Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2022 Third 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 dependent 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 15th for further clarification. The company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, further events, or otherwise. With us here is Mr. Charles Bradley, Chief Executive Officer, Mr. Mike Lavin, Chief Operating Officer, and Mr. Danny Barwani, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Thank you and welcome to our third quarter conference call. It's nice to be able to say we had another extremely strong quarter. It's what we expected and certainly what we want to continue to do. I'll give you a few highlights and I'll turn it over to the guys. But one of the things we did and a lot of things we did, you know, timing is everything. And we renewed, I think we had mentioned in our last conference call that we renewed one of our lines, our ARIES facility in June. And we renewed that line and increased it from $100 million to $200 million. And we did the same thing in July with Citibank. We renewed and increased that line from $100 million to $200 million. So now we have $400 million in warehousing, and it's very nice to not be in the market right now looking for warehousing or trying to increase warehousing. So we're quite happy we accomplished that and got it done before the market started to change. Another interesting thing is the portfolio has been growing enough this year so that our core operating expenses have dropped below 6%. That's always been a target for us. We think we can do even better than that. I think our target now is to get them below 5%. But given the increasing size of the portfolio and the size of the company, a strong focus on those core operating expenses is very important, and it's nice to be able to say we're doing quite well at achieving those goals. Also, another highlight would be we did the July securitization or a securitization during July. As everyone should know, the cost of funds in the market have been going up. So we're pretty happy with that deal at about 6% all in cost. It was up a bit from the deal before. But nonetheless, the most important thing for us is to be able to sell our bonds in the marketplace, and there was strong demand, and we got the deal done easily. And thinking of the marketplace today, as everyone knows, everyone's worried about the economy. We're in some sort of potential recession. We have the Fed raising rates hand over fist. So we're trying to combat that as well, and we think we're doing the appropriate thing. By raising rates, we've raised our rates over 200 basis points in the third quarter. We've also cut the fees we paid the dealers across all deals too. The interesting part about that, and we've also tightened credit, and the interesting part is the business isn't particularly slowing down. So the demand for financing for these cars, remember that our number one customer is a person who has to have a car, not a person who's just lightly shopping for a car. So we would expect business to continue, but if it does and the Fed keeps raising rates, we're going to walk along and raise our rates just as quickly so that we can continue to try and maintain our margins. There's always a problem. Maybe the credit isn't as good, but our credit is performing quite well. Many of our competitors are still citing that they've gone back to pre-pandemic levels in terms of delinquencies and losses, and we're still well ahead of those levels. So we're very happy with where we sit in that circumstance as well. There's some more things to talk about, but I'm going to turn it over to Danny to go over the financials, and then Mike will go over the operations.

Thank you, Brad. Going over the financial results for the third quarter, our revenues for the third quarter were $90.3 million. That's up 10% over the $82 million we posted last June in our second quarter, and it's up 32% from the $68.6 million in our third quarter of last year. The main driver for the increase in revenue is the increase in our servicing portfolio, which is really now driven by the fair value portfolio. If you've been listening to these calls in the past, you'll remember that we switched over to fair value accounting five years ago, beginning in 2018, and that fair value component is now 96% of our total portfolio. That has grown. We'll talk about that more when we cover the balance sheet, but that has grown. 8% quarter over quarter and 41% year over year. And that is yielding 11.4%. You might recall, too, if you've been on these calls in the past, that the yield on our fair value portfolio is net of losses. So the 11.4% is after our expected loss assumptions. The legacy portfolio is now down to only 4% of our total. That's yielding 24%. Included in these numbers for the third quarter is a fair value mark of 8.2 million. That represents some losses, COVID reserves we posted back in the last year or two, where we are now realizing that these losses are not materializing. So we have 8.2 million of these reversals in our fair value portfolio that we didn't have last year. last year in the third quarter. Going over expenses, it's 56 million expenses in the third quarter compared to 47.8 in the June quarter and 49 million in the third quarter last year. That is up 17% over the sequential quarter and 14% year over year. Those results include a similar reversal for losses on our legacy portfolio that did not materialize In this case, it's $6 million of reversals of loss provisions in the current quarter compared to $1.6 million in the third quarter of last year. Looking at pre-tax earnings for the quarter, $34.3 million. That's up slightly from $34.2 million in our June quarter and up significantly from $19.5 million in the third quarter of 2021. For the nine-month period ending September, our pre-tax earnings were $97.9 million compared to $41.4 million. That's up 136% year over year. Similarly, our net income is $25.4 million for the current