LAS VEGAS -

Consumer Portfolio Services chairman and chief executive officer Brad Bradley not only summarized how his company navigated the fourth quarter, but the outspoken industry veteran also perhaps gave a concise assessment of what’s happening at other subprime auto finance companies and the dealerships within their networks.

First, here are CPS numbers to give a backdrop of how Bradley approached his remarks during the company’s quarterly conference call with the investment community.

CPS posted its 22nd consecutive quarter of positive earnings, generating $7.5 million, or $0.26 per diluted share. The figure marked a bit of a drop-off from the $9.0 million, or $0.29 per diluted share, in net income the company posted during Q4 of 2015, but Bradley insisted the performance was in line with company expectations.

CPS’ revenue climbed 13.5 percent during Q4 and 16.1 percent for the full year, landing at $108.2 million and $422.3 million, respectively.

During the fourth quarter, CPS said it purchased $215.3 million of new contracts compared to $242.1 million during the third quarter of 2016 and $269.2 million during the fourth quarter of 2015.  The company’s managed receivables totaled $2.308 billion as of Dec. 31, an increase from $2.292 billion as of Sept. 30 and $2.031 billion as of the close 2015.

The company’s annualized net charge-offs for Q4 stood at 6.97 percent of the average owned portfolio as compared to 6.23 percent for the fourth quarter of 2015. Delinquencies greater than 30 days (including repossession inventory) ticked up to 10.96 of the total owned portfolio as of Dec. 31 as compared to 9.53 percent a year earlier.

Bradley opened his remarks to the Wall Street watchers by referencing a Chinese proverb that states in part, “May you live in interesting times.”

He continued with, “We at least at CPS — and the industry — are living in interesting times. Again everything you see — higher delinquency, higher losses — now in the fourth quarter everybody slowed down as everybody dropped something between 15 percent and 20 percent in volume.

“There’s a lot concerns, regulatory and the economy and the industry in general. So these are interesting times,” Bradley went on to say.

Having been in the subprime auto finance business since 1991 is part of the reason why Bradley is confident CPS will navigate through whatever challenges might be coming later this year.

“Generally speaking that’s a lot of what the fourth quarter came out at, that’s a lot of what 2017 is going to come out at,” Bradley said. “(The company will be) trying to stay the course and just see how the rest of these moving pieces shake out and hopefully be in a position to take advantage of it and maybe be in a position to have done the best of everyone there. So we’ll see how it goes but that is kind of the focus we’re going to have.”

As mentioned previously, CPS bought less paper during Q4 and Bradley explained why — again referencing what might be the case for other companies, too.

“The business was slow in the fourth quarter, significantly slower than we would have expected. Again our focus is on quality over quantity,” Bradley said. “You can almost feel the other companies reaching to provide their earnings or the growth that they’re expected to have, (but) we’re not in that kind of position. And so we’re not trying so hard and as a result our numbers are down a bit. But again we would rather have the quality over the quantity any day of the week.”

Later in the call, Bradley went on to say. “Lot of people in the originations area are seeing more and more sort of challenging or bad loans that we don't want to buy, and that’s a real good indicator of what's coming out of the dealership. And the way it works is if we’re seeing a lot of good loans, it means we get what we want to the extent, and also it means that dealers have lots of loans to send you.

“To the extent that problems are getting more difficult, dealers start trying to push through riskier and not-as-good loans. And so when you start seeing more of those, you can almost tell that in the marketplace, the dealers are struggling just as much as we are because they’re trying to push through bad deals that we don't want and they know most times we’re not going to buy them,” he continued.

“So that gives you an idea that they're even trying to send and shows you that the market is difficult. But again keeping our originations model the way we want it, and buying what we want to buy, in the end will pay off much better than any other course,” Bradley said.

View of collections

Bradley also touched on how CPS is handling collections. It’s been nearly three years since CPS agreed to pay more than $5.5 million to settle charges from the Federal Trade Commission that the company used “illegal tactics” to service and collect consumers’ contracts.

“In terms of collections, I think everybody is now, at least we are, comfortable with the new dynamic that given all the technology our customers are a whole lot smarter and a whole lot more aware of what's going on. And so when we’re looking for them, they just look at their iPhone and decide whether or not to take the phone call,” Bradley said. “However, when we then tell them we’re going to take their car, they pay.

“And so we’ve now for over a year or more run this higher (delinquencies), but not with horribly higher loss rates,” he continued. “If the loss rates truly tracked the (delinquencies) that we’ve been seeing, the losses would be much, much worse. And so there really is this new thing or new dynamic where customers pay you when you’re going to take their car as opposed to just paying you as soon as you start calling them. We’ve gotten used to that.

“We’ve redone the way we collect and certainly part of that is the regulatory environment, the way you now have to speak to customers and how often you can call them and things like that,” Bradley went on to say. “That whole thing is now settled in as our culture has changed and so we’re real happy with that.”

Update on securitizations

Back in January, CPS announced the closing of its first term securitization in 2017.  The transaction was CPS’ 23rd senior subordinate securitization since the beginning of 2011 and the sixth consecutive securitization to receive a triple-A rating on the senior class of notes from at least two rating agencies. 

In the transaction, qualified institutional buyers purchased $206.3 million of asset-backed notes secured by $210.0 million in automobile receivables purchased by CPS.  The sold notes, issued by CPS Auto Receivables Trust 2017-A, consisted of five classes. 

Ratings of the notes were provided by Standard & Poor’s, DBRS and Kroll Bond Rating Agency, and were based on the structure of the transaction, the historical performance of similar receivables and CPS experience as a servicer.

Note
Class
Amount Interest
Rate
Average
Life
Price S&P
Rating
DBRS
Rating
KBRA
Rating
 A  $99.12 million  1.68%   .87 years  99.99906%  AAA   AAA  AAA
 B  $29.92 million  2.68%  2.14 years  99.98567%  AA  AA (high)   AA
 C  $32.66 million  3.31%  2.84 years  99.98111%  A  A  A
 D  $24.57 million  4.61%  3.59 years  99.99845%  BBB  BBB (low)  BBB
 E  $20.05 million  7.07%  4.14 years  98.98958%  BB-  BB (low)  BB-

The weighted average coupon on the notes was approximately 3.91 percent.

The 2017-A transaction has initial credit enhancement consisting of a cash deposit equal to 1.00 percent of the original receivable pool balance and over-collateralization of 1.75 percent. 

The final enhancement level requires accelerated payment of principal on the notes to reach overcollateralization of 5.15 percent of the then-outstanding receivable pool balance.

Bradley mentioned in a company news release that the securitization CPS completed last October “achieved the lowest blended cost of funds of any deal since the second quarter of 2015.”

During the quarterly conference call, CPS chief financial officer Jeffrey Fritz added, “The asset-backed market continues to be very liquid, and so we continue to take advantage of that.”