The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto and other information contained herein or incorporated by reference.
Overview
We are a specialty finance company. Our business is to purchase and service
retail automobile contracts originated primarily by franchised automobile
dealers and, to a lesser extent, by select independent dealers in the United
States in the sale of new and used automobiles, light trucks and passenger vans.
Through our automobile contract purchases, we provide indirect financing to the
customers of dealers who have limited credit histories or past credit problems,
who we refer to as sub-prime customers. We serve as an alternative source of
financing for dealers, facilitating sales to customers who otherwise might not
be able to obtain financing from traditional sources, such as commercial banks,
credit unions and the captive finance companies affiliated with major automobile
manufacturers. In addition to purchasing installment purchase contracts directly
from dealers, we also originate vehicle purchase money loans by lending directly
to consumers and have (i) acquired installment purchase contracts in four merger
and acquisition transactions, and (ii) purchased immaterial amounts of vehicle
purchase money loans from non-affiliated lenders. In this report, we refer to
all of such contracts and loans as "automobile contracts."
We were incorporated and began our operations in March 1991. From inception
through December 31, 2022, we have originated a total of approximately $20.0
billion of automobile contracts, primarily by purchasing retail installment
sales contracts from dealers, and to a lesser degree, by originating loans
secured by automobiles directly with consumers. In addition, we acquired a total
of approximately $822.3 million of automobile contracts in mergers and
acquisitions in 2002, 2003, 2004 and 2011. Contract purchase volumes and managed
portfolio levels for the five years ended December 31, 2022 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
Contracts Purchased Managed Portfolio
Year in Period at Period End
2018 $ 902,416 $ 2,380,847
2019 1,002,782 2,416,042
2020 742,584 2,174,972
2021 1,146,321 2,249,069
2022 1,854,385 3,001,308
Our headquarters are in Las Vegas, Nevada. Most of our operational and administrative functions are based in Irvine, California. Credit and underwriting functions are performed primarily at our California office, although certain of these functions are also performed at our Florida and Nevada offices. We service our automotive contracts from our offices in California, Nevada, Virginia, Florida and Illinois.
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. 33 Coronavirus Pandemic In December 2019, a new strain of coronavirus (the "COVID-19 virus") originated in Wuhan, China. Since its discovery, the COVID-19 virus has spread throughout the world, and the outbreak has been declared to be a pandemic by the World Health Organization. We refer from time to time in this report to the outbreak and spread of the COVID-19 virus as "the pandemic." In March 2020 at the outset of the pandemic we complied with government mandated shutdown orders in the five locations we operate by arranging for many of our staff to work from home and invoking various safety protocols for workers who remained in our offices. In April 2020, we laid off approximately 100 workers, or about 10% of our workforce, throughout our offices because of significant reductions in new contract originations. As of December 31, 2022, most of our staff were working without a significant impact from the pandemic.
Securitization and inventory credit facilities
Throughout the period for which information is presented in this report, we have
purchased automobile contracts with the intention of financing them on a
long-term basis through securitizations, and on an interim basis through
warehouse credit facilities. All such financings have involved identification of
specific automobile contracts, sale of those automobile contracts (and
associated rights) to one of our special-purpose subsidiaries, and issuance of
asset-backed securities to be purchased by institutional investors. Depending on
the structure, these transactions may be accounted for under generally accepted
accounting principles as sales of the automobile contracts or as secured
financings. All of our active securitizations are structured as secured
financings.
When structured to be treated as a secured financing for accounting purposes,
the subsidiary is consolidated with us. Accordingly, the sold automobile
contracts and the related debt appear as assets and liabilities, respectively,
on our consolidated balance sheet. We then periodically (i) recognize interest
and fee income on the contracts, and (ii) recognize interest expense on the
securities issued in the transaction. For automobile contracts acquired 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 95 term securitizations of automobile contracts
that we originated under our regular programs. As of December 31, 2022, 19 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 Term Securitizations
$ in thousands
Amount of
Period Number of Term Securitizations Receivables
2016 4 $ 1,214,997
2017 4 870,000
2018 4 883,452
2019 4 1,014,124
2020 3 741,867
2021 4 1,145,002
2022 4 1,537,383
34
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 $400 million, comprising two credit
facilities. The first credit facility was established in May 2012. This facility
was most recently renewed in July 2022, extending the revolving period to July
2024, with an optional amortization period through July 2025. In addition, the
capacity was doubled from $100 million to $200 million at the July 2022 renewal.
In November 2015, we entered into another $100 million facility. This facility
was most recently renewed in February 2022, extending the revolving period to
January 2024, followed by an amortization period to January 2026. In June 2022,
we doubled the capacity for this facility from $100 million to $200 million.
We previously had a third facility. This $100 million facility was established
in April 2015 and was renewed in April 2017 and again in February 2019,
extending the revolving period to February 2021. We repaid this facility in full
at its maturity in February 2021 and elected not to renew it.
