Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2021 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 fact may be deemed forward-looking statements. Statements regarding current historical evaluation of receivables, because dependent on estimates of future events, are also forward-looking statements. All such forward-looking statements are subject to risk that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 10th 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 now is Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Ritz, Chief Financial Officer of Consumer Portfolio Services. I would now turn the call over to Mr. Bradley.

Thank you and welcome everyone to our first quarter conference call. I think the easy way to look at it, we had a nice quarter, worked really well. If you compare it to last year's first quarter, we had an excellent quarter. But, you know, again, last year was a different kind of year. We're really more interested in getting back on track, sort of our general growth mode and, you know, sort of forget about last year's pandemic problems. Certainly, given the circumstances at the beginning of this year, it seems to be the case. Obviously, with the government stimulus checks, it's really put in a huge impetus for us to grow. It's also helped performance tremendously. So we sort of have to calculate a little bit about how much of that is an impact from the government, how much of it is us doing things well, and as we go forward. Obviously, we think a lot of that's because we're doing quite well, but we'll see, and time will tell. A bunch of things we have been working on and worked on a lot last year, like automation, improving the processes, all those are having strong effects on how we go forward this quarter and the rest of the year. In terms of ABS, one of the things we did, we did the lowest ABS cost of funds in the history of the company, 1.11%, which is relatively unheard of. But given how the economy was sitting, those are the kind of deals people were able to get done. Certainly helps everyone else, too. But for us, it was sort of remarkable to be able to do a deal with that low cost of funds. That low cost of funds will probably stick around for the foreseeable future. It will probably creep up a little bit as we go forward. But, again, it's going to be an enhancement. It's going to be very helpful for the remainder of this year. The government stimulus checks, you know, not everyone we know gets one, but every one of our customers does. And so having that effect has really helped in terms of the delinquency and our charge-offs. So as you can see by the performance numbers, you know, as long as those checks keep coming, our performance numbers, you know, are going to be very, very strong and should continue that way. So that's also a very good thing. I'll get into some more of the specifics of what we expect for the quarter or the next few quarters after I have Jeff go through the financials.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues, $63.1 million for the quarter. That's up 1% from our fourth quarter of 2020 and down 11% from $70.8 million in the first quarter of 2020 last year. When you look at the revenue breakdown, we're really in the home stretch of our transition to fair value accounting on the portfolio. The legacy portfolio is only $421 million, or 20% of the total portfolio. and is yielding about 19% in this quarter. The fair value portfolio is $1.7 billion, or 80% of the total portfolio, yielding this quarter 10.4%. And as you know from our discussions, that yield, of course, is a net of losses which are baked into that fair value calculation. The other significant component this quarter in the revenue is the markdown of the fair value portfolio of $4.4 million. This is related to adjusting the yield on some older segments of the fair value portfolio to match the yield of the paper we bought in the first quarter. So essentially we raised the yield on some older components of the fair value portfolio, and that results in a markdown of that portfolio. And now all the segments of the fair value portfolio are yielding at about the same percentage. Moving on to expenses, $55.2 million. is a 1% decrease compared to the fourth quarter of 56 million and an 18% decrease compared to the first quarter last year of 67.7 million. Especially year over year, significant reductions in categories such as interest expense and employee costs and other captions are lower due to somewhat lower volumes but also due to efficiencies that we've incorporated over the course of the year in the last couple of years. Provisions for credit losses, well, they're zero for this quarter. A year ago in the first quarter, we took a provision on their legacy portfolio, $3.6 million that was related to, at the time, expectations of higher losses due to the pandemic. And I'll talk a little bit more about the CECL allowance as we move down the schedule here. Pre-tax earnings for the quarter, $7.9 million. a 22% increase over the $6.5 million from the fourth quarter of 2020, and a 155% increase over the $3.1 million pre-tax earnings in the first quarter of 2020. Net income was $5.2 million, a 27% increase over the fourth quarter of 2020, and a decrease of $10.8 million, a decrease compared to $10.8 million in the first quarter of last year. You'll recall that in the first quarter of last year, We recorded a tax benefit of $8.8 million, which resulted from the CARES Act, the first sort of pandemic-related government action that resulted in this kind of one-time tax benefit, which flows through those net income numbers. Earnings per share, 21 cents for the quarter, 24% increase compared to the fourth quarter of last year, and a decrease of 53%. Again, the first quarter of 2020 included a 37th cent earnings per share benefit from that one-time tax benefit. Moving on to the balance sheet, our liquidity situation is very good right now. Brad's alluded to the strong credit performance, and that has this kind of whole trickle-down effect when the delinquencies are less, the losses are less. When the losses are less, more cash is distributed out of the trusts back into our coffers, and it assists us in running the company. We can use the warehouse lines less frequently, and there's just a lot of benefits that occur from better credit performance, and we're realizing those now. The finance receivables I mentioned, now 20% of the total portfolio. The allowance on the finance receivables, what we call the CECL allowance, is now 19% of that portfolio, so it's a very robust allowance for credit losses. Looking at the liabilities, lower warehouse usage due to somewhat lower volumes, but also our strong liquidity position. And the residual financing transaction is in sort of full pay down amortization mode down to $20 million compared to $37.9 million a year ago. Looking at some of the other performance metrics, net interest margin was $42.2 million for the quarter. That's a 7% increase. compared to the fourth quarter of 2020 and a 4% decrease compared to the first quarter of last year. The risk-adjusted NIM, which takes into account the provisions for credit losses on the legacy portfolio, also 42.2 million for the quarter and the same increase compared to the fourth quarter of 2020, but it's a 5% increase compared to 40.2 million in the first quarter of last year, because, as I indicated, we had that pandemic-related provision for credit losses in the first quarter of last year. Core operating expenses were $34.2 million for the quarter. That's a 4% increase over the fourth quarter of 2020, but an 8% decrease compared to $37.1 million a year ago. So we've had significant decreases in our core operating expenses. As I mentioned, employee costs are down in several other of those categories. The core operating expenses as a percentage of the managed portfolio, 6.4% for the quarter. That's up a little bit compared to 6% in the December quarter, the fourth quarter of 2020, and up slightly from the first quarter of last year also when it was 6.1%. And even though our costs are down, our portfolio year over year has shrunk considerably, and so we're looking forward to getting the portfolio growing again, and we'll see improvement in that particular metric. Return on managed assets for the quarter, 1.5%. That's an increase of 25% compared to 1.2% in the fourth quarter of 2020, and a huge increase compared to 0.5% in the first quarter of 2020, last year. The credit performance metrics and these numbers are just eye-popping in many regards. The delinquency was 7.8% at the end of the first quarter. That's down considerably from 12% in the fourth quarter of 2020 and also down considerably from 12.4% a year ago. In fact, this delinquency number is the lowest such number we've reported since the second quarter of 2015. Net losses for the quarter, very strong numbers, 6.3% compared to 6.9% in the first quarter of last year. Again, this is one of the lowest net loss numbers, quarterly net loss numbers we've seen since the fourth quarter of 2014. Part of what's contributing to these loss numbers in particular is the recoveries at the auction. 43% of our loan balance was recovered at the auctions for vehicles we sold in the first quarter of 21. And that compares a significant improvement compared to 36% in the first quarter of 2020 before the squeeze of the inventory, vehicle inventories have really impacted these numbers. Brad alluded to our 21A securitization we completed in January, 1.11%, the lowest blended cost of funds in CPS history. Again, it has such a positive impact. Putting those bonds on the balance sheet for a four-year life is very good for the company. It's really a second quarter event, but we also did our 21B securitization, just closed that a week or so ago. And that also had great execution for a blended yield of 1.94%. And with that, I'll turn it over to Brad.

