cpss10qa_dtd160502.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
 
Washington, DC 20549
 
 
FORM 10-Q/A
 
 
Amendment No. 1
 
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
 
 
Commission file number: 1-11416
 
 
CONSUMER PORTFOLIO SERVICES, INC.
 
 
(Exact name of registrant as specified in its charter)
 
California
33-0459135
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
   
3800 Howard Hughes Parkway, Suite 1400,
Las Vegas, Nevada
89169
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including Area Code: (949) 753-6800
 
 
Former name, former address and former fiscal year, if changed since last report: N/A
 
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [X] No [_]
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [_]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large Accelerated Filer [_] Accelerated Filer [X]
 
 
Non-Accelerated Filer [_] Smaller Reporting Company [_]
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
 
 
As of April 26, 2016 the registrant had 24,748,115 common shares outstanding.
 
 
 
 

 
Explanatory Note
 
 
This quarterly report is amended solely to place on file the exhibits (nos. 4.65, 4.66, 4.67and 4.68) that were referenced as “to be filed by amendment” in the original filing. This amendment speaks as of the original filing date of the Form 10-Q and does not modify or update in any way the disclosures made in the Form 10-Q.
 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
INDEX TO FORM 10-Q
 
 
For the Quarterly Period Ended March 31, 2016
 
   
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
3
 
Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2016 and 2015
4
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2016 and 2015
5
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2016 and 2015
6
 
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 4.
Controls and Procedure
29
 

 
PART II. OTHER INFORMATION
     
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
30
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 6.
Exhibits
31
 
Signatures
32
 

 
 
 

 
 
Item 1. Financial Statements
 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
(In thousands, except share and per share data)
 
   
March 31,
   
December 31,
 
   
2016
   
2015
 
ASSETS
               
Cash and cash equivalents
 
$
16,191
   
$
19,322
 
Restricted cash and equivalents
   
126,011
     
106,054
 
                 
Finance receivables
   
2,098,243
     
1,985,093
 
Less: Allowance for finance credit losses
   
(79,867
)
   
(75,603
)
Finance receivables, net
   
2,018,376
     
1,909,490
 
                 
Finance receivables measured at fair value
   
23
     
61
 
Furniture and equipment, net
   
1,661
     
1,715
 
Deferred tax assets, net
   
37,543
     
37,597
 
Accrued interest receivable
   
30,617
     
31,547
 
Other assets
   
19,536
     
23,139
 
   
$
2,249,958
   
$
2,128,925
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Accounts payable and accrued expenses
 
$
32,890
   
$
29,509
 
Warehouse lines of credit
   
170,299
     
194,056
 
Residual interest financing
   
8,336
     
9,042
 
Securitization trust debt
   
1,856,396
     
1,720,021
 
Subordinated renewable notes
   
15,348
     
15,138
 
     
2,083,269
     
1,967,766
 
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; 24,926,465 and 25,616,460 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
   
79,653
     
81,337
 
Retained earnings
   
93,686
     
86,472
 
Accumulated other comprehensive loss
   
(6,650
)
   
(6,650
)
     
166,689
     
161,159
 
                 
   
$
2,249,958
   
$
2,128,925
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
3

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
(In thousands, except share and per share data)
 
   
Three Months Ended
 
   
March 31,
 
             
     
2016
     
2015
 
Revenues:
               
Interest income
 
$
96,663
   
$
82,359
 
Servicing fees
   
23
     
148
 
Other income
   
3,963
     
3,482
 
     
100,649
     
85,989
 
                 
Expenses:
               
Employee costs
   
15,143
     
14,486
 
General and administrative
   
5,331
     
4,836
 
Interest
   
17,821
     
13,173
 
Provision for credit losses
   
44,197
     
33,439
 
Marketing
   
4,670
     
4,204
 
Occupancy
   
1,083
     
954
 
Depreciation and amortization
   
175
     
148
 
     
88,420
     
71,240
 
Income before income tax expense
   
12,229
     
14,749
 
Income tax expense
   
5,015
     
6,416
 
Net income
 
$
7,214
   
$
8,333
 
                 
Earnings per share:
               
Basic
 
$
0.29
   
$
0.33
 
Diluted
   
0.24
     
0.26
 
                 
Number of shares used in computing earnings per share:
               
Basic
   
25,296
     
25,635
 
Diluted
   
30,154
     
31,991
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
4

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
(In thousands)
 
   
Three Months Ended
 
   
March 31,
 
             
     
2016
     
2015
 
                 
Net income
 
$
7,214
   
$
8,333
 
                 
Other comprehensive income/(loss); change in funded status of pension plan
   
     
 
Comprehensive income
 
$
7,214
   
$
8,333
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
5

 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
(In thousands)
 
   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
Cash flows from operating activities:
               
Net income
 
$
7,214
   
$
8,333
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Accretion of deferred acquisition fees
   
(1,253
)
   
(2,881
)
Amortization of discount on securitization trust debt
   
15
     
20
 
Depreciation and amortization
   
175
     
148
 
Amortization of deferred financing costs
   
2,003
     
1,673
 
Provision for credit losses
   
44,197
     
33,439
 
Stock-based compensation expense
   
1,249
     
1,096
 
Interest income on residual assets
   
     
(37
)
Changes in assets and liabilities:
               
Accrued interest receivable
   
930
     
(1,124
)
Deferred tax assets, net
   
54
     
2,500
 
Other assets
   
2,561
     
6,644
 
Accounts payable and accrued expenses
   
3,381
     
5
 
Net cash provided by operating activities
   
60,526
     
49,816
 
                 
Cash flows from investing activities:
               
Purchases of finance receivables held for investment
   
(312,300
)
   
(233,890
)
Payments received on finance receivables held for investment
   
160,470
     
122,066
 
Payments received on receivables portfolio at fair value
   
38
     
921
 
Change in repossessions held in inventory
   
1,042
     
882
 
Change in restricted cash and cash equivalents, net
   
(19,957
)
   
1,931
 
Purchase of furniture and equipment
   
(121
)
   
(404
)
Net cash used in investing activities
   
(170,828
)
   
(108,494
)
                 
Cash flows from financing activities:
               
Proceeds from issuance of securitization trust debt
   
329,460
     
245,000
 
Proceeds from issuance of subordinated renewable notes
   
715
     
111
 
Payments on subordinated renewable notes
   
(505
)
   
(262
)
Net repayments of warehouse lines of credit
   
(24,209
)
   
(34,874
)
Repayments of residual interest financing debt
   
(706
)
   
(253
)
Repayment of securitization trust debt
   
(192,622
)
   
(145,867
)
Repayment of debt secured by receivables measured at fair value
   
     
(1,250
)
Payment of financing costs
   
(2,029
)
   
(1,920
)
Purchase of common stock
   
(2,949
)
   
 
Exercise of options and warrants
   
16
     
336
 
Net cash provided by financing activities
   
107,171
     
61,021
 
                 
Increase (decrease) in cash and cash equivalents
   
(3,131
)
   
2,343
 
                 
Cash and cash equivalents at beginning of period
   
19,322
     
17,859
 
Cash and cash equivalents at end of period
 
$
16,191
   
$
20,202
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
15,518
   
$
11,415
 
Income taxes
 
$
2,043
   
$
5
 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
6

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
(1) Summary of Significant Accounting Policies
 
 
Description of Business
 
 
We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of loans secured by vehicles. In this report, we refer to all of such contracts and loans as “automobile contracts.”
 
 
Basis of Presentation
 
 
Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the three month period ended March 31, 2016 are not necessarily indicative of the operating results to be expected for the full year.
 
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
 
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.
 
