Earnings Call Transcript - CPSS Q1 2022

Operator, Operator

Good day, everyone, and welcome to the Consumer Portfolio Services 2022 First 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, depending on estimates or future events, are also 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 15 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future 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.

Charles Bradley, CEO

Thank you and welcome, everyone, to our first quarter earnings call. I guess it's nice to be able to look forward to a call. And since we've known the numbers for a little bit, I certainly was, since this was in fact the best quarter we've ever had in the history of the company. And it's nice to be able to say that as well. Finally, after working on all these different things for a few years and working through some problems during previous years, we can easily say we're now functioning on all cylinders and doing very, very well. Certainly the best quarter ever. A couple of highlights. We originated $410 million in new contracts versus $328 million last quarter and $205 million a year ago. So obviously, massive growth in our originations, which I'll explain a little bit later. But basically, we've expanded our base, we've added some programs, and our modeling and AI is working brilliantly. Also, we had, included in that quarter, a record all-time month of $171 million in the month of March. We were off to the races anyway, to finish the quarter with that kind of number was terrific. And those numbers should continue. We're very happy about all of that. Pretax income of $29.3 million, also a new milestone for the company. This is almost like what we should be doing and it's paying off; all the hard work is really working out. On another side, net charge-offs were 3.3% versus 6.3% a year ago. So again, even with the growth and anything else, our collection operation is still performing very, very well. And all of the things we've done in that area of the company are really coming home and really making their mark in terms of how we make things work. Auctions still remain high and recoveries of auctions were 61%. That certainly helps everything, but given the state of what's going on in the economy and the car business, we probably think that will continue for a while. Lastly, we did a securitization just recently of $395.6 million, which would also represent the largest securitization we've ever done. So lots of highlights, I'll go into a little more detail, but first, I'll let Jeff run through the financials.

