Transcript
Good day, everyone, and welcome to the Consumer Portfolio Services 2023 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 valuations of receivables are dependent on estimates of future events and are also 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 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.
Thank you, and welcome, everyone, to our fourth quarter and full year earnings call. Thinking about this call and what I should say, the real thing was '23 probably in retrospect, was what we'll loosely call a transitional year for us, somewhat of a neutral year in terms of where we want to go with the company. It harkens back to late January of '23 when we were looking at our credit performance. We were somewhat surprised and/or dismayed, if not shocked, that the '22 vintages weren't performing as well as we thought they would. At that point, we decided we needed to slow things down and figure out what was going on, and so we did. Unfortunately, at some level, we spent most of '23 evaluating the '22 performance and figuring out what went wrong and how to make it better so we can then move forward, and it took some time. One of the things we did immediately was to tighten credit, improve the model, beef up the collection team, and work on making that '22 paper perform as best as we could. What we found out as the year went on is that, as much as we were dismayed by our performance and how our credit was performing, we found out that almost everyone else in the industry was doing far, far worse. That was a revelation that, as much as we didn't like our paper, ours was doing way better than almost all the others, and that is true today. The question we get all the time is why. Why did that happen? So, without going through the whole analysis, I'll highlight a couple of reasons. One thing was someone in our industry came up with the not-so-brilliant idea of guaranteeing back-end profit to all the dealerships. Being that we have been around forever, we realized right away that was kind of a mistake. However, most people in the industry followed suit. Eventually, we came up with a much tighter and slower version of our back-end profit program, and in the end, that probably helped us. This program boosted LTVs, loan-to-values significantly when guaranteeing profits, which was a good program for the dealerships because they loved making money no matter what contract they were writing. We were obviously skeptical and adopted a more cautious approach. Additionally, everyone else started growing a lot with rates being low, business booming, and auction values great. For some unknown reason, a lot of our competitors decided to stop fully verifying stipulations. One thing we've always done is to verify everything, including proof of income and job stability. This has significantly protected us from industry problems. So, as we went slower and more cautiously into the guarantee back-end than everyone else and continued our verification habits, we stood out positively. So in the 30 years I've been with this company, we've never had a time where we stand out better than almost everyone else in terms of credit performance and model management. '23 hasn’t been the best year in terms of growth, but our relative performance is a cool takeaway. With '22 behind us, it looks like we're ready to go again. I'm excited to see how '24 develops. I'll turn it over to Mike for his operations review.
Thanks, Brad. Just to follow up on what Brad discussed concerning portfolio performance, that is our number one priority right now. I'll add that there were some macroeconomic issues weighing on the vintages in 2022 and early 2023. Inflation and rising interest rates were headwinds we could not control, along with the guaranteed back-end problems that Brad mentioned, which increased the amount financed and car payments, putting stress on consumers. However, this was somewhat balanced out by fantastic unemployment numbers, which is critical for judging our business's viability and remains near historical lows. Most economic pundits believe we are going to avoid a recession, whether soft or hard, which means that with low unemployment and no recession, our business remains viable. As Brad mentioned, the 2022 vintages started challenging but seemed to have leveled out by the end of 2023. Similarly, the first half of the 2023 vintages were challenging, but we are seeing steady improvement and expect them to align more with our historical CNLs. Anecdotally, at a recent major asset-backed security conference, we heard repeatedly from investors and bankers that our 2022 and 2023 vintages far outweighed our competitors' performance in the space. So, while we aren't thrilled with the challenges of 2022 and early 2023, we are very pleased with our performance in the industry. For the fourth quarter, DQ, including repossession inventory, ended up at 14.55% of the total portfolio compared to 12.68% in the same quarter of 2022. The all-important annualized net charge-offs metric in the fourth quarter ended at 