Q1 2021 Consumer Portfolio Services Inc Earnings Call
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Good day, everyone and welcome to the consumer portfolio of services 2021 first quarter operating results conference call.
Today's call is being recorded before we begin management of the asking you 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 for forward looking statements statements regarding current historical valuation of receivables because dependent on estimates of future events are also 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 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 what's.
With US here now is Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Fritz Chief Financial Officer of cars.
<unk> portfolio of services I will now turn the call over to Mr. Bradley.
Thank you and welcome everyone to our first quarter conference call.
Oh, I think the easy way to look at it we had a nice quarter, where it really well if you compared to last year's first quarter, we had an excellent quarter, but you know again last year was the different kind of year were really more interested in getting back on track.
Sort of our general growth mode, and sort of forget about last year's pandemic problems certainly given the circumstances and 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. Its also helped performance tremendously. So we sort of the calculate a little bit about how much of that is an impact from the government of how much of it is us doing things well and as we go for obviously, we think of lot of that is because we're doing quite well.
Well, but we will see is and time will tell.
Bunch of things, we have been working on the work done a lot of last year like automation and improving the processes. All of those are having a strong effect on how we go forward this quarter and the rest of the year.
In terms of a b S. 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 of the kind of deals people were able to get done certainly of them. So 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 gonna be the enhancements can be very helpful. For the remainder of this year the government stimulus checks.
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 day delinquency in our charge offs. So you can see by the performance numbers you know as long as those checks keep coming of performance numbers are going to be very very strong and should continue that way. So that's also a very good thing.
This is more of the specifics of what we expect for the quarter over the next few quarters. After we go after I have Jeff go through the financials.
Thanks, Brad welcome everybody well 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.
Two fair value accounting of the portfolio. The legacy portfolio was only $421 million or 20% of the total portfolio and is yielding about 19% in this quarter of the fair value portfolio was $1 7 billion or 80 per cent of the total portfolio, yielding this quarter 10, 4% and as.
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 of this quarter and the revenue is the mark down of the fair value portfolio of $4 $4 million. This is related to adjust.
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 for the yield on some older components of the fair value portfolio and that results in a mark down of that portfolio and now all of the segments of the fair value portfolio are yielding at about the <unk>.
Same percentage.
Moving onto expenses $55 2 million as of 1% decrease compared to the fourth quarter of $56 million in an <unk> 18 per cent 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 cost and other captions are lower due to somewhat lower volumes, but also due to efficiencies that we've incorporated over the course of the of the year in the last couple of years.
Provisions for credit losses, while the zero for this quarter.
A year ago in the first quarter, we took a provision on the legacy portfolio of $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 Cecil allowance as we move down to the.
The schedule here pre tax earnings for the quarter $7 $9 million of 22% increase over the $6 5 million from the fourth quarter of 2020, and 155% increase over the $3 1 million pre tax earnings in the first quarter of 2020 net income was $5 $2 million of 27% <unk>.
<unk> 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 and Youll 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 onetime tax benefit 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 of 37%.
Earnings per share benefit from that the onetime tax benefit.
Moving on to the balance sheet.
The liquidity situation is very good right now of Brad's alluded to the strong credit performance and that has this kind of hole.
Trickle down effect when the when the delinquencies are less the losses are less when the losses are less more cash.
Distributed out of the trust back into our coffers and assist us in running the company. We can use the warehouse line, so less frequently and Theres just a lot of benefits that occur from.
From better credit performance and we're realizing those now the finance receivables I mentioned now 20 per cent of the total portfolio the allowance and the finance receivables.
The system, what we call the seasonal allowance is now 19% of that portfolio of supposed to very robust allowance for credit losses.
Looking at the liabilities.
Lower warehouse usage 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.
The other performance metrics net.
Net interest margin was $42 $2 million for the quarter, that's the 7% increase compared to the fourth quarter of 2020 and of 4% decrease compared to the first quarter of last year.
The risk adjusted NIM, which takes into account the of.
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 of 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 the our core operating expenses as I mentioned employee costs are down and of several other of those categories. The core operating expenses as a percentage of the managed portfolio six point for.
Per cent for the quarter, that's up a little bit compared to 6% in the December quarter of the fourth quarter of 2020.