In a securitization and in our warehouse credit facilities, we are required to
make certain representations and warranties, which are generally similar to the
representations and warranties made by dealers in connection with our purchase
of the automobile contracts. If we breach any of our representations or
warranties, we will be obligated to repurchase the automobile contract at a
price equal to the principal balance plus accrued and unpaid interest. We may
then be entitled under the terms of our dealer agreement to require the selling
dealer to repurchase the contract at a price equal to our purchase price, less
any principal payments made by the customer. Subject to any recourse against
dealers, we will bear the risk of loss on repossession and resale of vehicles
under automobile contracts that we repurchase.
In a securitization, the related special purpose subsidiary may be unable to
release excess cash to us if the credit performance of the securitized
automobile contracts falls short of pre-determined standards. Such releases
represent a material portion of the cash that we use to fund our operations. An
unexpected deterioration in the performance of securitized automobile contracts
could therefore have a material adverse effect on both our liquidity and results
of operations.
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.
Financial 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 would be required. Results for the year ended December 31, 2022 included a $15.3 million mark to the carrying value of the portion of the receivables portfolio accounted for at fair value. The mark-up was the result of lower than expected losses during the period as our previous estimates for higher losses due to the pandemic had not materialized. In the fourth quarter of 2022, our re-evaluation of the fair values of these receivables resulted in a positive mark for certain older receivables and a negative mark to the fair values of newer receivables that largely offset each other. As a result, on a net basis, no mark was taken in the fourth quarter
of 2022. 35 Anticipated credit losses are included in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation of the appropriate level yield, 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 Buyer Credit Losses
In order to estimate an appropriate allowance for losses incurred on finance receivables, we use a loss allowance methodology commonly referred to as "static pooling," which stratifies our finance receivable portfolio into separately identified pools based on the period of origination. Using analytical and formula driven techniques, we estimate an allowance for finance credit losses, which we believe is adequate for probable incurred credit losses that can be reasonably estimated in our portfolio of automobile contracts. 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, prospective liquidation values of the underlying collateral and general economic and market conditions. As circumstances change, our level of provisioning and/or allowance may change as well. Receivables acquired after 2017, are accounted for using fair value and will have no allowance for finance credit losses in accordance with the fair value method of accounting for finance receivables. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. 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 credit performance of our portfolio is also significantly influenced by our underwriting guidelines and credit criteria we use when evaluating contracts for purchase from dealers. We regularly evaluate our portfolio credit performance and modify our purchase criteria to maximize the credit performance of our portfolio, while maintaining competitive programs and levels of service for
our dealers.
We generally do not lower the contractual interest rate or waive or forgive
principal when our borrowers incur financial difficulty on either a temporary or
permanent basis. An exception to this policy is when a court order mandates the
terms of the contract to be modified, such as in a Chapter 13 bankruptcy
proceeding. In such cases, which represent an immaterial portion of our
portfolio of finance receivables, we have estimated the amount of impairment
that results from such modification and established an appropriate allowance
within our Allowance for Finance Credit Losses.
Effective January 1, 2020, the Company adopted Accounting Standards Codification
("ASC") 326, which changes the criteria under which credit losses on financial
instruments (such as the Company's finance receivables) are measured. ASC 326
introduced a new credit reserving model known as the Current Expected Credit
Loss ("CECL") model, which replaces the incurred loss impairment methodology
previously used under U.S. GAAP with a methodology that records currently the
expected lifetime credit losses on financial instruments. The adoption of CECL
required that we establish an allowance for the remaining expected lifetime
credit losses on the portion of the Company's receivable portfolio for which the
Company was not already using fair value accounting. We refer to that portion,
which is those receivables that were originated prior to January 2018, as our
"legacy portfolio". To comply with CECL, the Company recorded an addition to its
allowance for finance credit losses of $127.0 million.
Term Securitizations
Our securitization structure was generally 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. 36
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.
For each transfer of auto contracts in a transaction that is structured as secured financing for financial accounting purposes, we retain the related auto contracts as assets on our consolidated balance sheet and record the asset-backed notes or loans issued in the transaction as liabilities.
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. 37
Provision for contingent liabilities
We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can
be reasonably determined.
We have recorded a liability as of December 31, 2022, 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, 2022, and in excess of the liability we have recorded, does not exceed $11.2 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 in particular under the subheading "Risk Factors -- 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.
