Consumer Portfolio Services, Inc.

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 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 for their 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, and welcome to our fourth quarter and full-year earnings call. It's nice to be able to say for once that the numbers really speak for themselves. We had a great year. Looking at the fourth quarter, we finished very strong. December in particular, normally December, even November and December, tail off somewhat substantially in a year. In 2021, December was a great month. It was the best month of our entire year in terms of originations and the second best originations month in the history of the company. So, whatever we've got going is continuing for sure. Looking at the whole year, as I said, it's the best year in company history. We grew the portfolio 54% originations, 54% year over year, which could be a little expected because of the pandemic. We also grew it 14% over the 2019 numbers. The industry... I think it's – I'm going to talk about this a bit more later, but finally it appears our industry is getting some respect on Wall Street. There's been a lot of M&A activity. So suddenly – or not suddenly, I guess, but certainly during 2021, it appears people are realizing the value of subprime platforms and how resilient the subprime auto industry really is. These are all great things for 2021 and should be great things for the future. Also, of course, the stock market finally has appreciated the company. Our stock has done very well for the year and very well lately. And again, I'll talk more about that in a little bit. So first, I'll let Jeff run through the financials.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues, $69.4 million for the fourth quarter. That's up 1% over our third quarter of 2021 and up 11% over the fourth quarter of last year. full-year revenues 267.8 million is down just 1% from 271.2 million for the full year of 2020 and so we still have you know kind of this bifurcated portfolio a little bit the legacy portfolio which is yielding 18% is now only 237 million or 11% of the total portfolio the fair value portfolio representing everything we've originated since 2018 is 1.9 billion dollars 89% of the total yielding 11.3 percent in the fourth quarter. And remember that that yield is net of losses. And there were no marks to the fair value portfolio in the fourth quarter. Moving on to the expenses for the quarter, 45.45 million, down 8 percent from 49 million in our third quarter of this year, and down 20 percent from 56 million in the fourth quarter of 2020. Full year expenses, 202.1 million, down 19 percent from $251 million in the full year of 2020. Now, we've seen year-over-year and even quarter-to-quarter reductions in many of our expense categories due to efficiencies. We've certainly had lower interest expense because of the way the asset-backed market has evolved over the last couple of years. And this quarter, we had somewhat unusual entry, $13 million credit, if you will, and negative expense for the provision for credit losses. And that obviously was a big favorable component of the results for the quarter. That $13 million compared to zero in provisions for credit losses a year ago, so you can see the difference that that impacts year over year. Pre-tax earnings, $24.4 million for the quarter. That's up 25% from the September quarter this year and up a whopping 275% from $6.5 million in the fourth quarter of 2020. Full year pre-tax earnings, $65.8 million, up 227% compared to $20.1 million for the full year of 2020. Net income for the quarter, $19 million. That's up 39% compared to $13.7 for the third quarter of 21, and up 300 and some percent compared to $4.1 million in net income for the fourth quarter of 2020. Full year net income, $47.5 million. which is 119% increase over the full year of net income of 21.7 million in 2020. Diluted earnings per share for the quarter, 71 cents, 37% increase over the 52 cents we put up in the third quarter this year, and a 318% increase over the 17 cents we posted in the fourth quarter of 2020. Full year diluted earnings per share, $1.84, nearly double a little over double the 90 cents that we posted for the full year of 2020. Moving on to the balance sheet, we have a strong liquidity position due to the really great credit performance, not just in the quarter, but really over the last 24 months or so. That has allowed us to rely somewhat less on the warehouse lines. We do have two $100 million warehouse facilities, but we're able to use a lot of our own cash on hand, further minimizing our interest expense. On the balance sheet, we have that residual financing facility. It's actually two facilities, but the one is down to $3.7 million, and that will be fully repaid very soon, probably sometime here in the first quarter. Moving on to some of the performance metrics. The net interest margin for the quarter was $52.4 million. That's up 10% compared to $47.8 million in the third quarter this year and up 33% compared to $39.5 million in the fourth quarter of 2020. Full year net interest margin $192.6 million, 13% increase over $169.8 million for the full year of 2020. So you've got a couple things going on here. Primarily, the blended cost of all of our ABS for the quarter was 3.4%. compared to 4.4% in the fourth quarter of 2020. So it's been happening as each successive quarter really over the last probably year and a half, almost two years, is the ABS deals that we're putting on are at lower blended costs than the stuff that's retiring in the older pools, and it's driving those rates down almost every quarter. Core operating expenses for the quarter, 41 million. That's