And up slightly from the first quarter of last year also when it was six 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 of growing again, and we will see improvement in that particular metric.
Return on managed assets for the quarter, 1.5% that's.
An increase of 25 per cent compared to one 2% in the fourth quarter 2020, and a huge increase compared to <unk>, 5% in the first quarter of 2020 last year.
The credit performance metrics and these numbers.
Or just eye popping in many regards the delinquency was seven 8% at the end of the first quarter, that's the 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 of we've reported since the second quarter of 2015.
Net losses for the quarter.
Very strong numbers six 3% compared to six 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.
Whats part of what's contributing to these loss numbers in particular is the recoveries at the auction 43% of our loan balances recovered at the auctions for vehicles, we sold in the first quarter of 'twenty, one and that compares a significant improvement compared to 36% in the first quarter of 2020 before the kind of the squeeze of.
The inventory the vehicle inventories of really impacted these numbers.
Had alluded to our 'twenty one a securitization we completed in January.
1.11%, the lowest blended cost of funds and Cps history.
Ken there's really the.
The test such a positive impact of putting those the bonds and the balance sheet for a four year life is a very good for the company.
It's truly a second quarter event, but we'd also did our 'twenty one be securitization just closed out a week or so ago and that also had great execution for a blended yield of 1.94%.
And then I'll turn it over to Brad.
Okay, so sort of trying to get a picture of where we sit today given all of the numbers. We've just given you are giving out of.
You know one of very good spot the.
<unk> as much as of kind of ruined last year in many different ways for everyone and certainly as it did give us a chance to sort of.
Set up for the future of and that's what we've done and I think the first quarter numbers sort of reflect that I think if youre going to pick two words as we go forward. This year one is growth in the others leverage we wanted to get back to growing the portfolio growing the company.
You know that will be the focus the rest of this year and leverage we've tried to put lots of of automation few things we've done.
We started using near shore of collections, a while ago, we now use nearshore 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 with a lot of effort went into being able to work from home so working remotely.
<unk> was effective we were able to do it without any loss and so one of the things we'll look at again as cutting expenses get continue to work on the leverage.
If we can have some amount of our folks work remotely.
We don't need all of the commercial real estate that we have so we can start looking at that but we're going to again look at all of those different things to try and get growing so we can increase the portfolio while the in the same time leveraging of lowering the expenses. So we can produce better results.
You know I think.
Sort of what we look at maybe the the those would be the pros of where we're going with this quarter in the next in the next few the cons are again, the stimulus checks and everything else has been enormously helpful of Jeff pointed out of the cash flows are super strong we're building more cash than we've had in.
Multiple years, so we're going to be teed up in the good way. The question is okay, well our automation will of performance continue when unemployment stops.
All of the care of check stock and so you know when you kind of walk both of those things should stop soon which I think is good for the economy.
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 tend to grow, whereas we intend to growth.
Probably one other little negative would be that they're running out of cars shocking of that may sound.
Good news there is the prices at auction should be very strong bad news as you know we need to have that get going again, so theres enough cars out there for us and everyone else. The finance. So again, we'll kind of watch that going forward, but we think in the end of these very strong delinquency and loss numbers very strong cash flows the amount of automation, we put in we have updated our scorecard.
In the last quarter or in the first quarter.
The results of that should be very strong. So we think there's a whole long list of positives you know of few takeaways there might be slightly negative, but I don't know that they really put any slow down 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 will start worrying about inflation, but I think the foreseeable future is very good we would like the sort of ride that wave the rest of this year.
With that we'll open up for questions.
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The first question comes from Jeff Rone the Jamie.
Hey, good afternoon, guys, John obviously, hi.
Hi, John Hi, John.
Yes.
I just wanted to focus in on.
What the company looks like where the profit comes from once the once we're done with the legacy portfolio right I mean, obviously youre looking at cutting costs.
Running costs will come down the last day be asked but I just wanted to a very simple model right youre going to have a portfolio of its getting yield 10% right now your funding cost of 4% of your operating expenses of 6% which leaves.
No pretax income margin.
We're in that model what changes.
When the fair value.
