Consumer Portfolio Services Inc (CPSS) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2021 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 valuations of receivables because dependent on estimates of 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 10 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 now 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 third quarter earnings call. I guess, the simplest way to say it, we had a very good quarter. It's one of the best quarters we've had. It's about really having everything functioning really well across all points of the company: marketing, originations, collections, everything. So it's nice to see that when you start doing things right, you can get the reward, and so we did.

I'm just going through a couple of the highlights. Year-over-year, we had 232% earnings growth. The numbers are really starting to come through. I don't know, we'll continue to do that forever, but that was a real good growth number from year-over-year. And somewhat just as interesting is during the same period of time, we cut expenses 24%. So to be able to do both those things, I don't -- like I said, it doesn't get any better than that. Originations, we had 14% quarter-to-quarter, 87% originations growth year-over-year. Third quarter was the highest quarter since second quarter of 2016 and the second highest quarter in our company history of 30 years. So again, real good numbers there.

Not to be outdone, servicing continues very strong. Everybody is -- a lot of the -- there's a lot of talk about the pandemic and the stimulus. The stimulus is kind of over at this point, and yet our collection still remains very, very strong. So there's a lot of stimulus money, yet we still have a very strong DQ. Charge-offs were down 41% year-over-year. So it's easy enough to say we're doing an awful lot right on that category as well. We owe a lot of it to our -- we've added scorecards across the board in collections. So we have a lot of AI, a lot of alternative data that's really helping us direct us to how to get the best performance out of the portfolio. And I'll talk a little bit more about that later.

The securitization market is still very strong. It had another very successful securitization in the third quarter. And also, while we noted that we purchased just about 2 million shares out of the market. So again, we're trying to do what we can to increase our shareholder value.

I'll get into more detail on all those subjects after I let Jeff walk through the financials for you.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues, which were $68.6 million for the quarter. That's up 3% from our second quarter of this year and down 3% compared to our third quarter of last year. The 9-month numbers, $198.4 million, is down about 5% compared to $208.7 million in the 9 months of 2020.

And pretty simple breakdown of components of revenue. The legacy portfolio is yielding about 20%, but that's only about 13% of our managed portfolio right now, $287 million, continues to decline pretty rapidly as we move along. The fair value portfolio continues to grow. It's $1.9 billion, 87% of our total, yielding a predictable 11.1% this quarter. And as you know, that yield is net of losses. And so it's -- as I said, it's got the losses baked in. So we don't have the offsetting provisions for credit losses that we've had in the past with the legacy portfolio.

No fair value marks in the third quarter. So it's pretty straightforward from a sort of breaking down the revenue standpoint.

The expenses $49 million for the quarter. That's a 7% decrease from our second quarter of this year of $52.9 million and a 24% decrease over the third quarter of 2020. 9-month numbers, $157.1 million, is a 19% decrease in expenses compared to the 9 months of 2020. And across the board, we've had significant reductions in all these expense categories, significantly lower interest expense as the securitizations we're putting on are coming in at lower yields than the ones running off, no provisions for credit losses this year. In fact, we're going to talk about a reversal of provision in a minute here, which contributed to the earnings this quarter. We have lower headcounts and better all-around efficiencies, which has really contributed to the lower expense profile.

Provisions for credit losses was a negative $1.6 million. So this is pretty sure the first time in the history of the company we've actually rolled back a portion of the allowance. And as I've said, this legacy portfolio, the CECL portfolio, is winding down, it has a significant allowance for loan losses, first, because we established a lifetime loss allowance for this portfolio back in January 2020, and then we made some additions to that allowance during 2020 for the pandemic. And the reality is that portfolio is performing pretty well and its remaining life suggests that the allowance is more than adequate, which is why we shaved off $1.6 million of that allowance this quarter.

Pretax earnings were $19.5 million. That's a 40% increase over just the last quarter of $13.9 million and a 232% increase over the third quarter of last year. 9-month numbers, $41.4 million in pretax earnings is a 204% increase over the 9 months of 2020.

Net income for the quarter, $13.7 million, 41% increase over the second quarter this year and a [261%] increase over the third quarter of 2020. And year-to-date net income, $28.6 million is 63% increase over the 9 months of 2020. And when we look at these net income numbers, as I've said before, we do have -- last year, in the first quarter, we booked a tax benefit of almost $9 million, which came as a result of the CARES Act. And so that's kind of baked into those numbers from last year.

Diluted earnings per share of $0.52 is a 33% increase over the $0.39 from our second quarter this year and a 225% increase over the $0.16 we posted in the third quarter of 2020. Year-to-date number is $1.12 for the 9 months ended September of this year compared to $0.74, a 51% increase over the first 9 months of last year.

