Ended December 31,
2024
2023
2022
Net income
$
19,203
$
45,343
$
85,983
Other comprehensive income (loss); change in funded status of pension
plan, net of $681, $422 and $513 in tax for 2024, 2023 and 2022,
respectively
1,857
1,164
(1,409)
Comprehensive income
$
21,060
$
46,507
$
84,574
See accompanying Notes to Consolidated Financial
Statements.
F-6
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(In thousands)
Accumulated
Other
Common Stock
Retained
Comprehensive
Shares
Amount
Earnings
Loss
Total
Balance at January 1, 2022
21,144 $
55,298 $
116,531 $
(1,622) $
170,207
Common stock issued upon exercise of options and
warrants
3,127
15,277
–
–
15,277
Repurchase of common stock
(4,140)
(46,096)
–
–
(46,096)
Other comprehensive income (loss)
–
–
–
(1,409)
(1,409)
Stock-based compensation
–
4,427
–
–
4,427
Net income
–
–
85,983
–
85,983
Balance at December 31, 2022
20,131 $
28,906 $
202,514 $
(3,031) $
228,389
Common stock issued upon exercise of options and
warrants
3,020
16,581
–
–
16,581
Repurchase of common stock
(1,976)
(20,273)
–
–
(20,273)
Other comprehensive income (loss)
–
–
–
1,164
1,164
Stock-based compensation
–
3,464
–
–
3,464
Net income
–
–
45,343
–
45,343
Balance at December 31, 2023
21,175 $
28,678 $
247,857 $
(1,867) $
274,668
Common stock issued upon exercise of options and
warrants
1,728
6,913
–
–
6,913
Repurchase of common stock
(1,470)
(12,828)
–
–
(12,828)
Other comprehensive income (loss)
–
–
–
1,857
1,857
Stock-based compensation
–
2,957
–
–
2,957
Net income
–
–
19,203
–
19,203
Balance at December 31, 2024
21,433 $
25,720 $
267,060 $
(10) $
292,770
See accompanying Notes to Consolidated Financial
Statements.
F-7
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2024
2023
2022
Cash flows from operating activities:
Net income
$
19,203
$
45,343
$
85,983
Adjustments to reconcile net income to net cash provided by operating
activities:
Net interest income accretion on fair value receivables
224,304
193,541
135,147
Depreciation and amortization
862
847
1,618
Amortization of deferred financing costs
10,574
9,690
8,207
Mark to fair value of finance receivables measured at fair value
(21,000)
(12,000)
(15,283)
Provision for credit losses
(5,307)
(22,300)
(28,100)
Stock-based compensation expense
2,957
3,464
4,427
Changes in assets and liabilities:
Other assets
(10,028)
4,667
4,171
Deferred tax assets, net
2,726
6,441
9,398
Accounts payable and accrued expenses
9,464
8,287
10,364
Net cash provided by operating activities
233,755
237,980
215,932
Cash flows from investing activities:
Payments received on finance receivables held for investment
25,004
68,167
133,733
Purchases of finance receivables measured at fair value
(1,653,037)
(1,251,020)
(1,673,166)
Payments on receivables portfolio at fair value
858,628
823,434
825,783
Change in repossessions held in inventory
125
446
1,899
Purchase of furniture and equipment
(433)
(559)
(2,149)
Net cash (used in) investing activities
(769,713)
(359,532)
(713,900)
Cash flows from financing activities:
Proceeds from issuance of securitization trust debt
1,453,921
1,235,534
1,411,018
Proceeds from issuance of subordinated renewable notes
11,037
–
4,004
Payments on subordinated renewable notes
(1,736)
(8,075)
(5,200)
Net advances (repayments) of warehouse lines of credit
180,574
(53,253)
181,868
Net advances (repayments) of residual interest financing debt
50,000
–
(4,311)
Repayment of securitization trust debt
(1,124,088)
(1,078,432)
(1,060,052)
Payment of financing costs
(15,869)
(7,888)
(12,299)
Purchase of common stock
(12,828)
(20,273)
(46,096)
Exercise of options and warrants
6,913
16,581
15,277
Net cash provided by financing activities
547,924
84,194
484,209
Increase (decrease) in cash and cash equivalents
11,966
(37,358)
(13,759)
Cash and cash equivalents at beginning of year
125,431
162,789
176,548
Cash and cash equivalents at end of year
$
137,397
$
125,431
$
162,789
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
177,949
$
135,203
$
76,696
Income taxes
11,799
3,552
16,182
See accompanying Notes to Consolidated Financial Statements.
F-8
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Consumer Portfolio Services,
Inc. (“CPS”) was incorporated in California on March 8, 1991. CPS and its subsidiaries (collectively, the “Company”)
specialize in purchasing and servicing retail automobile installment sale contracts ("Contracts") originated by licensed motor
vehicle dealers (“Dealers”)
located throughout the United States. Customers located in Texas, Ohio, California, Illinois, Florida,
and Georgia represented 7.8%, 7.3%, 6.0%, 5.7%,
5.4%, and 4.5%. respectively, of contracts purchased during 2024 compared with 7.1%, 6.2%,
6.0%, 6.9%, 5.4%, and 4.0% respectively in 2023. No other
state had a concentration in excess of 4.5% in 2024. We specialize in contracts
with vehicle purchasers who generally would not be expected to qualify for
traditional financing provided by commercial banks or automobile
manufacturers’ captive finance companies.
We are subject to various
regulations and laws as they relate to the extension of credit in consumer credit transactions. Failure to comply with such laws
and regulations
could have a material adverse effect on the Company.
Principles of Consolidation
The Consolidated Financial
Statements include the accounts of Consumer Portfolio Services, Inc. and its wholly-owned subsidiaries, certain of which are
special
purpose subsidiaries (“SPS”), formed to accommodate the structures under which we purchase and securitize our contracts.
The Consolidated
Financial Statements also include the accounts of CPS Leasing, Inc., an 80% owned subsidiary. All significant intercompany
balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements
of cash flows, we consider all highly liquid debt instruments with original maturities of three months or less to be cash
equivalents.
Cash equivalents consist of cash on hand and due from banks and money market accounts. Substantially all of our cash is deposited at three
financial institutions. We maintain cash due from banks in excess of the banks’ insured deposit limits. We do not believe we are exposed
to any significant
credit risk on these deposits. As part of certain financial covenants related to debt facilities, we are required to
maintain a minimum unrestricted cash
balance. As of December 31, 2024, our unrestricted cash balance was $11.7 million, which exceeded
the minimum amounts required by our financial
covenants.
Finance Receivables
Finance receivables, which
we have the intent and ability to hold for the foreseeable future or until maturity or payoff, are presented at cost. All finance
receivable
contracts are held for investment. Interest income is accrued on the unpaid principal balance. Origination fees, net of certain direct
origination
costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Generally,
payments received on finance
receivables are restricted to certain securitized pools, and the related contracts cannot be resold. Finance
receivables are charged off pursuant to the
controlling documents of certain securitized pools, generally as described below under Charge
Off Policy. Management may authorize an extension of
payment terms if collection appears likely during the next calendar month.
F-9
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our portfolio of finance receivables
consists of small-balance homogeneous contracts that are collectively evaluated for impairment on a portfolio basis.
We report delinquency
on a contractual basis. Once a Contract becomes greater than 90 days delinquent, we do not recognize additional interest income
until
the obligor under the Contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a Contract
that is greater than
90 days delinquent are first applied to accrued interest and then to principal reduction.
Finance Receivables Measured at Fair Value
Effective January 1, 2018,
we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance
receivable acquired
after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received
in
the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute
the internal rate of
return that results in the present value of those estimated cash receipts being equal to the purchase date fair value.
Thereafter, we recognize interest income
on such receivables on a level yield basis using that internal rate of return as the applicable
interest rate. Cash received with respect to such receivables is
applied first against such interest income, and then to reduce the recorded
value of the receivables.
We re-evaluate the fair value
of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different
from the recorded
value, an adjustment would be required. For the twelve-month period ended December 31, 2024 include a $21.0 million positive mark to
the
carrying value of the portion of the receivables portfolio accounted for at fair value. The Company recorded a $12.0 positive mark to
for the twelve-
month period ended December 31, 2023.
Anticipated credit losses
are included in our estimation of cash to be received with respect to receivables. In accordance with the fair value accounting
standards,
credit losses are included in our computation of the appropriate level yield, therefore we do not thereafter make periodic provision for
credit
losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also because we
include anticipated credit
losses in our computation of the level yield, the computed level yield is materially lower than the average
contractual rate applicable to the receivables.
Because our initial recorded value is fixed as the price we pay for the receivable, rather
than as the contractual principal balance, we do not record
acquisition fees as an amortizing asset related to the receivables, nor do
we capitalize costs of acquiring the receivables. Rather we recognize the costs of
acquisition as expenses in the period incurred.