7.74% of the portfolio, compared to 5.83% in the same quarter of the previous year. Extensions were up slightly in the quarter but within our historical numbers. Our extensions to active account ratio is below our historical averages. Regarding recovery, we generally aim for recoveries in the low 40s, but they have dropped into the high 30s due to declining used car prices and a shortage of repo agents who left the industry during COVID, impacting the timing of repossession and sale. That said, we believe our repo and sale timing remains the best in the industry. One positive trend we observed late last year was our Pots Group performance, our potential delinquencies in the 1 to 29-day bucket, which had its best results in two years. This is important because success in Pots translates to more overall successes in delinquent accounts. Another positive trend is our right party contact rate increased from 4% to 8%. This correlates with more promises to pay and improved collection outcomes. We've also introduced a new outreach program early in the collection stage to encourage customers to sign up for recurring payments, leading to a 25% increase in sign-ups, which significantly enhances our collection performance. Furthermore, we've beefed up our collection staff from 287 to 423 collectors, reducing accounts per collector from 675 to 515, allowing collectors to have more time to work accounts and focus on problem accounts manually. Lastly, we have enhanced our nearshore operation strategies, putting nearshore collectors on the power dialer, thereby freeing domestic collectors to focus more on manual collections. These service improvements are unique to us, and we believe that, but for these approaches, our performance might have been worse. Consequently, we are pleased with our servicing metrics. Moving to originations, the fourth quarter remains solid as we purchased $301 million of new contracts, compared to $322 million in Q3 of 2023 and $428 million in Q4 of 2022. For the year, we completed $1.3 billion in new contracts, down from $1.8 billion in 2022, reflecting our consistent credit tightening starting in March 2022 and continued into 2023 and beyond. We've tightened the LTV, capped payments, and increased job stability checks, resulting in lower overall approval percentages; however, knocking down LTVs will predict losses better in the future. While 2022 was a record year, 2023 ended up being the second-best originations year in our 30-plus year history, which is quite positive. Despite the pullback, we were able to grow the total managed portfolio to $3.195 billion, up from $3 billion at the end of 2022, indicating strong demand in the subprime auto space. We received more applications in 2023 than in our record year of 2022, which counters claims that the subprime market is downsizing. The subprime auto market remains robust. Regarding portfolio performance, we continue to focus on affordability for our customers, maintaining our payment-to-income and debt-to-income ratios over the past five to seven years. Our monthly payment averages around $535, compared to an average subprime payment of about $600, and new car payments around $775. We're keeping a watchful eye on affordability in our space. We also sustained a strong APR in the fourth quarter, averaging 21%, consistent with the end of 2022. Competition within our space remains abundant. Interestingly, while we lose some business to direct competitors, most losses are to credit unions, who have entered the space with low interest rates but often exit due to poor CNL outcomes. We've noticed a trend of credit unions leaving the market, which creates more opportunities for our remaining competitors. Moving to technology updates, we implemented our new Generation 8 machine learning-based AI model in October 2023. This latest model updates our Gen 7 model launched in 2021, reflecting the last two years of originations, considering COVID-related portfolio insights and employing new alternative data. We have a new fraud score expected to save us significant money in synthetic fraud avoidance, and we believe this is our best buy box yet. Initial results from the new model appear positive. We continue to integrate AI platforms to improve efficiency and accuracy, aligning with our strategy over the past five years. We utilize machine learning in our originations model, as well as a document review AI tool in our operations to increase efficiency. We are also testing new AI voice and tech bots. Our experience indicates texting is the best collection tactic, and we believe we've found the strongest voice bot, connecting it with our current texting platform to enhance our collection performance. Lastly, we've taken advantage of softening commercial real estate markets, renewing or moving four of our five leases recently, which we project will yield about $10.8 million in savings over the next four years. We’re also looking to implement what we consider a best-in-class work-from-home platform to reduce our space. I'll hand it back to Danny.
