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Q4 2022 Consumer Portfolio Services Inc Earnings Call


Charles E. Bradley; CEO & Chairman; Consumer Portfolio Services, Inc.

Denesh Bharwani; CFO & Executive VP of Accounting; Consumer Portfolio Services, Inc.

Michael T. Lavin; President, COO & Chief Legal Officer; Consumer Portfolio Services, Inc.



Good day, everyone, and welcome to the Consumer Portfolio Services 2022 Fourth 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 risks that could cause actual results to differ materially from the -- from those projected. I refer you to the company's annual report filed March 15 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. 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 E. Bradley

Thank you, and welcome, everyone, to our fourth quarter and year-end conference call. A little bit late this year to getting it out, but better late than never. I think -- and looking back, there's an awful lot of good things to think about and what happened in 2022.
The fourth quarter probably looks a little bit down relative to the rest of the year. However, 2022 is truly a sort of a tale of 2 economies, not quite a tale of 2 cities, but the same idea. We started out 2022 in full growth mode with literally everything clicking perfectly, and then, of course, inflation showed up and the Fed started raising rates. So we went from an all-out growth mode, which we did very successfully using lots of technology, lots of leverage in what we were doing and just did everything right, perfect storm in the right way. And so we grew dramatically for the first 6 months and somewhere around 6 months, all of a sudden, the cost of funds grow, inflation was getting out of hand. And so we literally had to do one of the most abrupt pivots you could ever imagine in terms of slowing the growth down sort of making sure we are keeping our margins intact by raising rates as quickly and as aggressively as we could. And of course, that had the effect of slowing the business down.
So it's kind of ironic, they wanted to get going really, really well in the best possible way. Almost immediately turning on a dime, we had to go the other way. The good news is we think we did that about as expertly as you possibly could within our industry. We were able to tighten credit very dramatically, very quickly. We were able to raise rates thoroughly the entire rest of the year. And so as much as the fourth quarter was a little bit light given that the sort of headwinds we are facing, the position we're in, we're very pleased with how the fourth quarter ended and even more so overall.
Without being obvious, it's the best earnings year we've ever had in the history in the company's history. It's best originations year we've ever had in the company's history. So the highlights are long and lengthy and all very good.
I think we're now in an interesting time again in 2023, and we'll sort of see how that goes, but more importantly, in 2022 showed us both that we could grow very aggressively and do it correctly in the right way and also, if necessary, and it was able to slow down and still maintain our credit performance and our volume and our margins. Now it took a minute to sort of make those things even out. But the way we were able to do it, at least in our mind, was very good and something that could be able to do, at least in our world is very impressive.
So with that, I'm going to turn it over to Danny to go over the financials, and I'll get back and we'll talk a little more about what's going on in the industry and where we think we're going in the future. Go ahead, Danny.