Allowance for Finance Credit Losses
In order to estimate an appropriate
allowance for losses likely incurred on finance receivables, we use a loss allowance methodology commonly referred
to as “static
pooling,” which stratifies the finance receivable portfolio into separately identified pools based on their period of origination,
then uses
historical performance of seasoned pools to estimate future losses on current pools. Historical loss experience is adjusted
as necessary for current economic
conditions. We consider our portfolio of finance receivables to be relatively homogenous and consequently
we analyze credit performance primarily in the
aggregate rather than stratification by any particular credit quality indicator. Using
analytical and formula driven techniques, we estimate an allowance for
finance credit losses, which we believe is adequate for current
expected credit losses that can be reasonably estimated in our portfolio of finance receivable
contracts. Net losses incurred on finance
receivables are charged to the allowance. We evaluate the adequacy of the allowance by examining current
delinquencies, the characteristics
of the portfolio, the value of the underlying collateral and historical loss trends. As conditions change, our level of
provisioning
and/or allowance may change.
F-10
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Charge Off Policy
Delinquent contracts for which
the related financed vehicle has been repossessed are generally charged off at the earliest of (1) the month in which the
proceeds from
the sale of the financed vehicle are received, (2) the month in which 90 days have passed from the date of repossession or (3) the month
in
which the Contract becomes seven scheduled payments past due (see Repossessed and Other Assets below). The amount charged off is the
remaining
principal balance of the Contract, after the application of the net proceeds from the liquidation of the financed vehicle. With
respect to delinquent contracts
for which the related financed vehicle has not been repossessed, the remaining principal balance is generally
charged off no later than the end of the month
that the Contract becomes five scheduled payments past due.
Contract Acquisition Fees and Origination Costs
Upon purchase of a Contract
from a Dealer, we generally either charge or advance the Dealer an acquisition fee. Dealer acquisition fees and deferred
origination costs
are applied to the recorded value of finance receivables and are accreted into earnings as an adjustment to the yield over the estimated
life
of the Contract using the interest method. However, for receivables measured at fair value, we do not record acquisition fees as
an amortizing asset related
to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs
of acquisition as expenses in the period incurred.
Repossessed and Other Assets
If a Contract obligor fails
to make or keep promises for payments, or if the obligor is uncooperative or attempts to evade contact or hide the vehicle, a
supervisor
will review the collection activity relating to the account to determine if repossession of the vehicle is warranted. Generally, such
a decision is
made between the 60th and 90th day past the obligor’s payment due date, but could occur sooner or later, depending
on the specific circumstances. At the
time the vehicle is repossessed we stop accruing interest on the Contract, and reclassify the remaining
Contract balance to the line item "Other Assets" on
our Consolidated Balance Sheet at its estimated fair value less costs to
sell.
Treatment of Securitizations
Our term securitization structure has generally
been as follows:
We sell contracts we acquire
to a wholly-owned SPS, which has been established for the limited purpose of buying and reselling our contracts. The SPS
then transfers
the same contracts to another entity, typically a statutory trust ("Trust").
The Trust issues interest-bearing asset-backed securities (“Notes”),
in
a principal amount equal to or less than the aggregate principal balance of the contracts. We typically sell these contracts to the
Trust at face value and
without recourse, except representations and warranties that we make to the Trust that are similar to those provided
to us by the Dealer. One or more
investors (the “Noteholders”) purchase
the Notes issued by the Trust; the proceeds from the sale of the Notes are then used to purchase the contracts from
us. We may retain
or sell subordinated Notes issued by the Trust. In addition, we have provided "Credit Enhancement" for the benefit of the Noteholders
in
three forms: (1) an initial cash deposit to a bank account (a "Spread Account") held by the Trust, (2) overcollateralization
of the Notes, where the principal
balance of the Notes issued is less than the principal balance of the contracts, and (3) in the form
of subordinated Notes. The agreements governing the
securitization transactions (collectively referred to as the "Securitization
Agreements") require that the initial level of Credit Enhancement be supplemented
by a portion of collections from the contracts
until the level of Credit Enhancement reaches specified levels, which are then maintained. The specified
levels are generally computed
as a percentage of the principal amount remaining unpaid under the related contracts. The specified levels at which the Credit
Enhancement
is to be maintained will vary depending on the performance of the portfolios of contracts held by the Trusts and on other conditions.
Such
levels have increased and decreased from time to time based on performance of the various portfolios, and have also varied from
one Trust to another.
F-11
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our warehouse securitization
structures are similar to the above, except that (i) the SPS that purchases the contracts pledges the contracts to secure
promissory notes
or loans that it issues, and (ii) no increase in the required amount of Credit Enhancement is contemplated. Upon each sale of contracts
in a
securitization structured as a secured financing, we retain as assets on our Consolidated Balance Sheet the securitized contracts
and record as indebtedness
the Notes issued in the transaction.
We have the power to direct
the most significant activities of the SPS. In addition, we have the obligation to absorb losses and the rights to receive
benefits from
the SPS, both of which could be potentially significant to the SPS. These types of securitization structures are treated as secured
financings,
in which the receivables remain on our Consolidated Balance Sheet, and the debt issued by the SPS is shown as a securitization
trust debt on our
Consolidated Balance Sheet.
We receive periodic base servicing
fees for the servicing and collection of the contracts. In addition, we are entitled to the cash flows from the Trusts that
represent
collections on the contracts in excess of the amounts required to pay principal and interest on the Notes, the base servicing fees, and
certain other
fees (such as trustee and custodial fees). Required principal payments on the Notes are generally defined as the payments
sufficient to keep the principal
balance of the Notes equal to the aggregate principal balance of the related contracts (excluding those
contracts that have been charged off), or a pre-
determined percentage of such balance. Where that percentage is less than 100%, the related
Securitization Agreements require accelerated payment of
principal until the principal balance of the Notes is reduced to the specified
percentage. Such accelerated principal payment is said to create
"overcollateralization"
of the Notes.
If the amount of cash required
for payment of fees, interest and principal on the senior Notes exceeds the amount collected during the collection period,
the shortfall
is generally withdrawn from the Spread Account, if any. If the cash collected during the period exceeds the amount necessary for the above
allocations plus required principal payments on the subordinated Notes, if any, and there is no shortfall in the related Spread Account
or other form of
Credit Enhancement, the excess is released to us. If the total Credit Enhancement amount is not at the required level,
then the excess cash collected is
retained in the Trust until the specified level is achieved. Cash in the Spread Accounts is restricted
from our use. Cash held in the various Spread Accounts
is invested in high quality, liquid investment securities, as specified in the
Securitization Agreements. In all of our term securitizations we have transferred
the receivables (through a subsidiary) to the securitization
Trust. We report the assets and liabilities of the securitization Trust on our Consolidated Balance
Sheet. The Noteholders’ and
the related securitization Trusts’ recourse against us for failure of the contract obligors to make payments on a timely basis is
limited, in general, to our Finance Receivables, and Spread Accounts.
Servicing
We consider the contractual
servicing fee received on our managed portfolio held by non-consolidated subsidiaries to be equal to adequate compensation.
Additionally,
we consider that these fees would fairly compensate a substitute servicer, should one be required. As a result, no servicing asset or
liability
has been recognized. Servicing fees received on the managed portfolio held by non-consolidated subsidiaries are reported as
income when earned.
Servicing fees received on the managed portfolio held by consolidated subsidiaries are included in interest income
when earned. Servicing costs are
charged to expense as incurred. Servicing fees receivable, which are included in Other Assets in the
accompanying Consolidated Balance Sheets, represent
fees earned but not yet remitted to us by the trustee.
F-12
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furniture and Equipment
Furniture and equipment are
stated at cost net of accumulated depreciation. We calculate depreciation using the straight-line method over the estimated
useful lives
of the assets, which range from three to five years. Assets held under capital leases and leasehold improvements are amortized over the
lesser
of the estimated useful lives of the assets or the related lease terms. Amortization expense on assets acquired under capital lease
is included with
depreciation expense on owned assets.
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of
an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to
future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of carrying
amount or fair value less costs to sell.
Other Income
The following table presents the primary components
of Other Income:
Year Ended December 31,
2024
2023
2022
(In thousands)
Third-party portfolio
$
7,324
$
9,350
$
6,814
Direct mail revenues
–
–
774
Sales tax refunds
1,093
1,078
737
Other
127
367
864
Other income for the period
$
8,544
$
10,795
$
9,189
F-13
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Earnings per share were calculated
using the weighted average number of shares outstanding for the related period. The following table illustrates the
computation of basic
and diluted earnings per share:
Year Ended December 31,
2024
2023
2022
(In thousands, except per share data)
Numerator:
Numerator for basic and diluted earnings per
share
$
19,203
$
45,343
$
85,983
Denominator:
Denominator for basic earnings per share -
weighted average number of common
shares outstanding during the year
21,292
20,896
20,958
Incremental common shares attributable to
exercise of outstanding options and
warrants
3,033
4,322
3,218
Denominator for diluted earnings per share
24,325
25,218
26,589
Basic earnings per share
$
0.90
$
2.17
$
4.10
Diluted earnings per share
$
0.79
$
1.80
$
3.23
Incremental shares of 1.7
million, 1.7 million and 1.2 million related to stock options and warrants have been excluded from the diluted earnings per
share calculation
for the years ended December 31, 2024, 2023 and 2022, respectively, because the effect is anti-dilutive.
