Consumer Portfolio Services, Inc. Q4 FY2021 Earnings Call

Good day, everyone, and welcome to the Consumer Portfolio Services 2021 Fourth 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 valuation of receivables because depending 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 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 for joining our fourth quarter and full year earnings call. I'm pleased to report that the numbers really demonstrate our success this year. The fourth quarter ended on a high note, especially in December. Typically, December and November see a significant decline as the year wraps up, but December 2021 was exceptional. It marked the best month of the entire year for originations and the second best month in our company's history. Clearly, our positive momentum is enduring. For the whole year, as I mentioned, we achieved the best results in our company’s history. Our portfolio grew by 54% in originations year-over-year, which may have been somewhat anticipated due to the pandemic, but we also exceeded 2019 numbers by 14%. I believe the industry is finally gaining recognition on Wall Street. We've seen considerable M&A activity, and throughout 2021, it's become evident that people are starting to appreciate the value of subprime platforms and the resilience of the subprime auto sector. This is encouraging for 2021 and bodes well for the future. Additionally, the stock market has recognized our company’s worth; our stock has performed very well over the year and recently. I will provide more details on that shortly. Now, I’ll hand it over to Jeff to go over the financials.

Thanks, Brad. Welcome, everyone. We'll start with the revenues, which were $69.4 million for the fourth quarter, reflecting a 1% increase over our third quarter of 2021 and an 11% increase compared to the fourth quarter of last year. For the full year, revenues totaled $267.8 million, down just 1% from $271.2 million in 2020. Our portfolio consists of two segments. The legacy portfolio, yielding 18%, is now $237 million, or 11% of the total, while the fair value portfolio, representing everything originated since 2018, stands at $1.9 billion, 89% of the total, with a yield of 11.3% in the fourth quarter. This yield accounts for net losses, and there were no marks to the fair value portfolio during the fourth quarter. Turning to expenses, we reported $45 million for the quarter, down 8% from $49 million in our third quarter and down 20% from $56 million in the fourth quarter of 2020. Full year expenses were $202.1 million, down 19% from $251 million in 2020. We have observed reductions in many expense categories year-over-year and quarter-to-quarter, thanks to efficiencies. We've benefited from lower interest expenses due to developments in the asset-backed market over the past couple of years. Additionally, this quarter included an unusual entry of a $13 million credit, a negative expense for the provision for credit losses, which significantly contributed to our quarterly results. This compares to no provisions for credit losses a year ago, highlighting the difference year-over-year. Our pretax earnings for the quarter were $24.4 million, which is a 25% increase from the September quarter and a remarkable 275% increase from $6.5 million in the fourth quarter of 2020. For the full year, pretax earnings reached $65.8 million, up 227% compared to $20.1 million in 2020. Net income for the quarter was $19 million, up 39% from $13.7 million in the third quarter of 2021 and up over 300% from $4.1 million in the fourth quarter of 2020. The full year net income was $47.5 million, a 119% gain over the $21.7 million net income in 2020. Diluted earnings per share for the quarter were $0.71, representing a 37% increase over the $0.52 in the third quarter this year and a 318% increase from the $0.17 in the fourth quarter of 2020. The full year diluted earnings per share was $1.84, more than double the $0.90 for the full year of 2020. Regarding our balance sheet, we maintain a strong liquidity position due to excellent credit performance over the last 24 months, allowing us to rely less on warehouse lines. We have two $100 million warehouse facilities but have used a significant amount of our cash on hand, which further lowers our interest expenses. On the balance sheet, one of our residual financing facilities is down to $3.7 million and will be fully repaid soon, likely in the first quarter. Now, looking at our performance metrics, the net interest margin for the quarter was $52.4 million, up 10% from $47.8 million in the third quarter and up 33% from $39.5 million in the fourth quarter of 2020. The full year net interest margin totaled $192.6 million, a 13% increase over $169.8 million in 2020. The blended cost of all of our asset-backed securities for the quarter was 3.4%, compared to 4.4% in the fourth quarter of 2020. This trend has been consistent as newer ABS deals have lower blended costs than those retiring, consistently driving costs down. Core operating expenses for the quarter were $41 million, a 21% increase from $33.9 million in the third quarter and a 24% increase over $33 million from the fourth quarter of 2020. The full year core operating expense was $141.4 million, a 4% increase over the prior year. As a percentage of the managed portfolio, core operating expenses were 7.5% for the fourth quarter, up slightly from 6.4% in the third quarter and from 6% in the fourth quarter last year. The core operating expenses as a percentage of the managed portfolio for the full year were 6.6%, compared to 5.9% for all of 2020. The return on managed assets for the quarter was 4.5%, a 73% increase over 2.6% in the third quarter and a 275% increase over 1.2% in the fourth quarter of 2020. The full year pretax return on managed assets was 3.1%, compared to 0.9% for 2020. The fourth quarter saw significant benefits from the $13 million reversal of prior provisions for credit losses. Even with this reduction in the allowance for credit losses on the current expected credit loss portfolio, the remaining allowance for loan losses on those loans remains approximately 24%, indicating a robust allowance for older receivables. In terms of credit performance metrics, delinquency at year-end was 10.5%, up seasonally from 9.4% at the end of September but down from 12% at the end of last year. The annualized net loss for the quarter was 2.57%, lower than 2.82% in the third quarter and significantly down from 5.18% for the fourth quarter of 2020. The annualized net losses for the full year were 4.7%, a significant reduction from 6.5% in 2020. A notable component of our credit performance this year was that we recorded a 63.3% auction liquidation percentage for the fourth quarter, compared to 41.9% a year ago, reflecting record-high returns at the auctions. Regarding the ABS market, our fourth quarter ABS transaction, 2021-D, was completed in October. We noted somewhat softer demand for some bond tranches, but the low benchmarks resulted in a very low 2.10% blended yield. Recently, we completed our first quarter transaction, 2022-A, where we observed improved demand across the stack with slightly higher benchmarks. Nevertheless, we achieved an attractive low blended cost of funds of 2.56%. Now, I’ll turn it back over to Brad.