Uncertainty in the capital markets and the general economic situation
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 95 term securitizations of approximately $17.7 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 four securitizations in each of 2021 and 2022. 38 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, 2022 we were in compliance with all such financial covenants. Results of Operations
Comparison of results of operations for the year ended December 31, 2022 to the year ended December 31, 2021
Revenues. During the year ended December 31, 2022, our revenues were $329.7 million, an increase of $61.9 million, or 23.1%, from the prior year revenues of $267.8 million. The primary reason for the increase in revenues is the increase in interest income resulting from the increase in the average outstanding balance of finance receivables measured at fair value. In addition, mark ups to the finance receivables measured at fair value also contributed to the increase in revenues during the year. Revenues for the year ended December 31, 2022 include a $15.3 million mark up to the recorded value of the finance receivables measured at fair value. The marks are estimates based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and increases or decreases in our estimates of future net losses. Results for the nine-month period ended September 30, 2022 included the $15.3 million mark to the carrying value of the portion of the receivables portfolio accounted for at fair value. The mark-up was the result of lower than expected losses during the period as our previous estimates for higher losses due to the pandemic had not materialized. In the fourth quarter of 2022, our re-evaluation of the fair values of these receivables resulted in a positive mark for certain older receivables and a negative mark to the fair values of newer receivables that largely offset each other. As a result, on a net basis, no mark was taken in the fourth quarter of 2022. Revenues for the prior year period include a $4.4 million mark down to the fair value portfolio.
Revenue for the year ended December 31, 2021 includes a $4.4 million discount on the fair value portfolio.
Interest income for the year ended December 31, 2022 increased $39.0 million, or
14.6%, to $305.2 million from $266.2 million in the prior year. The primary
reason for the increase in interest income is the 32.5% increase in the average
balance of finance receivables measured at fair value over the prior year
period. The table below shows the outstanding and average balances of our
portfolio held by consolidated subsidiaries for the years ended December 31,
2022 and 2021:
Year Ended December 31,
2022 2021
(Dollars in thousands)
Average Interest Average Interest
Balance Interest Yield
Balance Interest Yield
Interest Earning
Assets
Finance receivables $ 150,919 $ 36,616 24.3% $ 345,021 $ 69,805 20.2%
Finance receivables
measured at fair
value 2,388,191 268,621 11.2% 1,802,590 196,461 10.9% Total $ 2,539,110 $ 305,237 12.0% $ 2,147,611 $ 266,266 12.4%
Other income was $9.2 million for the year ended December 31, 2022 compared to $6.0 million for the year ended December 31, 2021. This 54.1% increase was primarily driven by the increase in origination and servicing fees we earned from third party receivables that we began originating in May 2021. These fees were $6.8 million for the year ended December 31, 2022 and $1.3 million in
the prior year period. 39 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 significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level. Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses consist primarily of facility costs, telephone and other communications services, credit services, computer services, selling and advertising expenses, and depreciation and amortization.
Total operating expenses were $213.5 million for the year ended December 31,
2021, compared to $202.1 million for the prior year, an increase of $11.5
million, or 5.7%. The increase is primarily due to increases in interest
expense, sales expense, employee costs and general and administrative expenses.
Reductions in provisions for credit losses offset some of the increase in
operating expenses.
Employee costs increased by $3.7 million or 4.7%, to $84.3 million during the
year ended December 31, 2022, representing 39.5% of total operating expenses.
Employee costs were $80.5 million in the prior year, or 39.9% of total operating
expenses.
The table below summarizes our employees by category as well as contract
purchases and units in our managed portfolio as of, and for the years ended,
December 31, 2022 and 2021:
December 31, 2022 December 31, 2021
Amount Amount
($ in millions)
Contracts purchased (dollars) $ 1,854.4 $
1,146.3
Contracts purchased (units) 81,935
54,317
Managed portfolio outstanding (dollars) $ 2,795.4 $
2,249.1
Managed portfolio outstanding (units) 180,795
156,280
Number of Originations staff 182
170
Number of Sales staff 107
105
Number of Servicing staff 407
388
Number of other staff 88
76
Total number of employees 784
739
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 $37.6 million, an increase of $3.0 million, or 8.7%, compared to
the previous year and represented 17.6% of total operating expenses.
40
Interest expense for the year ended December 31, 2022 increased by $12.3 million
to $87.5 million, or 16.3%, compared to $75.2 million in the previous year.
Interest expense represented 41.0% of total operating expenses in 2022. The
primary reason for the increase in interest expense is the increase in interest
expense on our warehouse lines of credit and securitization trust debt.
Interest on securitization trust debt increased by $6.2 million, or 9.7%, for
the year ended December 31, 2022 compared to the prior year. The average balance
of securitization trust debt increased 11.0% to $2,020.0 million for the year
ended December 31, 2022 compared to $1,819.9 million for the year ended December
31, 2021. The blended interest rates on new term securitizations have increased
in 2022 after decreasing in 2021. For any particular 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 2019 4.22%
April 2019 3.95%
July 2019 3.36%
October 2019 2.95%
January 2020 3.08%
June 2020 4.09%
September 2020 2.39%
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%
The annualized average rate on our securitization trust debt was 3.5% for the
years ended December 31, 2022 and 2021. The annualized average rate is
influenced by the manner in which the underlying securitization trust bonds are
repaid. The rate tends to increase over time on any particular securitization
since the structures of our securitization trusts generally provide for
sequential repayment of the shorter term, lower interest rate bonds before the
longer term, higher interest rate bonds.