Deferral and Amortization of Debt Issuance Costs
Costs related to the issuance
of debt are deferred and amortized using the interest method over the contractual or expected term of the related debt.
Unamortized debt
issuance costs are presented as a direct deduction to the carrying amount of the related debt on our Consolidated Balance Sheets.
Income Taxes
The Company and its subsidiaries
file a consolidated federal income tax return and combined or stand-alone state franchise tax returns for certain states.
We utilize the
asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases.
Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be
recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. We
estimate a valuation allowance against that portion of the deferred tax asset
whose utilization in future periods is not more than likely.
F-14
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchases of Company Stock
We record purchases of our own common stock at
cost and treat the shares as retired.
Stock Option Plan
The Company accounts for stock-based compensation
in accordance with FASB ASC Topic 718, Compensation—Stock Compensation, that generally
requires entities to recognize the
cost of employee services received in exchange for awards of stock options, restricted stock or other equity instruments,
based on the
grant date fair value of those awards. Compensation cost is recognized for awards issued to employees based on the fair value of these
awards
at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. This cost is recognized over
the period which an
employee is required to provide services in exchange for the award, generally the vesting period.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make
estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the
reported amounts
of income and expenses during the reported periods. These are material estimates that could be susceptible to changes
in the near term and, accordingly,
actual results could differ from those estimates.
Reclassification
Certain amounts for the prior
year have been reclassified to conform to the current year’s presentation with no effect on previously reported earnings or
shareholders’
equity.
Financial Covenants
Certain of our securitization
transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring
minimum
financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage
levels. As of December 31, 2024, we were in compliance with all such covenants. In addition, certain of our debt agreements other than
our term
securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare
a default if an event of default
occurred with respect to other indebtedness of ours, but only if such other event of default were to
be accompanied by acceleration of such other
indebtedness.
Provision for Contingent Liabilities
We are routinely involved
in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued.
Our legal
counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it
is both
probable that a liability has been incurred and the amount of the loss can be reasonably determined.
F-15
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have recorded a liability
as of December 31, 2024, which represents our estimate of the immaterial aggregate probable incurred losses for legal
contingencies. The
amount of losses that may ultimately be incurred, over and above such losses as are probable, cannot be estimated with certainty.
Accounting Pronouncements Recently Adopted
In November of 2023, the
FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The
amendments in
this ASU became effective for the Company beginning with this Annual Report on Form 10-K for the year ended December 31, 2024, and
we
have adopted using the retrospective transition method. The adoption did not have a material impact on the Company’s consolidated
financial
statements. See Note 13 for additional information on the adoption of ASU 2023-07.
(2) Restricted Cash
Restricted cash consists of
cash and cash equivalent accounts relating to our outstanding securitization trusts and credit facilities. The amount of restricted
cash
on our Consolidated Balance Sheets was $125.7 million and $119.3 million as of December 31, 2024 and 2023, respectively.
Our securitization transactions
and one of our warehouse credit facilities require that we establish cash reserves, or spread accounts, as additional credit
enhancement.
These cash reserves, which are included in restricted cash, were $62.3 million and $59.0 million as of December 31, 2024 and 2023,
respectively.
(3) Finance Receivables
Our portfolio of finance receivables
consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated
for impairment on
a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For
key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the
average for the
portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do
not recognize additional interest
income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent.
Any payments received on a contract that is
greater than 90 days delinquent are first applied to accrued interest and then to principal
reduction.
In January 2018 the Company
adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at
fair value are
recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote.
The following table presents the components of
finance receivables, net of unearned interest:
December 31,
2024
2023
Finance receivables
(In thousands)
Automobile finance receivables, net of unearned
interest
$
5,420
$
27,553
Unearned acquisition fees, discounts and deferred
origination costs, net
–
–
Finance receivables
$
5,420
$
27,553
F-16
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We consider an automobile
contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date,
which date may
have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days
payments
are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not reported as delinquent.
In
certain circumstances we will grant obligors one-month payment extensions. The only modification of terms is to advance the obligor’s
next due date by
one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension
may be granted. There are no other
concessions, such as a reduction in interest rate, forgiveness of principal or of accrued interest.
Accordingly, we consider such extensions to be insignificant
delays in payments. The following table summarizes the delinquency status
of finance receivables as of December 31, 2024 and 2023:
December 31,
2024
2023
Delinquency Status
(In thousands)
Current
$
2,994
$
17,771
31-60 days
1,184
5,626
61-90 days
971
3,087
91 + days
271
1,069
$
5,420
$
27,553
Finance receivables totaling
$271,000 and $1.1 million at December 31, 2024 and 2023, respectively, have been placed on non-accrual status as a result
of their delinquency
status.
Allowance for Credit Losses
– Finance Receivables
The allowance for credit losses
is a valuation account that is deducted from the amortized cost basis of finance receivables to present the net amount
expected to be
collected. Charge offs are deducted from the allowance when management believes that collectability is unlikely.
Management estimates the allowance
using relevant available information, from internal and external sources, relating to past events, current conditions
and, reasonable
and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation of expected credit
losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools based on their calendar quarter
of origination, to
forecast expected losses for less seasoned quarterly vintage pools.
We measure the weighted average
monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the
pools in the relevant
historical period, we consider each pool’s performance from its inception through the end of the current period. We then apply the
results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s most recent actual cumulative
net loss experience and
extrapolating from that point based on the historical data. We believe the pattern and magnitude of losses on
older vintages allows us to establish a
reasonable and supportable forecast of less seasoned vintages.
F-17
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our contract purchase guidelines
are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor
credit history,
job stability, residence stability and ability to pay, there is relatively little variation from the average for the portfolio. Similarly,
for key
structural characteristics such as loan-to-value, length of contract, monthly payment and amount financed, there is relatively
little variation from the
average for the portfolio. Consequently, we do not believe there are significant differences in risk characteristics
between various segments of our portfolio.
Our methodology incorporates
historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools.
Furthermore,
the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive landscape,
the
Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment.
In consideration of the depth
and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss
information for
differences in risk characteristics such as credit or structural composition of segments of the portfolio or for changes in environmental
conditions such as changes in unemployment rates, collateral values or other factors. Throughout our history we have observed how events
such as extreme
weather, political unrest, and other qualitative factors have influenced the performance of our portfolio. Consequently,
we have considered how such
qualitative factors may affect future credit losses and have incorporated our judgement of the effect of those
factors into our estimates.
The following table presents
the amortized cost basis of our finance receivables by annual vintage as of December 31, 2024 and 2023:
December 31,
2024
2023
Annual Vintage Pool
(In thousands)
2015 and prior
$
294
$
2,158
2016
1,336
7,673
2017
3,790
17,722
$
5,420
$
27,553
For our receivables originated prior to January
2018, we maintain an allowance for credit losses on automobile contracts held on our balance sheet, which
reflects our estimates of probable
credit losses that can be reasonably estimated. The Company recorded a reduction to provision for credit losses on
finance receivables
in the amount of $5.3 million, $22.3 million, and $28.1 million for the years ended December 31, 2024, 2023, and 2022, respectively.
The
reserve decrease was primarily due to a decrease in lifetime expected credit losses resulting from better than expected credit performance
for these
receivables.
