Consumer Portfolio Services, Inc. Q3 FY2021 Earnings Call

Good day, everyone, and welcome to the Consumer Portfolio Services 2021 Third Quarter Operating Results Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements. Any statements made during this call that are not statements of historical facts may be deemed forward-looking statements, statements regarding current or historical valuations of receivables which are dependent on estimates of future events, also are forward-looking statements. All such forward-looking statements are subject to risks that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 10 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, further events or otherwise. With us here now is Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Thank you, and welcome to our third quarter earnings call. I guess the simplest way to say we had a very good quarter, and it's one of the best quarters we've had. It's about really having everything functioning really well across all points of the company: marketing, originations, collections, everything. So it's nice to see that when you start doing things right, you can get the reward. And so we did. I'm just going to go through a couple of highlights. Year-over-year, we had 232% earnings growth. The numbers are really starting to come through. Don't know if we'll continue to do that forever, but that was a real good growth number from year-over-year. And somewhat just as interesting is during the same period of time, we cut expenses 24%. So to be able to do both those things, like I said, it doesn't get any better than that. Originations, we had 14% quarter-to-quarter, 87% originations growth year-over-year. The third quarter was the highest quarter since the second quarter of 2016, and the second highest quarter in our company history of 30 years. So again, real good numbers there. Not to be outdone, servicing continues very strong. There's a lot of talk about the pandemic and the stimulus. The stimulus is kind of over at this point, and yet, our collections still remain very, very strong. So there's a lot less stimulus money, yet, we still have a very strong delinquency, charge-offs were down 41% year-over-year. So it's easy not to say we're doing an awful lot right in that category as well. We owe a lot of it to our added scorecards across the board in collections. We have a lot of AI, a lot of alternative data that's really helping us direct to how to get the best performance out of the portfolio. And I'll talk a little bit more about that later. The securitization market is still very strong, another very successful securitization in the third quarter. We noted that we purchased just about 2 million shares out of the market. So again, we're trying to do what we can to increase our shareholder value. I'll go into more detail on all those subjects after I let Jeff walk through the financials for you.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues, which were $68.6 million for the quarter. That's up 3% from our second quarter of this year and down 3% compared to our third quarter of last year. The nine month number's $198.4 million, which is down about 5% compared to $208.7 million in the nine months of 2020. A pretty simple breakdown of components of revenue: the legacy portfolio is yielding about 20%, but that's only about 13% of our managed portfolio right now, $287 million continues to decline pretty rapidly as we move along. The fair value portfolio continues to grow. It’s 1.9 billion, 87% of our total, yielding a predictable 11.1% this quarter. And as you know that yield is net of losses. So we don't have the offsetting provisions for credit losses that we've had in the past with the legacy portfolio. No fair value marks in the third quarter. The expenses were $49 million for the quarter. That's a 7% decrease from our second quarter of this year of $52.9 million and a 24% decrease over the third quarter of 2020. The nine month numbers are $157.1 million, which is a 19% decrease in expenses compared to the nine months of 2020. We’ve had significant reductions in all these expense categories. Significantly lower interest expense as the securitizations are coming in at lower yields than the ones running off. No provisions for credit losses this year. In fact, we're going to talk about that reversal of a provision in a minute here, which contributed to the earnings this quarter. We have lower headcounts and better all-around efficiencies, which have really contributed to the lower expense profile. Provisions for credit losses were negative $1.6 million. This is the first time in the company's history that we've rolled back a portion of the allowance. As I've said, this legacy portfolio that CECL portfolio is winding down, has a significant allowance for loan losses. First, because we established a lifetime loss allowance for this portfolio back in January 2020 and then we made some additions to that allowance during 2020 for the pandemic. The reality is that portfolio is performing pretty well, and its remaining life suggests that the allowance is more than adequate, which is why we shaved off $1.6 million of that allowance this quarter. Pretax earnings were $19.5 million, a 40% increase over the last quarter's $13.9 million and a 232% increase over the third quarter of last year. The nine month numbers show $41.4 million in pretax earnings, which is a 204% increase over the nine months of 2020. Net income for the quarter was $13.7 million, representing a 41% increase over the second quarter this year, and a 261% increase over the third quarter of 2020. Year-to-date net income amounts to $28.6 million, a 63% increase over the nine months of 2020. Looking at the balance sheet, the better than expected credit performance continues to contribute to a strong liquidity position. We're getting significant releases of cash out of the trusts as those wind down. That's allowed us to rely somewhat less on warehouse financing, which also helps the P&L from a lower interest expense. Some additional insights show the legacy portfolio is winding down, and the remaining allowance is about 24%, which is why we were able to shave off about $1.6 million of that this quarter. Moving on to some other performance metrics, the net interest margin for the quarter was $47.8 million. That's about flat with our second quarter of this year, but a 4% increase compared to the third quarter of last year. The nine month net interest margin of $90 million shows a decrease of 31% compared to the nine months of last year, as we had paid significantly higher blended interest rates on the securitization trust debt. Core operating expenses for the quarter stood at $33.9 million, flat with Q2 this year and just up a little compared to $32.5 million in the third quarter of last year. However, nine month numbers show $68.1 million, with core operating expenses this year reflecting a 34% decrease compared to the same nine month period last year. We’ve observed significant improvements in operating leverage. Return on managed assets for the quarter pretax was 2.6%, flat compared to our second quarter of this year, but a 160% increase over the 1% posted in the third quarter of last year.

