Consumer Portfolio Services Q1 2024 Earnings Call Transcript

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May 14, 2024

There are 4 speakers on the call.

Operator

Good day, everyone, and welcome to the Consumer Portfolio Services 2024 First 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.

Operator

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 15 for further clarification. The company assumes no obligation to update publicly any forward looking statements, whether as a result of new information, future events or otherwise. With us here is Mr. Charles Bradley, Chief Executive Officer Mr.

Operator

Danny Barwani, 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.

Speaker 1

Thank you, and welcome everyone to the Q1 earnings call. Generally speaking, the earnings weren't particularly great, but more importantly, it's a point where we're now turning the corner on what's been a very big struggle for most everyone in the industry, but something we've handled quite well, which is to get through the 2021 2022 production and the sort of weaker performance of those pools. But at this point, still true what we said last time, which is our company has done far better in that area than almost anyone else in our industry. So, we're very proud of that. But somewhat more importantly, as I just said earlier, we've now sort of turned the corner.

Speaker 1

The new paper is performing much better. We're beginning to be able to grow again. A couple of highlights, we did raise $50,000,000 in new residual money to use for growth capital and originations in the Q1 beginning to really take off again. So, really everything is going the right way. One other note is we renewed one of our $200,000,000 warehouse lines.

Speaker 1

So the Q1 is really going to be sort of the jump off point for this year and kind of getting back to where we buy very good paper, it performs very well and we get to grow again and hopefully at some point rather aggressively. And we'll touch on all those areas a little bit more in a few minutes. But for now, I'm going to turn it over to Danny to go through the financials.

Speaker 2

Thank you, Brad. Going over some of the financial results for the Q1. Revenues were $91,700,000 in Q1 versus $83,100,000 in the March quarter last year, that's a 10% increase. That's primarily driven by our fair value portfolio, which is now $2,800,000,000 and that's yielding 11.3%. If you've been on these calls before, you're aware that that yield of $11,300,000,000 is net of credit losses or projected losses.

Speaker 2

The yield on the portfolio at the Q1 of last year was 11.2%. Moving down to expenses for the Q1, dollars 85,200,000 versus $64,700,000 last year in the Q1. A couple of things of note under expenses, the interest expense increased to $42,000,000 in the first quarter compared to $32,700,000 last year, largely due to higher rates, but also in part to portfolio growth and a higher debt balance. Also included in expenses is the reversal of the loss provision on our legacy portfolio, which is accounted for under CECL, that number, that contribution for the reversal of the loss provision last year was $9,000,000 and this year in the Q1 it's $1,600,000 So that portfolio is going to run off over the next 2 or 3 quarters and then we will not have much of that legacy portfolio remaining by the time we get to the end of the year. Our pre tax earnings for the quarter is $6,600,000 compared to $18,400,000 in the Q1 of last year, again mainly due to higher interest expense and the decrease in the reversal of the loss provision on the legacy portfolio.

Speaker 2

Net income is $4,600,000 for the quarter is down from $13,800,000 in the Q1 of last year. And following the same trends, diluted earnings per share is $0.19 per share in the Q1 compared to $0.54 last year. Moving to the balance sheet, our finance receivables at fair value 2.791 $1,000,000,000 in the Q1 is up 8% from the 2.575 in the Q1 of last year. Our securitization debt balance is 2,277,000,000 dollars which is a 5% from the 2,175,000,000 in the Q1 of last year. So we're seeing an 8% increase in the fair value asset and only a 5% increase in the corresponding debt.

Speaker 2

So that benefit in the lower leverage is making show some strength in our balance sheet. Shareholders' equity is up to $279,100,000 in the first quarter at the end of the Q1. That's a 22% increase from the $228,400,000 in March of last year. And that's driven by this would mark our 50th consecutive quarter of pre tax profit. That's over 12 years of pre tax profitability and that's helping to boost the shareholders' equity number on the balance sheet.

