Consumer Portfolio Services, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good day, everyone, and welcome to the Consumer Portfolio Services Fourth Quarter and Full Year 2020 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 risks that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 16 and its quarterly report filed November 3 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, which as a result of new information, further events or otherwise.

[Charles Bradley:]

Thank you. And thank you, everyone for joining us on our call. I think probably the best way to look at the fourth quarter is that it's the end of 2020 and everyone certainly us included are glad to be done with 2020 and spent with it, certainly an up and down year and a difficult year in many ways. But in other ways it was quite good for us. And certainly the fourth quarter reflects that. We had, if you take year-over-year, the fourth quarter to DQ was 12 versus 15.5 last year so that was very strong, losses 5% versus 8%, also very strong. And the recoveries were not unusual, but what we'll call historically high, 42% versus a normal 33%. So lots of the numbers went the right way. We have lots of good things that happened in the fourth quarter. We also renewed our Citibank warehouse line. We continue to have a very strong partnership with those folks. We do a lot of deals with them and have a good working relationship and that line continues to improve each time we renew it. So we look forward to continuing to do our business with them. When we didn't do – in the fourth quarter, we didn't do an ABS deal, given the pandemic and cutback the volumes, we didn't have enough volume to really make it warrant doing a deal in the fourth quarter. However, we did one pretty darn quick in the first quarter of 2021. And that deal was probably the best ABS deal in the history of the company with all-in costs of 1.1%. So that part worked out really well, probably the negative for the fourth quarter, and certainly for the year, which I'll talk about that later. It's just that the struggle for volume. Given the pandemic, given the financial markets sort of closing or slowing down dramatically for a little bit, and even just, the foot traffic at dealerships, struggling in 2020 and struggling in the fourth quarter continuing was to get volume in here. But the flip side of that is we were able to really focus on cutting some expenses. We really focused on core quality. If you look at the ABS performance for literally since 2018, it is substantially better every single year. I’m not so sure there's too many companies out there you can say that. Certainly with a lower cost of funds coming along, that's going to sort of, higher tide floats all boats. It's going to help out a few of our overly aggressive competitors, but nonetheless, it's still long run, probably just as good for us.

[Jeff Fritz:]

Thanks Brad. Welcome everybody. We'll begin with the revenues, $62.4 million for the fourth quarter that's a 12% decrease over the third quarter of this year and a 27% decrease over the fourth quarter of 2019. The full year revenues for 2020, $271.2 million is a 22% decrease compared to $345.8 million in the full year of 2019. So there's three important components when you kind of break this down. The revenues, first of all, legacy portfolio now is around $500 million representing 23% of the total portfolio and currently yielding 18.5%. The fair value portfolio, which is everything we've originated since January of 2018 is $1.7 billion or 77% of the total portfolio yielding 10.3%. And remember too, and we've talked about this many times, obviously the fair value portfolio yield is net of losses which is why you see what looks like such a dramatic decrease in revenues year-over-year. The third component this year anyway, is the markdowns we taken in the fair value portfolio, reflecting the COVID environment $6.5 million markdown in the fourth quarter, $29.5 million for the full year. And so that can be a little confusing, this is a kind of a contra-revenue item. So it detracts from the revenue rather than being an expense. Moving on to expenses, $56 million for the fourth quarter. That's a 14% reduction compared to $64.8 million for the third quarter of this year, 34% reduction compared to $84.8 million in the fourth quarter of 2019. Full year expenses, $251 million is a 25% decrease compared to $336 million in 2019. And we've seen year-over-year reductions in almost every expense category, doing part as Brad alluded to, to lower originations volumes, but also due to some of the efficiencies that we've built in and technology investments that we've made not only in 2020, but really in the last couple of years are really starting to pay dividends. And of course, the biggest decrease in expense comes from the provision for credit losses. If we look at that in a little more detail so we actually zero provision for credit losses in the fourth quarter compared to $7.4 million in the third quarter of 2020 and $21.5 million in the fourth quarter of 2019. For the full year, we had $14.1 million in provisions for credit losses compared to $86 million in the full year of 2019. And so remember also that we adopted CECL for the legacy portfolio in January 2020, in which time we established what we thought was a lifetime allowance for credit losses. And then of course, the pandemic set in and throughout the year, as you know, from following this we've been taking – except for the fourth quarter, we've been taking some additional provisions for credit losses, sort of pandemic related provisions for credit losses. But none in the fourth quarter, as you see.

