Edgar Filing: CONSUMER PORTFOLIO SERVICES INC

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer [ ]	Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]
	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]

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 30, 2018 the registrant had 21,254,141 common shares outstanding.

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarterly Period Ended March 31, 2018

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	3
	Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2018 and 2017	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2018 and 2017	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2018 and 2017	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	31



PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	33
	Signatures	34

PART I. FINANCIAL INFORMATION

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,
	2018			2017
ASSETS
Cash and cash equivalents	$	11,573		$	12,731
Restricted cash and equivalents		130,798			111,965

Finance receivables		2,091,875			2,304,984
Less: Allowance for finance credit losses		(100,844	)		(109,187	)
Finance receivables, net		1,991,031			2,195,797

Finance receivables measured at fair value		209,847			–
Furniture and equipment, net		1,649			1,752
Deferred tax assets, net		32,302			32,446
Accrued interest receivable		39,077			46,753
Other assets		22,700			23,397
	$	2,438,977		$	2,424,841

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses	$	33,569		$	28,715
Warehouse lines of credit		121,666			112,408
Securitization trust debt		2,080,070			2,083,215
Subordinated renewable notes		16,348			16,566
		2,251,653			2,240,904
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Preferred stock, $1 par value;authorized 4,998,130 shares; none issued		–			–
Series A preferred stock, $1 par value;authorized 5,000,000 shares; none issued		–			–
Series B preferred stock, $1 par value;authorized 1,870 shares; none issued		–			–
Common stock, no par value; authorized 75,000,000 shares; 21,441,659 and 21,488,589 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		71,824			71,582
Retained earnings		122,682			119,537
Accumulated other comprehensive loss		(7,182	)		(7,182	)
		187,324			183,937

	$	2,438,977		$	2,424,841

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended
	March 31,
	2018		2017
Revenues:
Interest income	$	100,906	$	104,575
Other income		2,657		3,023
		103,563		107,598

Expenses:
Employee costs		20,641		17,780
General and administrative		7,495		6,922
Interest		24,062		22,088
Provision for credit losses		40,507		47,167
Marketing		4,211		3,960
Occupancy		1,850		1,661
Depreciation and amortization		240		228
		99,006		99,806
Income before income tax expense		4,557		7,792
Income tax expense		1,412		3,312
Net income	$	3,145	$	4,480

Earnings per share:
Basic	$	0.15	$	0.19
Diluted		0.12		0.16

Number of shares used in computing earnings per share:
Basic		21,576		23,517
Diluted		25,664		28,223

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	Three Months Ended
	March 31,
	2018		2017

Net income	$	3,145	$	4,480

Other comprehensive income/(loss); change in funded status of pension plan		–		–
Comprehensive income	$	3,145	$	4,480

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended
	March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	3,145		$	4,480
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred acquisition fees and origination costs		728			(73	)
Net interest income accretion on fair value receivables		121			–
Depreciation and amortization		240			228
Amortization of deferred financing costs		2,136			2,159
Provision for credit losses		40,507			47,167
Stock-based compensation expense		1,186			1,394
Changes in assets and liabilities:
Accrued interest receivable		7,676			4,352
Deferred tax assets, net		144			(194	)
Other assets		2,461			3,936
Accounts payable and accrued expenses		4,854			(1,257	)
Net cash provided by operating activities		63,198			62,192

Cash flows from investing activities:
Purchases of finance receivables held for investment		–			(229,642	)
Payments received on finance receivables held for investment		163,531			167,996
Purchases of finance receivables measured at fair value		(212,610	)		–
Payments received on finance receivables at fair value		2,642			4
Change in repossessions held in inventory		(1,764	)		360
Change in restricted cash and cash equivalents, net		(18,833	)		(16,443	)
Purchase of furniture and equipment		(137	)		(137	)
Net cash used in investing activities		(67,171	)		(77,862	)

Cash flows from financing activities:
Proceeds from issuance of securitization trust debt		190,000			206,320
Proceeds from issuance of subordinated renewable notes		607			861
Payments on subordinated renewable notes		(825	)		(538	)
Net advances of warehouse lines of credit		8,880			16,482
Repayment of securitization trust debt		(193,560	)		(205,321	)
Payment of financing costs		(1,343	)		(1,572	)
Purchase of common stock		(1,419	)		(2,900	)
Exercise of options and warrants		475			473
Net cash provided by financing activities		2,815			13,805

Increase (decrease) in cash and cash equivalents		(1,158	)		(1,865	)

Cash and cash equivalents at beginning of period		12,731			13,936
Cash and cash equivalents at end of period	$	11,573		$	12,071

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	21,729		$	19,697
Income taxes	$	16		$	66

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

CONSUMER PORTFOLIO SERVICES, INC.

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, 2018 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, 2017.

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.

Finance Receivables Measured at Fair Value

Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the carrying value of the receivables.

We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the carrying value, an adjustment would be required.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Anticipated credit losses are included in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation of the appropriate level yield, we do not make continuing provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also as a result of including anticipated credit losses in our computation of the level yield, that level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial carrying value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred.

Other Income

The following table presents the primary components of Other Income for the three-month periods ending March 31, 2018 and 2017:

	Three Months Ended
	March 31,
	2018		2017
	(In thousands)
Direct mail revenues	$	1,797	$	1,999
Convenience fee revenue		450		570
Recoveries on previously charged-off contracts		118		186
Sales tax refunds		234		196
Other		58		72
Other income for the period	$	2,657	$	3,023

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The majority of the Company’s revenues come from interest income which is outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include revenue associated with direct mail and other related products and services that we offer to our dealers.

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, 2018.