Interest expense on warehouse lines of credit was $10.3 million for the year
ended December 31, 2022 compared to $4.4 million in the prior year. Lower rates
were offset by higher utilization of our credit lines during the year compared
to last year. The average balance of our warehouse debt was $130.1 million
during 2022 compared to $51.3 million in 2021.
Interest expense on residual interest financing for the year ended December 31, 2022 was $4.2 million compared to $3.8 million for the prior year as the average balance increased.
Interest expense on our subordinated renewable notes decreased by $297,000, or
11.3%, for the year ended December 31, 2022 compared to the prior year. The
average balance of the notes increased from $25.3 million in the prior year to
$26.8 million for the year ended December 31, 2022. The average interest rate on
our subordinated notes decreased to 8.7% for the year ended December 31, 2022
from 10.5% for the year ended December 31, 2021.
41
The following table presents the components of interest income and interest
expense and a net interest yield analysis for the years ended December 31, 2022
and 2021:
Year Ended December 31,
2022 2021
(Dollars in thousands)
Annualized Annualized
Average Average Average Average
Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate
Interest Earning Assets
Finance receivables gross
(2) $ 150,919 $ 36,616 24.3% $ 345,021 $ 69,805 20.2%
Finance receivables at fair
value 2,388,191 268,621 11.2% 1,802,590 196,461 10.9%
2,539,110 305,237 12.0% 2,147,611 266,266 12.4%
Interest Bearing Liabilities
Warehouse lines of credit $ 130,122 10,311 7.9% $ 51,313 4,448 8.7%
Residual interest financing 50,488 4,243 8.4% 42,692 3,763 8.8%
Securitization trust debt 2,020,036 70,626 3.5% 1,819,914 64,387 3.5%
Subordinated renewable notes 26,806 2,344 8.7% 25,270 2,641 10.5%
$ 2,227,452 87,524 3.9% $ 1,939,189 75,239 3.9%
Net interest income/spread $ 217,713 $ 191,027
Net interest margin (3) 8.6% 8.9%
Ratio of average interest
earning assets to average
interest bearing liabilities 114% 111%
(1) Average balances are based on month-end balances with the exception of inventory credit lines which are based on daily balances.
(2) Net of deferred fees and direct costs.
(3) Net interest income divided by average interest earning assets.
Year Ended December 31, 2022
Compared to December 31, 2021
Total Change Due to Change Due
Change Volume to Rate
(In thousands)
Interest Earning Assets
Finance receivables gross $ (33,189 ) $ (39,271 ) $ 6,082
Finance receivables at fair value 72,160 63,824 8,336
38,971 24,553 14,418
Interest Bearing Liabilities
Warehouse lines of credit 5,863 6,831 (968 )
Residual interest financing 480 687 (207 )
Securitization trust debt 6,239 7,080 (841 )
Subordinated renewable notes (297 ) 161 (458 )
12,285 14,759 (2,474 )
Net interest income/spread $ 26,686 $ 9,794 $ 16,892
42
The annualized yield on our finance receivables was 12.0% for 2022 compared to 12.4% in 2021. The interest yield on receivables measured at fair value is reduced to take account of expected losses and is therefore less than the yield on other finance receivables. The average balance of these fair value receivables was $2,388.2 million for the year ended December 31, 2022 compared to $1,802.6 million in the prior year period. Effective January 1, 2020, the Company adopted Accounting Standards Codification Topic 326 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss model, generally referred to as CECL. Adoption of CECL required the establishment of an allowance for the remaining expected lifetime credit losses on the portion of the Company's receivable portfolio that was originated prior to January 2018. To comply with CECL, the Company recorded an addition to its allowance for finance credit losses of $127.0 million. In accordance with the rules for adopting CECL, the offset to the addition to the allowance for finance credit losses was a tax affected reduction to retained earnings using the modified retrospective method. For the year ended December 31, 2022, we recorded a reduction to provision for credit losses on finance receivables in the amount of $28.1 million compared to $14.6 million in 2021. The reserve decreases were primarily due to improved 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. 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 $6.2 million to $23.0 million during the year ended December 31, 2022 and represented 10.8% of total operating expenses. We purchased $1,854.4 million of new contracts during the year ended December 31, 2022 compared to $1,146.3 million in the prior year period.
Occupancy costs decreased $180,000, or 2.3%, to $7.5 million compared to $7.7 million last year and represented 3.5% of total operating costs.