quarter compared to $25.3 million in the June quarter. That's up 85% from the $13.7 million we posted last last year. For the nine-month period, we're seeing a 151% increase in net income to $71.8 million compared to $28.6 million a year ago. Similarly, following these trends, our earnings per share is up to $0.95 for the current quarter. It was $0.52 in the third quarter of last year. That's up 83%. For the year-to-date period, $2.61 compared to $1.12 last year, which is 133% increase. Looking at the balance sheet, a couple of things of note. Our fair value portfolio, like I mentioned, driven by our originations rate for this year, which is at record-breaking territories. We're originating a large number of loans. We'll cover that later. But the fair value portfolio is up 8% over the June quarter and up 41% year over year. Brad discussed the increase in our warehouse capacity to $200 million, which we announced earlier this year. So our debt levels are up if you look at the balance sheet, but that's commensurate with the rise in our loan portfolio originations this year compared to last year. Looking at other metrics, our net interest margin is 66.8 million compared to 63.3 in June compared to 50.2 a year ago. That's a 6% increase over the sequential quarter and a 33% increase year-over-year. On a year-to-date basis, our net interest margin is 188 million compared to 140.2 million last year. That's a 34% increase. Our core operating expenses are $38.5 million in the current quarter compared to $37 million in June and $32 million last year. That's a 4% increase quarter over quarter and a 19% increase year over year. On a year-to-date basis, our core operating expenses are $113.6 compared to $100.4. That's a 13% increase. taking those core operating expenses as a percentage of the average managed portfolio. For the quarter, it's 5.8%. In June, it was 6%, so it's come down a little bit. It was also 6% in the third quarter of last year. On an annualized basis, it's 6.1% this year compared to 6.3% for the first nine months of last year. And finally, return on managed assets, For the quarter, 5.2%. That's down from 5.5% in June, and it's up significantly from 3.6% in September of last year. For the nine-month period, our return on managed assets were 5.3% this year compared to 2.6% last year. I'll turn the call over to Mike.

Thanks, Danny. And personnel and facilities, we're currently at 794 employees. We've fluctuated between 750 and 800 employees since we reduced our force during COVID in 2019 by 22%. 407 of those employees are in servicing. 247 are in sales and origination. The rest are in the support departments. I think it's important to note and very interesting to note that we originated $1.1 billion in originations in 2021 with roughly 750 employees, and we've blown by that volume in 2022 so far with the same amount of employees. We think that's a testament to our investment in new technologies leading to more personnel efficiencies, and I think it's safe to say right now and going forward we're at scale. In terms of our office leases, we've been quite fortunate to have four of our five leases come up for renewal post-COVID. So we've been able to leverage the sort of the commercial real estate crash to renew or relocate four of our offices. And we believe that'll save us between six to seven million a year to the bottom line. In sales, our record-setting year continues, albeit with a slight slowdown in Q3. In Q3, we originated 468 million, which compares to 548 million in Q2 of 2021. That's a 14% drop. But I think, as Brad noted earlier, the more interesting thing and the good news is that demand is still strong for our product. We had 653,000 applications in Q3. That compares to 615 applications in Q2, so it's a sequential increase of 6.2%, so the demand is still strong. So despite that dip, I think when you look at the year-over-year analysis, you'll see that we're in the middle of a record-setting year. In Q2 2022, we did 468 million, like I said, That compares to 326 million year-over-year. That's a 43% increase year-over-year. And in applications, you can see that we did 653,000, again, in Q3 2022, which compares to 436,000 year-over-year, which is a 50% increase. So, as Brad also mentioned, the slight drop in our sequential originations, Q over Q, was due to the aggressive nature of our raising rates and the fees. When you look at our originations for the entire year of 2022, you can really see the growth we've had. So far in 2022, we've originated 1.4 billion, and that compares to 818,000 over the same time period in 2021, which is a 71% growth rate year over year, which is a record for us. Some of the initiatives that we're concentrating on going forward is to maintain our rep force of 108, which we think is right around industry standard. We're still working to increase our dealer base upwards, which currently sits at 7,717. which we've grown 15% so far this year with our ultimate goal to get to 10,000. We're also looking to increase the number of funding dealers we have upwards, which currently sits at 2,740, which is a 30% increase year over year. We're also concentrating on large dealer groups, which has been a point of emphasis for us this year as another lever for growth. Switching and moving over to servicing, For delinquencies greater than 30 days, including our repo inventory, Q3 2022 ended up at 10.85%, which compares to 9.44% in Q3 2021. For annualized charge-offs, we ended up at 4.93% of the average portfolio, which compares to 2.82% for the third quarter of 2021. It's important to note that, as Brad mentioned, the pundits, the experts have all said that our competitors have pre-pandemic levels, and we're just not there. Pre-pandemic, we were running at 12.5% DQ. And as I previously said, we're running at 10.85% Q3, which shows that we're significantly beating pre-pandemic levels. In terms of our extensions, we are well positioned in that they are flat year over year and actually a tick below pre-pandemic levels. Those