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, 2018 and 2017, we recorded stock-based compensation costs in the amount of $1.2 million and $1.4 million, respectively. As of March 31, 2018, unrecognized stock-based compensation costs to be recognized over future periods equaled $4.5 million. This amount will be recognized as expense over a weighted-average period of 1.7 years.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following represents stock option activity for the three months ended March 31, 2018:

	Number of Shares (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Options outstanding at the beginning of period		13,135		$	4.66	N/A
Granted		40			3.74	N/A
Exercised		(308	)		1.54	N/A
Forfeited		–			–	N/A
Options outstanding at the end of period		12,867		$	4.73	4.30 years

Options exercisable at the end of period		8,687		$	4.67	3.93 years

At March 31, 2018, the aggregate intrinsic value of options outstanding and exercisable was $7.7 million and $7.3 million, respectively. There were 307,850 options exercised for the three months ended March 31, 2018 compared to 279,000 for the comparable period in 2017. The total intrinsic value of options exercised was $849,000 and $913,000 for the three-month periods ended March 31, 2018 and 2017. There were 2.4 million shares available for future stock option grants under existing plans as of March 31, 2018.

Purchases of Company Stock

The table below describes the purchase of our common stock for the three-month ended March 31, 2018 and 2017:

	Three Months Ended
	March 31, 2018				March 31, 2017
	Shares		Avg. Price		Shares		Avg. Price
Open market purchases		231,181	$	3.86		561,617	$	4.94
Shares redeemed upon net exercise of stock options		33,599		4.37		25,193		5.04
Other		90,000		4.13		–		–
Total stock purchases		354,780	$	3.97		586,810	$	4.94

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, 2018, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 record at each measurement date, most recently as of March 31, 2018, our best estimate of probable incurred losses for legal contingencies. The amount of losses that may ultimately be incurred cannot be estimated with certainty.

Adoption of New Accounting Standards

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”, which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets. The majority of the Company’s revenues come from interest income which is outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Other Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include revenue associated with direct mail and other related products and services that we offer to our dealers. The Company adopted ASC 606 in the first quarter of 2018 with no material effect on our financial statements.

The Company adopted ASC Topic 825 "Financial Instruments." Authoritative accounting guidance under ASC Topic 825, "Financial Instruments" amended prior guidance to require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The Company adopted ASC 825 on January 1, 2018 with no material effect on our financial statements.

(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.

In January 2018 the Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote.

The following table presents the components of Finance Receivables, net of unearned interest:

	March 31,		December 31,
	2018		2017
	(In thousands)
Finance receivables
Automobile finance receivables, net of unearned interest	$	2,086,227	$	2,298,608
Unearned acquisition fees and originations costs		5,648		6,376
Finance receivables	$	2,091,875	$	2,304,984

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not 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, 2018 and December 31, 2017:

	March 31,		December 31,
	2018		2017
	(In thousands)
Delinquency Status
Current	$	1,919,642	$	2,069,617
31 - 60 days		104,314		138,395
61 - 90 days		43,330		63,081
91 + days.		18,941		27,515
	$	2,086,227	$	2,298,608

Finance receivables totaling $18.9 million and $27.5 million at March 31, 2018 and December 31, 2017, 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 credit 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, 2018 and 2017:

	Three Months Ended
	March 31,
	2018			2017
	(In thousands)
Balance at beginning of period	$	109,187		$	95,578
Provision for credit losses on finance receivables.		40,507			47,167
Charge-offs		(56,102	)		(50,299	)
Recoveries		7,252			6,809
Balance at end of period	$	100,844		$	99,255

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,
	2018			2017
	(In thousands)
Gross balance of repossessions in inventory	$	37,190		$	33,679
Allowance for losses on repossessed inventory		(25,771	)		(24,024	)
Net repossessed inventory included in other assets	$	11,419		$	9,655

(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:

										Weighted
										Average
	Final	Receivables				Outstanding		Outstanding		Contractual
	Scheduled	Pledged at				Principal at		Principal at		Interest Rate at
	Payment	March 31,		Initial		March 31,		December 31,		March 31,
Series	Date (1)	2018 (2)		Principal		2018		2017		2018
	(Dollars in thousands)
CPS 2013-B	September 2020	$	17,882	$	205,000	$	15,089	$	18,407		2.08%
CPS 2013-C	December 2020		22,318		205,000		21,936		25,559		6.15%
CPS 2013-D	March 2021		22,804		183,000		21,146		24,917		5.31%
CPS 2014-A	June 2021		28,297		180,000		26,161		30,521		4.50%
CPS 2014-B	September 2021		40,715		202,500		38,976		44,516		3.86%
CPS 2014-C	December 2021		64,831		273,000		63,405		71,174		4.02%
CPS 2014-D	March 2022		71,801		267,500		70,473		79,099		4.32%
CPS 2015-A	June 2022		79,551		245,000		78,174		87,194		3.93%
CPS 2015-B	September 2022		93,331		250,000		92,899		102,873		3.84%
CPS 2015-C	December 2022		129,017		300,000		127,836		141,362		4.32%
CPS 2016-A	March 2023		165,582		329,460		164,649		180,761		4.66%
CPS 2016-B	June 2023		188,408		332,690		184,355		201,199		4.72%
CPS 2016-C	September 2023		190,875		318,500		186,387		203,504		4.28%
CPS 2016-D	April 2024		140,642		206,325		138,114		149,671		3.28%
CPS 2017-A	April 2024		152,891		206,320		149,832		161,892		3.44%
CPS 2017-B	December 2023		183,726		225,170		172,409		186,594		2.99%
CPS 2017-C	September 2024		189,969		224,825		181,471		197,155		2.92%
CPS 2017-D	June 2024		183,453		196,300		175,130		189,277		2.81%
CPS 2018-A	March 2025		187,493		190,000		183,672		–		2.91%
		$	2,153,586	$	4,540,590	$	2,092,115	$	2,095,675

_________________

(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 $695.4 million in 2018, $682.8 million in 2019, $412.6 million in 2020, $211.2 million in 2021, $66.3 million in 2021, $11.7 million in 2022.