Depreciation and amortization expenses decreased by $57,000 or 3.4%, to $1.6 million compared to $1.7 million in the previous year and represented 0.8%
of total operating expenses. For the year ended December 31, 2022, we recorded income tax expense of $30.2 million, representing a 26% effective tax rate. In the prior period, our income tax expense was $18.2 million, representing a 28% effective tax rate.
Comparison of results of operations for the year ended December 31, 2021 to the year ended December 31, 2020
Revenues. During the year ended December 31, 2021, our revenues were $267.8
million, a decrease of $3.4 million, or 1.2%, from the prior year revenues of
$271.2 million. The primary reason for the decrease in revenues is a decrease in
interest income. Interest income for the year ended December 31, 2021 decreased
$28.7 million, or 9.7%, to $266.3 million from $295.0 million in the prior year.
The primary reason for the decrease in interest income is the continued runoff
of our legacy portfolio of finance receivables originated prior to January 2018,
which accrued interest at an average of 20.2%, which is offset only in part by
the increase in our portfolio of receivables measured at fair value, which are
those originated since January 2018. The interest yield on receivables measured
at fair value is reduced to take account of expected losses and is therefore
less than the yield on other finance receivables. The table below shows the
outstanding and average balances of our portfolio held by consolidated
subsidiaries for the year months ended December 31, 2021 and 2020:
Year Ended December 31,
2021 2020
(Dollars in thousands)
Interest Interest
Average Balance Interest Yield Average Balance Interest Yield
Interest Earning Assets Finance receivables $ 345,021 $ 69,805 20.2% $ 684,259 $ 126,716 18.5% Finance receivables measured at fair value 1,802,590 196,461 10.9% 1,631,491 168,266 10.3% Total $ 2,147,611 $ 266,266 12.4% $ 2,315,750 $ 294,982 12.7% 43 Revenues for the year ended December 31, 2021 and 2020 are net of mark downs of $4.4 million and $29.5 million, respectively, to the recorded value of the finance receivables measured at fair value. The mark down is an estimate based on our evaluation of the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential additional future net losses arising from the pandemic.
Other income for the year ended December 31, 2021 was $6.0 million compared to $5.7 million for the year ended December 31, 2020.
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 significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level. Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.
Other operating expenses consist primarily of facility costs, telephone and other communications services, credit services, computer services, selling and advertising expenses, and depreciation and amortization.
Total operating expenses for the year ended December 31, 2021 were $202.1 million compared to $251.0 million in the prior year, a decrease of $49.0 million or 19.5 % is equivalent to. The decrease is primarily due to a decrease in interest expense and provisions for loan losses.
Employee costs increased by $336,000 or 0.4%, to $80.5 million during the year
ended December 31, 2021, representing 39.9% of total operating expenses, from
$80.2 million for the prior year, or 31.9% of total operating expenses. Employee
costs for 2021 include approximately $8.0 million for the establishment of a
bonus pool for a segment of employees we classify as Managers.
The table below summarizes our employees by category as well as contract
purchases and units in our managed portfolio as of, and for the years ended,
December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
Amount Amount
($ in millions)
Contracts purchased (dollars) $ 1,146.3 $
742.6
Contracts purchased (units) 54,317
39,887
Managed portfolio outstanding (dollars) $ 2,249.1 $
2,175.0
Managed portfolio outstanding (units) 156,280
163.177
Number of Originations staff 170
157
Number of Marketing staff 105
96
Number of Servicing staff 388
460
Number of other staff 76
74
Total number of employees 739
787
44
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 $34.6 million, an increase of $2.6 million, or 8.2%, compared to
the previous year and represented 17.1% of total operating expenses.
Interest expense for the year ended December 31, 2021 decreased by $26.1 million
to $75.2 million, or 25.8%, compared to $101.3 million in the previous year.
Interest expense represented 37.2% of total operating expenses in 2021. The
primary reason for the decrease in interest expense is the decrease in
securitization trust debt interest.
Interest on securitization trust debt decreased by $23.6 million, or 26.9%, for
the year ended December 31, 2021 compared to the prior year. The average balance
of securitization trust debt decreased 9.8% to $1,819.9 million for the year
ended December 31, 2021 compared to $2,017.2 million for the year ended December
31, 2020. The blended interest rates on new term securitizations have generally
decreased since 2019 and have stayed relatively low in 2021 despite trending
upward throughout the year. For any particular 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 2018 3.46%
April 2018 3.98%
July 2018 4.18%
October 2018 4.25%
January 2019 4.22%
April 2019 3.95%
July 2019 3.36%
October 2019 2.95%
January 2020 3.08%
June 2020 4.09%
September 2020 2.39%
January 2021 1.11%
April 2021 1.65%
July 2021 1.55%
October 2021 2.09%
The annualized average rate on our securitization trust debt was 3.5% for the
year ended December 31, 2021 compared with 4.4% for 2020. The annualized average
rate is influenced by the manner in which the underlying securitization trust
bonds are repaid. The rate tends to increase over time on any particular
securitization since the structures of our securitization trusts generally
provide for sequential repayment of the shorter term, lower interest rate bonds
before the longer term, higher interest rate bonds.
