Consumer Portfolio Services, Inc.

This is the operator. Today's conference is scheduled to begin shortly. Please continue to stand by. And thank you for your patience. Thank you. Thank you. Thank you. 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 risk 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.

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. 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. So we were kind of, you know, off to the races anyway. To finish the quarter with that kind of a number was terrific. And those numbers, you know, should continue. So we're very happy about all that. Pre-tax 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. And on the other side, net charge-offs were 3.3% versus 6.3% a year ago. So, again, even with the growth and everything else, our collection operation is still performing very, very well. And all 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. Auctions still remain high. Our recoveries at 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.

Thank you, Brad. Welcome, everybody. We'll begin with the revenues for our first quarter just ended. We're $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 of 2018, is $2.1 billion, 92% of the total portfolio, yielding this quarter about 11.7%, which, as you know from hearing this before, is net of losses. 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 revalued 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 is flat with our fourth quarter of last year and down 18% from $55 million in expenses in the first quarter of 2021. The 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 or 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. Pre-tax 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 pre-tax 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 percent increase of 5.2 million in net income a year ago. Diluted earnings per share, 75 cents for the quarter, 6 percent increase over the fourth quarter of 21, and a 257 percent increase compared to the 21 cents we posted in diluted earnings per share a year ago. Moving on to 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 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 balance. 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 of the 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 ABS interest cost a year ago. Core operating expenses for the quarter which exclude the interest and 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 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 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% at December of 2021 and 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 2022B securitization, the largest in our company history, at just under $400 million. And so, you know, we're pleased with the continued liquidity in those markets. And with that, I'll turn it back over to Brad.

Thanks, Jeff. So 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 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's easier. One of the big things we did recently is we added a non-prime program, which we happened to call Meta, and then Facebook copied us. But nonetheless, that's our new program, and it's been very successful. And 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 it also helps in terms of what we offer the dealers. So by adding that program, we've been able to sort of 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. So, you know, of course, we are adding as many new marketing 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 more people in the field and also just getting that dealer network into the sort of large double digits called 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 as easy as possible for our dealers and our marketing reps 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 gonna buy it, knows we're gonna 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 in the dealerships that we back up what we buy and we buy it quickly. So again, that's one of the big reasons, the deeper penetration, the more full service. Move on to originations and 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. 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. I think we're pretty far ahead of the curve in a lot of folks in terms of how we process deals, what kind of deals we can buy, and also, in some big way, being able to work with the dealers to structure deals that work both for the dealers and work for us and the customers. Moving along to collections, we mentioned a few quarters ago that we've 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 readily admit that this is 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, you know, one thing. But that stopped. There really hasn't been any new money handed out to, you know, the folks and everything in a long time. And yet our collections is still performing extremely well. You know, that leads one to believe that, you know, 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 really always expected them to normalize. And as much as ours have normalized a little bit, if you peek 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 DQs up some, 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 it has been in the past. So there are no new entrants. There hasn't been any new entrants in a long, 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 are maybe changing what they're doing a little bit here and there. So, again, we can't, you know, prove that out for a fact. But, you know, the fact of the 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, you know, putting us in a very strong position to add dealers, to grow the business, you know, to continue to, you know, deeper penetration of the dealership base and also expanding it. So with the products we're adding and the ease of 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 the one hand, it does help us with the auction values and recoveries. 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. They're not 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, you know, 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. When the car breaks down, they need a new one. And so we think our market will remain strong. The other thing, of course, is the interest rates are going to go up, you know, slightly at first, but, you know, depending on what the Fed does, we'll have to see. But, you know, being the size that we are and sort of the efficiencies we have, We think actually that doesn't hurt us. Certainly it tightens our margins a little bit, but our margins have 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. 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, given our cash position and everything else. It'll 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. Now, one of the reasons those happened is hedge funds, insurance companies, whoever it was, needed higher interest rates, and so that was one of the ways they obtained them. by buying, you know, bulk purchases or car loans from, you know, like competitors like us. We've never done that. But now with interest rates going up, we think, and it's certainly quite possible, a lot of those forward flow programs disappear, which means more and more cash will be 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 and 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 know, 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 certainly if the first quarter is an indication, you know, we've put all things in place to be very successful. You know, 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.

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.