Thanks, Mike. I'll go over the financial results. For the fourth quarter, revenues were $92 million, representing an 11% increase over the $83 million from the fourth quarter of 2022. For the full year, revenues totaled $352 million, a 7% increase over the full-year revenue of $329.7 million in 2022. Our largest revenue component is interest income. The fair value portfolio has risen to $2.7 billion, yielding 11.3%, net of credit losses. The fourth quarter included a markup of $6 million to our fair value portfolio, contrasting with $12 million in markups for the full year and $15.3 million in the previous year's fourth quarter. The markup stems from better-than-expected performance in our fair value portfolio. Expenses for the fourth quarter were $82.1 million, a 27% increase over the $64.7 million in the fourth quarter of 2022. Full-year expenses reached $290.9 million, 36% more than the $213.5 million in 2022. A significant driver under expenses has been the reversal of negative loss provisions from our CECL portfolio, which is the portfolio originated prior to 2018 that isn't accounted for under fair value. We've booked a lifetime loss reserve on that portfolio, and results have exceeded our expectations, allowing us to reverse unnecessary loss reserves, totaling $1.6 million in the fourth quarter and $22.3 million for the full year, compared to $4.7 million in the fourth quarter of 2022 and $28.1 million for the full year. Another major factor increasing expenses has been interest expense, which rose to $40.2 million in the fourth quarter from $28.9 million in the same quarter last year. For the year, interest expense totaled $146.6 million, compared to $87.5 million in 2022, driven largely by higher rates, with a smaller contribution from portfolio growth. Pretax earnings for the fourth quarter were $9.8 million, down from $18.3 million, marking a 46% reduction year-over-year. For the year, net income was $61.1 million, a 47% drop from $116.2 million in 2022. Likewise, net income for the quarter is $7.2 million versus $14.1 million a year earlier, and for the year 2023, it was $45.3 million compared to $86 million in 2022. Moving to the balance sheet, finance receivables at fair value are now at $2.7 billion, up 10% from $2.5 billion at the end of 2022. Our debt balance shows that our securitization debt is $2.265 billion at the end of 2023, compared to $2.1 billion at the end of 2022, which is a 7% increase in debt against a 10% increase in fair value assets, indicating we’ve managed to lower leverage while building our balance sheet, a clear sign of strength. Shareholders' equity reached $274.7 million at the end of the year, the highest in our history—20% up from $228.4 million at the end of 2022—driven by 49 consecutive quarters of pretax profit over the last 12 years. Our net interest margin of 51.7% is down from 54.1% a year ago. For the entire year, our net interest margin was $205.4 million, a 15% decline from 2022. Core operating expenses rose to $43.5 million, a 7% increase over the $40.6 million in the fourth quarter of 2022. For the year, core operating expenses totaled $166.6 million in 2023, up from $154.1 million in 2022, also an 8% increase. Our annualized core operating expenses as a percentage of the managed portfolio is now at 5.9% for the quarter of '23, unchanged from the fourth quarter of '22, while on an annualized basis, the '23 period was 5.7%, a reduction from the 6.1% in 2022, indicating some operational leverage improvement as the portfolio expands. Our return on managed assets was 1.3% for the quarter and 2.1% for the year, down from 4.6% in 2022. That's it for the financial results. I'll turn it back to Brad.
Thank you, Danny. As you can hear from both reports, while '22 wasn't our best year, we've accomplished quite a bit across many areas. Looking at the industry, everyone is still struggling with '22 paper, and even some cases '23 has experienced similar issues. However, our performance is notably better, positioning us favorably. We may have a head start in redefining our growth strategies compared to competitive peers. There will certainly be opportunities as we anticipate that some other companies may not make it through this period. Moreover, the potential for lower rates could improve our margins and enhance our performance. As we look toward the end of this year and into 2024, we expect a decent economy, if not a good one, while unemployment remains robust, which is the most important factor for our industry. Given that unemployment is not a concern, we are optimistic about the potential for growth and seizing opportunities to advance our company's position. We believe that transitioning through '22 and aligning for growth in '24 can foster a bright future ahead. Thus, it is remarkable that through all the challenges, our company's paper performed well in both '22 and '23. We are incredibly proud of our team's contributions and feel confident that '23 has positioned us well for a promising '24. I want to thank you all for joining us today, and we look forward to providing our first quarter report soon.
Thank you. This concludes today's teleconference. A replay will be available beginning two 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.