[Charles Bradley:]

Thank you, Jeff. So looking back at 2020, certainly the big focus or the big thing with the pandemics, we started off thinking it would be whatever year we might've thought it would be in, certainly by March, we knew where we were going. Normally we would have done a deal in early April, we couldn't do a deal, no one else could, so there was no ABS. For the moment, it looked like 2007 all over again with the market's closing down, but of course they didn't, which was good. So – but at the moment we had a problem there, and then when they finally started loosening up a little bit sort of in April or May, they needed more cash, the stress levels were – the rating agencies increased stress levels, so you needed more cash. Those kinds of things normally, and certainly in 2007 would have caused us serious problems. Ironically because of the stimulus and then all the things as part of the care package, we picked up $23 million in cash, the stimulus went to all of our customers and as Jeff pointed out, all of a sudden we had this tremendous cash flow. Now part of that of course, was we've tightened credit over the years. And so we now all of a sudden had stimulus, tighter credit cash, and so we had this – we were really in a great position shockingly coming through the pandemic. So the next hurdle of course was what were we going to do with people to come to the office. And so we had to come up with strategy, but everyone worked from home, which we did. And so of course that was a problem, which we worked very diligently on and solved, so that all of our folks could work from home and get their jobs done, of course, the highlight of that was it actually worked. Everyone continued to do a superior job, even working from home, all the technical things were accomplished and all the legal parts were accomplished without any problems.

[Operator:]

Thank you. Our first question comes from the line of David Scharf with JMP Securities. Your line is open.

[David Scharf:]

Hi, good morning. Thanks for taking my questions and congrats for a very challenging year. Hey Brad, maybe two things, first off, I know it's difficult to predict what volumes are going to look like this year, particularly with more stimulus coming in the effects of the vaccine on just foot traffic potentially. But as we think about sort of the cost structure, I think last quarter, you would provided an update that as much as 20% of the workforce there may have been that much of a reduction from a combination of belt tightening and natural attrition, given the lower volumes. I mean, if volumes kind of stay at current levels, will employ costs kind of remain at these levels going forward? Do you think, or is there even more room to cut?

[Charles Bradley:]

Easy answer, there is always more room to cut, but probably the safer rants, I would say they'd stay at these levels. I think you got it right, between the belt tightening and natural attrition through all this, we reduced the costs, I don't see us sort of rehiring up to sort of anticipating growth or something. I think with the automation has given 25 years, the automation is moving so quickly that you probably can grow and hire all you want without giving up much in terms of expanding expenses, so that part is really good. I think the grill one, because in the one hand, it's nice to have low cost of funds increases your margin, but it also opens the door for just about everybody to get super aggressive if they want to. And the problem, if you think about it, let's just take our deal we just did. At a 1% cost of funds, and so you could say, well, we should get super aggressive because you got at least an extra two points or three points in that margin all of a sudden, but buy a whole bunch of papers and all of a sudden the market has come back, which I don't expect to happen soon. And then all of a sudden you don't have the margin. And so I think a bunch of folks are doing just that, they're going let's go, let's go fast and hard, and we'll sort of worry about the cost of funds later. Now we would love to play in that game and we're going to try and do it very specific sort of safest possible way to get some of that growth. But between the pandemic, not quite being over, and the vaccination is not quite being done and the massive weather they've had lately, it's really put a damper in terms of what's out there. But what you have seen is Capital One or Santander had been quite aggressive and they can do it. So we'll see how that plays. But to answer your question, I think, a straight cost line or expense line isn't a bad option. And then, we'll have to figure out how to get the volume to go up with it. The problem – one of the problems with our revenues, as Jeff pointed out with change to fair value, it just looks like it's going down a lot and it's really not, but trying to get the volume up is something we need to focus on.

[David Scharf:]

Got it. That's helpful. And maybe as a follow-up along the lines on the revenue reporting, in terms of the 10.3% yield which is really sort of the risk adjusted yield on the fair value portfolio, I mean, using that as sort of a jumping off point. As we think about the pretty low delinquency levels right now and what that might mean for losses this year, as well as you would note it, maybe going a little deeper unbound pricing, just given the lower cost of funding, as we think about all that netting out and since charge offs are basically embedded in that GAAP revenue yield should that 10.3%, is it likely to creep up a bit just based on the loss outlook this year or potentially creep down a little bit as you maybe dig a little deeper on the pricing front?

