Consumer Portfolio Services, Inc. (NASDAQ:CPSS) Q1 2022 Earnings Conference Call April 19, 2022 1:00 PM ET
Company Participants
Charles Bradley – Chief Executive Officer
Jeffrey Fritz – Chief Financial Officer
Conference Call Participants
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, because depending on estimates or 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 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
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 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 a — and that 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 a number was terrific.
And those numbers should continue. We’re very happy about all on that. Pretax income of $29.3 million, also a new milestone in the company. This is almost like what we should be doing and it’s paying off, all the hard work is really working out. In 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 the mark in terms of how we make things work. Auction 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, which was $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
Thank you, Brad. Welcome, everybody. We’ll begin with the revenues for our first quarter just ended 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 is 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, from hearing this before is net of losses. The fair also a little bit interesting and uncommon. This quarter, we have a markup to the fair value portfolio of $2.4 million. And 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. And so we’ve gone back and reevaluate the fair value portfolio and effectively taken out a portion of those losses that we previously estimated. Because as I said, they didn’t materialize. And 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. But the other thing that’s significant about the operating expenses for the quarter is a significant reduction in interest expense compared to one year ago. So our interest expense 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 $29.3 million, that’s a 20% increase over the fourth quarter of 2021 and a whopping 271% increase compared to $7.9 million pretax earnings that we posted in the first quarter of ’21. Net income, $21.1 million for the quarter, 11% increase compared to the fourth quarter just previous to this quarter. And a 306% increase of $5.2 million in net income a year ago. Diluted earnings per share, $0.75 for the quarter, 6% increase over the fourth quarter of ’21, 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 performance — credit performance of the portfolio has helped maintain our strong liquidity position. And even with the significant volume increases that Brad referred to with our strong liquidity position in our two warehouse facilities, we’re in pretty good shape from a capital liquidity management standpoint. On the finance receivables portion of the balance sheet, as I said, the legacy portfolio is down to 8% of the total portfolio. And the allowance for the legacy portfolio, which as you know is a lifetime allowance required by the CECL accounting for that type of portfolio, the life — the remaining allowance in that portfolio is still 24% of that remaining balance, even though we reversed $9.4 million of it this quarter. Looking at the liabilities, we did repay during the quarter in full the 2018 residual facility that had been outstanding for almost four years. And so we have still remaining the 2021 residual facility of $50 million that we put on about a year ago. Looking at some other performance metrics, the net interest margin for the quarter was $58 million.
That’s an 11% increase over the $52.4 million from the fourth quarter of ’21 and a 37% increase over $42.2 million in net interest margin compared to a year ago. The blended cost of all of our ABS securitization debt for the quarter is about 3.5% compared to 3.9% in APS interest cost a year ago. Core operating expenses for the quarter, which exclude the interest in the provisions for credit losses were $38 million. That’s down a little bit 7% from the December quarter, fourth quarter of last year, and up just a little bit 11% compared to the first quarter of 2021. So it’s kind of interesting, even though our portfolio has grown 12% year-over-year and our quarterly originations volume are nearly really double what they were a year ago, we have just a nominal increase in those operating — core operating expenses. Those operating expenses as a percentage of the managed portfolio were 6.7% for the quarter, that’s down from 11% — that’s down 11% from the fourth quarter of last year, and up only 5% from a year ago.
Returned on managed assets for the quarter, 5.2%. That’s 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, Brad mentioned, we’ve really had a very good delinquency quarter, 8.5% in finishing delinquency at the end of Q1 this year. That’s down from 10.5% December of 2021 and it up just a little compared to the 7.8% that we posted a year ago. Net losses for the quarter, 3.3%. That’s up just a little bit from the fourth quarter of ’21, but it’s down compared to 6.3% one year ago. And a significant contributor to that credit performance, low net losses is the activity at the auctions we’re still running at over 60% recoveries of our balances at the auction compared to like 43% a year ago. 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, and so we’re pleased with the continued liquidity in those markets. And with that, I’ll turn it back over to Brad.
Charles Bradley
Thanks, Jeff. I guess the obvious question is, okay, why are things going so well? And I’m going to do my best to try and give you a few highlights of why we think it’s doing so well. Number 1, as always, one of our primary focus 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. But nonetheless, that’s a new program and it’s been very successful. And it isn’t so much 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 are for 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. And that helps our marketing folks to be able to sell that 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 more people in the field and also just getting the dealer network into the large double-digits, 10 or 12,000 dealers, which will give us just 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 easier — as easy as possible for our dealers and our margin ramps to get deals funded. We still have to keep our core ideas and things we have to have in terms of fund will probably always be known as somewhat of a sticky lender in the industry. But nonetheless, because we need to make sure our credit remains. However, we are doing everything we can to speed up funding, to make the steps as easy as possible, to really do everything so 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, the dealerships that we backup what we buy and we buy it quickly. So again, that’s one of the big reasons that deeper penetration, the more flooral service. And move on to originations in risk, again, it’s the same thing, we’re trying to make sure that the dealerships have quick access to our people they need to talk to and that we can make some exceptions that are creditworthy and get deals funded and do more and more using the models. And again, I think that’s 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. And I think we’re pretty far ahead of the curve and a lot of folks in terms of how we process deals, what kind of deals we can buy, and being — and also in some big way, being able to work with the dealers to structure deals that work both for dealers and work for us, and the customers.