 
Other Income
 
 
The following table presents the primary components of Other Income for the three-month periods ending March 31, 2016 and 2015:
 
   
Three Months Ended
   
   
March 31,
   
     
2016
     
2015
   
     
(In thousands)
   
Direct mail revenues
 
$
2,845
   
$
2,137
   
Convenience fee revenue
   
645
     
950
   
Recoveries on previously charged-off contracts
   
243
     
192
   
Sales tax refunds
   
199
     
150
   
Other
   
31
     
53
   
Other income for the period
 
$
3,963
   
$
3,482
   
 
Warrants
 
 
In connection with the amendment to and partial repayment of our residual interest financing in July 2008, we issued warrants exercisable for 2,500,000 common shares for $4,071,429. The warrants represent the right to purchase 2,500,000 CPS common shares at a nominal exercise price, at any time prior to July 10, 2018. In March 2010 we repurchased warrants for 500,000 of these shares for $1.0 million. Warrants to purchase 2,000,000 shares remain outstanding as of March 31, 2016.
 
 
7

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Stock-based Compensation
 
 
We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”.
 
 
For the three months ended March 31, 2016 and 2015, we recorded stock-based compensation costs in the amount of $1.2 million and $1.1 million, respectively. As of March 31, 2016, unrecognized stock-based compensation costs to be recognized over future periods equaled $11.9 million. This amount will be recognized as expense over a weighted-average period of 2.4 years.
 
 
The following represents stock option activity for the three months ended March 31, 2016:
 
   
Number of Shares
(in thousands)
   
Weighted Average
Exercise Price
   
Weighted Average Remaining
Contractual Term
 
Options outstanding at the beginning of period
   
11,228
   
$
4.66
   
5.55 years
 
Granted
   
     
   
N/A
 
Exercised
   
(14
)
   
0.99
   
N/A
 
Forfeited
   
     
   
N/A
 
Options outstanding at the end of period
   
11,214
   
$
4.67
   
5.31 years
 
                       
Options exercisable at the end of period
   
6,333
   
$
3.61
   
4.70 years
 
 
At March 31, 2016, the aggregate intrinsic value of options outstanding and exercisable was $12.4 million and $10.8 million, respectively. There were 14,000 options exercised for the three months ended March 31, 2016 compared to 209,000 for the comparable period in 2015. The total intrinsic value of options exercised was $51,000 and $1.2 million for the three-month periods ended March 31, 2016 and 2015. There were 5.5 million shares available for future stock option grants under existing plans as of March 31, 2016.
 
 
Purchases of Company Stock
 
 
During the three-month period ended March 31, 2016, we purchased 703,745 shares of our stock in the open market at an average price of $4.19. We did not purchase any shares of our common stock during the three months ended March 31, 2015.
 
 
New Accounting Pronouncements
 
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of ASU 2016-02 is for interim and annual reporting periods beginning after December 15, 2018. The ASU has not yet been adopted. The Company is currently evaluating the provisions of ASU No. 2016-02 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
 
 
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies and improves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The effective date of ASU 2016-09 is for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.
 
 
8

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Reclassifications
 
 
Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or total 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 March 31, 2016, we were in compliance with all such covenants. In addition, certain securitization and non-securitization related debt agreements contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility.
 
 
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 March 31, 2016, which represents our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.
 
 
(2) 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.
 
 
The following table presents the components of Finance Receivables, net of unearned interest:
 
   
March 31,
   
December 31,
   
   
2016
   
2015
   
Finance Receivables
 
(In thousands)
   
               
Automobile finance receivables, net of unearned interest
 
$
2,102,093
   
$
1,990,913
   
Less: Unearned acquisition fees and originations costs
   
(3,850
)
   
(5,820
)
 
Finance Receivables
 
$
2,098,243
   
$
1,985,093
   
 
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 included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. 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 rather than troubled debt restructurings. The following table summarizes the delinquency status of finance receivables as of March 31, 2016 and December 31, 2015:
 
   
March 31,
   
December 31,
   
   
2016
   
2015
   
   
(In thousands)
   
Delinquency Status
                 
Current
 
$
1,948,923
   
$
1,836,267
   
31 - 60 days
   
89,123
     
70,036
   
61 - 90 days
   
32,816
     
41,136
   
91 + days
   
31,231
     
43,474
   
   
$
2,102,093
   
$
1,990,913
   
 

 
 
9

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Finance receivables totaling $31.2 million and $43.5 million at March 31, 2016 and December 31, 2015, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status.
 
 
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. The estimate for probable incurred credit losses is reduced by our estimate for future recoveries on previously incurred losses. Provision for losses is charged to our consolidated statement of operations. Net losses incurred on finance receivables are charged to the allowance. We establish the allowance for new receivables over the 12-month period following their acquisition.
 
 
The following table presents a summary of the activity for the allowance for finance credit losses for the three-month periods ended March 31, 2016 and 2015:
 
   
Three Months Ended
   
   
March 31,
   
     
2016
     
2015
   
     
(In thousands)
   
Balance at beginning of period
 
$
75,603
   
$
61,460
   
Provision for credit losses on finance receivables
   
44,197
     
33,439
   
Charge-offs
   
(45,933
)
   
(31,829
)
 
Recoveries
   
6,000
     
5,072
   
Balance at end of period
 
$
79,867
   
$
68,142
   
 
Excluded from finance receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses:
 
   
March 31,
   
December 31,
   
   
2016
   
2015
   
   
(In thousands)
   
Gross balance of repossessions in inventory
 
$
38,807
   
$
39,728
   
Allowance for losses on repossessed inventory
   
(27,075
)
   
(26,954
)
 
Net repossessed inventory included in other assets
 
$
11,732
   
$
12,774
   
 

 
 
10

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
3) Securitization Trust Debt
 
 
We have completed many securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table:
 
Series
   
Final Scheduled Payment Date (1)
 
Receivables Pledged at March 31, 2016 (2)
   
Initial Principal
   
Outstanding Principal at March 31, 2016
   
Outstanding Principal at December 31, 2015
   
Weighted Average Contractual Interest Rate at March 31, 2016
 
     
(Dollars in thousands)
     
 
CPS 2011-B
   
September 2018
 
$
   
$
109,936
   
$
   
$
10,023
     
 
 
CPS 2011-C
   
March 2019
   
11,958
     
119,400
     
12,000
     
14,785
     
4.91%
 
 
CPS 2012-A
   
June 2019
   
14,785
     
155,000
     
13,461
     
16,795
     
3.09%
 
 
CPS 2012-B
   
September 2019
   
22,682
     
141,500
     
22,490
     
26,758
     
3.06%
 
 
CPS 2012-C
   
December 2019
   
26,217
     
147,000
     
26,004
     
30,653
     
2.36%
 
 
CPS 2012-D
   
March 2020
   
33,015
     
160,000
     
31,916
     
37,464
     
1.90%
 
 
CPS 2013-A
   
June 2020
   
50,001
     
185,000
     
48,693
     
56,583
     
1.80%
 
 
CPS 2013-B
   
September 2020
   
62,166
     
205,000
     
60,768
     
70,332
     
2.33%
 
 
CPS 2013-C
   
December 2020
   
73,202
     
205,000
     
72,651
     
82,851
     
3.68%
 
 
CPS 2013-D
   
March 2021
   
72,948
     
183,000
     
71,963
     
82,337
     
3.19%
 
 
CPS 2014-A
   
June 2021
   
82,550
     
180,000
     
82,371
     
92,571
     
2.67%
 
 
CPS 2014-B
   
September 2021
   
108,109
     
202,500
     
108,183
     
121,515
     
2.35%
 
 
CPS 2014-C
   
December 2021
   
165,468
     
273,000
     
165,152
     
183,802
     
2.54%
 
 
CPS 2014-D
   
March 2022
   
178,281
     
267,500
     
179,567
     
198,533
     
2.75%
 
 
CPS 2015-A
   
June 2022
   
184,209
     
245,000
     
183,802
     
201,527
     
2.57%
 
 
CPS 2015-B
   
September 2022
   
207,940
     
250,000
     
206,213
     
221,587
     
2.64%
 
 
CPS 2015-C
   
December 2022
   
271,082
     
300,000
     
266,817
     
283,482
     
3.03%
 
 
CPS 2016-A
   
March 2023
   
328,330
     
329,460
     
316,400
     
     
3.32%
 
           
$
1,892,943
   
$
3,658,296
   
$
1,868,451
   
$
1,731,598
         
 
_________________
 
 
(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 $555.0 million in 2016, $594.2 million in 2017, $385.4 million in 2018, $216.8 million in 2019, $97.9 million in 2020, $19.2 million in 2021.
 