(2)

Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt issuance costs of $12.0 million and $12.5 million as of March 31, 2018 and December 31, 2017, 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. As of March 31, 2018, we were in compliance with all such covenants.

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, 2018, restricted cash under the various agreements totaled approximately $130.8 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.

On April 16, 2018 we completed our second securitization transaction of 2018. In the transaction, qualified institutional buyers purchased $201.8 million of asset-backed notes secured by $205.0 million in automobile receivables purchased by us. The sold notes, issued by CPS Auto Receivables Trust 2018-B, consist of five classes. Ratings of the notes were provided by Standard & Poor’s and Kroll Bond Rating Agency and were based on the structure of the transaction, the historical performance of similar receivables and our experience as a servicer. The weighted average yield on the notes is approximately 3.98%.

(4) Debt

The terms and amounts of our other debt outstanding at March 31, 2018 and December 31, 2017 are summarized below:

			Amount Outstanding at
			March 31,		December 31,
			2018		2017
			(In thousands)
Description	Interest Rate	Revolving Maturity

Warehouse lines of credit	5.50% over one month Libor (Minimum 6.50%)	April 2019	$	40,603	$	25,629

	5.50% over one month Libor (Minimum 6.25%)	August 2018		69,791		77,546

	6.75% over a commercial paper rate (Minimum 7.75%)	November 2019		12,760		11,100


Subordinated renewable notes	Weighted average rate of 8.08% and 7.99% at March 31, 2018 and December 31, 2017, respectively	Weighted average maturity of May 2020 and March 2020 at March 31, 2018 and December 31, 2017, respectively		16,348		16,566

			$	139,502	$	130,841

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt issuance costs of $1.5 million and $1.9 million as of March 31, 2018 and December 31, 2017, 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.

(5) Interest Income and Interest Expense

The following table presents the components of interest income:

	Three Months Ended
	March 31,
	2018		2017
	(In thousands)
Interest on finance receivables	$	97,188	$	104,496
Interest on finance receivables at fair value		3,508		–
Other interest income		210		79
Interest income	$	100,906	$	104,575

The following table presents the components of interest expense:

	Three Months Ended
	March 31,
	2018		2017
	(In thousands)
Securitization trust debt	$	21,829	$	20,080
Warehouse lines of credit		1,887		1,708
Subordinated renewable notes		346		300
Interest expense	$	24,062	$	22,088

(6) Earnings Per Share

Earnings per share for the three-month periods ended March 31, 2018 and 2017 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 31, 2018 and 2017:

	Three Months Ended
	March 31,
	2018		2017
	(In thousands)
Weighted average number of common shares outstanding during the period used to compute basic earnings per share		21,576		23,517
Incremental common shares attributable to exercise of outstanding options and warrants		4,088		4,706
Weighted average number of common shares used to compute diluted earnings per share		25,664		28,223

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-months ended March 31, 2018 and 2017 would have included an additional 9.3 million and 6.6 million shares, respectively, attributable to the exercise of outstanding options and warrants.

(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 2013.

As of March 31, 2018 and December 31, 2017, 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 $32.3 million as of March 31, 2018 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $32.3 million consists of approximately $22.7 million of net U.S. federal deferred tax assets and $9.6 million of net state deferred tax assets.

Income tax expense was $1.4 million and $3.3 million for the three months ended March 31, 2018 and 2017, which represents an effective income tax rate of 31% and 43%, 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.

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.

Department of Justice Industry Inquiry. In January 2015, we were served with a subpoena by the U.S. Department of Justice (the “DOJ”) 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 DOJ in contemplation of a civil proceeding for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The DOJ in its investigation requested information relating, among other matters, to the underwriting criteria used to originate these automobile contracts and to the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile contracts. We are among several other securitizers of sub-prime automobile receivables who received such subpoenas in 2014, 2015 and 2016. We have provided the required information, and we were advised by the DOJ in February 2018 that no further information is required of us and that no enforcement action is recommended.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Although the inquiry commenced January 2015 is thus completed as to us, no assurance can be given as to whether some other government agency may commence inquiries into or actions against us, nor as to whether the DOJ may recommence its investigation, any of which hypothetical proceedings might materially and adversely affect us.

In General. There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently as of March 31, 2018, our best estimate of probable incurred losses for legal contingencies, including each 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 total of probable incurred losses for legal contingencies as of March 31, 2018 is immaterial, and 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, 2018 does not exceed $1 million.

Accordingly, we believe that the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the uncertainties inherent in contested proceedings, the wide discretion vested in the DOJ 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 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 the three-month periods ended March 31, 2018 and 2017.

	Three Months Ended
	March 31,
	2018			2017
	(In thousands)
Components of net periodic cost (benefit)
Service cost	$	–		$	–
Interest cost		194			214
Expected return on assets		(291	)		(287	)
Amortization of transition (asset)/obligation		–			–
Amortization of net (gain) / loss		111			101
Net periodic cost (benefit).	$	14		$	28

We did not make any contributions to the Plan during the three-month periods ended March 31, 2018 and 2017. We do not anticipate making any contributions for the remainder of 2018.

(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.