Moving on to collections. We mentioned a few quarters ago that we really focused on putting in new AI and collection models on that side of the business. And those are really doing really well too. I will really admit there’s kind of a good market with auction values, and it certainly was a good market with all the money the government was handing out mostly to our customers. Well, we thought that was one thing. But that’s stopped and there really hasn’t been any new money handed out to the folks and everything the long time, and yet our collection is still performing extremely well. That leads one to believe that what we’ve done with AI and the modeling and all those kind of aspects of the business is really paying off. So we continue to have very strong collections which you can see by the charge-off rates. The delinquencies went up a little bit, but we’ve been operating with extremely low delinquencies for a very long time. So we were always expected them to normalize. And as much as ours are normalized a little bit. If you peaked around the industry a little bit, some other folks, DQs have not normalized, probably to the extent they would wish, they more ran away a little bit. So we’re very happy that as much as our DQ up sum, it’s really more of a normalization rather than a problem we have to deal with, and it’s something to keep an eye on for other folks in the industry. Whereas some of those delinquencies seem to be quite high, but ours are doing very, very well. In terms of looking at the industry.
The industry is still competitive, but there seems to be a sign that maybe it’s not quite as competitive as has been in the past. There are no new entrants. There hasn’t been any new entrants in a long time. And so I think maybe that’s part of the reasons we’ve been able to establish ourselves as one of the better lenders, one of the foundation lenders, and somebody the dealerships can count on when maybe other lenders maybe changing what they’re doing a little bit here and there. Again, we can’t prove that out for a fact, but the fact of matter is, what we do know is we’re growing, we’re doing very well, we’re adding dealerships very quickly, we’re adding lots of marketing people very quickly, and it’s putting us in a very strong position to add dealers, to grow the business, to continue to deeper penetration, other dealership base, and also expanding it. With the products we’re adding and the user motion we’re trying to put in, it’s really, really helpful. In terms of everything else, what’s the car industry going to do? It’s anyone’s guess, but we would certainly think that the car industry is going to remain very tight for the future. And people wonder what that does for us. Well, on one hand, it does help us with the auction values and recoveries, but on the other hand though, all of our customers, almost always buy a new car or get a new car used or new when they have to. And they’re out there shopping. They need this car to drive to work every day. That’s the primary reason they’re getting a car, that’s the primary reason we want to finance them. And so as much as the market can move a little bit, we continue to focus on that kind of borrower, and that borrower doesn’t really have a choice. They buy a car when they need to buy a car, and almost particularly in this market with inflation and everything else, we don’t really expect that to change. Certainly, the casual buyer and the casual shopper is going to slow down substantially, but our person isn’t. They have to have a car, they drive to work every day, wen the car breaks down, they need a new one. And so we think our market will remain strong.
The other, of course, the interest rates are going to go up slightly at first, but depending on what the Fed does, we’ll have to see. But being the size that we are and the efficiencies we have, we think actually that doesn’t hurt us. Certainly, it tightens our margins a little bit, but our margin has been quite wide for a long time. We think the effect on other folks might be somewhat, if not significantly, more severe. Our cost of funds, we securitize everything. As Jeff pointed out, the securitization market remains very strong and we’ve been in it for a long, long time. We don’t really have any problems with the way that market works and even having a slightly higher cost of funds. We used to sell a deeper bond when we did ABS, and now we don’t. We don’t really need to give our cash position and everything else, so it will be interesting to see with higher interest rates. And also the other thing to mention is a lot of companies were using flow programs, forward flow purchase programs, which we have not done. One of the reasons that has happened is hedge funds, insurance companies otherwise, needed higher interest rates. And so that was one of the ways they obtain them by buying bulk purchases or car loans from like competitors like us. We’ve never done that. But now with the interest rates going up, we think and certainly quite possible, a lot of those forward-flow programs disappear, which means more and more cash we needed for those companies to securitize and or hold paper or find out ways to get rid of paper. So again, since we’ve securitized everything, we’re in a very strong cash position, we’re not overly concerned with that aspect at all.
We’re very curious to see how that affects the rest of the industry, and certainly we will be standing there eagerly waiting to benefit from it. So I think you kind of put all that together and as nice as the first quarter because we have the whole rest of the year to see what we can do in this environment. But it certainly, if the first quarter is an indication, we put all things in place to be very successful and hopefully this continues, hopefully the markets all stay the same and the economy doesn’t fall apart, and rates don’t change too much. But either way, we think we’re very well-positioned to succeed in this market. First quarter is very representative of that, and we will look to continue that for the rest of the year. So again, thank you all for attending this call and we look forward to the next call in July.
Question-and-Answer Session
End of Q&A
And thank you. This does concludes 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.
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