Speaker 2

Moving to other important metrics, the net interest margin is $49,800,000 which is down 1% from the $50,300,000 in the Q1 of last year. Core operating expenses as a percentage of the average managed portfolio is 6% in the Q1 of this year compared to 5.7% for the Q1 of 2023. That's it for the financial numbers. I will turn the call over to Mike.

Speaker 3

Thank you, Danny. The first quarter in originations as we purchased $346,000,000 of new contracts that compares to $301,000,000 dollars in the Q4 of 2023 $415,000,000 during the Q1 of 2023. More good news, our portfolio grew to $3,020,000,000 as of March 31, 2024. I note that's the highest portfolio amount in our 33 year history and that's an increase from $2,970,000,000 as of December 31, 2023 and an increase from $2,860,000,000 as of March 31, 2023. As Brad said, the Q1 showed a positive growth trend.

Speaker 3

We did $102,000,000 in January, then upped that to $105,000,000 in February and upped that to $139,000,000 in March. The trick is to hold that volume and we're optimistic we can do so. We use several credit initiatives to nudge our growth in the Q1, which worked, but it is critical to note that none of those credit initiatives touched our LTV, our loan to value, which is the key credit metric that predicts losses, didn't affect our price and didn't affect our fees. So all good news there. Those initiatives helped increase our organic growth of contracts through increasing our capture rate, our funding dealers and our dealer loyalty.

Speaker 3

One of the things that we've been focusing on for the last two years is to onboard and service more large dealer groups, which is defined by a dealer group with more than 15 dealers under their umbrella. When we launched that initiative in early 2023, the large dealer groups made up 17% of our business and at the end of the Q1 that has grown to 22%. That is exponential growth because instead of adding just one dealer, we're adding between 15 100 dealers per dealership. We currently have 70 sales reps in the 42 in the field, 28 inside. We hired a new class of reps in the Q1 and will likely do more as the year heads out.

Speaker 3

This has and will help our growth going forward. We continued our ironclad partnerships with Ally and Pagaya in the 1st quarter, resulting in added origination volume and with Pagaya solid on game profits. Another thing of note, we continue to build our customer service platform and originations. In the first quarter, we lowered our packers return rate to an all time low. We lowered our deal funding time to less than 3 days and we significantly reduce our underwriting errors.

Speaker 3

All of these are metrics that encourage the dealers to send their applications and do business with CPS. In terms of competition, we continue to see waves of credit unions come in and out of the space with lower rates and then they pull out of the space when the losses don't meet their expectations. Demand remains strong. And so there's enough business for the 5 or 6 of us that sort of dominate the market. Again, the sort of silver bullets for us and our friendly competitors are things like a recession and the unemployment rate.

Speaker 3

So far, there has been no recession. And even though unemployment ticked up just a bit, it hasn't affected our demand or our near term portfolio performance. Taking a quick check on our Q1 risk profile, we continue to hold a strong APR at 21%. Probably the best thing in our risk profile is we've driven down our LTV from 125 to and it fluctuates between 118 and 119. Our payment to income ratio and our debt to income ratio which we use in our scoring model remains flat which is great and the amount finance remains flat quarter over quarter at $20,500 Switching to portfolio performance, for the Q1 DQ including repossession inventory ended up at 14.55 percent of the total portfolio as compared to 12.68% in the same quarter in 2022.

Speaker 3

Annualized net charge offs for the Q1 were 7 point 8 4% of the total portfolio as compared to 7.74% as of the Q4 of 2023 and 5 point 2 0% in the same quarter in 2023. The positive news is that we indeed have turned the corner in terms of performance as we've lowered our DQ compared to our previous quarter and we've also lowered our charge offs as compared to our previous quarter. So year over year it's ticked up, but quarter over quarter we've driven those metrics down. We've done this while utilizing less extensions which is industry. We believe sort of as of the end of quarter 1, we've got our arms around the 2022 vintages.