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Effective January 2018 we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter. Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables, and are based on the best information available in the circumstances. They include such inputs as estimated net charge-offs and timing of the amortization of the portfolio of finance receivables. The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs:

	Three Months Ended
	March 31,
	2018			2017
	(In thousands)
Balance at beginning of period	$	–		$	–
Finance receivables at fair value acquired during period		212,610			–
Payments on finance receivables at fair value		(6,271	)		–
Interest income on finance receivables at fair value		3,508			–
Mark to fair value		–			–
Balance at end of period	$	209,847		$	–

The table below compares the fair values of these finance receivables to their contractual balances for the periods shown:

As of March 31, 2018

As of December 31, 2017

Contractual

Fair

Contractual

Fair

Balance

Value

Balance

Value

(In thousands)

Finance receivables measured at fair value

207,952

209,847

–

The following table provides certain qualitative information about our level 3 fair value measurements:

Financial Instrument

Fair Values as of

Inputs as of

March 31,

December 31,

Unobservable

March 31,

December 31,

2018

2017

Inputs

2018

2017

(In thousands)

Assets:

Finance receivables measured at fair value

209,847

–

Discount rate

10.2% - 10.7%

n/a

Cumulative net losses

16.0%

n/a

CONSUMER PORTFOLIO SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2018 the finance receivables related to the repossessed vehicles in inventory totaled $37.2 million. We have applied a valuation adjustment, or loss allowance, of $25.8 million, which is based on a recovery rate of approximately 31%, resulting in an estimated fair value and carrying amount of $11.4 million. The fair value and carrying amount of the repossessed inventory at December 31, 2017 was $9.7 million after applying a valuation adjustment of $24.0 million.

There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended March 31, 2018 and 2017.

The estimated fair values of financial assets and liabilities at March 31, 2018 and December 31, 2017, were as follows:

	As of March 31, 2018
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	11,573	$	11,573	$	–	$	–	$	11,573
Restricted cash and equivalents		130,798		130,798		–		–		130,798
Finance receivables, net		1,991,031		–		–		2,104,430		2,104,430
Finance receivables measured at fair value		209,847		–		–		209,847		209,847
Accrued interest receivable		39,077		–		–		39,077		39,077
Liabilities:
Warehouse lines of credit	$	121,666	$	–	$	–	$	121,666	$	121,666
Accrued interest payable.		4,409		–		–		4,409		4,409
Securitization trust debt		2,080,070		–		–		2,079,770		2,079,770
Subordinated renewable notes		16,348		–		–		16,348		16,348

	As of December 31, 2017
Financial Instrument	(In thousands)
	Carrying		Fair Value Measurements Using:
	Value		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	12,731	$	12,731	$	–	$	–	$	12,731
Restricted cash and equivalents		111,965		111,965		–		–		111,965
Finance receivables, net		2,195,797		–		–		2,171,846		2,171,846
Accrued interest receivable		46,753		–		–		46,753		46,753
Liabilities:
Warehouse lines of credit	$	112,408	$	–	$	–	$	112,408	$	112,408
Accrued interest payable		4,212		–		–		4,212		4,212
Securitization trust debt		2,083,215		–		–		2,089,678		2,089,678
Subordinated renewable notes		16,566		–		–		16,566		16,566

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, 2018 and December 31, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

CONSUMER PORTFOLIO SERVICES, INC.

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 discount rates at which similar receivables could be sold.

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 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a specialty finance company. Our business is to purchase and service retail automobile contracts originated primarily by franchised automobile dealers and, to a lesser extent, by select independent dealers in the United States in the sale of new and used automobiles, light trucks and passenger vans. Through our automobile contract purchases, we provide indirect financing to the customers of dealers who have limited credit histories, low incomes or past credit problems, who we refer to as sub-prime customers. We serve as an alternative source of financing for dealers, facilitating sales to customers who otherwise might not be able to obtain financing from traditional sources, such as commercial banks, credit unions and the captive finance companies affiliated with major automobile manufacturers. In addition to purchasing installment purchase contracts directly from dealers, we 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) directly originated an immaterial amount of vehicle purchase money loans by lending money directly to consumers. 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, 2018, we have originated a total of approximately $14.6 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. In addition, we acquired a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004 and, most recently, in September 2011. The September 2011 acquisition consisted of approximately $217.8 million of automobile contracts that we purchased from Fireside Bank of Pleasanton, California. In 2004 and 2009, we were appointed as a third-party servicer for certain portfolios of automobile contracts originated and owned by non-affiliated entities. Recent contract purchase volumes and managed portfolio levels are shown in the table below:

Contract Purchases and Outstanding Managed Portfolio
	$ in thousands
Period	Contracts Purchased in Period		Managed Portfolio at Period End
2012	$	551,742	$	897,575
2013		764,087		1,231,422
2014		944,944		1,643,920
2015		1,060,538		2,031,136
2016		1,088,785		2,308,070
2017		859,069		2,333,530
Three months ended March 31, 2018		210,594		2,332,317

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 that California branch with certain of these functions also performed in our Florida and Nevada branches. We service our automobile contracts from our California, Nevada, Virginia, Florida and Illinois branches.

The programs we offer to dealers and consumers are intended to serve a wide range of sub-prime customers, primarily through franchised new car dealers. We originate automobile contracts with the intention of financing them on a long-term basis through securitizations. Securitizations are transactions in which we sell a specified pool of contracts to a special purpose subsidiary of ours, which in turn issues asset-backed securities to fund the purchase of the pool of contracts from us.

Securitization and Warehouse Credit Facilities

Throughout the period for which information is presented in this report, we have purchased automobile contracts with the intention of financing them on a long-term basis through securitizations, and on an interim basis through warehouse credit facilities. All such financings have involved identification of specific automobile contracts, sale of those automobile contracts (and associated rights) to one of our special-purpose subsidiaries, and issuance of asset-backed securities to be purchased by institutional investors. Depending on the structure, these transactions may be accounted for under generally accepted accounting principles as sales of the automobile contracts or as secured financings.