F-18
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents
a summary of the activity for the allowance for finance credit losses, for the years ended December 31, 2024, 2023 and
2022:
December 31,
2024
2023
2022
(In thousands)
Balance at beginning of period
$
2,869
$
21,753
$
56,206
Provision for credit losses on finance
receivables
(5,307)
(22,300)
(28,100)
Charge-offs
(1,846)
(8,064)
(18,319)
Recoveries
4,717
11,480
11,966
Balance at end of period
$
433
$
2,869
$
21,753
The following table presents
the gross charge-offs by year of origination of our finance receivables for the year ended December 31, 2024, 2023, and
2022:
December 31,
2024
2023
2022
Annual Vintage Pool
(In thousands)
2014 and prior
$
353
$
325
$
963
2015
285
1,031
3,047
2016
703
3,266
6,586
2017
976
4,294
8,271
Applied against repos in inventory (net)
(471)
(852)
(548)
$
1,846
$
8,064
$
18,319
(4) Furniture and Equipment
The following table presents the components of
furniture and equipment:
December 31,
2024
2023
(In thousands)
Furniture and fixtures
$
2,083
$
1,936
Computer and telephone equipment
6,942
6,823
Leasehold improvements
1,638
1,570
10,663
10,329
Less: accumulated depreciation and amortization
(9,720)
(8,957)
$
943
$
1,372
F-19
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense totaled $862,000, $847,000,
and $1,618,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
(5) Securitization Trust Debt
We have completed numerous
term securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt
issued in these
transactions is shown on our Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt
are summarized in
the following table:
Weighted
Average
Final
Receivables
Outstanding
Outstanding
Contractual
Debt
Scheduled
Pledged at
Principal at
Principal at
Interest Rate at
Payment
December 31,
Initial
December 31,
December 31,
December 31,
Series
Date (1)
2024 (2)
Principal
2024
2023
2024
(Dollars in thousands)
CPS 2019-B
June 2026 $
– $
228,275 $
– $
15,742
–
CPS 2019-C
September 2026
–
243,513
–
19,725
–
CPS 2019-D
December 2026
–
274,313
–
27,445
–
CPS 2020-A
March 2027
–
260,000
–
26,382
–
CPS 2020-B
June 2027
–
202,343
–
24,197
–
CPS 2020-C
November 2027
27,353
252,200
22,453
43,487
4.79%
CPS 2021-A
March 2028
31,368
230,545
22,396
39,039
2.30%
CPS 2021-B
June 2028
41,023
240,000
31,903
55,684
3.30%
CPS 2021-C
September 2028
63,518
291,000
49,739
85,563
2.43%
CPS 2021-D
December
2028
86,594
349,202
72,090
126,059
3.25%
CPS 2022-A
April 2029
98,550
316,800
77,872
137,479
3.40%
CPS 2022-B
October 2029
156,093
395,600
132,002
213,779
5.64%
CPS 2022-C
April 2030
185,160
391,600
141,176
230,273
6.55%
CPS 2022-D
June 2030
157,127
307,018
135,857
205,583
8.84%
CPS 2023-A
August 2030
188,215
324,768
146,020
231,906
6.79%
CPS 2023-B
November 2030
207,630
332,885
172,154
268,172
6.97%
CPS 2023-C
February 2031
199,594
291,732
175,219
257,568
6.89%
CPS 2023-D
May 2031
214,416
286,149
191,621
271,939
7.57%
CPS 2024-A
August 2031
228,617
280,924
206,348
–
6.20%
CPS 2024-B
November 2031
283,802
319,871
262,768
–
6.36%
CPS 2024-C
March 2032
408,423
436,310
379,254
–
6.21%
CPS 2024-D
June 2032
415,560
416,816
390,983
–
5.18%
$
2,993,044 $
6,671,864 $
2,609,855 $
2,280,022
_________________________
(1) The Final Scheduled Payment Date represents final legal maturity of the securitization trust debt.
Securitization trust debt is expected to become
due and to be paid prior to those dates, based on amortization of the finance receivables
pledged to the Trusts. Expected payments, which will
depend on the performance of such receivables, as to which there can be no assurance,
are $987.8 million in 2025, $696.4 million in 2026, $470.5
million in 2027, $275.1 million in 2028, $126.6 million in 2029, and $38.0
million in 2030.
(2) Includes repossessed assets that are included in Other Assets on our Consolidated Balance Sheets.
F-20
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt issuance costs of $15.5
million and $14.6 million as of December 31, 2024 and December 31, 2023, respectively, have been excluded from the table
above. These
debt issuance costs are presented as a direct deduction to the carrying amount of the Securitization trust debt on our Consolidated Balance
Sheets.
All of the securitization
trust debt was issued in private placement transactions to qualified institutional investors. The debt was issued by our wholly-
owned,
bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by any of our other assets.
The terms of the various securitization
agreements related to the issuance of the securitization trust debt require that certain delinquency and credit loss
criteria be met with
respect to the collateral pool, and require that we maintain minimum levels of liquidity and net worth and not exceed maximum
leverage
levels. We were in compliance with all such covenants as of December 31, 2024.
We are responsible for the
administration and collection of the contracts. The securitization agreements also require certain funds be held in restricted
cash accounts
to provide additional credit enhancement for the Notes or to be applied to make payments on the securitization trust debt. As of December
31, 2024, restricted cash under the various agreements totaled approximately $125.7 million. Interest expense on the securitization trust
debt is composed
of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include
facility fees, insurance premiums,
amortization of deferred financing costs, and amortization of discounts required on the notes at the
time of issuance. Deferred financing costs related to the
securitization trust debt are amortized using the interest method. Accordingly,
the effective cost of borrowing of the securitization trust debt is greater than
the stated rate of interest.
Our wholly-owned, bankruptcy
remote subsidiaries were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote
subsidiaries issue
the debt outstanding under our warehouse line of credit. Bankruptcy remote refers to a legal structure in which it is expected that the
applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries
have been pledged as
collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes,
are treated as sales for all other
purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available
to pay any of our other creditors.
F-21
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Debt
The terms of our debt outstanding at December
31, 2024 and 2023 are summarized below:
Amount Outstanding at
December 31, December 31,
2024
2023
Subordinate Lender
(In thousands)
Description
Interest Rate
Interest Rate
Maturity
Warehouse line of
credit
2.85% over CP yield rate
(Minimum 3.60%) 7.52%
and 8.58% at December 31,
2024 and December 31 2023,
respectively
6.40% over SOFR yield rate
(Minimum 7.15%) 11.09% at
December 31, 2024
July 2026
$
269,602 $
165,628
Warehouse line of
credit
4.50% over a commercial
paper rate (Minimum 7.50%)
8.90% and 9.63% at
December 31 2024, and
December 31 2023,
respectively
March 2026
145,597
68,997
Residual interest
financing
7.86%
June 2026
50,000
50,000
Residual interest
financing
11.50%
March 2029
50,000
–
Subordinated renewable
notes
Weighted average rate of
9.24% and 8.45% at
December 31, 2024 and
December 31, 2023,
respectively
Weighted average maturity
of December 2026 and
February 2026 at
December
31, 2024 and December 31,
2023, respectively
26,489
17,188
$
541,688 $
301,813
F-22
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt issuance costs of $4.3
million and $599,000 as of December 31, 2024 and December 31, 2023, respectively, have been excluded from the table
above. These debt
issuance costs are presented as a direct deduction to the carrying amount of the Warehouse lines of credit and residual interest financing
on our Consolidated Balance Sheets.
On May 11, 2012, we entered
into a $100 million one-year warehouse credit line with Citibank, N.A. The facility is structured to allow us to fund a
portion of the
purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary Page Eight Funding, LLC. On
July
15, 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity from $100 million to $200
million. The
facility is structured to allow us to fund a portion of the purchase price of automobile contracts by borrowing from a credit
facility to our consolidated
subsidiary Page Eight Funding, LLC. The facility provides for effective advances up to 95.00% of eligible
finance receivables. The Class A loans under the
facility generally accrue interest during the revolving period at a per annum rate equal
to the CP Cost of Funds Rate plus 2.85% per annum, with a
minimum rate of 3.60% per annum and during the amortization period at a per
annum rate equal to the CP Cost of Funds Rate plus 3.85% per annum, with
a minimum rate of 4.60% per annum. In July 2024, this facility
was amended to extend the revolving period to July 2026 and to include an amortization
period through July 2027 for any receivables pledged
to the facility at the end of the revolving period. In November 2024, we closed a revolving credit
agreement with Oaktree Capital Management,
which was subordinate to our credit agreement with Citibank, N.A., and with a $25 million credit capacity.
The facility provides effective
advances up to 10.00% of eligible finance receivables. The Class B loans under the facility generally accrue interest during
the revolving
period at a per annum rate equal to the Adjusted Term SOFR plus 6.40% per annum, with a minimum rate of 7.15% per annum and during
the
amortization period at a per annum rate equal to the Adjusted Term SOFR plus 7.40% per annum, with a minimum rate of 8.15% per annum.
In
December 2024, we increased the capacity to $335 million. At December 31, 2024 there was $269.6 million outstanding under this facility.
On February 2, 2022, we renewed
our two-year revolving credit agreement with Ares Agent Services, L.P. The facility is structured to allow us to fund a
portion of the
purchase price of automobile contracts by borrowing from a credit facility to our consolidated subsidiary Page Nine Funding, LLC. The
facility provides for effective advances up to 85.25% of eligible finance receivables. The loans under the facility accrue interest at
a commercial paper rate
plus 4.50% per annum, with a minimum rate of 7.50% per annum. In June 2022, we increased the capacity of our credit
agreement with Ares Agent
Services, L.P. from $100 million to $200 million. This facility was most recently renewed in March 2024, extending
the revolving period to March 2026
followed by an amortization period through March 2028 for any receivables pledged to the facility at
the end of the revolving period. At December 31,
2024 there was $145.6 million outstanding under this facility.
The total outstanding debt
on our two warehouse lines of credit was $415.2 million as of December 31, 2024, compared to $234.6 million outstanding as
of December
31, 2023.
On June 30, 2021, we completed
a $50 million securitization of residual interests from previously issued securitizations. In this residual interest financing
transaction,
qualified institutional buyers purchased $50.0 million of asset-backed notes secured by residual interests in eleven CPS securitizations
consecutively issued from January 2018 and September 2020. The sold notes (“2021-1 Notes”), issued by CPS Auto Securitization
Trust 2021-1, consist of
a single class with a coupon of 7.86%. At December 31, 2024 there was $50.0 million outstanding under this facility.
