There probably are not many strategies leveraged by subprime auto finance companies that Consumer Portfolio Services chairman and chief executive officer Brad Bradley hasn’t seen since joining the company in 1991.

But Bradley described a concept as being “the new thing on the street” during CPS’ latest quarterly conference call. “It’s something called guaranteed back-end,” he continued after first explaining why many of CPS’ upstart competitors are trying this approach.

“As everyone knows, we’ve talked about cycles and this is what we usually call the third cycle, and third cycle has been dominated by (private equity) players putting money into companies, trying to grow them a lot, take them public have somebody buy them, any of those things,” Bradley said. “Obviously, that hasn’t worked out very well for a whole lot of folks.

“Over the last two years, in 2016 and 2017, everybody said there will be some consolidation in the industry. There was none,” he continued. “So far this year, two companies have gone away. There’s probably another one kind of gone away; at least three or four more on the ropes.

“So, 2018 may finally be the year that consolidation happens in the industry, some of the (private equity) guys give up the ghost and things start to move in the right direction,” Bradley went on to say.

Bradley continued his subprime environment assessment by turning next to football analogies when considering what other auto finance companies are doing with regard to loan-to-value ratios.

“But of course, before that (move in the ‘right’ direction) can happen, you have to have the Hail Mary pass where everybody goes nuts, and so here we are,” Bradley said. “Everyone is buying as aggressively as we’ve seen in 25 years. They’re doing crazy things in terms of both credit and pricing. And so it’s a market we just can’t plan.”

While Bradley is seeing some providers originating contracts as high as 130 percent, CPS is keeping that portfolio metric at its target of 111 percent.

Then Bradley arrived at “guaranteed back-end,” which he explained to investment analysts.

“These lenders are guaranteeing the dealers a guaranteed back-end, which basically allows them to make some money in the loan off the customer,” Bradley said. “As a result of that, that’s just destroying the LTVs.

Later in the call Bradley added, “We’re not 100-percent sure if everyone is doing this, but there’s enough folks out there that it has become very interesting and we’ll see how it all plays.”

So will CPS join the ranks of offering a “guaranteed back-end?”

Bradley said, “We cannot play nor will we play in that game. It’s a great idea if you want to get a whole lot of paper real quick. The paper is going to be horrible and eventually going to default like crazy.”

Leveraging about 30 years of experience, Bradley tried to explain to Wall Street observers why this strategy is being leveraged at all. He noted private equity firms typically operate on five-year plans. Several firms pushed money into subprime auto finance companies in 2012 and 2013, Bradley said, meaning that the juncture when they want to sell off these providers for a profit is now.

“The problem is, a lot of these guys came in back to these companies, made investments in these companies and they like to see a return,” Bradley said. “But part of the problem is to the extent the company rule was a little bit more than should have or didn’t quite have the controls in place, and the results haven’t been what they want.

“To the extent they didn’t make any money, you’ve got a problem. A lot of those folks out there today are facing that problem, whether it’s small companies, medium size companies or large companies,” he continued.

“The plan probably wasn’t executed quite as well as it should have and now they’re standing there with not great results in terms of losses and not great results in terms of earnings, and they’re trying to figure out what to do,” Bradley went on to say. “In past lives or cycles, we’ve seen how this works and it’s difficult. I have huge amounts of pity for everybody who's facing that problem because it is very difficult to get out of it. So that’s what's really going on with the companies.”

CPS Q1 performance

Consumer Portfolio Services announced earnings of $3.1 million, or $0.12 per diluted share, for its first quarter that ended March 31. This compares to net income of $4.5 million, or $0.16 per diluted share, in the first quarter of 2017.

The company reported its Q1 revenues softened to $103.6 million, a decrease of $4.0 million or 3.8 percent, compared to $107.6 million for the first quarter of last year. Total Q1 operating expenses remained nearly steady year-over-year at $99.0 million.

Pretax income for the first quarter came in at $4.6 million compared to pretax income of $7.8 million in the first quarter of 2017, a decrease of 41.5 percent.

During the first quarter, CPS purchased $210.6 million of new contracts compared to $190.8 million during the fourth quarter of 2017 and $229.6 million during the first quarter of 2017. 

The company's receivables totaled $2.332 billion as of March 31, a decrease from $2.334 billion as of Dec. 31 and an increase from $2.323 billion as of March 31 of last year.

CPS noted that its annualized net charge-offs for the first quarter stood at 8.16 percent of the average portfolio as compared to 7.91 percent a year earlier.

The company added that its delinquencies greater than 30 days (including repossession inventory) represented 8.74 percent of the total portfolio when Q1 closed as compared to 9.74 percent when the year-ago quarter finished.

“Our collection is really starting to show some improvement,” Bradley said during the call. “It’s a shame that portfolio isn’t growing. But even with the shrinking portfolio and an aging portfolio, our collections are really beginning to show some of the results we’ve been hoping for literally last two years.”

In a news release, Bradley added, “We are pleased to get 2018 off to a good start.

“We’ve maintained a disciplined approach to pricing and credit in the face of a robust competitive environment, our asset-backed securities continue to be well received in the capital markets and we recorded our 26th consecutive quarter of positive pre-tax earnings,” he went on to say.