Interest expense on warehouse lines of credit decreased by $3.2 million, or
42.1% for the year ended December 31, 2021 compared to the prior year. The
decrease was primarily due to the lower utilization of our credit lines during
the year. The average balance of our warehouse debt was $51.3 million during
2021 compared to $92.5 million in 2020.
Interest expense on residual interest financing for the year ended December 31, 2021 was $3.8 million compared to $3.5 million for the prior year as the average balance increased.
45
Interest expense on our subordinated renewable notes increased by $466,000, or
21.4%, for the year ended December 31, 2021 compared to the prior year. The
average balance of the notes increased from $19.3 million in the prior year to
$25.3 million for the year ended December 31, 2021. The average interest rate on
our subordinated notes decreased to 10.5% for the year ended December 31, 2021
from 11.2% for the year ended December 31, 2020.
The following table presents the components of interest income and interest
expense and a net interest yield analysis for the years ended December 31, 2021
and 2020:
Year Ended December 31,
2021 2020
(Dollars in thousands)
Annualized Annualized
Average Average Average Average
Balance (1) Interest Yield/Rate Balance (1) Interest Yield/Rate
Interest Earning Assets
Finance receivables gross (2) $ 345,021 $ 69,805 20.2% $ 684,259 $ 126,716 18.5%
Finance receivables at fair value 1,802,590 196,461 10.9% 1,631,491 168,266 10.3%
2,147,611 266,266 12.4% 2,315,750 294,982 12.7%
Interest Bearing Liabilities
Warehouse lines of credit $ 51,313 4,448 8.7% $ 92,481 7,678 8.3%
Residual interest financing 42,692 3,763 8.8% 34,906 3,454 9.9%
Securitization trust debt 1,819,914 64,387 3.5% 2,017,152 88,031 4.4%
Subordinated renewable notes 25,270 2,641 10.5% 19,340 2,175 11.2%
$ 1,939,189 75,239 3.9% $ 2,163,879 101,338 4.7%
Net interest income/spread $ 191,027 $ 193,644
Net interest margin (3) 8.9% 8.4%
Ratio of average interest earning
assets to average interest
bearing liabilities 111% 107%
(1) Average balances are based on month-end balances with the exception of inventory credit lines which are based on daily balances.
(2) Net of deferred fees and direct costs.
(3) Net interest income divided by average interest earning assets.
Year Ended December 31, 202
Compared to December 31, 2020
Total Change Due to Change Due
Change Volume to Rate
(In thousands)
Interest Earning Assets
Finance receivables gross $ (56,911 ) $ (62,823 ) $ 5,912
Finance receivables at fair value 28,195 17,647 10,548
(28,716 )
(45,176) 16,460
Interest Bearing Liabilities
Warehouse lines of credit (3,230 ) (3,418 ) 188
Residual interest financing 309 770 (461 )
Securitization trust debt (23,644 ) (8,608 ) (15,036 )
Subordinated renewable notes 466 667 (201 )
(26,099 ) (10,589 ) (15,510 )
Net interest income/spread $ (2,617 ) $ (34,587 ) $ 31,970
46
The reduction in the annualized yield on our finance receivables for the year
ended December 31, 2021 compared to the prior year period is the result of the
lower interest yield on the receivables measured at fair value. The interest
yield on receivables measured at fair value is reduced to take account of
expected losses and is therefore less than the yield on other finance
receivables. The average balance of these receivables was $1,802.6 million for
the twelve months ended December 31, 2021 compared to $1,631.5 million in the
prior year period.
Effective January 1, 2020, the Company adopted Accounting Standards Codification
Topic 326 - Financial Instruments - Credit Losses: Measurement of Credit Losses
on Financial Instruments. The amendment introduces a new credit reserving model
known as the Current Expected Credit Loss model, generally referred to as CECL.
Adoption of CECL required the establishment of an allowance for the remaining
expected lifetime credit losses on the portion of the Company's receivable
portfolio that was originated prior to January 2018. To comply with CECL, the
Company recorded an addition to its allowance for finance credit losses of
$127.0 million. In accordance with the rules for adopting CECL, the offset to
the addition to the allowance for finance credit losses was a tax affected
reduction to retained earnings using the modified retrospective method.