 
 
(2)
Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.
 
Debt issuance costs of $12.1 million and $11.6 million as of March 31, 2016 and December 31, 2015, 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 Unaudited Condensed Consolidated Balance Sheets.
 
 
All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets.
 
 
The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. In addition, certain securitization and non-securitization related debt contain cross-default provisions, which would allow certain creditors to declare a default if a default were declared under a different facility. As of March 31, 2016, we were in compliance with all such covenants.
 
 
11

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
We are responsible for the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of March 31, 2016, restricted cash under the various agreements totaled approximately $126.0 million. Interest expense on the securitization trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost of the securitization trust debt is greater than the contractual rate of interest disclosed above.
 
 
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 credit facilities. 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 other creditors.
 
 
(4) Debt
 
 
The terms and amounts of our other debt outstanding at March 31, 2016 and December 31, 2015 are summarized below:
 
             
Amount Outstanding at
 
             
March 31,
   
December 31,
 
             
2016
   
2015
 
             
(In thousands)
 
Description
 
Interest Rate
   
Maturity
                 
                             
Warehouse lines of credit
 
5.50% over one month Libor (Minimum 6.50%)
   
April 2019
   
$
90,492
   
$
91,504
 
                             
   
5.50% over one month Libor (Minimum 6.25%)
   
August 2017
     
43,558
     
73,940
 
                             
   
6.75% over a commercial paper rate (Minimum 7.75%)
   
November 2019
     
38,202
     
31,017
 
                             
Residual interest financing
 
11.75% over one month Libor
   
April 2018
     
8,336
     
9,042
 
                             
Subordinated renewable notes
 
Weighted average rate of 8.67% and 9.04% at March 31, 2016 and December 31, 2015, respectively
   
Weighted average maturity of December 2017 and October 2017 at March 31, 2016 and December 31, 2015, respectively
     
15,348
     
15,138
 
               
$
195,936
   
$
220,641
 
 
Debt issuance costs of $2.0 million and $2.4 million as of March 31, 2016 and December 31, 2015, 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 on our Unaudited Condensed Consolidated Balance Sheets.
 
 
12

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
(5) Interest Income and Interest Expense
 
 
The following table presents the components of interest income:
 
   
Three Months Ended
   
   
March 31,
   
   
2016
   
2015
   
   
(In thousands)
   
               
Interest on finance receivables
 
$
96,628
   
$
82,321
   
Residual interest income
   
     
37
   
Other interest income
   
35
     
1
   
Interest income
 
$
96,663
   
$
82,359
   
 
The following table presents the components of interest expense:
 
   
Three Months Ended
   
   
March 31,
   
   
2016
   
2015
   
   
(In thousands)
   
               
Securitization trust debt
 
$
14,764
   
$
10,876
   
Warehouse lines of credit
   
2,422
     
1,473
   
Residual interest financing
   
271
     
423
   
Subordinated renewable notes
   
364
     
401
   
Interest expense
 
$
17,821
   
$
13,173
   
 
(6) Earnings Per Share
 
 
Earnings per share for the three-month periods ended March 31, 2016 and 2015 were calculated using the weighted average number of shares outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted earnings per share for the three-month periods ended March 30, 2016 and 2015:
 
     
Three Months Ended
     
March 31,
     
2016
 
2015
     
(In thousands)
Weighted average number of common shares outstanding during the period used to compute basic earnings per share
   
25,296
 
25,635
           
Incremental common shares attributable to exercise of outstanding options and warrants
   
4,858
 
6,356
           
Weighted average number of common shares used to compute diluted earnings per share
   
30,154
 
31,991
 
If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month periods ended March 31, 2016 and 2015 would have included an additional 6.8 million and 4.7 million shares, respectively attributable to the exercise of outstanding options and warrants.
 
 
13

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
(7) Income Taxes
 
 
We file numerous consolidated and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2012.
 
 
As of March 31, 2016 and December 31, 2015, we had no unrecognized tax benefits for uncertain tax positions. We do not anticipate that total unrecognized tax benefits will significantly change due to any settlements of audits or expirations of statutes of limitations over the next 12 months.
 
 
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.
 
 
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 judgments, 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 $37.5 million as of March 31, 2016 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $37.5 million consists of approximately $29.9 million of net U.S. federal deferred tax assets and $7.6 million of net state deferred tax assets.
 
 
Income tax expense was $5.0 million and $6.4 million for the three months ended March 31, 2016 and 2015, which represents an effective income tax rate of 41% and 44%, respectively.
 
 
(8) 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.
 
 
We are currently subject to one such class action, which has been settled by agreement with the plaintiffs. The settlement remains subject to final court approval. (The court has approved the settlement, but an objecting member of the settlement class has appealed that approval.)
 
 
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. We have recorded a liability as of March 31, 2016 with respect to such matters, in the aggregate.
 
 
Department of Justice Subpoena. In January 2015, we were served with a subpoena by the U.S. Department of Justice directing us to produce certain documents relating to our and our subsidiaries’ and affiliates’ origination and securitization of sub-prime automobile contracts since 2005, in connection with an investigation by the U.S. Department of Justice in contemplation of a civil proceeding for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. We are among several other securitizers of sub-prime automobile receivables who received such subpoenas in 2014 and 2015. Among other matters, the subpoena required information relating to the underwriting criteria used to originate these automobile contracts and the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile contracts. We provided the required documents in March 2015, and are unaware of any subsequent material developments in the government’s investigation. The investigation could in the future result in the imposition of damages, fines or civil or criminal claims and/or penalties. No assurance can be given as to the ultimate outcome of the investigation or any resulting proceeding(s), which might materially and adversely affect us.
 
 
In General. There can be no assurance as to the outcomes of the matters referenced above. We have recorded a liability as of March 31, 2016, which represents our best estimate of probable incurred losses for legal contingencies, including all of the matters described or referenced 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 referenced above, as of March 31, 2016, and in excess of the liability we have recorded, is from $0 to $250,000.
 
 
14

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
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, the wide discretion vested in the U.S. Department of Justice and other government agencies, and the deference that courts may give to assertions made by government litigants, 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.
 
 
(9) Employee Benefits
 
 
On March 8, 2002 we acquired MFN Financial Corporation and its subsidiaries in a merger. We sponsor the MFN Financial Corporation Benefit Plan (the “Plan”). Plan benefits were frozen June 30, 2001. The table below sets forth the Plan’s net periodic benefit cost for the three-month periods ended March 31, 2016 and 2015.
 
   
Three Months Ended
 
   
March 31,
 
   
2016
   
2015
 
   
(In thousands)
 
Components of net periodic cost (benefit)
           
Service cost
 
$
   
$
 
Interest cost
   
221
     
211
 
Expected return on assets
   
(300
)
   
(377
)
Amortization of transition (asset)/obligation
   
     
 
Amortization of net (gain) / loss
   
138
     
87
 
Net periodic cost (benefit)
 
$
59
   
$
(79
)
 
We did not make any contributions to the Plan during the three-month periods ended March 31, 2016 and 2015. We do not anticipate making any contributions for the remainder of 2016.
 
 
(10) 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 would be 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.
 
 
Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At March 31, 2016 the finance receivables related to the repossessed vehicles in inventory totaled $38.8 million. We have applied a valuation adjustment, or loss allowance, of $27.1 million, which is based on a recovery rate of approximately 30%, resulting in an estimated fair value and carrying amount of $11.7 million. The fair value and carrying amount of the repossessed inventory at December 31, 2015 was $12.8 million after applying a valuation adjustment of $26.9 million.
 
 
There were no transfers in or out of level 1 or level 2 assets and liabilities for the three months ended March 31, 2016 and 2015. We have no level 3 assets that are measured at fair value on a non-recurring basis.
 