a 21 percent increase over the $33.9 million in the third quarter of this year and a 24 percent increase over $33 million for the fourth quarter of 2020. Full-year core operating expenses, $141.4 million, a 4 percent increase over core operating expenses for 2020. Core operating expenses as a percent of the managed portfolio, 7.5 percent for the fourth quarter up slightly from 6.4 in the third quarter of this year and up a little bit from 6 percent in the fourth quarter of last year. Full quarter core operating expenses is a percent of the managed portfolio, 6.6 percent compared to 5.9 percent for all of 2020. Return on managed assets for the quarter, 4.5 percent, which is a 73 percent increase over the 2.6 percent from the third quarter of this year. and a 275% increase over 1.2% for the fourth quarter of 2020. Full year return on managed assets, pre-tax return on managed assets, 3.1% compared to 0.9% for the full year of 2020. Again, for the fourth quarter, significant benefit from the $13 million in reversal of prior provisions for credit losses. I might say also that that Even with the $13 million reduction in the allowance for credit losses on that CECL portfolio, that legacy portfolio, the remaining allowance for loan losses on those loans is something like 24%. So we still have a robust allowance for loan losses on those older receivables. Credit performance metrics, the delinquency at the end of the year was 10.5%. That's up kind of on a seasonal expected basis from 9.4% at the end of September, but down from 12% at the end of last year. Net losses for the quarter, annualized net losses, 2.57%. That's less than the 2.82% for the third quarter of this year and significantly less than 5.18 for the fourth quarter of 2020. Full-year annualized net losses, 4.7%. That's a significant reduction from the full-year annualized net losses of 6.5% in 2020. And what's really been a significant component of the story of credit performance over this full year, the auction liquidation percentages for the fourth quarter, we got 63.3% of our loan balances at the auction compared to 41.9% a year ago in the fourth quarter. So that, as I said, is part of the story for sure. Record high returns at the auctions. Looking to the ABS market, our fourth quarter ABS transaction, 2021D, was completed in October, and we observed somewhat softer demand in some of the bond tranches, but the low benchmarks still resulted in a very low 2.10% blended yield. And then more recently, just last month in January, we did our first quarter transaction, 2022A, and we saw somewhat improved demand across the stack, but with the somewhat higher benchmarks and spreads, still got a very attractive low blended cost of funds of 2.56%. And with that, I'll turn it back over to Brad.

Thank you, Jeff. So let's start looking at a few things. For many reasons, 2021 was a great year. Sort of looking at where we stand, probably the first thing is looking at market originations, and it's easy enough to say it's all about growth. As I mentioned earlier, we grew the portfolio substantially. We grew originations substantially in 2021. You know, as much as the market, there's lots of good things. There's stimulus help and everything else. But the real trick here is, as we continue forward, is to grow. And so we grew a lot in 2021. As I mentioned, December was the best month of the year and the second best month ever. And that month was around 119, just shy of 120 million in a month. But if you look at the year as a whole, we only averaged around $95 million a month. We have continued from December moving exactly that kind of trend. So to the extent we can stay in that $115 to $120 a month range, originations are going to grow, the portfolio is going to grow, and down the road, that's what's really going to help the stability and the growth and the earnings expectation of the company. So very strong. We are expanding significantly. Our marketing base with people, we're expanding our dealership base across all states. That program is going very well. It was a little slow during the pandemic, but towards the end of the year and now, it is really starting to kick off. And again, that would be the key to how we continue the growth trends. Also, during the pandemic, we had the stimulus, and that certainly helped lots of customers and everything else. But actually, you know, it's been a tough market because there weren't any cars. So one of the things we've always said, and certainly has been borne out in 2021, is our customers, when they need a car, they go get a car. They need it to drive to work. And so that's a fundamental reason why our business has continued to do well, even through the pandemic. Also, we should point out that our scoring model, we're working on our seventh-generation scoring model. It's producing great results. We're able to sort of tweak it to get into different segments of the market. We're probably going to put out our eighth-generation scoring model in a few months. It's, again, one of the core reasons things are doing so well. So looking at collections for a minute, as Jeff pointed out, our DQ and our losses are doing great. One might have thought that after all this money sort of stopped flowing that things would change. But it really has, and our performance continues to be good. We're really trying to stick to our basis of not having high LTVs. We want to make sure the customer is in the car the correct way. It makes it easier to collect. It'll make it easier to collect down the road when those recovery rates go down. But all things are working very well there. We do, as we mentioned, I think, in previous calls, we added some near-shore servicing. It's a little better