On March 22, 2024, we completed
a $50 million securitization of residual interests from previously issued securitizations. In the transaction, a qualified
institutional
buyer purchased $50.0 million of asset-backed notes secured by an 80% interest in a CPS affiliate that owns the residual interests in
five CPS
securitizations issued from January 2022 through January 2023. The sold notes (“2024-1 Notes”), issued by CPS Auto
Securitization Trust 2024-1, consist
of a single class with a coupon of 11.50%. At December 31, 2024 there was $50.0 million outstanding
under this facility.
F-23
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreed valuation of the
collateral for the 2021-1 and 2024-1 Notes are the sum of the amounts on deposit in the underlying spread accounts for each
related securitization
and the over-collateralization of each related securitization, which is the difference between the outstanding principal balances of the
related receivables less the principal balance of the outstanding notes issued in the related securitization. On each monthly payment
date, the 2021-1 and
2024-1 Notes are entitled to interest at the coupon rate and, if necessary, a principal payment necessary to maintain
a specified minimum collateral ratio.
Unamortized debt issuance
costs of $824,000 and $125,000 as of December 31, 2024 and December 31, 2023, respectively, have been excluded from the
amount reported
above for residual interest financing. These debt issuance costs are presented as a direct deduction to the carrying amount of the debt
on
our Consolidated Balance Sheets.
We must comply with certain
affirmative and negative covenants related to debt facilities, which require, among other things, that we maintain certain
financial ratios
related to liquidity, net worth and capitalization. Further covenants include matters relating to investments, acquisitions, restricted
payments
and certain dividend restrictions. See the discussion of financial covenants in Note 1.
The following table summarizes the contractual
and expected maturity amounts of our outstanding subordinated renewable notes as of December 31,
2024:
Subordinated
Contractual maturity
renewable
date
notes
(In thousands)
2025
$
8,444
2026
5,284
2027
6,911
2028
4,648
2029
88
Thereafter
1,114
Total
$
26,489
(7) Shareholders’ Equity
Common Stock
Holders of common stock are
entitled to such dividends as our board of directors, in its discretion, may declare out of funds available, subject to the terms
of any
outstanding shares of preferred stock and other restrictions. In the event of liquidation of the Company, holders of common stock are
entitled to
receive, pro rata, all of the assets of the Company available for distribution, after payment of any liquidation preference
to the holders of outstanding shares
of preferred stock. Holders of the shares of common stock have no conversion or preemptive or other
subscription rights and there are no redemption or
sinking fund provisions applicable to the common stock.
F-24
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Purchases
For the year ending December
31, 2024, we purchased 1,469,658
shares of our common stock at an average price of $8.73.
In April 2024 our board of
directors authorized the repurchase of an additional $10
million of our common stock. There is approximately $6.3
million of board authorization
remaining under such plans, which have no expiration date. The table below describes the purchase
of our common stock for the twelve-month period
ended December 31, 2024 and 2023:
Twelve Months Ended
December 31, 2024
December 31, 2023
Shares
Avg. Price
Shares
Avg. Price
Open market purchases
473,202
$
8.67
670,968
$
10.20
Shares redeemed upon net exercise of stock options
876,456
8.66
1,305,388
10.29
Other
120,000
9.49
–
–
Total stock purchases
1,469,658
$
8.73
1,976,356
$
10.26
Options and Warrants
In 2006, the Company adopted
and its shareholders approved the CPS 2006 Long-Term Equity Incentive Plan (the “2006 Plan”) pursuant to which our
Board of
Directors, or a duly-authorized committee thereof, may grant stock options, restricted stock, restricted stock units and stock appreciation
rights to
our employees or employees of our subsidiaries, to directors of the Company, and to individuals acting as consultants to the
Company or its subsidiaries. In
June 2008, May 2012, April 2013, May 2015, July 2018 and again in November 2021, the shareholders of the
Company approved an amendment to the
2006 Plan to increase the maximum number of shares that may be subject to awards under the 2006 Plan
to 5,000,000, 7,200,000, 12,200,000, 17,200,000,
19,200,000 and 22,200,000, respectively, in each case plus shares authorized under prior
plans and not issued. Options that have been granted under the
2006 Plan and a previous plan approved in 1997 have been granted at an
exercise price equal to (or greater than) the stock’s fair value at the date of the
grant, with terms generally of 7-10 years and
vesting generally over 4-5 years.
There were no stock options
granted during the years ended December 31, 2024 and 2023. The per share weighted-average fair value of stock options
granted during the
year ended December 31 2022 was $5.42.
That fair value was estimated using a binomial option pricing model using the weighted
average assumptions noted in the following table.
We use historical data to estimate the expected term of each option. The volatility estimate is based on
the historical and implied volatility
of our stock over the period that equals the expected life of the option. Volatility assumptions ranged from 75%
to 80%
for 2022. The risk-free interest rate is based on the yield on a U.S. Treasury bond with a maturity comparable to the expected life of
the option. The
dividend yield is estimated to be zero based on our intention not to issue dividends for the foreseeable future.
Year Ended
December
31,
2022
Expected life (years)
4.00
Risk-free interest rate
2.38%
Volatility
76%
Expected dividend yield
–
F-25
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December
31, 2024, 2023 and 2022, we recorded stock-based compensation costs in the amount of $3.0 million, $3.5 million and
$4.4 million, respectively.
As of December 31, 2024, the unrecognized stock-based compensation costs to be recognized over future periods was equal to
$3.0 million.
This amount will be recognized as expense over a weighted-average period of 1.1 years.
At December 31, 2024 and
2023, options outstanding had intrinsic values of $33.3
million and $36.1
million, respectively. At December 31, 2024 and
2023, options exercisable had intrinsic values of $31.2
million and $31.2
million, respectively. The total intrinsic value of options exercised was $8.2
million and $14.5
million for the years ended December 31, 2024 and 2023, respectively. New shares were issued for all options exercised during
the year
ended December 2024 for a total price of $6.9
million. At December 31, 2024, there were a total of 2,984,000
additional shares available for grant under
the 2006 Plan.
Stock option activity for
the year ended December 31, 2024 for stock options under the 2006 and 1997 plans is as follows:
Weighted
Number of
Weighted
Average
Shares
Average
Remaining
(in thousands)
Exercise Price
Contractual Term
Options outstanding at the beginning of period
8,125
$
5.11
3.14 years
Granted
–
–
N/A
Exercised
(1,728)
4.00
N/A
Forfeited/Expired
(300)
5.80
N/A
Options outstanding at the end of period
6,097
$
5.39
2.68 years
Options exercisable at the end of period
5,087
$
4.73
2.40 years
The following table presents
the price distribution of stock options outstanding and exercisable for the years ended December 31, 2024 and 2023:
Number of shares as of
Number of shares as of
December 31, 2024
December 31, 2023
Outstanding
Exercisable
Outstanding
Exercisable
Range of exercise prices:
(In thousands)
(In thousands)
$2.00 - $2.99
1,197
1,197
1,410
1,082
$3.00 - $3.99
2,026
2,026
2,473
2,473
$4.00 - $4.99
1,262
972
2,539
1,929
$10.00 - $10.99
1,612
892
1,703
578
Total shares
6,097
5,087
8,125
6,062
We did not issue any stock options with an exercise
price above or below the market price of the stock on the grant date for the years ended December 31,
2024, 2023 and 2022.
F-26
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Interest Income and Interest Expense
The following table presents the components of
interest income:
Year Ended December 31,
2024
2023
2022
(In thousands)
Interest on finance receivables
$
6,948
$
15,567
$
35,091
Interest on finance receivables at fair value
350,729
307,543
268,621
Other interest income
6,285
6,109
1,525
Interest income
$
363,962
$
329,219
$
305,237
The following table presents the components of
interest expense:
Year Ended December 31,
2024
2023
2022
(In thousands)
Securitization trust debt
$
161,014
$
121,409
$
70,627
Warehouse lines of credit
19,292
19,192
10,310
Residual interest financing
8,702
4,199
4,243
Subordinated renewable notes
2,249
1,831
2,344
Interest expense
$
191,257
$
146,631
$
87,524
(9) Income Taxes
Income taxes consist of the following:
Year Ended December 31,
2024
2023
2022
(In thousands)
Current federal tax expense
$
4,376
$
7,122
$
16,946
Current state tax expense
1,807
2,613
3,352
Deferred federal tax expense
1,382
4,307
5,573
Deferred state tax expense
663
1,712
4,339
Income tax expense
$
8,228
$
15,754
$
30,210
F-27
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense for the
years ended December 31, 2024, 2023 and 2022 differs from the amount determined by applying the statutory federal rate to
income before
income taxes as follows:
Year Ended December 31,
2024
2023
2022
(In thousands)
Expense at federal tax rate
$
5,760
$
12,830
$
24,401
State taxes, net of federal income tax effect
1,863
3,716
6,462
Stock-based compensation
(958)
(1,184)
(2,611)
Non-deductible expenses
1,612
1,629
1,056
Net operating loss carryback
–
–
–
Effect of change in tax rate
–
–
–
Accounting method change
–
–
–
Other
(49)
(1,237)
902
$
8,228
$
15,754
$
30,210
The tax effected cumulative
temporary differences that give rise to deferred tax assets and liabilities as of December 31, 2024 and 2023 are as follows:
December 31,
2024
2023
(In thousands)
Deferred Tax Assets:
Finance receivables
$
77
$
895
Accrued liabilities
703
1,423
NOL carryforwards
256
400
Built in losses
753
1,383
Stock compensation
755
1,131
Lease liability
5,846
883
Other
185
–
Total deferred tax assets
$
8,575
$
6,115
Deferred Tax Liabilities:
Pension accrual
$
(2,015)
$
(1,217)
Lease right-of-use assets
(5,301)
(803)
Furniture and equipment and other
(249)
(359)
Total deferred tax liabilities
(7,565)
(2,379)
Net deferred tax asset
$
1,010
$
3,736
F-28
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We acquired certain net operating
losses and built-in loss assets as part of our acquisitions of MFN Financial Corp. (“MFN”) in 2002 and TFC
Enterprises, Inc.