 
15

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
The estimated fair values of financial assets and liabilities at March 31, 2016 and December 31, 2015, were as follows:
 
   
As of March 31, 2016
 
Financial Instrument
 
(In thousands)
 
   
Carrying
   
Fair Value Measurements Using:
       
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                                       
Cash and cash equivalents
 
$
16,191
   
$
16,191
   
$
   
$
   
$
16,191
 
Restricted cash and equivalents
   
126,011
     
126,011
     
     
     
126,011
 
Finance receivables, net
   
2,018,376
     
     
     
1,956,634
     
1,956,634
 
Finance receivables measured at fair value
   
23
     
     
     
23
     
23
 
Accrued interest receivable
   
30,617
     
     
     
30,617
     
30,617
 
Liabilities:
                                       
Warehouse lines of credit
 
$
172,252
   
$
   
$
   
$
172,252
   
$
172,252
 
Accrued interest payable
   
3,545
     
     
     
3,545
     
3,545
 
Residual interest financing
   
8,336
     
     
     
8,336
     
8,336
 
Securitization trust debt
   
1,868,451
     
     
     
1,854,242
     
1,854,242
 
Subordinated renewable notes
   
15,348
     
     
     
15,348
     
15,348
 
 

 
   
As of December 31, 2015
 
Financial Instrument
 
(In thousands)
 
   
Carrying
   
Fair Value Measurements Using:
       
   
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                                       
Cash and cash equivalents
 
$
19,322
   
$
19,322
   
$
   
$
   
$
19,322
 
Restricted cash and equivalents
   
106,054
     
106,054
     
     
     
106,054
 
Finance receivables, net
   
1,909,490
     
     
     
1,879,510
     
1,879,510
 
Finance receivables measured at fair value
   
61
     
     
     
61
     
61
 
Accrued interest receivable
   
31,547
     
     
     
31,547
     
31,547
 
Liabilities:
                                       
Warehouse lines of credit
 
$
196,461
   
$
   
$
   
$
196,461
   
$
196,461
 
Accrued interest payable
   
3,260
     
     
     
3,260
     
3,260
 
Residual interest financing
   
9,042
     
     
     
9,042
     
9,042
 
Securitization trust debt
   
1,731,598
     
     
     
1,718,418
     
1,718,418
 
Subordinated renewable notes
   
15,138
     
     
     
15,138
     
15,138
 
 
The following summary presents a description of the methodologies and assumptions used to estimate the fair value of our financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of our financial instruments, active markets do not exist. Therefore, significant elements of judgment were required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, credit quality and interest rates, all of which are subject to change. Since the fair value is estimated as of March 31, 2016 and December 31, 2015, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
 
 
16

 
 
CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Cash, Cash Equivalents and Restricted Cash and Equivalents
 
 
The carrying value equals fair value.
 
 
Finance Receivables, net
 
 
The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar receivables could be originated.
 
 
Finance Receivables Measured at Fair Value
 
 
The carrying value equals fair value.
 
 
Accrued Interest Receivable and Payable
 
 
The carrying value approximates fair value.
 
 
Warehouse Lines of Credit, Residual Interest Financing, and Subordinated Renewable Notes
 
 
The carrying value approximates fair value because the related interest rates are estimated to reflect current market conditions for similar types of secured instruments.
 
 
Securitization Trust Debt
 
 
The fair value is estimated by discounting future cash flows using interest rates that we believe reflect the current market rates.
 
 
17

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Overview
 
 
We are a specialty finance company focused on consumers who have limited credit histories or past credit problems, whom we refer to as sub-prime customers. 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 sub-prime customers of dealers. 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 have also (i) acquired installment purchase contracts in four merger and acquisition transactions, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) lent money directly to consumers for an immaterial amount of loans secured by vehicles. 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 March 31, 2016, we have purchased a total of approximately $12.7 billion of automobile contracts from dealers. In addition, we obtained a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and 2011. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile receivables originated and owned by non-affiliated entities. Beginning in 2008 through the third quarter of 2011, our managed portfolio decreased each year due to our strategy of limiting contract purchases in 2008 and 2009 to conserve our liquidity, as discussed further below. However, since October 2009 we have gradually increased contract purchases, which, in turn has resulted in recent increases to our managed portfolio. Recent contract purchase volumes and managed portfolio levels are shown in the table below:
 
   
$ in thousands
   
Period
 
Contracts Purchased in Period
   
Managed Portfolio at Period End
   
2008
 
$
296,817
   
$
1,664,122
   
2009
   
8,599
     
1,194,722
   
2010
   
113,023
     
756,203
   
2011
   
284,236
     
794,649
   
2012
   
551,742
     
897,575
   
2013
   
764,087
     
1,231,422
   
2014
   
944,944
     
1,643,920
   
2015
   
1,060,538
     
2,031,136
   
Three months ended March 31, 2016
   
312,300
     
2,141,628
   
 
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 are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. We purchase 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 fund the transactions. 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.
 
 
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 unaudited condensed 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.
 
 
18

 
 
Since 1994 we have conducted 69 term securitizations (generally quarterly) of automobile contracts that we purchased from dealers under our regular programs. As of March 31, 2016, 18 of those securitizations are active and all but one are structured as secured financings. Our September 2010 transaction is our only active securitization that is structured as a sale of the related contracts. From 1994 through April 2008 we generally utilized financial guarantees for the senior asset-backed notes issued in the securitization. Since September 2010 we have utilized senior subordinated structures without any financial guarantees. We have generally conducted our securitizations on a quarterly basis, near the end of each calendar quarter, resulting in four securitizations per calendar year. However, in 2015, we elected to defer what would have been our December securitization in favor of a securitization in January 2016. We also completed a securitization in April 2016.
 
 
Our recent history of term securitizations is summarized in the table below:
 
Recent Asset-Backed Term Securitizations
   
   
$ in thousands
   
Period
 
Number of Term Securitizations
   
Amount of Term Securitizations
   
2006
   
4
   
$
957,681
   
2007
   
3
     
1,118,097
   
2008
   
2
     
509,022
   
2009
   
0
     
   
2010
   
1
     
103,772
   
2011
   
3
     
335,593
   
2012
   
4
     
603,500
   
2013
   
4
     
778,000
   
2014
   
4
     
923,000
   
2015
   
3
     
795,000
   
Three months ended March 31, 2016
   
1
     
329,500
   
 
From time to time we have also completed financings of our residual interests in other securitizations that we and our affiliates previously sponsored. As of March 31, 2016 we have one such residual interest financing outstanding.
 
 
Since December 2011, our securitizations have included a pre-funding feature in which a portion of the receivables to be sold to the trust were not delivered until after the initial closing. As a result, our restricted cash balance at March 31, 2015 included $72.0 million from the proceeds of the sale of the asset-backed notes that were held by the trustee pending delivery of the remaining receivables. In April 2015, the requisite additional receivables were delivered to the trust and we received the related restricted cash, most of which was used to repay amounts owed under our warehouse credit facilities. Since we have changed the timing of our securitizations to generally occur at the beginning rather than the end of the calendar quarter, there was no related amount of restricted cash representing the pre-funding proceeds at March 31, 2016.
 
 
Generally, prior to a securitization transaction we fund our automobile contract purchases primarily with proceeds from warehouse credit facilities. Our current short-term funding capacity is $300 million, comprising three credit facilities. The first $100 million credit facility was established in May 2012. This facility was renewed in August 2014, extending the revolving period to August 2016, and adding an amortization period through August 2017. In April 2015, we entered into a new $100 million facility, with a revolving period extending to April 2017, followed by an amortization period to April 2019. In November 2015, we entered into a third $100 million facility, with a revolving period extending to November 2017, followed by an amortization period to November 2019.
 
 
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 March 31, 2016 we were in compliance with all such covenants.
 