Okay. So, you know, sort of trying to get a picture of where we sit today, given all the numbers we've just given you or given out, you know, we're in a very good spot. The pandemic, as much as it kind of ruined last year in many different ways for everyone and certainly us, it did give us a chance to sort of set up for the future, and that's what we've done, and I think the first quarter numbers sort of reflect that. I think if you're going to pick two words as we go forward this year, one is growth and the other is leverage. We want to get back to growing the portfolio, growing the company. That will be the focus the rest of this year, and leverage. We've tried to put in lots of automation. A few of the things we've done, we started using near-shore collections a while ago. We now use near-shore originations. along with the automation, we'd be able to cut back our workforce by 25% almost in the last year. Because of the pandemic, a lot of effort went into being able to work from home, so working remotely. That really was effective. We were able to do it without any loss. And so one of the things we'll look at again is cutting expenses, continue to work on the leverage. If we can have some amount of our folks work remotely, then we don't need all the commercial real estate that we have. So we can start looking at that. But we're going to, again, look at all those different things to try and get growing so we can increase the portfolio, while at the same time leveraging and lowering the expenses so we can produce better results. So we'll look at maybe those would be the pros of where we're going with this quarter and the next few. The cons are, again, the stimulus checks and everything else have been enormously helpful. As Jeff pointed out, the cash flows are super strong. We're building on more cash than we've had in multiple years. So we're going to be teed up in a good way. The question is, okay, will our automation, will our performance continue when unemployment stops, you know, when all the care checks stop? And so, you know, we think out of luck. Both those things should stop soon, which I think is good for the economy. And I think we've got enough things in place where we will do just as well anyway. Because, you know, we get the economy going, you know, that's going to help us as we intend to grow. Probably one other little negative would be that they're running out of cars. Shocking how that may sound. Good news there is the prices at auction should be very strong. Bad news is, you know, we need to have that get going again so there's enough cars out there for us and everyone else to finance. So, again, we'll kind of watch that going forward. But we think in the end, you know, with these very strong delinquency and loss numbers, very strong cash flows, the amount of automation we put in, We updated our scorecard in the first quarter. The results of that should be very strong. So we think there's a whole long list of positives. A few takeaways that might be slightly negative, but I don't know that they really put any slowdown on our progress going forward. In terms of the economy, obviously if they can stop unemployment, get everybody going to work, the economy should really kick off. Eventually we'll start worrying about inflation, but I think the foreseeable future is very good. We would like to sort of ride that wave the rest of this year. With that, we'll open up to questions.