Jeff Fritz, CFO

Thank you, Brad. Welcome, everybody. We'll begin with the revenues for our first quarter that just ended, which were $74.4 million. That's a 7% increase over our fourth quarter of last year and an 18% increase over the first quarter of 2021. Our revenue score is driven by the portfolio; the legacy portfolio has continued to amortize down to $190 million, or about 8% of our total portfolio, and is currently yielding 17%. The fair value portfolio, which includes everything we've originated since January 2018, is $2.192 billion, 92% of the total portfolio, yielding this quarter about 11.7%, which, as you know, is net of losses. The fair value portfolio is a little bit interesting and uncommon. This quarter, we have a markup to the fair value portfolio of $2.4 million. What we've seen is that some of the losses that we estimated for the COVID event that began about two years ago have not materialized. So we've gone back and reevaluated the fair value portfolio and effectively taken out a portion of those losses that we previously estimated. As I said, they didn't materialize. So that represents $2.4 million of the revenue for this quarter. Moving on to expenses, $45 million is flat with our fourth quarter of last year and down 18% from $55 million in expenses in the first quarter of 2021. Expenses have a couple of things going on. First of all, we have a significant reduction in our allowance for loan losses, so we have a reversal of previous provisions for credit losses on the legacy portfolio that's $9.4 million this quarter. We had a $13 million similar reversal of credit losses on the legacy portfolio in the fourth quarter of last year, but there was no such similar adjustment to reversal in the year-ago quarter. So that's $9.4 million of a negative expense, if you will, that took place in this quarter. The other significant factor impacting operating expenses for the quarter is the notable reduction in interest expense compared to one year ago, which is down about $4.5 million in our first quarter of this year compared to the first quarter of last year. Pretax earnings for the quarter totaled $29.3 million, a 20% increase over the fourth quarter of 2021 and a whopping 271% increase compared to the $7.9 million pretax earnings that we posted in the first quarter of 2021. Net income was $21.1 million for the quarter, an 11% increase compared to the fourth quarter just previous to this quarter, and a 306% increase from $5.2 million in net income a year ago. Diluted earnings per share were $0.75 for the quarter, a 6% increase over the fourth quarter of 2021 and a 257% increase compared to the $0.21 we posted in diluted earnings per share a year ago. Moving onto the balance sheet, continued strong credit performance of the portfolio has helped maintain our strong liquidity position. Even with the significant volume increases that Brad referred to, our capital liquidity management standpoint is in pretty good shape from the standpoint of our two warehouse facilities. Regarding the finance receivables portion of the balance sheet, as I said, the legacy portfolio is down to 8% of the total portfolio. The allowance for the legacy portfolio, which is required by the CECL accounting, remains at 24% of the remaining balance, even after the $9.4 million reversal this quarter. Looking at the liabilities, we repaid the 2018 residual facility during the quarter, which had been outstanding for almost four years. We still have the 2021 residual facility of $50 million that we put on about a year ago. Looking at other performance metrics, the net interest margin for the quarter was $58 million, an 11% increase over the $52.4 million from the fourth quarter of 2021 and a 37% increase over $42.2 million in net interest margin compared to a year ago. The blended cost of all our ABS securitization debt for the quarter is about 3.5% compared to 3.9% in ABS interest cost a year ago. Core operating expenses for the quarter, which exclude the interest and provisions for credit losses, were $38 million. That's down a little bit, 7% from the fourth quarter of last year, and up just a little, 11% compared to the first quarter of 2021. Even though our portfolio has grown 12% year-over-year and our quarterly originations volume nearly doubled compared to a year ago, we have just a nominal increase in those core operating expenses. Those operating expenses as a percentage of the managed portfolio were 6.7% for the quarter, down 11% from the fourth quarter of last year and up only 5% from a year ago. The return on managed assets for the quarter was 5.2%, a 16% increase over the fourth quarter of last year and a 247% increase compared to the first quarter of 2021. Looking at the credit performance metrics, as Brad mentioned, we had a very good delinquency quarter, ending at 8.5% in finishing delinquency at the end of Q1 this year. That's down from 10.5% in December of 2021 and only slightly up from 7.8% posted a year ago. Net losses for the quarter were 3.3%, up just a little from the fourth quarter of 2021, but down compared to 6.3% a year ago. A significant contributor to our low net losses is the activity at the auctions, still running at over 60% recoveries of our balances at the auction compared to about 43% a year ago. A quick look at the ABS market: As Brad indicated, we're in the process of closing our 2022 B securitization, the largest in our company history at just under $400 million, so we're pleased with the continued liquidity in those markets. With that, I'll turn it back over to Brad.