Speaker 3

We've employed more collectors to collect those vintages and we've been utilizing unique collection strategies to control those key metrics and flatten out those curves. The first two of our 2023 vintages were also challenging, albeit a little slightly more slightly less challenging, I should say. But the most critical thing to look at in our 2023 vintages is that our 2023C vintage is doing much, much better. The 2023D while it's a little early to judge is also looking to be a much better. And those 2023 vintages might just normalize into our historical C and Ls.

Speaker 3

Looking at how we stack up in the industry, we are reportedly according to the investment bankers that we work with and the investors in our securitization bonds who follow the industry, note that we're outperforming all of our competitors in CNL performance on the 2022 and 2023 vintages, and also our DQ. And interestingly enough, we're outperforming our competitors when it comes to the all important recovery metric. One thing to note is in the first quarter we bolstered our ARD department, which is in charge of collecting our charge off balances. And after employing a few new initiatives training up the staff, we've collected at least 40% so far in 3 months of what we collected all of 2023. And all of those collections go right to offset our losses.

Speaker 3

In terms of technology, we deployed our artificial intelligence scoring tool for fraud in the Q1, which has significantly reduced the synthetic fraud in our application base that has already saved us over $1,000,000 in the Q1 and looking and we expect to save many more millions going forward on that with using that AI fraud tool. As I mentioned in our last call, we launched our Gen 8 originations model in the Q4 of 2023. We have now had a chance to analyze the October 2023 originations where we originated it. We originated those originations with Gen 8 and we also originated those that paper with Gen 7 and Gen 8 has organically lowered our DQ by 200 basis points. So that bodes well for our DQ going forward, which also translates should translate to lower CNLs just through our AI model.

Speaker 3

And with that, I'll kick it back to Brad.

Speaker 1

Thank you, Mike. Turning to the industry, as Mike pointed out, we and I guess I pointed out as well, we weather the storm probably much better than most in the industry. And we think at this point given that our growth is going, it would be able to hang on to a very large margins that some of our fellow friendly industry players are either easing back or going slow to get through the problems they've had with the 22 vintages. That creates an opportunity for us to grow and hang on to big margins, and so that's good. And it also might create some opportunities for a few of the weaker fellow folks out there that may or may not be able to get through the production problems of 'twenty one, 'twenty two.

Speaker 1

So we'll wait and see, but we're always looking for opportunities in the industry and maybe helping out some of our fellow competitors. And looking at the economy, generally speaking, we're quite optimistic. We think our industry is very much the tip of the spear on recessions and yet our customers seem to be doing just fine. Unemployment is certainly the thing we watch and care about the most and unemployment looks fine. What we would love to do, of course, is keep things growing, get the volumes up to where when and if they get a rate cut, we then get to pick up that extra margin and really just enhance what we're doing.

Speaker 1

We're not really thinking there's going to be rates cut currently, but down the road, it could be, so doing large volumes when those come will be much better than just sitting around waiting for them to then grow. So again, we're kind of optimistic on all those different fronts. We're almost well into our Q2. Those things look good as well. So we'll be back rather shortly to report in the Q2 in a little bit.

Speaker 1

So with that, thank you all for joining us, and we'll speak to you soon.

Operator

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

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Key Takeaways

  • Performance turnaround: CPS has “turned the corner” on weaker 2021–2022 pools as new paper shows improved performance, positioning the company for renewed growth.
  • Record portfolio size: Originations in Q1 totaled $346 million, driving the fair‐value portfolio to $2.791 billion and managed portfolio to a 33-year high of $3.02 billion.
  • First-quarter revenues rose 10% year-over-year to $91.7 million, though pre-tax earnings fell to $6.6 million due to higher interest expense and a smaller CECL reversal, yielding net income of $4.6 million (EPS $0.19).
  • Credit metrics strengthened as loan-to-value improved from 125% to ~118–119%, DQ and net charge-off rates declined sequentially, and AI tools cut synthetic fraud losses by over $1 million in Q1.
  • Management sees ongoing opportunities to gain market share as competitors address legacy vintages, with no imminent recession or unemployment spikes expected to curb demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Consumer Portfolio Services Q1 2024
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