The floor is now open for questions. At this time, if you have a question or a comment, please press star 1 on your touchtone telephone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up the handset to provide optimum sound quality. Our first question comes from Jeff Rowan with Jamie.

Good afternoon, guys. It's John, obviously. Hi, John. Hi, John. I just want to focus in on, you know, what the company looks like, where the profit comes from once we're done with the legacy portfolio, right? I mean, obviously, you're looking at cutting costs. You know, funding costs are down less ABS, but I just want a very simple model, right? you're going to have a portfolio that's going to yield 10%. Right now your funding costs are 4% and your operating expenses are 6%, which leaves no pre-tax income margin. Where in that model, what changes when the fair value, what in there is off when the fair value portfolio is the only portfolio and where do you get pre-tax profit margin from?

Well, the fair value portfolio is trending up, and the newer stuff that we put on is 11 in a couple of monthly cohorts, more than 11%. So they're going on between 11 and 11.2% individual monthly cohorts. And so that's a function of the structure of the receivables themselves, like what the coupons are and what the fees that we pay or charge the dealers, and the expected losses. So we are improving the top-line revenue generation of the fair value portfolios. And the other component, the big component that you mentioned, is really the operating costs as a percentage of the portfolio. And so, you know, that number, the infrastructure that we have in place can support a much bigger portfolio than the $2.1 billion or so that we have on the books. And so we expect to grow the business this year. We've done some things on the credit side of the business in terms of service levels and automation and pricing. that we think will allow us to grow the business significantly this year, and the corresponding servicing and operating costs are not going to increase proportionally. And so we think there's a lot of profit potential in the business model.

But that's just dependent on growth, though, right? Because, I mean, you need to generate that leverage on your operating expense base by growing the fair value portfolio from where it is today.

Exactly. As Brad said, that's one of our priorities, right?

Okay. Okay. When will the legacy portfolio finally run off? It seems like it's taking longer than we had kind of initially talked about.