Charles Bradley, CEO

Thanks, Jeff. I guess the obvious question is, okay, why are things going so well? I'm going to do my best to give you a few highlights of why we think it's doing so well. Number one, as always, one of our primary focuses is marketing. The whole trick with marketing is to get as many people on the ground and as many dealerships signed up as possible, and that's been our focus for a long time. I think we're almost at a critical mass size where some of that is easier. One of the big things we did recently is we added a non-prime program, which we have in the call matter, and then Facebook copied us. Nonetheless, that's a new program and it's been very successful. It isn't so much that we're buying a lot of it, but it does help that we are buying more of the high-end spectrum. It both helps in terms of our credit performance but also helps in terms of what we offer to the dealers. I added that program. We've been able to be even more of a one-stop shop or full-service spectrum for our dealers. That helps our marketing folks sell or pitch that to the dealers, and I think it's been very effective. Of course, we are adding as many new market reps and people as we can; we're also expanding the dealer base as much as we possibly can. That will continue this year to be a big focus in putting lots of new people in the field and also getting the dealer network into the large double digits, 10 or 12,000 dealers, which will give us that much more ability to go deeper into the dealers as we expand the dealer base itself. Also, in our continuing focus with AI and using our models, one of the other things we've been truly focused on is making this process as easy as possible for our dealers and our margin reps to get deals funded. We still have to keep our core commitments and funding requirements; we will probably always be known as somewhat of a sticky lender in the industry. But nonetheless, we need to ensure our credit remains strong. However, we are doing everything we can to speed up funding, making the steps as easy as possible to ensure that when a deal comes in, the dealer knows we're going to buy it, knows we're going to fund it, and we can get the proper documentation done as quickly as possible. All those efforts are really paying off in terms of our reputation, as the dealerships know we back up what we buy, and we buy it quickly. That deeper penetration, the more full-service options we provide is a big reason for our success. Moving on to originations in risk, again, it's the same thing; we're trying to ensure that the dealerships have quick access to the people they need to talk to and that we can make exceptions that are creditworthy to get deals funded, and we're doing more and more using the models. I think that is really starting to pay off in a big way, and I think the future in that aspect of what the company is doing is quite bright. I think we're pretty far ahead of the curve and many of our competitors in terms of how we process deals, what kind of deals we can buy, and importantly, being able to work with the dealers to structure deals that work for both the dealers and us, and for the customers. Moving on to collections: We mentioned a few quarters ago that we really focused on implementing new AI and collection models in that side of the business, and those are doing really well too. I will admit there's a good market with auction values, and it certainly was a good market with all the government funding received by our customers. We thought that was one thing, but that has stopped, and there really hasn't been any new funding handed out to folks in a long time, and yet our collections are still performing extremely well. That leads one to believe that what we've done with AI and modeling and all those facets of the business is really paying off. We continue to have very strong collections, as can be seen from our charge-off rates. The delinquencies went up a little bit, but we've been operating with extremely low delinquencies for a very long time. We expected them to normalize, and while ours normalized slightly, many industry competitors' delinquencies seem to have problems they need to deal with. We're very happy that as much as our delinquency rates have increased slightly, it's really more a normalization rather than a significant problem we have to deal with. It's something to keep an eye on for others in the industry. As for the broader market, the industry remains competitive, but there are signs that it may be less competitive than before. There haven't been any new entrants in a long time, which I believe has helped us establish ourselves as a reliable lender, a foundational lender, and a company the dealerships can trust when others might be changing their approaches significantly. While we can't prove that definitively, what we do know is we're growing, doing well, adding dealerships rapidly, and bringing in many marketing professionals. This positions us strongly to add dealers, grow the business, and continue deepening our relationships within the dealership base, also expanding it. With the new products we're adding and a user-friendly approach, it's been extremely helpful. In terms of what's next for the car industry, it's anyone's guess, but we think that the car industry will remain very tight for the foreseeable future. People wonder what that does for us. On one hand, it helps with auction values and recoveries, but on the other hand, most of our customers will always need to purchase a new or used vehicle when necessary. They are out there shopping because they need a car to drive to work every day. That's why they come to us for financing. While the market may shift somewhat, we continue to target borrowers who truly need a vehicle, which won't change. Casual buyers may slow down, but our clients won't; they buy a car out of necessity. Regarding interest rates, they may rise slightly at first, but depending on the Federal Reserve's actions, we will have to monitor that closely. However, being the size we are and the efficiencies we have, we believe that it won't hurt us significantly. While it may tighten our margins slightly, our margins have been strong for a long time. The potential effect on our competitors might be much more severe. Our cost of funds is secure, and we securitize everything. As Jeff pointed out, the securitization market remains very robust, and we've been part of it for a long time. We don't anticipate any issues in that regard, and even with a slightly higher cost of funds, we are well-positioned. Many companies have heavily utilized forward flow purchase programs, which we have not pursued. These alternative funding sources have been a way for hedge funds and insurance companies to achieve higher interest rates. However, with the rise in interest rates, those programs may become less common, potentially increasing the cash requirement for those companies to securitize, hold, or liquidate paper. Since we've securitized everything, we're in a strong cash position and not overly concerned about that aspect at all. We're very interested to see how this affects the rest of the industry and are prepared to benefit from it accordingly. Overall, the first quarter has been quite positive, and we still have the whole rest of the year ahead to build on this momentum. If this quarter is any indication, we have laid the groundwork to be very successful moving forward, and we hope this continuity prevails throughout the year, barring any drastic changes to the economy or interest rates. We believe we are incredibly well-positioned to thrive in this market. Thank you all for attending this call, and we look forward to the next call in July.

Operator, Operator

And thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until April 26, 2022, by dialing 855-859-2056 or 404-537-3406 with conference identification number 377-1614. 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.