 
Results of Operations
 
 
Comparison of Operating Results for the three months ended March 31, 2016 with the three months ended March 31, 2015
 
 
19

 
 
Revenues. During the three months ended March 31, 2016, our revenues were $100.6 million, an increase of $14.7 million, or 17.0%, from the prior year revenue of $86.0 million. The primary reason for the increase in revenues is an increase in interest income. Interest income for the three months ended March 31, 2016 increased $14.3 million, or 17.4%, to $96.7 million from $82.4 million in the prior year. The primary reason for the increase in interest income is the increase in finance receivables held by consolidated subsidiaries. The table below shows the outstanding and average balances of our portfolio held by consolidated subsidiaries for the three months ended March 31, 2016 and 2015:
 
   
March 31, 2016
   
March 31, 2015
 
   
Amount
   
Amount
 
Finance Receivables Owned by
 
($ in millions)
 
Consolidated Subsidiaries
               
Average balance for the three-month period
 
$
2,098.0
   
$
1,704.3
 
                 
Ending balance for the period
 
$
2,141.3
   
$
1,724.3
 
 
Servicing fees totaling $23,000 for the three months ended March 31, 2016 decreased $125,000, or 84.5%, from $148,000 in the prior year. We earn base servicing fees on three portfolios and incentive servicing fees on one of those three portfolios. All three of these portfolios are decreasing in size as we receive customer payments and, consequently, base servicing and incentive servicing fees are decreasing also. The aggregate balance of portfolios generating servicing fees decreased to $323,000 at March 31, 2016 from $1.2 million at March 31, 2015.
 
 
In the three months ended March 31, 2016, other income of $4.0 million increased by $481,000, or 13.8% compared to the prior year. The three-month period ended March 31, 2016 includes an increase of $708,000 in revenue associated with direct mail and other related products and services that we offer to our dealers, a net increase of $51,000 on payments to us for our interest in certain sold charge off portfolios and acquired third-party portfolios and an increase of $49,000 in sales tax refunds. The increases were somewhat offset by a decrease of $305,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments.
 
 
Expenses. Our operating expenses consist largely of provision for credit losses, interest expense, employee costs, marketing and general and administrative expenses. Provision for credit losses and interest expense are significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and by the outstanding balance of finance receivables held by consolidated subsidiaries. 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 largely of facilities expenses, telephone and other communication services, credit services, computer services, marketing and advertising expenses, and depreciation and amortization.
 
 
Total operating expenses were $88.4 million for the three months ended March 31, 2016, compared to $71.2 million for the prior year, an increase of $17.2 million, or 24.1%. The increase is primarily due to costs associated with the increase in the amount of new contracts we purchased, the resulting increase in our consolidated portfolio and associated servicing costs, and the related increases in interest expense and in our provision for credit losses.
 
 
Employee costs increased by $657,000 or 4.5%, to $15.1 million during the three months ended March 31, 2016, representing 17.1% of total operating expenses, from $14.5 million for the prior year, or 20.3% of total operating expenses. Since 2010, we have added employees in our Originations and Marketing departments in conjunction with the increase in contract purchases. More recently, we have also added Servicing staff to accommodate the increase in the number of accounts in our 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 three-month periods ended, March 31, 2016 and 2015:
 
 
20

 
 

 
   
March 31, 2016
   
March 31, 2015
 
   
Amount
   
Amount
 
   
($ in millions)
 
Contracts purchased (dollars)
 
$
312.3
   
$
233.9
 
Contracts purchased (units)
   
19,222
     
14,688
 
Managed portfolio outstanding (dollars)
 
$
2,141.6
   
$
1,725.5
 
Managed portfolio outstanding (units)
   
157,138
     
129,657
 
                 
Number of Originations staff
   
233
     
214
 
Number of Marketing staff
   
110
     
140
 
Number of Servicing staff
   
497
     
457
 
Number of other staff
   
86
     
73
 
Total number of employees
   
926
     
884
 
 
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 $5.3 million, an increase of $495,000, or 10.2% compared to the previous year and represented 6.0% of total operating expenses.
 
 
Interest expense for the three months ended March 31, 2016 increased by $4.6 million to $17.8 million, or 20.2% of total operating expenses, compared to $13.2 million in the previous year.
 
 
Interest on securitization trust debt increased by $3.9 million, or 35.7%, for the three months ended March 31, 2016 compared to the prior year. The average balance of securitization trust debt increased 22.5% to $1,938.4 million at March 31, 2016 compared to $1,582.9 million at March 31, 2015. In addition, the blended interest rates on new term securitizations have generally increased since December 2014. As a result, the cost of securitization debt during the three month period ended March 31, 2016 was 3.0%, compared to 2.7% in the prior year period. Moreover, the trend toward higher securitization trust debt interest costs has continued beyond March 31, 2016 as indicated by our completion in April 2016 of our second securitization of 2016 where the weighted average coupon of the related notes was 4.65% compared to weighted average coupon of 4.34% for the notes in our January 2016 securitization.
 
 
Interest expense on subordinated renewable notes decreased by $37,000, or 9.2%. The decrease is due to a decrease in the average yield on our subordinated renewable notes to 9.5% for the three-month period ended March 31, 2016 compared to the prior year when the average yield on our subordinated renewable notes was 10.6%. The decrease in the yield offset an increase in the average balance to $15.4 million for the three-month period ended March 31, 2016 compared to $15.1 million in the prior year period.
 
 
Interest expense on warehouse debt increased by $949,000 for the three months ended March 31, 2016 compared to the prior year. We increased our contract purchases to $312.3 million for the three months ended March 31, 2016 compared to $233.9 million in the prior period. However, when possible, we hold contracts with our own cash rather than pledging them to one of our warehouse facilities to minimize interest expense.
 
 
21

 
 
The following table presents the components of interest income and interest expense and a net interest yield analysis for the three-month periods ended March 31, 2016 and 2015:
 
   
Three Months Ended March 31,
   
   
2016
   
2015
   
   
(Dollars in thousands)
   
   
Average Balance (1)
   
Interest
   
Annualized Average Yield/Rate
   
Average Balance (1)
   
Interest
   
Annualized Average Yield/Rate
   
Interest Earning Assets
                                     
Finance receivables gross (2)
  $ 2,057,010     $ 96,663       18.8 %   $ 1,679,619     $ 82,359       19.6 %  
                                                   
Interest Bearing Liabilities
                                                 
Warehouse lines of credit (3)
  $ 97,364       2,422       10.0 %   $ 63,626       1,473       9.3 %  
Residual interest financing
    8,607       271       12.6 %     12,191       423       13.9 %  
Securitization trust debt
    1,938,397       14,764       3.0 %     1,582,934       10,876       2.7 %  
Subordinated renewable notes
    15,406       364       9.5 %     15,126       401       10.6 %  
    $ 2,059,774       17,821       3.5 %   $ 1,673,877       13,173       3.1 %  
                                                   
Net interest income/spread
          $ 78,842                     $ 69,186            
Net interest yield (4)
                    15.3 %                     16.5 %  
Ratio of average interest earning assets to average interest bearing liabilities
  $ 100 %                     100 %                  
 

 
(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) Interest expense includes deferred financing costs and non-utilization fees.
(4) Annualized net interest income divided by average interest earning assets.
 


   
Three Months Ended March 31, 2016
Compared to March 31, 2015
   
   
Total Change
   
Change Due
to Volume
   
Change Due
to Rate
   
Interest Earning Assets
 
(In thousands)
   
Finance receivables gross
  $ 14,304     $ 18,505     $ (4,201 )  
                           
Interest Bearing Liabilities
                         
Warehouse lines of credit
    949       781       168    
Residual interest financing
    (152 )     (124 )     (28 )  
Securitization trust debt
    3,888       2,442       1,446    
Subordinated renewable notes
    (37 )     7       (44 )  
      4,648       3,106       1,542    
                           
Net interest income/spread
  $ 9,656     $ 15,399     $ (5,743    
 

 
The reduction in the annualized yield on our finance receivables for the three months ended March 31, 2016 compared to the prior year period is the result of our decision to offer dealers slightly lower acquisition fees and also to require slightly lower contract interest rates on a portion of the contracts we purchase.
 