When structured to be treated as a secured financing for accounting purposes, the subsidiary is consolidated with us. Accordingly, the sold automobile contracts and the related debt appear as assets and liabilities, respectively, on our consolidated balance sheet. We then periodically (i) recognize interest and fee income on the contracts, (ii) recognize interest expense on the securities issued in the transaction and (iii) record as expense a provision for credit losses on the contracts.

Since 1994 we have conducted 77 term securitizations of automobile contracts that we originated. As of March 31, 2018, 19 of those securitizations are active and all are structured as secured financings. 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, and since that time have generally conducted our securitizations near the beginning of each calendar quarter.

Our recent history of term securitizations is summarized in the table below:

Recent Asset-Backed Term Securitizations
	$ in thousands
Period	Number of Term Securitizations		Receivables Pledged in Term Securitizations
2012		4	$	603,500
2013		4		778,000
2014		4		923,000
2015		3		795,000
2016		4		1,214,997
2017		4		870,000
Three months ended March 31, 2018		1		193,581

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 2016, extending the revolving period to August 2018, and adding an amortization period through August 2019. In April 2015, we entered into a second $100 million facility. This facility was renewed in April 2017, extending the revolving period to April 2019, followed by an amortization period to April 2021. In November 2015, we entered into a third $100 million facility. This facility was renewed in November 2017, extending the revolving period to November 2019, followed by an amortization period to November 2021.

In a securitization and in our warehouse credit facilities, we are required to make certain representations and warranties, which are generally similar to the representations and warranties made by dealers in connection with our purchase of the automobile contracts. If we breach any of our representations or warranties, we will be obligated to repurchase the automobile contract at a price equal to the principal balance plus accrued and unpaid interest. We may then be entitled under the terms of our dealer agreement to require the selling dealer to repurchase the contract at a price equal to our purchase price, less any principal payments made by the customer. Subject to any recourse against dealers, we will bear the risk of loss on repossession and resale of vehicles under automobile contracts that we repurchase.

In a securitization, the related special purpose subsidiary may be unable to release excess cash to us if the credit performance of the securitized automobile contracts falls short of pre-determined standards. Such releases represent a material portion of the cash that we use to fund our operations. An unexpected deterioration in the performance of securitized automobile contracts could therefore have a material adverse effect on both our liquidity and results of operations.

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 of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of March 31, 2018, we were in compliance with all such covenants.

Results of Operations

Comparison of Operating Results for the three months ended March 31, 2018 with the three months ended March 31, 2017

Revenues. During the three months ended March 31, 2018, our revenues were $103.6 million, a decrease of $4.0 million, or 3.8%, from the prior year revenue of $107.6 million. The primary reason for the decrease in revenues is a decrease in interest income. Interest income for the three months ended March 31, 2018 decreased $3.7 million, or 3.41%, to $100.9 million from $104.6 million in the prior year. The primary reason for the decrease in interest income is the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced for the impact of expected losses and is therefore less than the yield on other finance receivables. The table below shows the average balances and interest yields of our loan portfolio for the three months ended March 31, 2018 and 2017:

	Three Months Ended March 31,
	2018						2017
	(Dollars in thousands)
	Average				Interest		Average				Interest
	Balance		Interest		Yield		Balance		Interest		Yield
Interest Earning Assets
Finance receivables	$	2,160,975	$	97,398		18.0%	$	2,271,937	$	104,575		18.4%
Finance receivables measured at fair value		133,543		3,508		10.5%		–		–		–
Total	$	2,294,518	$	100,906		17.6%	$	2,271,937	$	104,575		18.4%

In the three months ended March 31, 2018, other income of $2.7 million decreased by $366,000, or 12.1% compared to the prior year. The three-month period ended March 31, 2018 includes a decrease of $202,000 in revenue associated with direct mail and other related products and services that we offer to our dealers, a decrease of $120,000 in payments from third-party providers of convenience fees paid by our customers for web based and other electronic payments, and a decrease of $68,000 on payments to us for our interest in certain sold charge offs and acquired third-party portfolios, Those decreases were somewhat offset by an increase of $38,000 on sales tax refunds.

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 is affected by the balance and credit performance of our portfolio of finance receivables. Interest expense is significantly affected by the volume of automobile contracts we purchased during the trailing 12-month period and the use of our warehouse facilities and asset-backed securitizations to finance those contracts. Employee costs and general and administrative expenses are incurred as applications and automobile contracts are received, processed and serviced. Factors that affect margins and net income include changes in the automobile and automobile finance market environments, and macroeconomic factors such as interest rates and changes in the unemployment level.

Employee costs include base salaries, commissions and bonuses paid to employees, and certain expenses related to the accounting treatment of outstanding stock options, and are one of our most significant operating expenses. These costs (other than those relating to stock options) generally fluctuate with the level of applications and automobile contracts processed and serviced.

Other operating expenses consist 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 $99.0 million for the three months ended March 31, 2018, compared to $99.8 million for the prior period, a decrease of $800,000, or 0.8%. The decrease is primarily due to a decrease in provision for credit losses, offsetting increases in employee costs, interest expense and general and administrative expenses.

Employee costs increased by $2.9 million or 16.1%, to $20.6 million during the three months ended March 31, 2018, representing 20.9% of total operating expenses, from $17.8 million for the prior year, or 17.8% of total operating expenses. Employee costs for the prior year period were net of $1.4 million of direct employee costs associated with the originations of contracts during that period. Such deferred costs are then recognized over the life of the related receivables using the interest method. In the current period, new originations of our finance receivables contracts are measured at fair value and the related direct originations costs are no longer deferred. All direct origination or acquisition costs are now expensed in the acquisition period. 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, 2018 and 2017:

	March 31, 2018		March 31, 2017
	Amount		Amount
	($ in millions)
Contracts purchased (dollars)	$	210.6	$	229.6
Contracts purchased (units)		13,067		14,304
Managed portfolio outstanding (dollars)	$	2,332.3	$	2,323.2
Managed portfolio outstanding (units)		174,627		172,106

Number of Originations staff		201		212
Number of Marketing staff		129		124
Number of Servicing staff		582		548
Number of other staff		96		89
Total number of employees		1,008		973

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 $7.5 million, an increase of $573,000, or 8.3% compared to the previous year and represented 7.6% of total operating expenses.