What in the areas off when the fair value portfolio is the only portfolio and where do you get you know pre tax profit margin from.
While the fair value portfolio is trending up and it's trying to enter the the newer stuff that we put on US is 11 or a couple of monthly cohorts more than 11%. So theyre going on between 11 of 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 of charge the dealers and the expected losses. So we are improving the top line revenue generation of the fair value portfolio and the other component of the big component that you mentioned is really the operating costs as a percentage of the portfolio and so.
We are.
That number of 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.
Net.
We think will allow us to grow the business significantly this year and the corresponding servicing and operating costs are not going to increase proportionately and so we think theres a lot of profit potential in the business model.
But that's that's just dependent on growth rate because I mean, you you would need to generate debt leverage on your operating expense base by growing the fair value portfolio from where it actually is Bray as Brad said, that's one of our priorities right now okay.
Okay.
When will the 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 us like of static portfolio. That's just kind of sitting out there running off you know a lot of these 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 of payments because they've been late often and so they more of their payments are gone to finance charges and so the the tail of these things turn.
To linger on for a while but I mean, it's down to $421 million by the end of the year it will be.
Nearly insignificant.
Okay. Thank you very much welcomed.
Welcome John.
Our next question comes from Kyle Joseph with Jefferies.
Yeah.
Hey, good morning, guys. Thanks for taking my questions.
Just wanted to understand the fair value Mark I know you talked about it being attributable to kind of the yield enhancement youre seeing on the fair value portfolio.
In terms of that yield enhancement is that a function of higher gross yields are lower expected losses.
And then would you expect any incremental yield fair value marks going forward.
Well, so any given I think of in period, we look at the receivables that we acquired this month for for example, right inside of well based on the the Apr's on those receivables and the fees that we charged are paid to the dealers and the expected losses.
The the IRR is say 11, 1% rate and so to the and what we've seen is that when we first started the fair value accounting back in 2018 applying those same.
Using the same formula in applying the same variables and assumptions, we got generally lower yields of between nine five and 10, 5%, but as the business is just evolve normal evolution. During the last few years, we've been able to improve upon.
<unk> is due to somewhat lower loss assumptions because of the credit performance, even before the pandemic set and we've been seeing significantly improved credit performance and so we've been writing up the irr's on these older cohorts to match the IRR is of the new business.
And it's a combination of.
Better somewhat lower loss assumptions on the newer business, but also better apr's in pricing compared to what we were getting back in 2018 in early 19.
And the answer to your second question as 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 rate so like if the if the the.
The competitive marketplaces sort of static and we keep our guidelines and our pricing kind of the same then we should have pretty much. The same an hour of loss expectations of 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 if we chose to be.
Significantly more aggressive in the in the pricing. For example, then potentially that would have a trip a domino effect going back to some of the older cohorts or if we drastically change of model. Neither of these things I would expect us to do but if we drastically changed the credit profile of that would.
Impact our ours on the current business again that potentially would roll back to the older stuff, but we don't we make tweaks to the pricing and tweaks to the credit model doesn't move the needle very significantly.
Got it.
And then regarding credit performance, obviously been been very strong, but any other in the rearview mirror being.
The error.
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.
You know what the cars certainly our hope is that we've done enough things right in terms of the paper we are buying currently and the automation we have in our strong collection efforts.
We won't really lose too much but I'm.
It's kind of like you hope for the best in the prepared for the worst. So you know I think you probably.
I would bet over the next the second and third quarters club for the end of the third quarter. It should be normalized assuming they don't start sending them more checks.
But there seems to be a lot more uproar about ending this unemployment the amount of jobs open is crazy and going up. So you would think let's just assume over the next the rest of the second quarter that all stops to get people going back to work maybe it takes one more quarter normalize. So you would probably expect the end of the third.
Order for those numbers to be sort of what we call the real numbers that we're capable of providing.
Got it very helpful. Thanks for answering my questions.
Sure. Thank you welcome Carl.
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 or closing remarks.
So I mean that kind of wrapped up our first quarter.
Like I said earlier I think it gives us a great position for the rest of this year.
Assuming all things go the way, we would hope they would we would expect things to be good.
We'll be talking soon enough after the second quarter. Thank you all for attending.
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