 
22

 
 
Provision for credit losses was $44.2 million for the three months ended March 31, 2016, an increase of $10.8 million, or 32.2% compared to the prior year and represented 50.0% of total operating expenses. The provision for credit losses maintains the allowance for finance credit losses at levels that we feel are adequate for probable incurred credit losses that can be reasonably estimated. Our approach for establishing the allowance requires greater amounts of provision for credit losses early in the terms of our finance receivables. In addition, we monitor the delinquency and net charge off rates in our portfolio to consider how such rates may affect the allowance for finance credit losses. Consequently, the increase in provision expense is the result of the increase in contract purchases, the larger portfolio owned by our consolidated subsidiaries, and somewhat higher delinquency and charge off rates compared to the prior year.
 
 
Marketing expenses consist primarily of commission-based compensation paid to our employee marketing representatives. Our marketing 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. Marketing expenses increased by $466,000, or 11.1%, to $4.7 million during the three months ended March 31, 2016, compared to $4.2 million in the prior year period, and represented 5.3% of total operating expenses. For the three months ended March 31, 2016, we purchased 19,222 contracts representing $312.3 million in receivables compared to 14,688 contracts representing $233.9 million in receivables in the prior year.
 
 
Occupancy expenses increased by $129,000 or 13.5%, to $1.1 million compared to $954,000 in the previous year and represented 1.2% of total operating expenses. In July 2015, we entered into a lease for additional office space in Irvine, California.
 
 
Depreciation and amortization expenses increased by $28,000 or 18.8%, to $175,000 compared to $148,000 in the previous year and represented 0.2% of total operating expenses.
 
 
For the three months ended March 31, 2016, we recorded income tax expense of $5.0 million, representing a 41.0% effective income tax rate. In the prior year period, we recorded $6.4 million in income tax expense, representing a 43.5% effective income tax rate.
 
 
Credit Experience
 
 
Our financial results are dependent on the performance of the automobile contracts in which we retain an ownership interest. Broad economic factors such as recession and significant changes in unemployment levels influence the credit performance of our portfolio, as does the weighted average age of the receivables at any given time. In addition, in June 2014 we entered into a consent decree with the FTC that required us to make certain procedural changes in our servicing practices, which we believe have contributed to somewhat higher delinquencies and extensions compared to prior periods. The tables below document the delinquency, repossession and net credit loss experience of all such automobile contracts that we originated or own an interest in as of the respective dates shown. The tables do not include the experience of third party originated and owned portfolios.
 
 
23

 
 
Delinquency, Repossession and Extension Experience (1)
 
 
Total Owned Portfolio
 
   
March 31, 2016
   
March 31, 2015
   
December 31, 2015
 
   
Number of Contracts
   
Amount
   
Number of Contracts
   
Amount
   
Number of Contracts
   
Amount
 
   
(Dollars in thousands)
 
Delinquency Experience
                                   
Gross servicing portfolio (1)
    157,123     $ 2,141,601       126,290     $ 1,684,382       149,138     $ 2,031,099  
Period of delinquency (2)
                                               
31-60 days
    6,512     $ 89,126       2,726     $ 38,165       5,375     $ 70,041  
61-90 days
    2,563       32,817       2,101       23,230       3,140       41,142  
91+ days
    2,446       31,231       2,427       31,920       3,364       43,484  
Total delinquencies (2)
    11,521       153,174       7,254       93,315       11,879       154,667  
Amount in repossession (3)
    3,338       38,836       2,251       21,971       3,138       38,939  
Total delinquencies and amount in repossession (2)
    14,859     $ 192,010       9,505     $ 115,286       15,017     $ 193,606  
                                                 
Delinquencies as a percentage of gross servicing portfolio
    7.3 %     7.2 %     5.7 %     5.5 %     8.0 %     7.6 %
                                                 
Total delinquencies and amount in repossession as a percentage of gross servicing portfolio
    9.5 %     9.0 %     7.5 %     6.8 %     10.1 %     9.5 %
                                                 
                                                 
Extension Experience
                                               
Contracts with one extension, accruing (4)
    26,996     $ 364,919       19,958     $ 259,523       26,682     $ 361,338  
Contracts with two or more extensions, accruing (4)
    19,700       260,810       9,438       119,247       16,638       219,175  
      46,696       625,729       29,396       378,770       43,320       580,513  
                                                 
Contracts with one extension, non-accrual (4)
    1,634       19,312       1,078       13,224       1,784       22,725  
Contracts with two or more extensions, non-accrual (4)
    1,425       17,574       616       6,572       1,444       18,527  
      3,059       36,886       1,694       19,796       3,228       41,252  
                                                 
Total contracts with extensions
    49,755     $ 662,615       31,090     $ 398,566       46,548     $ 621,765  
 
____________________________________
 
 
(1) All amounts and percentages are based on the amount remaining to be repaid on each automobile contract, including, for pre-computed automobile contracts, any unearned interest. The information in the table represents the gross principal amount of all automobile contracts we have purchased, including automobile contracts subsequently sold in securitization transactions that we continue to service. The table does not include certain contracts we have serviced for third parties on which we earn servicing fees only and have no credit risk.
 
 
(2) We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the Servicing Agreements. The period of delinquency is based on the number of days payments are contractually past due. Automobile contracts less than 31 days delinquent are not included. The delinquency aging categories shown in the tables reflect the effect of extensions.
 
 
(3) Amount in repossession represents financed vehicles that have been repossessed but not yet liquidated.
 
 
(4) Accounts past due more than 90 days are on non-accrual.
 
 
24

 
 

 
   
March 31,
2016
   
March 31,
2015
   
December 31, 2015
 
   
(Dollars in thousands)
 
Average servicing portfolio outstanding
 
$
2,098,261
   
$
1,704,259
   
$
1,847,764
 
Annualized net charge-offs as a percentage of
                       
average servicing portfolio (2)
 
$
7.6%
     
6.6%
     
6.4%
 
 
_________________________
 
 
(1) All amounts and percentages are based on the principal amount scheduled to be paid on each automobile contract, net of unearned income on pre-computed automobile contracts.
 
 
(2) Net charge-offs include the remaining principal balance, after the application of the net proceeds from the liquidation of the vehicle (excluding accrued and unpaid interest) and amounts collected subsequent to the date of charge-off, including some recoveries which have been classified as other income in the accompanying interim consolidated financial statements. March 31, 2016 and March 31, 2015 percentage represents three months ended March 31, 2016 and March 31, 2015 annualized. December 31, 2015 represents 12 months ended December 31, 2015.
 
 
Extensions
 
 
In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. In general, an obligor would not be entitled to more than two such extensions in any 12-month period and no more than six over the life of the contract. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In some cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings.
 
 
The basic question in deciding to grant an extension is whether or not we will (a) be delaying the inevitable repossession and liquidation or (b) risk losing the vehicle as a result of not being able to locate the obligor and vehicle. In both of those situations, the loss would likely be higher than if the vehicle had been repossessed without the extension. The benefits of granting an extension include minimizing current losses and delinquencies, minimizing lifetime losses, getting the obligor’s account current (or close to it) and building goodwill 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. In most cases, the extension will be granted in conjunction with our receiving a past due payment (and where allowed by law, a nominal fee, applied to the loan as a partial payment) from the obligor, thereby indicating an additional monetary and psychological commitment to the contract on the obligor’s part.
 
 
The credit assessment for granting an extension is initially made by our collector, who bases the recommendation on the collector’s discussions with the obligor. In such assessments the collector will consider, among other things, the following factors: (1) the reason the obligor has fallen behind in payment; (2) whether or not the reason for the delinquency is temporary, and if it is, have conditions changed such that the obligor can begin making regular monthly payments again after the extension; (3) the obligor's past payment history, including past extensions if applicable; 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. After receiving an extension, an account remains subject to our normal policies and procedures for interest accrual, reporting delinquency and recognizing charge-offs.
 