Interest expense for the three months ended March 31, 2018 increased by $2.0 million to $24.1 million, or 8.9% and represented 24.3% of total operating expenses, compared to $22.1 million in the previous year, when it was 22.1% of total operating expenses.

Interest on securitization trust debt increased by $1.7 million, or 8.7%, for the three months ended March 31, 2018 compared to the prior period. The average balance of securitization trust debt decreased 0.4% to $2,158.2 million for the three months ended March 31, 2018 compared to $2,168.0 million for the three months ended March 31, 2017. However, the blended interest rates on new term securitizations have generally increased since June 2014. As a result, the cost of securitization debt during the three-month period ended March 31, 2018 was 4.0%, compared to 3.7% in the prior year period. For any particular quarterly securitization transaction, the blended cost of funds is ultimately the result of many factors including the market interest rates for benchmark swaps of various maturities against which our bonds are priced and the margin over those benchmarks that investors are willing accept, which in turn, is influenced by investor demand for our bonds at the time of the securitization. These and other factors have resulted in a general trend toward higher securitization trust debt interest costs since June 2014, although that trend has reversed somewhat since July 2016. The blended interest rates of our recent securitizations are summarized in the table below:

Blended Cost of Funds on Recent Asset-Backed Term Securitizations

Period		Blended Cost of Funds
June 2014		2.37%
September 2014		2.71%
December 2014		3.07%
March 2015		3.04%
June 2015		3.18%
September 2015		3.78%
January 2016		4.34%
April 2016		4.65%
July 2016		4.48%
October 2016		3.62%
January 2017		3.91%
April 2017		3.45%
July 2017		3.52%
October 2017		3.39%
January 2018		3.46%

Interest expense on subordinated renewable notes increased by $46,000, or 15.3 %. The increase is due to an increase in the average balance by $1.2 million, or 7.8%, for the three months ended March 31, 2018 compared to the prior period. In addition, the average yield of subordinated notes increased to 8.4% in the three-month period ended March 31, 2018 compared to 7.8% in the prior period.

Interest expense on warehouse debt increased by $179,000, or 10.5 %, for the three months ended March 31, 2018 compared to the prior period. The interest is due to the higher outstanding debt balance in the current period.

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, 2018 and 2017:

	Three Months Ended March 31,
	2018						2017
	(Dollars in thousands)
					Annualized						Annualized
	Average				Average		Average				Average
	Balance (1)		Interest		Yield/Rate		Balance (1)		Interest		Yield/Rate
Interest Earning Assets
Finance receivables gross (2)	$	2,160,975	$	97,398		18.0%	$	2,271,937	$	104,575		18.4%
Finance receivables at fair value		133,543		3,508		10.5%		–		–		–

Interest Bearing Liabilities
Warehouse lines of credit (3)	$	62,258		1,887		12.3%	$	52,409		1,708		13.2%
Securitization trust debt		2,158,224		21,829		4.0%		2,167,961		20,080		3.7%
Subordinated renewable notes		16,510		346		8.4%		15,312		300		7.8%
	$	2,236,992		24,062		4.3%	$	2,235,682		22,088		4.0%

Net interest income/spread			$	76,844					$	82,487
Net interest yield (3)						13.4%						14.5%
Ratio of average interest earning assets to average interest bearing liabilities						103%						102%

________________

(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)

Annualized net interest income divided by average interest earning assets.

	Three Months Ended March 31, 2018
	Compared to March 31, 2017
	Total			Change Due			Change Due
	Change			to Volume			to Rate
	(In thousands)
Interest Earning Assets
Finance receivables gross	$	(7,177	)	$	(5,016	)	$	(2,161	)
Finance receivables at fair value		3,508			3,508			–
		(3,669	)		(1,508	)		(2,161	)
Interest Bearing Liabilities
Warehouse lines of credit		179			319			(140	)
Securitization trust debt		1,749			130			1,619
Subordinated renewable notes		46			21			25
		1,974			470			1,504

Net interest income/spread	$	(5,643	)	$	(1,978	)	$	(3,665	)

The reduction in the annualized yield on our finance receivables for the three months ended March 31, 2018 compared to the prior year period is the result of our decision over the last twelve months to offer dealers slightly lower acquisition fees and to require slightly lower contract interest rates on a portion of the contracts we purchase. Another reason for the decrease in the annualized yield is the lower interest yield on the receivables measured at fair value. The interest yield on receivables measured at fair value is reduced for the impact of expected losses and is therefore less than the yield on other finance receivables.

Provision for credit losses was $40.5 million for the three months ended March 31, 2018, a decrease of $6.7 million, or 14.1% compared to the prior year and represented 40.9% 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. Finance receivables that we have originated since January 2018 are accounted for at fair value. Under the fair value method of accounting, we recognize interest income under the interest method on a level yield basis based on forecasted future cash flows net of expected credit losses. Thus, no provision for credit loss expense is recorded for finance receivables measured at fair value.