[Jeff Fritz:]

Well, there is a lot of moving pieces to the 10.3% David, as you know, so it's the estimation of the losses that makes it risk adjusted, but it's also the coupon on the receivables and it's also the fees we either pay or charge to the dealers. And so, as Brad mentioned, we're trying to pull some leverage here to grow the business. And one of the levers we can pull is to maybe put a couple of other – couple more dollars to dealers pocket to incentivize the dealer to send us the contract. And we can also – the scoring model and what our risk people do in the office is, tell us when we can buy something that maybe looks a little bit deeper, but doesn't have necessarily greater loss expectation. So when we think the business plan works pretty well at around that 10.5 or so percent risk adjusted yield with the pricing and so, we're – I think it's safe to say that's a target for us. And it's going to fluctuate a little bit with those levers, but we're pretty comfortable with that level.

[David Scharf:]

Got it. Great. Thank you very much.

[Charles Bradley:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of John Rowan with Janney. Your line is open.

[John Rowan:]

Good afternoon, guys.

[Charles Bradley:]

Hi, John.

[Jeff Fritz:]

Good afternoon.

[John Rowan:]

I just want to focus in a little bit on what happens when the legacy portfolio finally matures off. Jeff, you mentioned the size of the portfolio and the 18% yield, and that would imply that there is about $24 million and correct me if I'm wrong there, on a revenue that you're booking through the legacy portfolio, which obviously is in runoff and you're not booking any provisions against it. I'm wondering if there are any other costs offsets in that number, and even if that number is correct, because without that, it doesn't look like just based off of the fair value portfolio that the company is profitable.

[Jeff Fritz:]

Well, there are a couple of other nuances that come along with the legacy portfolio, for instance as you know we either pay or charge dealers fees in conjunction with acquiring those contracts. And so, embedded into the net yield on the legacy portfolio are additional, what's really a net fees that we charge to dealers that are being accreted into income over the life of that portfolio. So that's kind of – that's not a giant piece, but that's a piece of the revenue picture for the legacy portfolio. And I think John actually with the – as we talked about the 10.5% yield on the fair value portfolio and our costs structures kind of coming down a little bit with some efficiencies. And I mean, I think the company is profitable.

[John Rowan:]

So is there a finer point that you could put on how much revenue you actually generated off of the fair value? Net of the dealer fees that you're talking about, because obviously at some point in 2021, the fair value – the legacy portfolio is going to go away, unless cost come down quite a bit off of where they are, if there is like a $20 million odd run rate on a legacy portfolio, it just doesn't – the math doesn't seem to indicate that there is much profit in 2021. Now, unless there is a big decline in funding costs, I'm just trying to flip that up because, or maybe you can just answer how much revenue came this quarter off of the legacy portfolio.

[Jeff Fritz:]

Well, remember too, that we also had for the year $29.5 million marks on the fair value portfolio, which come out of the revenue. And so, there is a little bit of a fair value adjustment there, but the vast majority of that is pandemic, I mean, really it's all pandemic related. And so that, if you're trying to really look at the fair value revenue component that's the bulk of the rate there and we do a schedule in the 10-K and unfortunately I don't have it with me right now, but we do a schedule in the 10-K, but we break out the fair value revenue and the legacy portfolio revenue in a more tabular fashion that might be helpful for you.

[John Rowan:]

Okay. And then just lastly, the losses in the legacy portfolio, like 11%, you have 14 some odd percent if I’m not mistaken, allowance in that portfolio. As you get – 16% rather, as you get through the end of the year, if you don't materialize 16% losses, do you credit the differential through the provision expense, right. Obviously, those allowances were transferred there based on CECL, but we're not a charge to earnings. Do they become a credit to earnings if you don't use up that 16% allowance through charge-offs as that book, recurs off in 2021?

[Jeff Fritz:]

Yes. I mean, that would be the mechanics theoretically, right. And in fact, I've seen where a couple of the institutions, banks, these were that's filed earnings reports already, which had clawed back some of the provisions that they had made earlier in the year, pandemic related provisions. And they go back through the P&L sort of negative provision credit losses and the…

[John Rowan:]

Okay. I just want to make sure it was the same in a runoff portfolio, right. Those are still portfolios that are growing. So I just want to make sure that's still the mechanics in a runoff scenario?