Yeah, and that's what happens when you look at like a static portfolio that's just kind of sitting out there running off. You know, a lot of these consumers in these loans, you know, even though they have like a 60-month loan, they get to the end and it's like, well, I've got six more payments, you know, because I've been late, you know, often. And so more of their payments have gone to finance charges. And so the tail of these things tends to, you know, linger on for a while. But, I mean, it's down to $421 million. By the end of the year, it will be, you know, nearly insignificant.

Okay. Thank you very much.

You're welcome, John.

Our next question comes from Kyle Joseph of Jefferies.

Hey, good morning, Ed. Thanks for taking my questions. Just want to understand the fair value marks. I know you talked about it being attributable to kind of the yield enhancement you're seeing on the fair value portfolio. In terms of that yield enhancement, is that a function of higher gross yields or lower expected losses? And then would you expect any incremental yield fair value marks going forward?

Well, so any given period, we look at the receivables that we acquired this month, for example, right? And it's like, well, based on the APRs on those receivables and the fees that we charged or paid to the dealers and the expected losses, the IRR is, say, 11.1%, right? And what we've seen is that when we first started the fair value accounting back in 2018, we applying those same, you know, using the same formula and applying those same variables and assumptions, we got generally lower yields of, you know, between 9.5% and 10.5%. But as the business has just evolved, normal evolution during the last few years, we've been able to improve, and partially it's due to somewhat lower loss assumptions because the credit performance, even before the pandemic set in, we've been seeing significantly improved credit performance. And so we've been writing up the IRRs on these older cohorts to match the IRRs of the new business. And it's a combination of better, somewhat lower loss assumptions on the newer business, but also better APRs and pricing compared to what we were getting back in 2018 and early 2019. And the answer to your second question is, well, yeah, I mean, there's going to be from time to time in the future similar types of marks to the portfolio if the economics change, right? So like if the competitive marketplace is sort of static and we keep our guidelines and our pricing kind of the same, then we should have pretty much the same and our loss expectations are the same. We should have pretty much the same yields, which would not create much volatility in terms of marks to the older portfolio. But if we chose to be significantly more aggressive in the pricing, for example, then potentially that would have a domino effect going back to some of the older cohorts. Or if we drastically change the model, neither of these things I would expect us to do. But if we drastically change the credit profile, that would you know, impact the IRRs and the current business. Again, that potentially would roll back to the older stuff. But, you know, we don't, we make tweaks to the pricing and tweaks to the credit model. It doesn't move the needle very significantly.

Got it. And then, yeah, regarding credit performance, obviously been very strong, but, you know, with stimulus in the rear view, rear view mirror, you know, weighing in elevated used car prices and which should be an improving economy, how quickly do you expect credit to kind of normalize over the remainder of the year and into next year?

That's an interesting question. Certainly our hope is that we've done enough things right in terms of the paper we're buying currently and the automation we have and our strong collection efforts. you know, we won't really lose too much. But, you know, it's kind of like you hope for the best and prepare for the worst. So, you know, I think you'll probably – I would bet over the next – the second and third quarter, this call, by the end of the third quarter, it should be normalized, assuming they don't start sending out more checks. But, you know, there seems to be a lot more uproar about ending this unemployment. The amount of jobs open is crazy, you know, and going up. So you would think – Let's just assume over the rest of the second quarter that all stops to get people going back to work. Maybe it takes one more quarter to normalize. So you would probably expect the end of the third quarter for those numbers to be sort of what we'll call the real numbers that we're capable of providing.

Got it. Very helpful. Thanks for answering my questions.

Sure. Thank you.

You're welcome, Kyle.

And there are no further questions at this time. I'd like to turn the floor back over to Mr. Charles Bradley for any additional closing remarks.

So, I mean, that kind of wraps up our first quarter. You know, like I said earlier, I think it gives us a great position for the rest of this year. You know, assuming all things go the way we would hope they would, you know, we expect things to be good. We will be talking soon enough after the second quarter. Thank you all for attending.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until May 18, 2021 by dialing 855-859-2056 or 404-537-3406 with conference identification number 764-5419. A rebroadcast of the conference call will also be available live 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.