economically, but it gives us even more ways to attack the portfolio. That has been very effective, and our collection scoring model is also very effective, so we know who to call, when to call, how to call. All of that in 2021, as I think I mentioned in previous phone calls, when things slow down a little bit in the pandemic because of different things, you have time to look at different areas, fix them, rebuild them, make them better, and we certainly did that in all of 2021. We expect that to pay off handsomely in 2022, but again, mostly in the fourth quarter and the late third quarter, we saw a lot of these things really work. As I said, there wasn't really any more government money coming, yet we were able to still grow the business, keep the performance where it was, if not even improve it even still. Normally, the fourth quarter is not a strong quarter. It was a very strong quarter for us in 2021. We still, as Jeff pointed out, we have the strongest cash position in the history of the company. We raised $50 million of extra money during 2021. Looking back, we might not have needed to do that. But, however, you know, the best time to raise money is when you don't need it, so we did. I think that will give us a very strong position going forward. That cash continues to build, even in a sort of less government-helpful environment. So it should be very good. So we're now transitioning over to look at the industry. This is probably the most interesting part of what we're doing today. As I mentioned, our industry is suddenly back in favor in many ways. One of those ways is by some M&A activity that's happened in the industry. People have bought some of the platforms. People have mentioned they want to buy a platform. Some dealer groups out there have recently said, very recently, they're interested in buying a platform. The fintech surge is also very interesting. Everybody's all interested in fintechs that might want to buy a platform. What's a little bit interesting to us is we basically are a fintech that nobody realizes. We've had our own black box for 25 years. We've had the ability to use our data, not other people's data, not other data you've found, to make our model very, very effective. But with the interest, with the fintech and, you know, the platform interest, you know, being done, and the valuations some of these companies are getting on both sides of that equation, you know, I think it's paying off in our stock price. Certainly it shows in that way. But, you know, if this all continues, it's a good thing for us. One of the things to mention is, you know, No one's really entered our industry in almost 10 years. A few have, but only in a small way. And so, you know, there's real good barriers to entry now. The extent people want to expand, get a finance part, you know, we're in a good spot for all those things. Again, looking at a pandemic, as I mentioned, the cash balance for us will be very important. You know, I think the transition as the car market heats up again will only help us. It'll have more cars to sell, more cars to finance. Again, you know, the fact that we were able to get through what, you know, was a relatively challenging time for other reasons in terms of work from home and things like that. You know, I think many things that happened during the pandemic benefited us quite greatly. And so a lot of that was seen in 2021. But again, I think it's really showed across all things. It shows that our model works. It shows that the way we do things, both in terms of marketing originations, in terms of collections, you know, are all very strong. As Jeff pointed out, the securitization market remains very strong. You know, the fact that we have a lot of cash gives us a little more of the flexibility in terms of how we do securitizations and when we do securitizations. And again, I think going forward, that helps too. So, you know, It's been interesting. And looking at the future, certainly the economy and world events will always be a major factor in how we fare in the world. I think, again, things should be okay for a while when the supply chain unlocks and things get going. We should have a very good year for the next couple. Our goal, after building on 2021, is to continue to do that, continue the growth, continue to use a collection model, our origination scorecards to produce the best products we possibly can, and more importantly, get bigger. Our portfolio is somewhat shy of $2.5 billion. And our goal is to, you know, double that in a few years. And the way you do it is to have a model that works, to have an organization that works, and to use it and grow it. So, you know, those are the goals we have. You know, at this point, you know, it's all systems, full speed. You know, we're probably certainly in the 30-year history of the company. We're in the best position we've ever been in. The overall markets seem to recognize our industry and give us some credit for it finally. So, again, let's see what we can do with that going forward. So that will open it up for questions.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask while you pose your question that you pick up your handset to provide optimum sound quality. Again, that is star one to ask a question. I'm not showing any questions in the queue, sir. Oh, I'm sorry. We just have one from Sam Ellis with Auto Experience. I'm sorry. Sir, 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, and sort of in the details, you know, 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 two hours from now until February 22, 2022 by dialing 855-859-2056 or 404-537-3406 with the conference identification number 931-9729. 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.