(“TFC”) in 2003. Moreover, both MFN and TFC have undergone an ownership change for purposes of Internal Revenue Code (“IRC”)
Section 382. In general, IRC Section 382 imposes an annual limitation on the ability of a loss corporation (that is, a corporation with
a net operating loss
(“NOL”) carryforward, credit carryforward, or certain built-in losses (“BILs”)) to utilize
its pre-change NOL carryforwards or BILs to offset taxable
income arising after an ownership change.
In determining the possible
future realization of deferred tax assets, we have considered future taxable income from the following sources: (a) reversal of
taxable
temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years
in which net
operating losses might otherwise expire.
Deferred tax assets are recognized
subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a
deferred tax
asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not
be realized.
In making such judgements, significant weight is given to evidence that can be objectively verified. Although realization
is not assured, we believe that the
realization of the recognized net deferred tax asset of $1.0 million as of December 31, 2024 is more
likely than not based on forecasted future net earnings.
Our net deferred tax asset of $1.0 million consists of approximately $479,000
of net U.S. federal deferred tax assets and $530,000 of net state deferred tax
assets.
As of December 31, 2024, we
had net operating loss carryforwards for state income tax purposes of $4.1 million. These state net operating losses begin to
expire in
2025.
We recognize a tax position
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on
examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize
potential interest and penalties related
to unrecognized tax benefits as income tax expense. At December 31, 2024, we had no unrecognized
tax benefits for uncertain tax positions.
We are subject to taxation
in the US and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or local
examinations
by tax authorities for years before 2020.
(10) Commitments and Contingencies
Leases
The Company has operating
leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the
majority of its
real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options.
The
depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not
recorded on the balance sheet
and the related lease expense is recognized on a straight-line basis over the lease term.
We determine if a contract
contains a lease at contract inception. Right-of-use assets and liabilities are recognized based on the present value of lease
payments
over the lease term. In determining the present value of lease payments, we use the Company’s incremental borrowing rate. Right-of-use
assets
are included in other assets and lease liabilities are included in accounts payable and accrued expenses in our Condensed Consolidated
Balance Sheet.
F-29
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the supplemental balance
sheet information related to leases:
December 31,
December 31,
2024
2023
(In thousands)
Operating Leases
Operating lease right-of-use assets
$
51,093
$
29,575
Less: Accumulated amortization right-of-use assets
(31,644)
(26,651)
Operating lease right-of-use assets, net
$
19,449
$
2,924
Operating lease liabilities
$
(21,471)
$
(3,220)
Finance Leases
Property and equipment, at cost
$
3,794
$
3,474
Less: Accumulated depreciation
(3,488)
(3,385)
Property and equipment, net
$
306
$
89
Finance lease liabilities
$
(315)
$
(93)
Weighted Average Discount Rate
Operating lease
5.0%
5.0%
Finance lease
6.5%
6.5%
Maturities of lease liabilities were as
follows:
(In thousands)
Operating
Finance
Year Ending December 31,
Lease
Lease
2025
$
5,233
$
128
2026
5,084
118
2027
5,242
61
2028
5,408
30
2029
3,761
10
Thereafter
985
–
Total undiscounted lease payments
25,713
347
Less amounts representing interest
(4,242)
(32)
Lease Liability
$
21,471
$
315
F-30
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the leases expense
included in Occupancy, General and administrative on our Condensed Consolidated Statement of
Operations:
Year Ended December 31,
2024
2023
2022
(In thousands)
Operating lease cost
$
3,582
$
5,547
$
6,650
Finance lease cost
115
158
987
Total lease cost
$
3,697
$
5,705
$
7,637
The following table presents the supplemental cash
flow information related to leases:
Year Ended December 31,
2024
2023
2022
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
5,308
$
5,547
$
7,056
Operating cash flows from finance leases
97
152
948
Financing cash flows from finance leases
18
6
40
Legal Proceedings
Consumer
Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both
continuing
and discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of
receivables, and such lawsuits
sometimes allege that resolution as a class action is appropriate. For the most part, we have legal and
factual defenses to consumer claims, which we
routinely contest or settle (for immaterial amounts) depending on the particular circumstances
of each case.
Following our
filing of a complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim on
October
16, 2019 alleging that our deficiency notices were not compliant with Connecticut law, and seeking relief on behalf of a class
of Connecticut obligors
whose vehicles we had repossessed. The complaint seeks primarily damages, injunctive relief, waiver of contract
deficiencies, and attorney fees and
interest. The defendant’s contract provided for resolution of disputes exclusively by arbitration,
and exclusively on an individual basis, not a class basis.
Nevertheless, in August 2021, the court denied our motion to compel arbitration,
without opinion. In April 2024, a motion for certification of a class was
filed. Prior to the motion being ruled upon, summary judgment
was granted in our favor, disposing of the claims against CPS. An appeal of the summary
judgment ruling was filed on October 25, 2024
and a cross appeal of the denial of the motion to compel arbitration was filed on October 31, 2024.
In General.
There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently
as of December 31, 2024, our best estimate of probable incurred losses for legal contingencies, including the matters identified above.
The amount of losses
that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available
to us, we believe that the range of
reasonably possible losses for the legal proceedings and contingencies we face, including those described
or identified above, as of December 31, 2024
does not exceed $3.2 million.
F-31
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, we believe that
the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our
consolidated financial
condition. We note, however, that in light of the uncertainties inherent in contested proceedings there can be no assurance that the
ultimate
resolution of these matters will not be material to our operating results for a particular period, depending on, among other factors,
the size of the
loss or liability imposed and the level of our income for that period.
(11) Employee Benefits
We sponsor a pretax savings
and profit sharing plan (the “401(k) Plan”) qualified under Section 401(k) of the Internal Revenue Code. Under the 401(k)
Plan, eligible employees are able to contribute up to the maximum allowed under the law. We may, at our discretion, match 100% of employees’
contributions up to $2,000 per employee per calendar year. Our matching contributions to the 401(k) Plan were $1.5 million, $1.4 million,
and $1.3 million
respectively, for the years ended December 31, 2024, 2023 and 2022.
We also sponsor a defined
benefit plan, the MFN Financial Corporation Pension Plan (the “Plan”). The Plan benefits were frozen on June 30, 2001.
The following tables represents
a reconciliation of the change in the plan’s benefit obligations, fair value of plan assets, and funded status at December
31,
2024 and 2023:
December 31,
2024
2023
(In thousands)
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year
$
15,477
$
15,952
Interest cost
695
753
Assumption changes
(564)
(3)
Actuarial (gain) loss
(223)
(271)
Settlements
–
–
Benefits paid
(1,113)
(954)
Projected benefit obligation, end of year
$
14,272
$
15,477
Change in Plan Assets
Fair value of plan assets, beginning of year
$
20,048
$
18,768
Return on assets
2,967
2,347
Employer contribution
–
–
Expenses
(122)
(113)
Settlements
–
–
Benefits paid
(1,113)
(954)
Fair value of plan assets, end of year
$
21,780
$
20,048
Funded Status at end of year
$
7,508
$
4,571
F-32
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional Information
Weighted average assumptions used to determine
benefit obligations and cost at December 31, 2024 and 2023 were as follows:
December, 31
2024
2023
Weighted average assumptions used to determine benefit obligations
Discount rate
5.32%
4.68%
Weighted average assumptions used to determine net periodic benefit cost
Discount rate
4.68%
4.87%
Expected return on plan assets
6.75%
7.00%
Our overall expected long-term
rate of return on assets is 6.75%
per annum as of December 31, 2024. The expected long-term rate of return is based on
the weighted average of historical returns on individual
asset categories, which are described in more detail below.