For the year ended December 31, 2021, we recorded a reduction to provision for
credit losses on finance receivables in the amount of $14.6 million. The reserve
decrease was primarily due to a decrease in lifetime expected credit losses
resulting from improved credit performance. In the prior year period, we
recorded an increase to provision for credit losses for $14.1 million. That
provision represented our estimate in 2020 of additional forecasted losses that
might be incurred as a result of the pandemic on our portfolio of finance
receivables. Such losses were not considered in our initial estimate of
remaining lifetime losses that we recorded upon our adoption of CECL in January
2020.
The allowance applies only to our finance receivables originated through
December 2017, which we refer to as our legacy portfolio. Finance receivables
that we have originated since January 2018 are accounted for at fair value.
Under the fair value method of accounting, we recognize interest income net of
expected credit losses. Thus, no provision for credit loss expense is recorded
for finance receivables measured at fair value.
Sales expense consists primarily of commission-based compensation paid to our
employee sales representatives. Our sales representatives earn a salary plus
commissions based on volume of contract purchases and sales of ancillary
products and services that we offer our dealers, such as training programs,
internet lead sales, and direct mail products. Sales expense increased by $2.7
million to $16.9 million during the year ended December 31, 2021 and represented
8.4% of total operating expenses. We purchased $1,146.3 million of new contracts
during the year ended December 31, 2021 compared to $742.6 million in the prior
year period. In our second quarter of 2020, we experienced a significant
reduction in contract purchases due to the pandemic and partial shutdown of the
economy. Since then, our contract purchase volumes have gradually increased
to pre-pandemic levels.
Occupancy costs increased $294,000, or 4.0%, to $7.7 million compared to $7.4 million a year earlier and accounted for 3.8% of total operating costs.
Depreciation and amortization expenses decreased by $109,000 or 6.1%, to $1.7 million compared to $1.8 million in the previous year and represented 0.8%
of
total operating expenses.
Income tax expense was $18.2 million in 2021 compared to an income tax benefit
of $1.6 million for 2020. On March 27, 2020, the Coronavirus Aid, Relief and
Economic Security ("CARES") Act was passed into law, providing wide ranging
economic relief for individuals and businesses. One component of the CARES Act
provides the Company with an opportunity to carry back net operating losses
("NOLs") arising from 2018, 2019 and 2020 to the prior five tax years. The
Company has previously valued its NOLs at the federal corporate income tax rate
of 21%. However, the CARES Act provides for NOL carryback claims to be
calculated based on a rate of 35%, which was the federal corporate tax rate in
effect for the carryback years. The result of the revaluation of NOLs and other
tax adjustments is a net tax benefit of $680,000 and $8.8 million for 2021 and
2020, respectively. Excluding the tax benefit, income tax expense for 2021 would
have been $18.9 million, representing an effective income tax rate of 29%. For
2020, income tax expense would have been $7.2 million for an effective tax
rate of 36%. 47
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, 2022, 2021 and 2020 was $215.9 million, $198.2 million and $238.8 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, 2022 and 2021 was $713.9 million and $115.4 million, respectively. This compares to net cash provided by investing activities of $93.0 million for the year ended December 31, 2020. Cash used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables were $1,673.2 million (includes acquisition fees paid), $1,107.5 million and $739.7 million in 2022, 2021 and 2020, 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 $484.2 million in 2022. Net cash used in financing activities for the year ended December 31, 2021 and 2020 was $50.4 million and $328.5 million, respectively. 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 $1,411.0 million in new securitization trust debt in 2022 compared to $1,110.7 million in 2021 and $714.5 million in 2020. Repayments of securitization debt were $1,060.1 million, $1,153.1 million and $1,010.0 million in 2022, 2021 and 2020, 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. 48 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, 2022, we had unrestricted cash of $13.5 million and $114.7 million aggregate available borrowings under our two warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of December 31, 2022, we had approximately $22.1 million of such eligible collateral. During 2022, we completed four securitizations aggregating $1,411.0 million of notes sold. In January 2023, we completed another securitization with $324.8 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, 2022, we were in compliance with all such financial covenants. We currently have and will continue to have a substantial amount of indebtedness. At December 31, 2022, we had approximately $2,469.0 million of debt outstanding. Such debt consisted primarily of $2,108.7 million of securitization trust debt, and also included $285.3 million of warehouse lines of credit, $49.6 million of residual interest financing debt and $25.3 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 significant contractual commitments as of December 31, 2022 (in thousands of dollars):
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) $ 25,263 $ 13,800 $ 5,944 $
4,101 $1,418 Operating and Finance Leases $8,558 $4,524 $2,373 $1,009 $652
(1) Securitization Trust Debt totaling $2,108.7 million
December 31, 2022 is omitted from this table as it is due as and
if the associated receivables balance is reduced by payments and write-offs.
Expected payments that depend on the fulfillment of such claims,
about which no assurance can be given is $804.4 million in 2023, $578.9
million in 2024, $339.1 million in 2025, $202.3 million in 2026, $128.1
million in 2027, $55.3 million in 2028, and $0.6 million in 2029.