 
25

 
 
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 March 31, 2016, for accounts that received extensions from 2008 through 2014 (2015 extension data are not included at this time due to insufficient passage of time for meaningful evaluation of results):
 
                                                                     
 
Period of Extension
     
# Extensions Granted
     
Active or Paid Off at March 31, 2016
     
% Active or Paid Off at March 31, 2016
     
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
 
                                                                     
 
2008
     
35,588
     
10,719
     
30.1%
     
20,043
     
56.3%
     
4,819
     
13.5%
     
19
 
                                                                     
 
2009
     
32,226
     
10,288
     
31.9%
     
16,155
     
50.1%
     
5,783
     
17.9%
     
17
 
                                                                     
 
2010
     
26,167
     
12,187
     
46.6%
     
11,981
     
45.8%
     
1,999
     
7.6%
     
19
 
                                                                     
 
2011
     
18,786
     
11,032
     
58.7%
     
6,822
     
36.3%
     
932
     
5.0%
     
19
 
                                                                     
 
2012
     
18,783
     
11,707
     
62.3%
     
6,280
     
33.4%
     
796
     
4.2%
     
16
 
                                                                     
 
2013
     
23,398
     
14,120
     
60.3%
     
8,302
     
35.5%
     
976
     
4.2%
     
16
 
                                                                     
 
2014
     
25,773
     
17,995
     
69.8%
     
6,952
     
27.0%
     
826
     
3.2%
     
12
 
 
Table excludes extensions on portfolios serviced for third parties.
 
 
We view these results as a confirmation of the effectiveness of our extension program. For example, of the accounts granted extensions in 2011, 58.7% were either paid in full or active and performing at March 31, 2016. Each of these successful accounts represent continued payments of interest and principal (including payment in full in many cases), where without the extension we likely would have incurred a substantial loss and no interest revenue subsequent to the extension.
 
 
For the extension accounts that ultimately charge off, we consider any that charged off more than six months after the extension to be at least partially successful. For example, of the accounts granted extensions in 2011 that subsequently charged off, such charge offs occurred, on average, 19 months after the extension, indicating that even in the cases of an ultimate loss, the obligor serviced the account with additional payments of principal and interest.
 
 
Additional information about our extensions is provided in the tables below:
 
                   
   
Three Months Ended March 31,
   
Year Ended December 31,
       
   
2016
   
2015
   
2015
       
                         
Average number of extensions granted per month
   
5,137
     
3,248
     
4,443
       
                               
Average number of outstanding accounts
   
153,908
     
127,986
     
137,306
       
                               
Average monthly extensions as % of average outstandings
   
3.3%
     
2.5%
     
3.2%
       
 
Table excludes portfolios originated and owned by third parties.
 
 
26

 
 

 
   
March 31, 2016
   
March 31, 2015
   
December 31, 2015
 
   
Number of Contracts
   
Amount
   
Number of Contracts
   
Amount
   
Number of Contracts
   
Amount
 
   
(Dollars in thousands)
 
                                     
Contracts with one extension
    28,630     $ 384,230       21,036     $ 272,747       28,466     $ 384,064  
Contracts with two extensions
    13,231       176,756       7,390       95,163       11,763       156,840  
Contracts with three extensions
    5,416       70,631       2,132       25,691       4,567       59,255  
Contracts with four extensions
    1,886       23,957       424       4,127       1,401       17,764  
Contracts with five extensions
    506       6,078       82       648       301       3,351  
Contracts with six extensions
    86       963       26       190       50       521  
      49,755     $ 662,615       31,090     $ 398,566       46,548     $ 621,795  
                                                 
Managed portfolio (excluding originated and owned by 3rd parties)
    157,123     $ 2,141,601       126,290     $ 1,684,382       149,138     $ 2,031,099  
 
Table excludes portfolios originated and owned by third parties.
 
 
Non-Accrual Receivables
 
 
It is not uncommon for our obligors to fall behind in their payments. However, with the diligent efforts of our Servicing staff and systems for managing our collection efforts, we regularly work with our customers to resolve delinquencies. Our staff are trained to employ a counseling approach to assist our customers with their cash flow management skills and help them to prioritize their payment obligations in order to avoid losing their vehicle to repossession. Through our experience, we have learned that once a customer becomes greater than 90 days past due, it is not likely that the delinquency will be resolved and will ultimately result in a charge-off. As a result, we do not recognize any interest income for contracts that are greater than 90 days past due.
 
 
If a contract exceeds the 90 days past due threshold at the end of one period, and then makes the necessary payments such that it becomes less than or equal to 90 days delinquent at the end of a subsequent period, it would be restored to full accrual status for our financial reporting purposes. At the time a contract is restored to full accrual in this manner, there can be no assurance that full repayment of interest and principal will ultimately be made. However, we monitor each obligor’s payment performance and are aware of the severity of his delinquency at any time. The fact that the delinquency has been reduced below the 90-day threshold is a positive indicator. Should the contract again exceed the 90-day delinquency level at the end of any reporting period, it would again be reflected as a non-accrual account.
 
 
Our policy for placing a contract on non-accrual status is independent of our policy to grant an extension. In practice, it would be an uncommon circumstance where an extension was granted and the account remained in a non-accrual status, since the goal of the extension is to bring the contract current (or nearly current).
 
 
Liquidity and Capital Resources
 
 
Our business requires substantial cash to support our purchases of automobile contracts and other operating activities. Our primary sources of cash have been cash flows from operating, investing and financing activities, including 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), servicing fees on portfolios of automobile contracts previously sold in securitization transactions or serviced for third parties, 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 three-month period ended March 31, 2016 was $60.5 million compared to net cash provided by operating activities for the three-month period ended March 31, 2015 of $49.8 million. Cash provided by operating activities is significantly affected by our net income before provisions for credit losses. The increase is due primarily to the increase in the increase in provision for credit losses of $10.8 million.
 
 
Net cash used in investing activities for the three-month period ended March 31, 2016 was $170.8 million compared to net cash used in investing activities of $108.5 million in the prior year period. Cash provided by investing activities primarily results from principal payments and other proceeds received on finance receivables held for investment and increases in restricted cash. Cash used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables held for investment were $312.3 million and $233.9 million during the first three months of 2016 and 2015, respectively.
 
 
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Net cash provided by financing activities for the three months ended March 31, 2016 was $107.2 million compared to net cash provided by financing activities of $61.0 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first three months of 2016, we issued $329.5 million in new securitization trust debt compared to $245.0 million in the same period of 2015. In addition, we repaid $192.6 million in securitization trust debt in the three months ended March 31, 2016 compared to repayments of securitization trust debt of $145.9 million in the prior year period. In the three months ended March 31, 2016, we had net repayments on warehouse lines of credit of $24.2 million, compared to net repayments of $34.9 million in the prior year’s period.
 
 
We purchase automobile contracts from dealers for a cash price approximately equal to their principal amount, adjusted for an acquisition fee which may either increase or decrease the automobile contract purchase price. Those automobile contracts generate cash flow, however, over a period of years. As a result, we have been dependent on warehouse credit facilities to purchase automobile contracts, and on the availability of cash from outside sources in order to finance our continuing operations, as well as to fund the portion of automobile contract purchase prices not financed under revolving warehouse credit facilities.
 
 
The acquisition of automobile contracts for subsequent financing in securitization transactions, and the need to fund spread accounts and initial overcollateralization, if any, and increase credit enhancement levels when those transactions take place, results in a continuing need for capital. The amount of capital required is most heavily dependent on the rate of our automobile contract purchases, the required level of initial credit enhancement in securitizations, and the extent to which the previously established trusts and their related spread accounts either release cash to us or capture cash from collections on securitized automobile contracts. Of those, the factor most subject to our control is the rate at which we purchase automobile contracts.
 