December 31,
2024
2023
2022
(In thousands)
Amounts recognized on Consolidated Balance Sheet
Other assets
$
7,508
$
4,571
$
2,816
Other liabilities
–
–
–
Net amount recognized
$
7,508
$
4,571
$
2,816
Amounts recognized in accumulated other comprehensive loss consists
of:
Net loss
$
1,593
$
4,130
$
5,716
Unrecognized transition asset
–
–
–
Net amount recognized
$
1,593
$
4,130
$
5,716
Components of net periodic benefit cost
Interest cost
$
695
$
753
$
579
Expected return on assets
(1,311)
(1,280)
(1,860)
Amortization of transition asset
–
–
–
Amortization of net loss
216
358
105
Net periodic benefit cost
(400)
(169)
(1,176)
Settlement (gain)/loss
–
–
256
Total
$
(400)
$
(169)
$
(920)
Benefit Obligation Recognized in Other Comprehensive Loss (Income)
Net loss (gain)
$
(2,937)
$
(1,755)
$
1,003
Prior service cost (credit)
–
–
–
Amortization of prior service cost
–
–
–
Net amount recognized in other comprehensive loss (income)
$
(2,937)
$
(1,755)
$
1,003
F-33
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated net gain
that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2025 is $703,000.
The weighted average asset allocation of our pension
benefits at December 31, 2024 and 2023 were as follows:
December 31,
2024
2023
Weighted Average Asset Allocation at Year-End
Asset Category
Equity securities
87%
87%
Debt securities
13%
13%
Cash and cash equivalents
0%
0%
Total
100%
100%
Our investment policies and
strategies for the pension benefits plan utilize a target allocation of 75% equity securities and 25% fixed income securities
(excluding
Company stock). Our investment goals are to maximize returns subject to specific risk management policies. We address risk management
and
diversification by the use of a professional investment advisor and several sub-advisors which invest in domestic and international
equity securities and
domestic fixed income securities. Each sub-advisor focuses its investments within a specific sector of the equity
or fixed income market. For the sub-
advisors focused on the equity markets, the sectors are differentiated by the market capitalization,
the relative valuation and the location of the underlying
issuer. For the sub-advisors focused on the fixed income markets, the sectors
are differentiated by the credit quality and the maturity of the underlying fixed
income investment. The investments made by the sub-advisors
are readily marketable and can be sold to fund benefit payment obligations as they become
payable.
Cash Flows
Estimated Future Benefit Payments (In thousands)
2025
$
1,206
2026
1,324
2027
1,240
2028
1,129
2029
942
Years 2030 - 2034
5,954
Anticipated Contributions in 2025
$
–
F-34
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value
of plan assets at December 31, 2024 and 2023, by asset category, is as follows:
December 31, 2024
Level 1 (1)
Level 2 (2)
Level 3 (3)
Total
Investment Name:
(in thousands)
Company Common Stock
$
9,617
$
–
$
–
$
9,617
Large Cap Value
–
2,198
–
2,198
Mid Cap Index
–
625
–
625
Small Cap Growth
–
631
–
631
Small Cap Value
–
599
–
599
Large Cap Blend
–
722
–
722
Growth
–
2,713
–
2,713
International Growth
–
2,249
–
2,249
Core Bond
–
1,656
–
1,656
High Yield
–
348
–
348
Inflation Protected Bond
–
407
–
407
Money Market
–
15
–
15
Total
$
9,617
$
12,163
$
–
$
21,780
December 31, 2023
Level 1 (1)
Level 2 (2)
Level 3 (3)
Total
Investment Name:
(in thousands)
Company Common Stock
$
8,308
$
$
–
$
8,308
Large Cap Value
–
2,121
–
2,121
Mid Cap Index
–
606
–
606
Small Cap Growth
–
604
–
604
Small Cap Value
–
596
–
596
Large Cap Blend
–
638
–
638
Growth
–
2,278
–
2,278
International Growth
–
2,330
–
2,330
Core Bond
–
1,763
–
1,763
High Yield
–
351
–
351
Inflation Protected Bond
–
437
–
437
Money Market
–
16
–
16
Total
$
8,308
$
11,740
$
–
$
20,048
________________________
(1) Company common stock is classified as level 1 and valued using quoted prices in active markets for identical assets.
(2) All other plan assets in stock, bond and money market funds are classified as level 2 and valued using significant observable inputs.
(3) There are no plan assets classified as level 3 in the fair value hierarchy as a result of having significant unobservable inputs.
F-35
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Fair Value Measurements
ASC 820, "Fair Value
Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when
pricing
an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under
the standard, fair
value measurements are separately disclosed by level within the fair value hierarchy.
ASC 820 defines fair value,
establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value
measurement
and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation
methodology include quoted
prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially
the full term of the financial instrument; and level 3 – inputs to the
valuation methodology are unobservable and significant to the fair value measurement.
Effective January 2018 we
have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter.
Our valuation policies and
procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation
with outside
valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include
methodologies
for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in
fair value
measurements and documentation of the reasons for such changes. There is little available third-party information such as broker
quotes or pricing services
available to assist us in our valuation process.
Our level 3, unobservable
inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on
the
best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs
and the rate of
amortization of the portfolio of finance receivable. Significant changes in any of those inputs in isolation would have
a significant impact on our fair value
measurement.
The table below presents
a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:
Twelve Months Ended
December 31,
2024
2023
(In thousands)
Balance at beginning of period
$
2,722,662
$
2,476,617
Finance receivables at fair value acquired during period
1,653,037
1,251,020
Payments received on finance receivables at fair value
(858,628)
(823,434)
Net interest income accretion on fair value receivables
(224,304)
(193,541)
Mark to fair value
21,000
12,000
Balance at end of period
$
3,313,767
$
2,722,662
F-36
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below compares the fair values of these
finance receivables to their contractual balances for the periods shown:
December 31, 2024
December 31, 2023
Contractual
Fair
Contractual
Fair
Balance
Value
Balance
Value
(In thousands)
Finance receivables measured at fair value.
$
3,485,540
$
3,313,767
$
2,941,915
$
2,722,662
The following table provides certain qualitative
information about our level 3 fair value measurements:
Financial Instrument
Fair Values as of
Weight Avg. Inputs as of
December 31,
December 31,
2024
2023
Unobservable Inputs
2024
2023
(In thousands)
Assets:
Discount rate
11.37%
11.35%
Finance receivables measured at
fair value
$
3,313,767
$
2,722,662
Cumulative net losses
15.47%
15.25%
Results for the years ended
December 31, 2024 and 2023 include marks of $21.0 and $12.0 million, respectively, to the carrying value of the finance
receivables accounted
for 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. 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 $21.0 million and $12.0 million for the years ended
December 31, 2024 and 2023, respectively.
The following table summarizes
the delinquency status using the contractual balance of these finance receivables measured at fair value as of December
31, 2024 and
December 31, 2023:
December 31,
December 31,
2024
2023
(In thousands)
Delinquency Status
Current
$
2,969,864
$
2,520,158
31 - 60 days
241,883
204,574
61 - 90 days
113,662
101,057
91 + days
64,810
49,541
Repo
95,321
66,585
$
3,485,540
$
2,941,915
F-37
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no transfers in
or out of level 1 or level 2 assets and liabilities for 2024 and 2023. We have no level 3 assets or liabilities that are measured at
fair
value on a non-recurring basis.
The estimated fair values of financial assets
and liabilities at December 31, 2024 and 2023, were as follows:
As of December 31, 2024
Financial Instrument
(In thousands)
Carrying
Fair Value Measurements Using:
Value
Level 1
Level 2
Level 3
Total
Assets:
Cash and cash equivalents
$
11,713 $
11,713 $
– $
– $
11,713
Restricted cash and equivalents
125,684
125,684
–
–
125,684
Finance receivables, net
4,987
–
–
3,996
3,996
Accrued interest receivable
65
–
–
65
65
Liabilities:
Warehouse lines of credit
$
410,898 $
– $
– $
410,898 $
410,898
Accrued interest payable
10,663
–
–
10,663
10,663
Securitization trust debt
2,594,384
–
–
2,614,352
2,614,352
Subordinated renewable notes
26,489
–
–
26,489
26,489
As of December 31, 2023
Financial Instrument
(In thousands)
Carrying
Fair Value Measurements Using:
Value
Level 1
Level 2
Level 3
Total
Assets:
Cash and cash equivalents
$
6,174 $
6,174 $
– $
– $
6,174
Restricted cash and equivalents
119,257
119,257
–
–
119,257
Finance receivables, net
24,684
–
–
20,848
20,848
Accrued interest receivable
292
–
–
292
292
Liabilities:
Warehouse lines of credit
$
234,025 $
– $
– $
234,025 $
234,025
Accrued interest payable
7,928
–
–
7,928
7,928
Securitization trust debt
2,265,446
–
–
2,183,331
2,183,331
Subordinated renewable notes
17,188
–
–
17,188
17,188
F-38
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13) Business Segment Information
The company has identified
one reportable segment. This determination is made by our Chief Executive Officer, who acts as the chief operating decision-
maker (“CODM”),
in assessing performance and making decisions regarding resource allocation. The CODM assesses performance by reviewing the
consolidated
financial statements, which reflect the financial results of our one reportable operating segment.