(2) Long-term debt represents subordinated renewable bonds.
49
We expect to repay maturing debt in 2023 with a combination of cash flows from operations and potential new debt.
inventory 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. The facility provides for effective advances up to
82.0% 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 one-month SOFR plus 3.00% per annum, with a minimum rate of 3.75% per annum
and during the amortization period at a per annum rate equal to one-month SOFR
plus 4.00% per annum, with a minimum rate of 4.75% per annum. The Class B loans
under the facility generally accrue interest during the revolving period at a
per annum rate equal to 8.50% per annum and during the amortization period at a
per annum rate equal to 9.50% per annum. In July 2022, we renewed our two-year
revolving credit agreement with Citibank, N.A., and doubled the capacity from
$100 million to $200 million. This facility was amended to extend the revolving
period to July 2024 and to include an amortization period through July 2025 for
any receivables pledged to the facility at the end of the revolving period. At
December 31, 2022 there was $150.3 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 88.00% of eligible finance
receivables. The loans under the facility accrue interest at a commercial paper
rate plus 4.15% per annum, with a minimum rate of 5.15% 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 amended to extend the revolving period to January 2024 followed by an
amortization period through January 2028 for any receivables pledged to the
facility at the end of the revolving period. At December 31, 2022 there was
$137.6 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.
50
Capitalization
Over the period from January 1, 2020 through December 31, 2022 we have managed
our capitalization by issuing and refinancing debt as summarized in the
following table:
Year Ended December 31,
2022 2021 2020
(Dollars in thousands)
RESIDUAL INTEREST FINANCING:
Beginning balance $ 53,682 $ 25,426 $ 39,478
Issuances - 50,000 -
Payments (4,311 ) (21,265 ) (14,424 )
Capitalization of deferred financing costs - (755 ) - Amortization of deferred financing costs 252 276 372 Ending balance $ 49,623 $
53,682$25,426
SECURITIZATION TRUST DEBT: Beginning balance $ 1,759,972 $ 1,803,673 $ 2,097,728 Issuances 1,411,018 1,110,747 714,543 Payments (1,060,052 ) (1,153,114 ) (1,009,988 )
Capitalization of deferred finance costs (8,681) (7,058) (4,862)
Amortization of deferred financing costs 6,487
5,724 6,252 Ending balance $ 2,108,744 $ 1,759,972 $ 1,803,673 SUBORDINATED RENEWABLE NOTES: Beginning balance $ 26,459 $ 21,323 $ 17,534 Issuances 4,004 12,298 6,750 Payments (5,200 ) (7,162 ) (2,961 ) Ending balance $ 25,263 $ 26,459 $ 21,323
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, 2022 there was
$50.0 million outstanding under this facility.
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The agreed valuation of the collateral for the 2021-1 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 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 45 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 $2,108.7 million
of securitization trust debt outstanding at December 31, 2022.
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, 2022 there were $25.3 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, 2022, we
were in compliance with all such covenants.
Forward-looking Statements
This report on Form 10-K includes certain "forward-looking statements".
Forward-looking statements may be identified by the use of words such as
"anticipates," "expects," "plans," "estimates," or words of like meaning. As to
the specifically identified forward-looking statements, factors that could
affect charge-offs and recovery rates include unexpected exogenous events, such
as a widespread plague that might affect the ability or willingness of obligors
to pay pursuant to the terms of contracts; mandates imposed in reaction to such
events, such as prohibitions of otherwise permissible activity, which might
impair the obligation to perform contracts, or the ability of obligors to earn;
changes in the general economic climate, which could affect the willingness or
ability of obligors to pay pursuant to the terms of contracts; changes in laws
respecting consumer finance, which could affect our ability to enforce rights
under contracts; and changes in the market for used vehicles, which could affect
the levels of recoveries upon sale of repossessed vehicles. Factors that could
affect our revenues in the current year include the levels of cash releases from
existing pools of contracts, which would affect our ability to purchase
contracts, the terms on which we are able to finance such purchases, the
willingness of dealers to sell contracts to us on the terms that it offers, and
the terms on which we are able to complete term securitizations once contracts
are acquired. Factors that could affect our expenses in the current year include
competitive conditions in the market for qualified personnel, investor demand
for asset-backed securities and interest rates (which affect the rates that we
pay on asset-backed securities issued in our securitizations). The statements
concerning structuring securitization transactions as secured financings and the
effects of such structures on financial items and on future profitability also
are forward-looking statements. Any change to the structure of our
securitization transaction could cause such forward-looking statements to be
inaccurate. Both the amount of 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 are estimates. The accuracy
of such estimates will be affected by the rate at which we purchase and sell
contracts, any changes in that rate, the credit performance of such contracts,
the financial terms of future securitizations, any changes in such terms over
time, and other factors that generally affect our profitability.
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