 
We are and may in the future be limited in our ability to purchase automobile contracts due to limits on our capital. As of March 31, 2016, we had unrestricted cash of $16.2 million and $127.7 million aggregate available borrowings under our three warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of March 31, 2016 we had approximately $29.4 million of such eligible collateral. During the three-month period ended March 31, 2016, we completed one securitization aggregating $329.5 million of notes sold. 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. Moreover, certain of our retained interests in securitization transactions and their related spread accounts are pledged as collateral to our residual interest financing and cash releases from these transactions will be used to repay the financings.
 
 
One of our securitization transactions, our warehouse credit facilities and our residual interest 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, some agreements contain cross-default provisions that would allow certain creditors to declare a default if a default occurred under a different facility. As of March 31, 2016, we were in compliance with all such financial covenants.
 
 
28

 
 
We have and will continue to have a substantial amount of indebtedness. At March 31, 2016, we had approximately $2,064.4 million of debt outstanding. Such debt consisted primarily of $1,868.5 million of securitization trust debt, and also included $172.3 million of warehouse lines of credit, $8.3 million of residual interest financing and $15.3 million in subordinated renewable notes. We are also currently offering the subordinated notes to the public on a continuous basis, and such notes have maturities that range from three months to 10 years.
 
 
Our recent operating results include pre-tax earnings of $12.2 million for the three months ended March 31, 2016 and $61.4 million, $52.2 million, $37.2 million and $9.2 for the years ended December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Those periods were preceded by pre-tax losses of $14.5 million and $16.2 million in 2011 and 2010, respectively. We believe that our 2011 and 2010 results were materially and adversely affected by the disruption in the capital markets that began in the fourth quarter of 2007, by the recession that began in December 2007, and by related high levels of unemployment.
 
 
Although we believe we are able to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to issue additional debt or equity securities.
 
 
Forward Looking Statements
 
 
This report on Form 10-Q includes certain “forward-looking statements.” Forward-looking statements may be identified by the use of words such as “anticipates,” “expects,” “plans,” “estimates,” or words of like meaning. Our provision for credit losses is a forward-looking statement, as it is dependent on our estimates as to future chargeoffs and recovery rates. Factors that could affect charge-offs and recovery rates include changes in the general economic climate, which could affect the willingness or ability of obligors to pay pursuant to the terms of automobile contracts, changes in laws respecting consumer finance, which could affect our ability to enforce rights under automobile contracts, and changes in the market for used vehicles, which could affect the levels of recoveries upon sale of repossessed vehicles. Factors that could affect our revenues in the current year include the levels of cash releases from existing pools of automobile contracts, which would affect our ability to purchase automobile contracts, the terms on which we are able to finance such purchases, the willingness of dealers to sell automobile contracts to us on the terms that we offer, and the terms on which and whether we are able to complete term securitizations once automobile contracts are acquired. Factors that could affect our expenses in the current year include competitive conditions in the market for qualified personnel and interest rates (which affect the rates that we pay on notes issued in our securitizations).
 
 
Item 4. Controls and Procedures
 
 
We maintain a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of such disclosure controls and procedures. Based upon that evaluation, the principal executive officer (Charles E. Bradley, Jr.) and the principal financial officer (Jeffrey P. Fritz) concluded that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, material information relating to us that is required to be included in our reports filed under the Securities Exchange Act of 1934. There has been no change in our internal controls over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
29

 
 
PART II — OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
 
The information provided under the caption “Legal Proceedings,” Note 8 to the Unaudited Condensed Consolidated Financial Statements, included in Part I of this report, is incorporated herein by reference.
 
 
Item 1A. Risk Factors
 
 
We remind the reader that risk factors are set forth in Item 1A of our report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 9, 2016. Where we are aware of material changes to such risk factors as previously disclosed, we set forth below an updated discussion of such risks. The reader should note that the other risks identified in our report on Form 10-K remain applicable.
 
 
We have substantial indebtedness.
 
 
We have and will continue to have a substantial amount of indebtedness. At March 31, 2016, we had approximately $2,064.3 million of debt outstanding. Such debt consisted primarily of $1,868.5 million of securitization trust debt, and also included $172.3 million of warehouse lines of credit, $8.3 million of residual interest financing and $15.3 million in subordinated renewable notes. We are also currently offering the subordinated notes to the public on a continuous basis, and such notes have maturities that range from three months to 10 years. Our substantial indebtedness could adversely affect our financial condition by, among other things:
 
 
·
increasing our vulnerability to general adverse economic and industry conditions;
 
 
·
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing amounts available for working capital, capital expenditures and other general corporate purposes;
 
 
·
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
 
·
placing us at a competitive disadvantage compared to our competitors that have less debt; and
 
 
·
limiting our ability to borrow additional funds.
 
Although we believe we are able to service and repay such debt, there is no assurance that we will be able to do so. If we do not generate sufficient operating profits, our ability to make required payments on our debt would be impaired. Failure to pay our indebtedness when due could have a material adverse effect.
 
 
Forward-Looking Statements
 
 
Discussions of certain matters contained in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. You can generally identify forward-looking statements as statements containing the words "will," "would," "believe," "may," "could," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. The discussion under "Risk Factors" identifies some of the factors that might cause such a difference, including the following:
 
 
·
changes in general economic conditions;
 

 
 
·
our ability or inability to obtain necessary financing, and the terms of any such financing
 

 
 
·
changes in interest rates, especially as applicable to securitization trust debt;
 

 
 
·
our ability to generate sufficient operating and financing cash flows;
 

 
 
·
competition;
 

 
 
·
level of future provisioning for receivables losses;
 

 
 
·
the levels of actual losses on receivables; and
 

 
 
·
regulatory requirements.
 

 
 
30

 
 
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Actual results may differ from expectations due to many factors beyond our ability to control or predict, including those described herein, and in documents incorporated by reference in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
 
We undertake no obligation to publicly update any forward-looking information. You are advised to consult any additional disclosure we make in our periodic reports filed with the SEC.
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
During the three months ended March 31, 2016, we repurchased 703,745 shares from existing shareholders, as reflected in the table below.
 
 
Issuer Purchases of Equity Securities
 
                 
Total Number of
   
Approximate Dollar
 
     
Total
         
Shares Purchased as
   
Value of Shares that
 
     
Number of
   
Average
   
Part of Publicly
   
May Yet be Purchased
 
     
Shares
   
Price Paid
   
Announced Plans or
   
Under the Plans or
 
Period(1)
   
Purchased
   
per Share
   
Programs
   
Programs (2)
 
 
January 2016
     
242,230
   
$
4.27
     
242,230
   
$
4,027,414
 
 
February 2016
     
197,219
   
$
4.15
     
197,219
   
$
3,208,530
 
 
March 2016
     
264,296
   
$
4.15
     
264,296
   
$
2,111,185
 
 
Total
     
703,745
   
$
4.19
     
703,745
         
 
____________________
 
 
(1)
Each monthly period is the calendar month.
 

 
 
(2)
Through March 31, 2016, our board of directors had authorized the purchase of up to $44.5 million of our outstanding securities, under a program 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 program announced in March 2003, which has no fixed expiration date. Our board of directors in April 2015 increased the aggregate authorization from $34.5 million to $39.5 million.
 
Item 6. Exhibits
 
 
The Exhibits listed below are filed with this report.
 
4.14
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.
4.65
Indenture dated January 1, 2016 re Notes issued by CPS Auto Receivables Trust 2016-A
4.66
Sale and Servicing Agreement dated as of January 1, 2016
4.67
Indenture dated April 1, 2016 re Notes issued by CPS Auto Receivables Trust 2016-B
4.68
Sale and Servicing Agreement dated as of April 1, 2016
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer of the registrant.
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer of the registrant.
32
Section 1350 Certifications.*
 
* These Certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These Certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registration statement specifically states that such Certifications are incorporated therein.
 
 
31

 
 
SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
CONSUMER PORTFOLIO SERVICES, INC.
 
(Registrant)
Date: May 4, 2016
 
 
By:
/s/ CHARLES E. BRADLEY, JR
   
Charles E. Bradley, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
   
Date: May 4, 2016
 
 
By:
/s/ JEFFREY P. FRITZ
   
Jeffrey P. Fritz
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
32