Although the Company operates
as one reportable segment, it serves a diverse network of 8,600 dealerships across 47 states, in which we provide
financing to the dealer’s
less credit- worthy borrowers. During the year ended December 31, 2024, no dealer accounted for as much as 2% of the total
number of automobile
contracts we purchased, and revenue generated from any individual borrower is deemed to be immaterial.
14) Subsequent Events
On January 22, 2025 we executed
our first securitization of 2025. In the transaction, qualified institutional buyers purchased $442.4 million of asset-
backed notes secured
by $462.5 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2025-A,
consist of
five classes. Ratings of the notes were provided by Standard & Poor’s and DBRS Morningstar, and were based on the structure
of the transaction,
the historical performance of similar receivables and CPS’s experience as a servicer. The weighted average coupon
on the notes is approximately 5.88%.
The 2025-A transaction has
initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and
overcollateralization
of 4.35%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser
of 8.50% of the original receivable pool balance, or 23.00% of the then outstanding pool balance. The transaction was a private offering
of securities, not
registered under the Securities Act of 1933, or any state securities law.
F-39
Exhibit 19
CONSUMER PORTFOLIO SERVICES, INC.
CORPORATE
POLICY REGARDING INSIDER TRADING
This Corporate Policy Regarding
Insider Trading (the “Policy”) of Consumer Portfolio Services, Inc. (“CPS” or the “Company”) sets
forth the policy and
procedures for directors, executive officers, and employees when trading in Company securities.
This Policy is divided into two
parts:
·
Part I prohibits trading in certain circumstances and applies to all directors,
officers and employees of the Company; and
·
Part II imposes special additional trading restrictions and procedures and
applies to all (i) directors of the Company and (ii) executive officers
of the Company (together "Company Insiders").
Please contact the Corporate Legal
Department if you have any questions on insider trading or this Policy.
PART I
INSIDER TRADING CONCEPTS
“Material” Information
Information is material if a reasonable
investor would consider it important in making an investment decision in CPS’s securities or if it could affect the
market price
of the stock. Material information is not limited to historical facts but may also include projections and forecasts. Either good or bad
information may be material. If you are unsure whether the information is material, assume it is material or consult the Corporate Legal
Department.
Examples of material information typically
include, but are not limited to:
·
changes in the Company’s prospects;
·
estimates of future earnings or losses;
·
events that could result in restating financial information;
·
a proposed acquisition or sale;
·
beginning or settling a major lawsuit;
·
changes in dividend policies;
·
major changes in the Company's management or the board of directors;
·
declaring a stock split;
·
a stock or bond offering; or
·
award or loss of a significant contract.
“Non-public” Information
Non-public information is information
that has not yet been made public by the Company. Information only becomes public when it is generally available
to the public (such as
in a publicly accessible conference call, a press release or in SEC filings), and people have had an opportunity to see or hear it.
“Trading”
“Trading” includes not
only purchases and sales of stock, but also acquisitions and dispositions of equity derivative securities and stock swap agreements,
certain
option exercises, warrants, puts and calls, and certain gifts of stock, etc.
1
GENERAL TRADING POLICY
General Policy Applicable to all Directors,
Officers, and Employees
You may not trade in CPS securities when
you are aware of any material, non-public information about CPS. You also may not trade in the securities of any
other company when you
are aware of any material, non-public information about that company obtained in the course of your involvement with CPS. You
also must
not “tip” or otherwise give material, non-public information to anyone, including people in your immediate family, friends,
or anyone acting for
you (such as a stockbroker).
You should not trade in CPS securities
before the public announcement of material information. It is usually safe to trade after the information is released
as long as you do
not know of other material information that has not yet been released. Even after the information is released, you should wait until the
close of business on the second trading day after the information was publicly disclosed before trading, to allow the market to absorb
the information.
PART II
RESTRICTED TRADING PERIODS
You may not engage in the trading of CPS securities during
a restricted trading period, unless you have obtained special permission from the Corporate
Legal Department. Restricted trading periods
are periods designated by CPS as times in which you may not trade in CPS stock. These restricted trading
periods are instituted by CPS
for a variety of reasons.
Quarterly Restricted Trading Period
One such restricted trading period is instituted prior to CPS
releasing its quarterly results. This restricted trading period begins two weeks prior to the end
of each quarter and lasts until two
days after CPS releases its results for that quarter.
Other Restricted Trading Periods
From time to time, other types of material nonpublic information
regarding the Company may be pending and not be publicly disclosed. While such
material nonpublic information is pending, the Company
may impose special restricted trading periods during which Company Insiders are prohibited from
trading in the Company's securities. If
the Company imposes such a restriction, it will notify the Company Insiders.
Pension Fund Blackout Periods
Company Insiders are prohibited from trading in the Company's
equity securities during a blackout period imposed under an "individual account"
retirement or pension plan of the Company,
during which at least 50% of the plan participants are unable to purchase, sell or otherwise acquire or transfer
an interest in equity
securities of the Company, due to a temporary suspension of trading by the Company or the plan fiduciary.
2
PRE-CLEARANCE POLICIES
General Pre-Clearance Policy
You may not trade at any time without
prior clearance. Pre-clearance is the heart of the CPS policy to prevent misuse of inside information. Before trading
in CPS stock, you
must contact the Corporate Legal Department to ensure a restricted trading period is not in effect and to obtain pre-clearance of the
contemplated trade. Pre-clearance will also assist us in helping you avoid potential inadvertent liability under the Section 16(b) short-swing
profit rules, and
in complying with your Section 16 reporting obligations.
Pre-Clearance Policy for Rule 10b5-1
or Other Trading Plans
You may not enter into a pre-arranged trading plan or arrangement
without preclearance. Once a plan adopted in compliance with Rule 10b5-1 under the
Securities Exchange Act of 1934 (“10b5-1 Plan”)
is pre-cleared, transactions effected pursuant to the 10b5-1 Plan will not require additional pre-clearance
and the trading restrictions
of this Policy do not apply.
You must notify the Corporate Legal Department
if any trading plan is modified or terminated, and when any transaction under a trading plan or a pre-
cleared transaction has been completed.
PROHIBITED TRANSACTIONS
You may not engage in transactions that would trigger the SEC’s
short-swing profit rule which provides that any director or officer that buys and sells, or
sells and buys, a company's securities within
a six-month period must disgorge any profits made on the transaction(s) to the company, regardless of
material nonpublic information.
This is a strict liability provision.
You may not sell short Company shares. You may also not enter
into transactions that would have the effect of causing you to benefit from a decline in the
price of the Company stock, such as the purchase
of “put” options. Such “hedging” transactions are prohibited.
SECTION 16 REPORTING
The SEC rules under Section 16(a)
of the Exchange Act impose reporting requirements on executive officers, directors and 10% shareholders, when there
is a change in their
ownership of CPS securities. The deadline for reporting is generally no later than the second business day following the execution date
of the transaction.
If you have any transaction or change
in ownership in your Company stock or other equity securities (including gifts, derivative securities, and including
transactions pursuant
to a trading plan), please report the transaction(s) to the Corporate Legal Department no later than the execution date of the
transaction
so that the Corporate Legal Department can help you prepare and file the appropriate form in a timely manner.
3
Exhibit 21
Registrant Consumer Portfolio Services, Inc.
Subsidiaries of the Registrant
Name
Jurisdiction of Organization
CPS Receivables Five LLC
Delaware
Page Eight Funding LLC
Delaware
Page Nine Funding LLC
Delaware
Folio Residual Holdings LLC
Delaware
Folio Residual Holdings III LLC
Delaware
Folio Residual Holdings IV LLC
Delaware
Other subsidiaries, which would not constitute a significant subsidiary
if considered collectively as a single subsidiary, are omitted.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement Nos. 333-168976 and 333-190766 on Form S-1, Nos. 333-272653
on Form S-3, and
Nos. 333-58199, 333-35758, 333-75594, 333-115622, 333-135907, 333-161448, 333-166892 and 333-193926 on Form S-8 of Consumer
Portfolio
Services, Inc. and Subsidiaries of our report dated March 12, 2025 relating to the financial statements and effectiveness of
internal control over financial
reporting appearing in this Annual Report on Form 10-K.
Crowe LLP
Dallas, Texas
March 12, 2025
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Charles E. Bradley, Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2024 of Consumer Portfolio Services, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 12, 2025
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr.
Director and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Denesh Bharwani, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2024 of Consumer Portfolio Services, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 12, 2025
/s/ Denesh Bharwani
Denesh Bharwani
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
EXHIBIT 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of Consumer Portfolio Services,
Inc. (“Registrant”) on Form 10-K for the fiscal year ended December 31, 2024, as
filed with the Securities and Exchange Commission
(the “Report”), Charles E. Bradley, Jr., Chairman and Chief Executive Officer, and Denesh Bharwani,
Chief Financial Officer
and Executive Vice President, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations as of December
31, 2024.
March 12, 2025
/s/ Charles E. Bradley, Jr.
Charles E. Bradley, Jr.
Chairman and Chief Executive Officer
March 12, 2025
/s/ Denesh Bharwani
Denesh Bharwani
Chief Financial Officer and Executive Vice President