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 increase by $251,000, or 6.3%, to $4.2 million during the three months ended March 31, 2018, compared to $4.0 million in the prior year period, and represented 4.3% of total operating expenses. Our marketing staff increased to 129 as of March 31, 2018 compared to 124 at March 31, 2017. In addition, in recent months, we have gradually shifted to more field marketing representatives as compared to in-house marketing representatives. Field marketing representatives are somewhat more costly than in-house marketing representatives, but we feel will ultimately be more effective. For the three months ended March 31, 2018, we purchased 13,067 contracts representing $210.6 million in receivables compared to 14,304 contracts representing $229.6 million in receivables in the prior period.

Occupancy expenses increased by $189,000 or 11.4%, to $1.9 million compared to $1.7 million in the previous year and represented 2.0% of total operating expenses. In May 2017, we entered into a lease for additional office space in Las Vegas, Nevada.

Depreciation and amortization expenses increased by $12,000 or 5.3%, to $240,000 compared to $228,000 in the previous year and represented 0.2% of total operating expenses.

For the three months ended March 31, 2018 we recorded income tax expense of $1.4 million, representing a 31.0% effective income tax rate. In the prior year period, we recorded $3.3 million in income tax expense, representing a 42.5% effective income tax rate. In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act lowered the federal corporate income tax rate from 35% to 21% beginning in 2018.

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. 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.

Delinquency, Repossession and Extension Experience (1)

Total Owned Portfolio

	March 31, 2018				March 31, 2017				December 31, 2017
	Number of				Number of				Number of
	Contracts		Amount		Contracts		Amount		Contracts		Amount
	(Dollars in thousands)
Delinquency Experience
Gross servicing portfolio (1)		174,626	$	2,332,313		172,105	$	2,323,211		173,998	$	2,333,524
Period of delinquency (2)
31-60 days		7,684	$	104,314		7,913	$	109,652		10,163	$	138,395
61-90 days		3,329		43,330		3,426		45,377		4,741		63,081
91+ days		1,618		18,941		2,856		33,503		2,295		27,515
Total delinquencies (2)		12,631		166,585		14,195		188,532		17,199		228,991
Amount in repossession (3)		2,882		37,227		2,996		37,650		2,630		33,679
Total delinquencies and amount in repossession (2)		15,513	$	203,812		17,191	$	226,182		19,829	$	262,670

Delinquincies as a percentage of gross servicing portfolio		7.2%		7.1%		8.2%		8.1%		9.9%		9.8%

Total delinquencies and amount in repossession as a percentage of gross servicing portfolio		8.9%		8.7%		10.0%		9.7%		11.4%		11.3%


Extension Experience
Contracts with one extension, accruing (4)		29,683	$	397,622		34,649	$	480,191		31,708	$	430,801
Contracts with two or more extensions, accruing (4)		58,254		794,789		34,812		468,778		55,203		756,561
		87,937		1,192,411		69,461		948,969		86,911		1,187,362
Contracts with one extension, non-accrual (4)		833		9,958		1,520		18,729		1,032		12,241
Contracts with two or more extensions, non-accrual (4)		2,558		33,133		1,970		24,380		2,701		35,626
		3,391		43,091		3,490		43,109		3,733		47,867

Total contracts with extensions		91,328	$	1,235,502		72,951	$	992,078		90,644	$	1,235,229

____________________________________

(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.

Net Charge-Off Experience (1)
Total Owned Portfolio
	March 31,		March 31,		December 31,
	2018		2017		2017
	(Dollars in thousands)
Average servicing portfolio outstanding.	$	2,331,582	$	2,311,798	$	2,334,008
Annualized net charge-offs as a percentage of average servicing portfolio (2)		8.2%		7.9%		7.7%

_________________________

(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, 2018 and March 31, 2017 percentages represent three months ended March 31, 2018 and March 31, 2017 annualized. December 31, 2017 represents 12 months ended December 31, 2017.

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.

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, 2018, for accounts that received extensions from 2008 through 2016 (2017 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, 2018		% Active or Paid Off at March 31, 2018		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		10,710		30.1%		20,059		56.4%		4,819		13.5%		19

2009		32,226		10,275		31.9%		16,168		50.2%		5,783		17.9%		17

2010		26,167		12,167		46.5%		12,001		45.9%		1,999		7.6%		19

2011		18,786		10,979		58.4%		6,875		36.6%		932		5.0%		19

2012		18,783		11,385		60.6%		6,602		35.1%		796		4.2%		18

2013		23,398		11,983		51.2%		10,439		44.6%		976		4.2%		20

2014		25,773		12,793		49.6%		12,154		47.2%		826		3.2%		19

2015		53,319		31,970		60.0%		20,267		38.0%		1,082		2.0%		17

2016		80,897		61,125		75.6%		17,839		22.1%		1,933		2.4%		12

______________________

Note: 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 2012, 60.6% were either paid in full or active and performing at March 31, 2018. 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 2012 that subsequently charged off, such charge offs occurred, on average, 18 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,
	2018		2017		2017

Average number of extensions granted per month		10,630		7,939		11,157

Average number of outstanding accounts		174,247		170,888		173,137

Average monthly extensions as % of average outstandings		6.1%		4.6%		6.4%

_____________________

Note: Table excludes portfolios originated and owned by third parties

	March 31, 2018				March 31, 2017				December 31, 2017
	Number of Contracts		Amount		Number of Contracts		Amount		Number of Contracts		Amount
					(Dollars in thousands)

Contracts with one extension		30,516	$	407,580		36,169	$	498,920		32,740	$	443,042
Contracts with two extensions		22,794		310,711		19,386		264,968		24,375		335,643
Contracts with three extensions		17,058		235,319		9,904		132,569		16,378		227,980
Contracts with four extensions		11,282		155,514		4,917		64,452		9,506		129,795
Contracts with five extensions		6,332		84,695		1,946		24,120		5,096		67,703
Contracts with six extensions		3,346		41,682		629		7,049		2,549		31,067
		91,328	$	1,235,501		72,951	$	992,078		90,644	$	1,235,230

Managed portfolio (excluding originated and owned by 3rd parties)		174,626	$	2,332,313		172,105	$	2,323,211		173,998	$	2,333,524

______________________

Note: Table excludes portfolios originated and owned by third parties

In recent years, we have experienced an increase in the number of extensions that we grant to our customers. We attribute this to a number of factors. First, 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. Secondly, in recent years we have found it more difficult to communicate with our customers via outbound voice telephone calls, which have historically been our primary means of communicating with our customers. Consequently, we have recently developed text messaging platforms to supplement our outbound voice calling efforts. In addition, in 2016 we added features to the customer portal of our website to facilitate the process whereby the customer may request an extension.