Thank you, Jeff. Let’s begin by discussing several key points. 2021 was a remarkable year for various reasons. To start, let’s assess our marketing originations. While growth is paramount, we achieved significant growth in our portfolio and originations throughout the year. This growth was supported by positive market conditions, stimulus effects, and other factors, but the real challenge moving forward is sustaining this momentum. We experienced substantial growth in 2021, with December marking our strongest month of the year, achieving just under $120 million in originations. However, our average for the whole year was about $95 million per month. Since December, we have maintained a similar trend. If we can consistently reach the $115 million to $120 million monthly range, our originations and portfolio will continue to expand, which will ultimately bolster the stability and growth expectations for the company. We are actively broadening our marketing and dealership network nationwide. Although progress was slow during the pandemic, we've seen significant momentum as the year concluded. This expansion is crucial for sustaining our growth trends. Additionally, the pandemic stimulus helped many customers, but the market has faced challenges with limited car availability. Nonetheless, our customers consistently seek cars out of necessity, underpinning the resilience of our business even during tough times. Moreover, we are developing our seventh-generation scoring model, which has yielded excellent results. This model allows us to better penetrate various market segments, and we anticipate introducing our eighth-generation model in a few months. This advancement has been central to our success. Regarding collections, our delinquency and loss rates remain favorable. Despite the cessation of government financial support, our performance has remained strong. We stick to our principle of maintaining low loan-to-value ratios, ensuring customers are positioned appropriately in their vehicles, which simplifies collections. Our collections strategy, including nearshore servicing, has proven effective, allowing us to target our portfolio more efficiently. In 2021, we took the opportunity to refine our operations during the pandemic, leading to improvements that we expect will yield significant benefits in 2022, particularly towards the latter part of the year. Despite the typical challenges of the fourth quarter, we observed exceptional performance during that time. We currently hold the strongest cash position in our company's history, having raised an additional $50 million in 2021. While we may not have needed those funds, it is prudent to secure financing when conditions are favorable, and we believe this positions us well for the future. Transitioning to the broader industry context, we are witnessing renewed interest and activity in our sector. Recent M&A movements indicate that companies are looking to acquire platforms. Interestingly, we operate as a fintech that many may overlook, leveraging our unique data insights over 25 years rather than relying on external data sources. The ongoing interest in fintech and platform valuations benefits us, which is reflected in our stock performance. With few new entrants in our industry over the last decade, we face minimal competition, establishing substantial barriers for any potential new players. As we conclude, our substantial cash reserves will be vital as the car market strengthens, providing more opportunities for sales and financing. The challenges we navigated during the pandemic have brought us favorable outcomes. All aspects of our operation—marketing, origination, and collections—demonstrate solid performance. The securitization market remains robust, enhanced by our cash position which provides flexibility in managing our securitizations. Looking ahead, external economic conditions will always play a critical role in our business, but we anticipate a solid outlook for the near future. As the supply chain improves, we expect a thriving year. Our aim is to build on the momentum from 2021, continue expanding, refining our collection methodologies, and enhancing our origination processes to deliver superior products while growing our portfolio, which currently sits at approximately $2.5 billion. Our goal is to double that within a few years through effective operational strategies. At this juncture, we are well positioned, arguably the best in the company's 30-year history. The overall market is beginning to acknowledge our industry, and we look forward to leveraging this recognition as we move forward. Now, let's open the floor for questions.

I'm not showing any questions in the queue, so you may continue with any final comments or closing remarks.

Thank you. We had a great quarter. We had a great year. We're looking forward to this year. Again, as I said in sort of in those details, everything is going the right way for us. We just want to continue to do it that way and keep things moving. Thank you very much. We'll talk to you shortly after our first quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until February 22, 2022, by dialing (855) 859-2056 or (404) 537-3406 with the conference identification number 9319729. A broadcast of the conference call will also be available live and for 90 days after the call via the company's website at www.consumerportfolio.com. Please disconnect your lines at this time, and have a wonderful day.