Looking at the balance sheet. The better-than-expected credit performance continues to contributed to a strong liquidity position, and we're getting significant releases of cash out of the trusts as those wind down. That's allowed us to rely somewhat less on the warehouse financing, which also helps the P&L from a lower interest expense. And then you'll recall, back in the second quarter of this year in June '21, we did raise $50 million in a residual financing at a very attractive rate. So the balance sheet and liquidity position is very strong. The legacy portfolio, as I mentioned, continues to wind down. And the remaining allowance on that is about 24%, which is why, as I said, we were able to shave off about $1.6 million of that this quarter.

Moving on to some of the other performance metrics. The net interest margin for the quarter was $47.8 million. That's about flat with our second quarter of this year, but a 4% increase compared to the third quarter of last year. And the 9-month net interest margin of $90 million is a decrease of 31% compared to the 9 months of last year.

But you'll recall that last year, we booked where we were paying significantly higher blended interest rates on the securitization trust debt compared to what that has come down to. For instance, this quarter, the ABS cost was 3.4% compared to 4.4% in the third quarter of 2020.

Core operating expenses for the quarter, $33.9 million, is flat with our Q2 this year and up just a little bit compared to $32.5 million in the third quarter of last year. And 9-month number, however, is $68.1 million in core operating expenses this year is a 34% decrease compared to the same period of last year, the same 9-month period.

And this is where we've had significant improvements in operating leverage, some of the technology and efficiencies that we've been incorporated have really improved that particular metric. As a percent of the outstanding portfolio, those core operating expenses were 6.4% for the quarter. That's flat with our second quarter this year and up just a little bit compared to 5.7% for the third quarter of last year.

And one thing to point out is, although we've kept our operating expenses relatively flat year-over-year, our portfolio has actually shrunk. Even though we had a very good originations quarter during this last quarter and originations this year have been steadily increased.

We had low originations throughout 2020 and that has contributed to a year-over-year smaller portfolio, which makes this particular metric go up year-over-year, even though the costs have come down or stayed about the same.

Return on managed assets for the quarter pretax, 2.6% and that's flat compared to our second quarter of this year, but a 160% increase over the 1% that we posted in the third quarter of last year. And the 9-month numbers of return on pretax -- pretax return on the managed portfolio was 2.1% compared to just 0.8% last year. And so this incorporates everything, of course, and you've got gains, improvement in the spreads from the lower cost of funds.

And of course, last year, we also took marks on the fair value portfolio. We added increased credit protection on the legacy portfolio and had really had none of that this year.

Looking at some of the key credit performance metrics. Delinquency was 9.36% at the end of this quarter. That's up seasonally from 828% in the second quarter but down significantly from 10.3% in September of 2020.

down significantly from 10.3% in September of 2020. The net loss picture is really positive, 2.8% for the third quarter. That's just up a little bit compared to 2.79% in the second quarter of this year, but down significantly from 6.39% for the third quarter of 2020. The 9-month number is also very positive, 3.85% for the 9 months so far this year. That's down significantly for the 9 months of 2020 where it was 6.93%.

We continue to do very well on liquidating vehicles at the auction. 57.8% of our loan balances are being recovered at the auction. That's up from 45.1% last year. And last year's numbers were great. And so these numbers are -- continue to be very good. It's well known that there's a sort of a vehicle shortage, and it's driving up these values at the auctions.

A quick look at the ABS market. Our third quarter securitization was completed in July of '21. Continued strong demand pretty much across the stacks of the layers of tranches that we securitize, resulted in a blended yield of 1.55%, which is the second lowest in our history. So we continue to see good demand for our bonds and we expect that to continue here in the near future.

With that, I'll turn it back over to Brett.

Thank you, Jeff. So I just want to focus on a few of the things that sort of are working for the company. We've highlighted them, but maybe in a little more detail.

In terms of originations, one of the things we did, even though our application rate was relatively flat, we still were able to increase our originations. Again, we're using a lot more of our Gen 7 scorecard, which relies heavily on AI and alternative data. And so we're getting -- we got a 17% growth year-over-year, even though apps were kind of flat. And so that's directly related to the ability to sort of dig into the customers and figure out which ones we should buy. And it's just become very effective and works very well.

Another thing that's coming on is the inventory issues. And I think that's caused a lot of people to get a little more competitive. We've cut our APR to play in that game a bit, and it's worked. I think when inventory issues subside next year, that will give us substantial growth increases just because the inventory will be there, plus probably the APR market will be a little less competitive.

Let's see what else we got. We're still -- things we're trying to do, we're still trying to drive to get our dealer base. We're around 8,000. We want to get it to 10,000. All these things will help. But the better scorecard -- and then we're about to send out our Generation 8 scorecard. It's in the works, and we think that will be even more effective in terms of using these outside metrics to sort of pick the best customers and continue our growth.

