Consumer Portfolio Services, Inc. (NASDAQ:CPSS) Q3 2023 Earnings Call Transcript

Consumer Portfolio Services, Inc. (NASDAQ:CPSS) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Good day, everyone. And welcome to the Consumer Portfolio Services 2023 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 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 today is Mr. Charles Bradley, Chief Executive Officer; Mr. Danny Bharwani, Chief Financial Officer; and Mr. Mike Lavin, President and Chief Operating Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Charles Bradley: Thank you. Welcome everyone to the CPS third quarter conference call. In terms of opening comments, I think, what we used to say a few quarters ago was, generally speaking, that our industry was returning to the pre-pandemic levels in terms of loss expectations and performance, and since then, obviously, in the last few quarters, we’ve had a lot of things happen to make that return more bumpy. Things like there’s become a huge focus on the portfolio performance from the 2021, 2022 vintages. Also, interest rates are obviously much higher. Therefore, cost of funds is much higher. So and then just the consumer position in terms of inflation. Lots of little things that all together make it a difficult time. The good news is, even having said that, we turned in another strong quarter and we’re a size now.

We’ve been through all these problems before, numerous different iterations and CPS is in a very good position to weather any potential storm. It really looks like, given our situation in the industry with other competitors, that we’re probably in a much better position today than lots of other people and that we would have been in other previous scenarios. The size of our portfolio, the size of the company, the experience we have and the credit controls we have in place have put us in a good position today and I would think going forward, we can prove that even better. I’ll touch on that a little more after we go through the financials and the operations update. And so, with that, I’ll turn it over to Danny.

Danny Bharwani: Thanks, Brad. Going over the financials, we’ll start with revenues. Revenue for the quarter $92.1 million is 8% higher than the $84.9 in our second quarter of this year and 2% higher than the $90.3 million in the third quarter of last year. For the nine-month period ending September 30th, revenues were $260 million, which is 5% higher than the $246.7 million in the third — three quarters of 2022. Of note here, our fair value portfolio is now $2.7 billion, continuing to grow. If you’ve been listening to these calls in the past, you’ll know that the yield on the fair value portfolio is risk-adjusted and it’s after losses and that portfolio is yielding 11.3% in the current period. Also included in revenues for this quarter is a fair value mark.

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Q&A Session

It’s a markup in Q3 of $6 million. That compares to a markup of $8.1 million in Q3 of 2022. For the year-to-date period, that markup is $15.2 million in 2022 and $6 million in — for the three quarters of 2023. The markup is a result of better-than-expected performance in our fair value portfolio, mainly the older vintages that have outperformed our initial expectation and we recognize the benefits we receive from our collections and losses from those portfolios and that’s resulting in the markup that you’re seeing that’s included in revenues for all the four periods we’re comparing. Moving on to expenses, it’s $77.9 million in the current quarter, compared to $66.3 million in the second quarter of 2023. That’s a 17% increase in expenses.

That is compared to $56 million in the third quarter of last year, which is a 39% increase. For the year-to-date period, expenses are $208.8 million for the nine months ending 2023, compared to $148.8 million last year, which is a 40% increase. Two things of note in terms of expenses. All — again, all four periods that we’re comparing here include an adjustment to our legacy portfolio and that’s the portfolio that’s not accounted for under fair value. These are accounted for using CECL and we posted a lifetime loss reserve on these loans and over time we’ve realized that the performance has come in better than expected and we’re able to reverse the loss provisions we took for this portfolio. The reversing of loss provisions helped to reduce expenses by $2 million in the third quarter, compared to $6 million in the third quarter of last year.

For the nine months, that reversal of loss provision is $20.7 million, compared to $23.4 million in the three quarters of 2022. The other driver of the additional expenses is interest expense. That interest expense is $37.9 million in the current quarter, $106 million for the year-to-date period and that compares to $23.5 million in the third quarter of last year and $57 point — $58.7 million last year. For the most part, that increase in interest expense is attributable to higher interest costs. The portfolio size is also greater, so that’s partly contributing to increased costs, but the real driver of that is obviously the increase in rates that we’ve seen. In fact, to further quantify the increase in interest expense, it’s up 61% quarter-over-quarter and 81% year-over-year.

Looking at pre-tax earnings, it’s $14.2 million in the current quarter, $34.3 million in the quarter last year. For the nine-month period, $51.3 million this year versus $97.9 million last year. That’s a 48% decrease. We’re seeing the same trends in net income and earnings per share. Net income is $10.4 million in the current quarter, $25.4 last year. That’s a 59% decrease. For the nine-month period, $38.2 million versus $71.8 million last year. So net income is down 47%, similar to the rate of decline in pre-tax earnings. And again, obviously, diluted earnings per share will reflect and manifest those same trends, $0.41 per diluted share this quarter, compared to $0.95 last year, a $1.51 for the three quarters ending September 30 this year versus $2.61 last year.

Moving on to the balance sheet, our fair value portfolio grew by 2% over the June quarter and 14% year-over-year, driven by healthy origination levels throughout the year. Our securitization debt is up only 1% sequentially and 9% year-over-year. So this shows an area of strength on our balance sheet where we’re able to maintain our liquidity despite lower leverage on our loan portfolio. Another area of strength is our shareholders’ equity. The $265.9 million we posted at 9/30 this year is an all-time high for the company, driven by 48 consecutive quarters of pre-tax profitability. So we’ve shown our durability that over the last 12 years we’ve been able to post quarterly profits throughout the entire period. Looking at some other metrics, our net interest margin is $54.2 million in the current quarter versus $66.8 in the third quarter last year.