[Jeff Fritz:]

It wouldn't make any difference, I don't think.

[John Rowan:]

Okay. All right. That's it for me. Thank you.

[Jeff Fritz:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.

[Kyle Joseph:]

Hey, good morning guys. Thanks for having me on and congratulations on wrapping up 2020. On the legacy portfolio, look like a lot of the credit strength in the quarter was actually improvement on the legacy portfolio. Can you give us a sense for what specifically drove that in the quarter and for that credit performance on that portfolio going forward?

[Jeff Fritz:]

I think we'd attribute that and particularly in the losses, I think we'd attributed to the auction recoveries primarily which were running at substantially better levels. And normally with a season, super season portfolio, like the legacy portfolio, it would be pretty rocky when it gets into life. But I think that – though that segment – the whole portfolio, but that segment in particular did very well for what we liquidated the auctions. And then, just the overall delinquencies even for such a seasoned portfolio have been much better on the legacy portfolio than we would have expected.

[Kyle Joseph:]

Okay. And then I think that's a good transition. Can you guys give us kind of your sense for used car price, your outlook for used car prices in 2021?

[Charles Bradley:]

I think our recoveries are going to drop, obviously as the sort of the manufacturers catch up, then you'll see the demand at the auctions drop. And so our recoveries will come down, but I still think at least for the rest of the year, that market is still remains strong. And going back to the other point, if you think about the legacy portfolio, these are the guys that have been in the car for a long, long time, and probably at some level are bouncing around from current the 30 days to 60 days. And so getting a stimulus check, gave them a real opportunity to catch up kind of, rather than running their normal sort of in the bad part, in the good part. Having a stimulus check not to mention and another one coming, or they've gotten too, I guess, another, a third one coming, that's the kind of free money they get that gives them an opportunity to sort of make a movement in that kind of an older loan. And so, it's easier to see in the legacy as much as it should have the same effect on the fair value, but since the fair value is newer, you got to figure, people are sort of, it's not so much people are buying cars, there's stimulus checks, but you'd see it a little more clearly in the legacy portfolio as sort of a free money catch-up for our customers. So back to the used car prices or the used car market, I think you'll see, I think that market will stay strong for the rest of the year.

[Kyle Joseph:]

Got it. And then last one for me on the fair value mark, what triggered it in the fourth quarter, obviously we've seen it throughout the year, but we kind of know that there's a pandemic that have been gradually recovering, in what scenario do we not see fair value adjustments going forward?

[Charles Bradley:]

That's a good question. I think certainly one of things we've learned through time is to be cautious. And so I think the whole 2020 and the pandemic, as much as we pointed out, lots of good things have happened as a result. You just not sure what's going to happen next. I mean, even – and so that's probably the easy answer for most of 2020 and all the adjustments, we just weren't sure what the future holds. Now, as we move into 2021 depending on who you listen to, if you listen to some twerp and the government, we've got a couple more years of this, but if you don't, it's probably over in about six months or three months, and we're going to go with that version. And so, at that point you wouldn't see anymore effect on the fair value hits. I mean, we think at this point, this thing should be over pretty darn quick. So I wouldn't expect, don't hold me to it, but if I were going to guess, I said, we wouldn't have any more this year going forward.

[Kyle Joseph:]

Got it. Thanks very much for answering my questions.

[Jeff Fritz:]

Thank you, Kyle.

[Charles Bradley:]

Thank you.

[Operator:]

Thank you. I'm showing no further questions. I will now turn the call back over to Mr. Charles Bradley for any additional or closing remarks.

[Charles Bradley:]

Thank you. I think we've kind of summed up where we stand fourth quarter. It was a nice way to finish up the year. The year worked out all the things we had to deal with really, really well. As we sort of alluded to a lot during this call, 2021 should be a significantly better year in terms of not having to deal with the pandemic, we can really focus on doing what we normally do, which is running the company, growing the company, growing the portfolio, growing the profitability and working on that stock price. So thank you all for joining us and we'll speak to you rather soon after the first quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. A replay will be available beginning two hours from now until March 3, 2021, by dialing [phone] or [phone] with a conference identification number 3998868. 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 any time, and have a wonderful day.