Looking at collections, again, it's still the AI and alternative data. But this collection scorecard, it's so much more effective. And we put that in last year. And so, now it's really sort of gotten to the point where I think it's working very effectively in terms of who should we call, when should we call and how should we call a customer. And as a result of that, we do have much better contact, much better feel for the customer and what's coming on. They get lower repossessions, better collections.

Same thing, we now have an extension scorecard using the same kind of model and also we use text messaging to a far greater extent. So we're really trying to use as much technology as we possibly can. And before, I don't know, a few years ago, the focus was much more on originations in the front end. And now we've been able to focus on the back end in terms of collections.

And I think we're really seeing results. People -- a lot of people are saying because of the stimulus packages and all of this, you're going to have these great results. We're beginning to hit the market, some folks' results are beginning to go the other way. So it's very nice to see that ours are not.

We have flat delinquency way better charge-offs. So we're actually, at some level, bucking the trend or bucking the market, which, again, we think will pay off handsomely down the road.

Also during the pandemic, we were able to, I think as we said in the last call, focus on efficiencies. You can see that by the amount of expenses we've cut. We think, we'll continue to do that, but we've experimented with hybrid occupancy in terms of people being in the office and out of the office. That went with very good results.

I think down the road as we can focus on occupancy costs, all those things come into play. So we're doing a lot of different things that really are going to help as we continue to do things in the future.

As Jeff mentioned, the securitization market is still very strong. No problem getting deals done. Cost of funds remain low. So that's again a plus. In terms of the industry, like I said, it's fairly competitive. I think the lack of inventory is probably the strongest indicator of that. I think people are -- a lot of people really need to grow. We don't have to grow.

We just happen to be growing very well. So I think, again, when that sort of supply line loosens up, things will get better.

The other interesting thing in the industry is the acquisitions. A few of our fellow competitors have been purchased recently, and they've been getting very good values on those purchases. So we hope that will rub off on us at some point. I think time will tell, but it's certainly becoming a little more interesting market.

I think people are beginning to realize the benefit of these platforms. And obviously, we've been here a long-time, and our platform is very well built and becoming more successful by the day.

I also mentioned we bought that stock, the 2 million shares. We've actually bought another 0.5 million shares this quarter. So our last thing to mention or focus on is shareholder value. I think, we're trying to do what we can. The disappointing thing is today, after putting out these great numbers, the stock price is down.

It's very, very frustrating for us. We're going to continue to do everything we can to improve shareholder value. We're certainly an active purchaser of shares in the market. We will continue to do that until we see something change.

With that, we'll open it up for questions.

(Operator Instructions) Our first question comes from Kyle Joseph with Jefferies.

Congratulations on a good quarter. I just -- I know you touched on that, but just give us your sense for -- outlook for used car prices, obviously, had another uptick recently. When do you think supply chain kind of thaws and we get a normalized new car supply and what you're thinking about for 2022 on that front?

Again, we're sort of crystal balling a little bit, but my guess is the supply chain improved dramatically going into the first quarter. I think most of the manufacturers realized that 2021 is kind of shot. I wouldn't put it past them to slow play the rest of the year, so they have a real good year next year.

So that's my sort of bet on the market. But one would think, one way or another, that supply chain will ease up in the next 3 to 6 months. So that, again, would give them plenty of time to have a pretty good year next year compared to this year. It's fairly hard to tell, but at least in looking at what we see, that's what we would think.

I mean the used car prices are still strong. They had another -- as Jeff mentioned, the auction prices are still strong. Again, I don't think that's a huge effect on us. It certainly probably does affect, as I mentioned earlier, the front-end sales of the business. It's a tight market out there because everybody wants to grow and everybody is buying cars.

So it's a little interesting, you'd almost think the market for financing the car would be dropping off because of the lack of cars. Remembering that most of our cars are used, as much as they're more expensive, they're still out there finance. And so I think that part of the market stays strong, and then as new cars come in, it slows down some or sort of normalizes.

So I would guess new cars pick up in the first quarter next year. And then at that point, you'll see the used car market start to normalize back to where it should be.

Got it. And then just one follow-up there. Jeff, just remind us what the remaining life on the legacy portfolio is at this point.

So that portfolio is seasoned [58] months already, okay? And so it's got probably a remaining expected life of not much more than 12 months. There's always a tail, some of these loans kind of tail out for more extended period. But it's clearly rounding third heading for home.

And I will turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. As I said earlier, we were very pleased with the quarter. We just want to keep doing what we're doing and hopefully get people to notice, we want the stock market to notice and start having things happen. So like I said, the acquisition market seems to be heating up some. I think that's a plus. We think that's a benefit for the industry, a benefit for us.

All we can do is keep what we're doing, which is produce really good results and becoming more efficient every day. Thank you all for joining us, and we will talk to you probably in February. Thank you.

Thank you. And this does conclude today's teleconference. (Operator Instructions) Please disconnect your lines at this time, and have a wonderful day.