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 the proceeds from term securitization transactions and other sales of automobile contracts, amounts borrowed under various revolving credit facilities (also sometimes known as warehouse credit facilities), customer payments of principal and interest on finance receivables, fees for origination of automobile contracts, and releases of cash from securitization transactions and their related spread accounts. Our primary uses of cash have been the purchases of automobile contracts, repayment of amounts borrowed under lines of credit, securitization transactions and otherwise, operating expenses such as employee, interest, occupancy expenses and other general and administrative expenses, the establishment of spread accounts and initial overcollateralization, if any, the increase of credit enhancement to required levels in securitization transactions, and income taxes. There can be no assurance that internally generated cash will be sufficient to meet our cash demands. The sufficiency of internally generated cash will depend on the performance of securitized pools (which determines the level of releases from those pools and their related spread accounts), the rate of expansion or contraction in our managed portfolio, and the terms upon which we are able to acquire and borrow against automobile contracts.

Net cash provided by operating activities for the three-month period ended March 31, 2018 was $63.2 million, an increase of $1.0 million, compared to net cash provided by operating activities for the three-month period ended March 31, 2017 of $62.2 million. Cash provided by operating activities is significantly affected by our net income before provisions for credit losses. For the three months ended March 31, 2018, our net income excluding provisions for credit losses was $43.7 million, or $8.0 million less than our net income excluding provisions for credit losses for the three months ended March 31, 2017.

Net cash used in investing activities for the three-month period ended March 31, 2018 was $67.2 million compared to net cash used in investing activities of $77.9 million in the prior year period. Cash provided by investing activities primarily results from principal payments and other proceeds received on finance receivables. Cash used in investing activities generally relates to purchases of automobile contracts. Purchases of finance receivables were $210.6 million and $229.6 million during the first three months of 2018 and 2017, respectively.

Net cash provided by financing activities for the three months ended March 31, 2018 was $2.8 million compared to net cash provided by financing activities of $13.8 million in the prior year period. Cash provided by financing activities is primarily related to the issuance of securitization trust debt, reduced by the amount of repayment of securitization trust debt and net proceeds or repayments on our warehouse lines of credit and other debt. In the first three months of 2018, we issued $190.0 million in new securitization trust debt compared to $206.3 million in the same period of 2017. In addition, we repaid $193.6 million in securitization trust debt in the three months ended March 31, 2018 compared to repayments of securitization trust debt of $205.3 million in the prior year period. In the three months ended March 31, 2018, we had net advances on warehouse lines of credit of $8.9 million, compared to net advances of $16.5 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, 2018, we had unrestricted cash of $11.6 million and $178.3 million aggregate available borrowings under our three warehouse credit facilities (assuming the availability of sufficient eligible collateral). As of March 31, 2018, we had approximately $16.6 million of such eligible collateral. During the three-month period ended March 31, 2018, we completed one securitization aggregating $190.0 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.

Our warehouse credit facilities contain various financial covenants requiring certain minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. As of March 31, 2018, we were in compliance with all such financial covenants.

We have and will continue to have a substantial amount of indebtedness. At March 31, 2018, we had approximately $2,218.1 million of debt outstanding. Such debt consisted primarily of $2,080.1 million of securitization trust debt and $121.7 million of warehouse lines of credit. Our securitization trust debt has decreased by $2.0 million while our warehouse lines of credit have increased by $1.4 million since March 31, 2017 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from nine months to 10 years. We had $16.3 million and $15.3 million in subordinated renewable notes outstanding at March 31, 2018 and 2017, respectively.

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.

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 7, 2018. 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, 2018, we had approximately $2,218.1 million of debt outstanding. Such debt consisted primarily of $2,080.1 million of securitization trust debt and $121.7 million of warehouse lines of credit. Our securitization trust debt has decreased by $2.0 million while our warehouse lines of credit have increased by $1.4 million since March 31, 2017 (each net of deferred financing costs). Since 2005, we have offered renewable subordinated notes to the public on a continuous basis, and such notes have maturities that range from six months to 10 years. We had $16.3 million and $15.3 million in subordinated renewable notes outstanding at March 31, 2018 and 2017, respectively. 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.

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, 2018, we repurchased 321,181 shares from existing shareholders, as reflected in the table below.

Issuer Purchases of Equity Securities

Period (1)	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2)

January 2018		–	$	–		–	$	12,630,508
February 2018		138,030	$	4.07		138,030	$	12,069,162
March 2018		183,151	$	3.88		183,151	$	11,358,286
Total		321,181	$	3.96		321,181

___________________

(1)

Each monthly period is the calendar month.

(2)

Through March 31, 2018, our board of directors had authorized the purchase of up to $74.5 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.

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.
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.

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 8, 2018
	By: /s/ CHARLES E. BRADLEY, JR.
	Charles E. Bradley, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 8, 2018
	By: /s/ JEFFREY P. FRITZ
	Jeffrey P. Fritz
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)