Thank you, Jeff. I just want to focus on a few things that are working for the company. We’ve highlighted them, but maybe a little more detail. In terms of originations, we did, even though our application rate was relatively flat, we still were able to increase originations. Again, we're using a lot more of our Gen 7 scorecard, which relies heavily on AI and alternative data. We've experienced a 17% growth year-over-year, even though our applications were kind of flat. It's directly related to our ability to analyze customers and determine who to target. Another factor is the inventory issues causing increased competition. We’ve lowered our APRs to remain competitive, and I believe when these inventory issues subside next year, we’ll see substantial growth increases just because the inventory will be there. We’re looking to expand our dealer base from around 8,000 to 10,000. All these initiatives will help. The new Generation 8 scorecard we are working on is expected to be even more effective in utilizing outside metrics to select the best customers and continue our growth. Regarding collections, we’re enhancing our collection scorecard and utilizing AI and alternative data. Our improved methods have resulted in much better contact rates and collections, leading to lower repossessions. Additionally, we have an extension scorecard to better assess customer circumstances. We are maximizing technology use, focusing now significantly on collections for more efficiency. Although some results from other companies post-stimulus are declining, it’s reassuring that ours remain stable. We’re seeing flat delinquency and improved charge-offs, so we believe we’re successfully bucking the trend. Throughout the pandemic, we maintained a focus on efficiencies, as indicated by our cut in expenses. We see potential in experimenting with hybrid work models, and we are optimistic about future occupancy cost reductions. As mentioned, the securitization market remains robust. In terms of industry observations, the lack of inventory is affecting many companies, and we are fortunate to be growing well without needing it. The acquisition activities among competitors could also benefit us in time. We have also purchased 2 million shares, along with an additional half million this quarter, as we focus on shareholder value. It's frustrating to see our stock price down despite these strong numbers, but we are committed to enhancing shareholder value and will continue to purchase shares until we see movement.

Thank you. Our first question comes from Kyle Joseph at Jefferies.

Hey, good morning, guys. Congratulations on a good quarter. I know you touched on that. But just give us your sense for the outlook for used car prices; obviously had another uptick recently. When do you think the supply chain kind of thaws and we get a normalized new car supply, and what are you thinking about for 2022 on that front?

Again, we're sort of crystal balling a little bit, but my guess is as blockchain improves dramatically going into the first quarter, I think most of the manufacturers realized that 2021's kind of shot. I wouldn't put it past them to slow play the rest of the year to have a really good year next year. So that’s my bet on the market. One would think that the supply chain will ease up in the next three to six months, giving manufacturers ample opportunity for a good year next year compared to this year. It's tough to predict, but used car prices are still strong. We experienced another strong auction performance. I don't think this significantly affects us, but it certainly could impact front-end sales. The financing market remains strong despite the tight supply of vehicles. In summary, I expect new cars to see improvement in the first quarter of next year, which would help normalize the used car market.

Got it, and then just one follow up there, Jeff, just remind us what the remaining life on the legacy portfolio is at this point.

So that portfolio is seasoned 58 months already, and so it's got probably a remaining expected life of not much more than 12 months. There's always a tail, as some of these loans tail out for more extended periods, but it’s clearly rounding third, heading for home.

Okay, very helpful. Appreciate the color. Thanks, guys.

Welcome.

Thank you.

Thank you. And I will turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. As I said earlier, we were very pleased with the quarter. We just want to keep doing what we're doing and hopefully get people to notice. We want the stock market to acknowledge our efforts and start having things happen. As the acquisition market seems to be heating up, I think that's a plus. We believe this will benefit the industry and us. All we can do is keep producing solid results and work on efficiencies every day. Thank you all for joining us, and we will talk to you probably in February. Thank you.

Thank you, and this concludes today's teleconference. A replay will be available beginning two hours from now until November 4, 2021. Please disconnect your lines at this time, and have a wonderful day.