extensions are driven by artificial intelligence. In terms of our repos, they also ticked up a bit. sequentially, but we're still running 30% below pre-pandemic levels on our repos. In terms of the recovery market, we've recently seen quite a drop, but we're still above historical levels. In general, the Mannheim vehicle value index dropped in Q3 by about 10.6%. For us, our net recovery in January of 2021 was 41%. It climbed to the height of 64% in November last year, and it seems to be normalizing back into the mid-40s, currently at the end of Q3. A couple of miscellaneous things. We continue to build on our artificial intelligence and machine learning platforms in the quarter by entering into a few partnerships. That will allow us to further use the robotic process automation that we've concentrated on over the last three to four years. Specifically concentrating in originations and servicing that will allow us to do certain things like use bots to extract information from the dealer packages instead of utilizing the processors to do that. We think that will cut down the processing time. and allow us to fund the packages quicker to dealers, which is what they're looking for, a more frictionless experience with us. We're also expecting to use bots to listen in to collection calls and populate the collection notes, which we think will significantly cut down on the wrap time that the collectors use, which will allow us to make more calls per hour and collect more dollars overall on a monthly basis. Those are the type of things that we think are further bolstering our platforms and add into our credit decisioning algorithms, our collection behavior scorecards, and improve our overall performance and contribute to our efficiencies. So with that, I'll kick it back to Brad.

Thanks, Mike. So, you know, obviously we're doing a lot of things well. We've taken a lot of time. We've been doing this a long time, so one might expect we should be doing things well, and we are. Looking at the industry, certainly what the things going on in the industry are, everyone is doing what they can to madly keep up with the federal government raising the interest rates. We are, of course, doing the same. I think we've done a pretty good job of moving along. I think given how our credit performance has done very well, that we're in a pretty good position, all of our pools are doing great, but nonetheless, you just don't know what the next six months or nine months or year is going to involve. it's much safer to scale back, tighten credit, and raise rates. And we're doing all those things very efficiently and pretty quickly. And what's interesting is we're continuing to get a fair amount of volume. So if you get all those kind of rates, that's real good. With the CPI coming out today and being very positive and the market's kind of picking up on that, one might hope that sometime soon we get to the peak of this and maybe rates start to level off and so on and so forth. But nonetheless, we can't predict anything about that. We can just do what we can to stay in front of that curve. A couple things to think about, though. A lot of folks in our industry used forward flow agreements where they sold their loans to other folks who were just looking for more yield. So back when a basic yield was a couple points, a couple percent, these forward flow folks would pay 5%. Those games are all over now. So some companies who relied on forward flow commitments substantial amounts of their capital are probably looking around now trying to raise capital. We haven't done a forward flow program in decades, and we're not relying on any of that, so that's probably a pretty good plus for us compared to some others. Also, in terms of the investor market, we've also heard that many of the bond investors are looking towards concentrating what they're buying in seasoned long-term players like ourselves. with very good track records, rather than supporting new issuers or new people in the market. And again, I think that supports where we are. And of course, all these things mean the industry should tighten up. There's lots of good players, and I think lots of good players, including us, are all doing the right things. And to the extent there's some weaker folks out there, then they may get weeded out. They may have problems with raising capital or cost of capital and things like that. So, again, we haven't really seen any of that just yet, but we will certainly, as always, keep our eyes open for any opportunities that might evolve that way. But it's nice to be where we sit rather than trying to raise money or needing money in this particular market. In terms of the economy, as I said, the CPI today was very good. One might hope that that continues and maybe the Fed does, in fact, lay off a little bit. Either way, I think we'll continue to raise rates to keep up with the Fed rate-raising And eventually when it stops, we should be in a good spot. So overall, you know, the election results, we'll see if that calms anybody down as well. But again, nothing we can control about that. What we can do and we have been doing is we're running our company just exactly the way we want. We're looking to find ways to cut costs. We're looking for ways to become more efficient. We're looking for ways to grow in what is a slightly more difficult environment than it has in the past. But overall, we've now put together three super strong quarters for 2022. We're looking forward to do it again in the fourth quarter and close out the year as strong as we can. And then, you know, sort of be all set up for next year. So that's about all we have today. Thank you all for attending our call, and we look forward to speaking to you probably in February when we do the year-end call. Thank you.

Thank you. This concludes today's conference. A replay will be available beginning two hours from now for 12 months via the company's website at www. consumerportfolio.com. Please disconnect your lines at this time and have a wonderful day.