Denesh Bharwani

All right. Thank you, Brad. Going over the numbers in the financial statements, I'll start by going over the quarter-over-quarter comparisons. And then I'll circle back and we'll do the year-over-year comparisons. But revenues in the fourth quarter were $83 million compared to $69.4 million in the fourth quarter last year. That's a 20% increase. The main driver of that increase is the increase in the size of our fair value portfolio driven by the originations growth that Brad alluded to earlier.
The fair value portfolio, as you might recall, we've discussed before, is yielding about 11% currently. And remembering that, that yield is net of losses. In terms of the fair value mark, which is also a part of revenues, we did not take any fair value mark in Q4 of this year, and that compares with a fair value markup of $8.2 million in the third quarter and no mark in the fourth quarter of last year.
In terms of expenses, $64.7 million in the fourth quarter of this year compares to $45 million in the fourth quarter of last year, a 44% increase. Here, the one -- the couple of main drivers here is the reversal of the CECL reserves that we booked on our legacy portfolio. That portfolio continues to wind down and our estimate for the losses that we expected on that portfolio has -- the actual losses have been coming in lower. So we've been able to take reversals of those loss provisions, and it works as an addition to income and a reduction to expense for the year.
For the quarter, we did take $4.7 million of such loss provision reversals cuts compared to $13 million in the fourth quarter of last year. All that sort of trickles down to pretax earnings where we reported $18.3 million of pretax earnings in the fourth quarter of this year compared to $24.4 million in the fourth quarter of last year.
Net income for the quarter of $14.1 million is a 26% decrease to the $19 million we posted last year. Again, the main difference in net income and pretax earnings quarter over -- or the year-over-year number for the fourth quarter is the reduction in the reversal for the lost division for the CECL portfolio.
Our diluted earnings per share is $0.59 for the quarter compared to $0.71 in the fourth quarter of last year. That's a 17% decrease. And like I said, I'll circle back and go over the same metrics for the year-over-year comparison. So starting with revenues again, $329.7 million of revenues for 2022 is a 23% increase over the $267.8 million revenues we reported for 2021. Again, the main drivers are the increase in the portfolio and the fair value marks that we took during the year. We took $15.3 million total markup in the fair value portfolio for 2022 compared to a markdown of $4.4 million in 2021.
The expenses were $213.5 million, an increase of 6% over the $202 million we posted last year in 2021. So we're able to increase revenues without a significant increase in expenses.
In terms of the loss provision reversals, it was $28.1 million in 2022 compared to $14.6 million in 2021 and that translates to a large increase in pretax earnings, a 77% increase from $65.7 million in 2021 to $116.2 million in 2022. The same trends in net income, an 81% increase from $47.5 million to $86 million in 2022. And diluted earnings per share, a 76% increase from $1.84 to $3.23 in 2022.
Going over to the balance sheet. Our unrestricted cash balance is $13.5 million at the end of this year, the end of 2022 compared to $29.9 million at the end of '21. Our fair value receivables are up 42% from $1.7 billion in 2021 compared to $2.5 billion in 2022.
In terms of our liabilities, our debt -- outstanding debt, we thought our increase in our warehouse lines to a total capacity of $400 million. We did that in 2022 in the second and third quarters. So we have plenty of warehouse capacity, while our securitization debt is up commensurately with the increase in our servicing portfolio.
Going over some of the metrics of net interest margin is up 26% year-over-year from $192.6 million to $242 million in 2022. Core operating expenses are up 9% from $141 million in 2021 compared to $154 million in 2022. And core operating expenses as a percentage of the managed portfolio was 6.6% in 2021. We got that down to 6.1% in 2022, mainly because of the holding the line on expenses and trying to keep those from rapidly increasing while at the same time, increasing our managed portfolio base.
Our return on managed assets increased from 3.1% in '21. It's now up to 4.6% in 2022. And again, the same trends, increasing managed portfolio base and trying to keep the line on expenses from going up. And that covers the financials. I'll turn it over to Mike.

Michael T. Lavin

Okay. Thanks, Danny. As alluded to, 2022 is a record-setting year for us. We originated $1.85 billion in 2022, that compares to originating $1.1 billion in 2021. So effectively, we grew our originations 69% year-over-year, which is a record growth rate for us in originations. Of note, which is interesting, we set the origination records while achieving an efficiency scale operationally that we haven't seen before in our history. So for example, we originated $1.1 billion in 2021 with 755 employees, yet we did $1.8 billion in 2022 was 777. So in effect, we grew our portfolio or our origination 69% with only increasing our employee base by 2.9% to originate and service that growth.
Switching to the fourth quarter quickly. We originated $428 million in Q4 as compared to $468 million in our record-setting Q3, but still well above the $328 million we originated in Q4 2021. We did so -- we did everything set records considering that we tighten credit the second half of the year.
The scale and growth has allowed us to reduce our operating expense quite a bit going forward. And certainly, our investment in new technologies featuring artificial intelligence and more specifically, machine learning have helped our efficiency among the other benefits. For example, our Generation 7 AI-based model was fully matured in 2022, which we believe allowed us to originate the best-performing subprime paper, but also do so in a more streamlined manner.
It's also important to note that our record growth was achieved at the same time that we aggressively raised rates, increased fees and most importantly, tightened credit. For example, our average APR in February of 2022 was 15.99%, yet ended the year 2022 at nearly 21%. In addition, we increased our dealer fees throughout the year. And more importantly and more responsibly, we began to tighten credit sort of halfway through the year, and we did so by setting fairly low LTV caps. We reduced our back-end allowance, and we eliminated numerous exceptions that we might have made on some declines.
As such, our overall percentage dropped as we're being more selective on our originations, but the strong demand for our product more than made up for our credit pullback. At the end of the day 2022, we believe we bought and continue to buy the best slice subprime auto paper available on the market.
A couple of notes about competition and demand. New -- in 2022, new car prices remained at record highs as manufacturers are limiting new car inventory. Despite the chip shortage and inventory issues seen during COVID, largely being over. At the same time, used car prices have gone down towards the end of 2022, which is kicking more car buyers into the used car space which comprises the majority of our originations. Interestingly, we lose most of our deals in 2022, 2021, to credit unions, and it appeared in 2022 that the credit unions were pulling out of the space. At the same time, we've also seen some bigger players leave the space or cut back in the space as some are concentrating on being a more full-spectrum lender.
In terms of competition, I think our niche is not the most competitive business to begin with, considering that there really are only 3 or 4 players who consistently compete with us in our space as say compared to other industries who face hundreds of competitors for their product. We have a solid market share at the top slice of the subprime spectrum, while our other close competitors tend to target the lower share of the subprime slice. That competition landscape is consistent, remained consistent in 2022 and as insulated, as there is a high bar entry into our niche business.
Our business remains relationship based. So a vast loyal dealer network is required. You got to have proprietary originations and servicing models based on decades of data to ensure portfolio performance. The business does remain capital-intensive. And of course, it's highly regulated, which requires experience dealing with that.
Turning to portfolio performance. Our year-end 2022 delinquency, including repossession inventory ended at 12.62% as compared to 10.53% at year-end 2021. Our annual net charge-offs for the fourth quarter were 5.83% as compared to 2.57% for the fourth quarter of 2021.
Good news on extensions. They're up just a tick in 2022. But as a percentage of the outstanding portfolio, they ended up at 2.98%, which is the second-best year ever when it comes to extension usage.
We do have an AI machine learning based extension scoring model, which we believe has given us more bang for our buck on the extensions and allowed us to get more out of our extensions going forward.
Overall, we're pleased with our performance in 2022, considering the economic headwinds we faced and of course, the end of the COVID-free government money that bolstered our 2021 results. In particular, and with more specificity and while it's early, it looks like in the industry that 2022 vintages have been a bit choppy coming out of the gates, yet we have heard that ours are performing well as compared to industry average. Our curves are still well below our pre-pandemic levels, especially compared to the industry averages.
We believe that we were one of the first to tighten our credit in 2022, which kind of follows our 31-year history, modus operandi being a conservative responsible lender.
As with originations, we believe our investment in new technologies featuring artificial intelligence and machine learning have helped our portfolio performance and efficiency and servicing it. For example, we have a Generation 7 AI-driven collection model that we use to instruct our collectors on who to communicate with, how to communicate with them. Whether it's text or e-mail or phone and when to communicate with them. For our 2022 vintages, we tweak the algorithm a little bit towards the end of 2020 to dive deeper and better address the early issues. This, combined with a few proprietary strategy adjustments we made towards the second half of 2022, has allowed us to outperform the industry averages.
And with that, I'll kick it back to Brad.

Charles E. Bradley

Thank you, Mike. And so that's kind of where we are today. 2022 seems almost a long time ago, given the ups and downs having that great first half of the year and then sort of a challenge in somewhat second half of the year. But I think the most important thing to see is that, and as Mike and Danny both pointed out, through 2022, we're able to adjust and move both our credit criteria, our pricing model almost seamlessly to kind of react to what was going on in the industry.
We're not quite sure everyone else did quite that. But nonetheless, we're very happy with how we did it. I think in the future, that bodes very well for adjusting to the different sort of market levels. Certainly today, once again, things are moving around. But the fact that we're able to go through 2022, and on the one hand, grow so significantly and so successfully shows that they have to pull back some, shows that we can move with the rising and lowering ties just as easily. And I think that's very important going forward because we've been doing this a long time. And the one thing that you can always count on is things will change. And sometimes they change in a time.
So I think, again, we're very pleased with how it worked. I think the industry overall. I think we sit very well off our 2022 performance. Certainly, all the performance behind that has been very excellent. And so we kind of look forward to how we think 2023 could go. Most importantly, on sort of the technology side, we've been able to use lots of technology, more and more coming every day that actually, we almost can shrink our people and what we need to continue to grow. And so the combination of those things really puts us in a spot where we can sort of look forward to what we're doing, see what the industry does, the ups and downs of the free money in 2021 and '22 or mostly '20 and '21, that's over with. Now we're getting back to what we might look at as sort of the normal course in our industry. And so again, we'll have to kind of ride with what the inflation numbers do and the banking issues and such. But overall, I think based on what we've done in 2022 and 2023, it looks like a new year, new things we can handle, and we're looking forward to the challenge.
With that, thank you all for joining us, and we will speak to you rather soon in April.


Thank you. This concludes today's teleconference. A replay will be available beginning 2 hours from now for 12 months by the company's website at www.consumerportfolio.com. Please disconnect your lines at this time, and have a wonderful day.