Transcript
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 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 those projected. I refer you to the company's annual report on March 15 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of the 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 the first quarter earnings call. Generally speaking, the earnings weren't particularly great, but more importantly, we are now turning the corner on what's been a very big struggle for most in our industry, but something we've handled quite well, which is to get through the '21 and '22 production and the sort of weaker performance of those pools. But at this point, it’s 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. We're very proud of that. More importantly, we've now turned the corner. The new paper is performing much better. We're beginning to grow again. A couple of highlights: We raised $50 million in new residual money to use for growth capital and originations in the first quarter, beginning to really take off again. Everything is going the right way. One other note is that we renewed one of our $200 million warehouse lines. The first quarter will be the jump-off point for this year in getting back to where we buy very good paper, it performs very well, and we can grow again, hopefully, rather aggressively. We'll touch on all those areas a little more in a few minutes, but for now, I'm going to turn it over to Danny to go through the financials.
Thank you, Brad. Going over to some of the financial results for the first quarter. Revenues were $91.7 million in Q1 versus $83.1 million in the March quarter last year. That's a 10% increase. That's primarily driven by our fair value portfolio, which is now $2.8 billion and yielding 11.3%. If you've been on these calls before, you're aware that the yield of 11.3% is net of credit losses or projected losses. The yield on the portfolio at the first quarter of last year was 11.2%. Moving down to expenses: For the first quarter, we had $85.2 million versus $64.7 million last year in the first quarter. A couple of things to note under expenses: the interest expense increased to $42 million in the first quarter compared to $32.7 million last year, largely due to higher rates but also due 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 contribution for the reversal of the loss provision last year was $9 million; in the first quarter this year, it's $1.6 million. This portfolio will run off over the next 2 or 3 quarters, and by the end of the year, we will not have much of that legacy portfolio remaining. Our pretax earnings for the quarter were $6.6 million compared to $18.4 million in the first quarter of last year, again mainly due to higher interest expense and the decrease in the reversal of the loss provision on the legacy portfolio. Net income was $4.6 million for the quarter, down from $13.8 million in the first quarter of last year. Following the same trends, diluted earnings per share is $0.19 per share in the first quarter compared to $0.54 last year. Moving to the balance sheet, our finance receivables at fair value were $2.791 billion in the first quarter, up 8% from $2.575 billion in the first quarter of last year. Our securitization debt balance was $2.277 billion, which is up 5% from $2.175 billion in the first quarter of last year. We're seeing an 8% increase in the fair value asset and only a 5% increase in the corresponding debt, so that benefit and the lower leverage show some strength in our balance sheet. Shareholders' equity is up to $279.1 million in the first quarter's end, a 22% increase from $228.4 million in March of last year, marking our 50th consecutive quarter of pretax profit. That's over 12 years of pretax profitability that helps boost the shareholders' equity number on the balance sheet. Moving to other important metrics, the net interest margin is $49.8 million, which is down 1% from the $50.3 million in the first quarter of last year. Core operating expenses as a percentage of the average managed portfolio is 6% in the first quarter of this year compared to 5.7% for the first quarter of 2023. That's it for the financial numbers. I will turn the call over to Mike.
Thank you, Danny. We had an excellent first quarter in terms of originations, purchasing $346 million in new contracts, which is an increase from $301 million in the fourth quarter of 2023, but lower than the $415 million in the first quarter of 2023. Our portfolio has grown to $3.02 billion as of March 31, 2024, marking the highest amount in our 33-year history, up from $2.97 billion in December 2023 and $2.86 billion in March 2023. As Brad mentioned, the first quarter demonstrated a positive growth trend, with $102 million in originations in January, rising to $105 million in February and $139 million in March. Maintaining this volume is crucial, and we are optimistic about our capabilities. We implemented several credit initiatives to support our growth in the first quarter, which were successful, and importantly, none of these initiatives impacted our loan-to-value ratio, a key credit metric for predicting losses, nor did they affect our pricing or fees. These initiatives contributed to our organic growth by enhancing our capture rate, funding more dealers, and increasing dealer loyalty. For the past two years, we've focused on onboarding and servicing larger dealer groups, defined as those with more than 15 dealers. When we initiated this effort in early 2023, large dealer groups comprised 17% of our business; by the end of the first quarter, that figure rose to 22%. This rapid growth indicates that instead of bringing on a single dealer, we are adding between 15 and 200 dealers per dealership. We currently employ 70 sales representatives, including 42 in the field and 28 inside, and we recently hired a new group of reps in the first quarter, with plans for further hiring throughout the year to support our growth. We also maintained strong partnerships with Pagaya and another partner in the first quarter, resulting in increased origination volume, with Pagaya contributing positively. Furthermore, we are enhancing our customer service platform within originations. This past quarter, we achieved an all-time low for return rates, reduced our deal funding time to under three days, and significantly decreased underwriting errors, all metrics that will encourage dealers to submit applications and conduct business with us. In terms of competition, we continue to see credit unions enter and exit the market with lower rates but pull back when losses exceed their expectations. Demand remains strong, allowing sufficient business for the five or six key players in the market. Economic influences like a recession and unemployment rates are important factors for us and our competitors. So far, we have not encountered a recession, and even though unemployment has increased slightly, it has not negatively impacted our demand or near-term portfolio performance. Regarding our risk profile for the first quarter, we maintain a solid APR at 21%. A positive aspect of our risk profile is the decrease in our loan-to-value ratio from 125 to between 118 and 119. Our payment-to-income and debt-to-income ratios, used in our scoring model, have remained stable, which is favorable, and the average financing has remained consistent at $20,500 quarter-over-quarter. Moving to portfolio performance, our delinquency rate, including repossession inventory, stood at 14.55% of the total portfolio for Q1, up from 12.68% in the same quarter last year. The annualized net charge-offs for Q1 were 7.84% of the total portfolio, compared to 7.74% in the fourth quarter of 2023 and 5.20% in the same quarter last year. The positive development is that we have notably improved performance compared to the previous quarter, with lower delinquency rates and reduced charge-offs as well. Although these metrics have increased year-over-year, we have made progress quarter-over-quarter while employing fewer extensions, which is significant. Concerning our vintages, the 2022 vintages have posed challenges for the industry. By the close of Q1, we believe we have managed these challenges, hiring additional collectors and implementing unique collection strategies to control essential metrics. The first two vintages of 2023 faced some difficulties, though the 2023-C vintage is performing considerably better. While it is still early to assess the 2023-D vintage, initial signs are positive, and these vintages might align with historical charge-off levels. In the industry, we are reportedly leading in charge-off performance for the 2022 and 2023 vintages, as well as in delinquency, especially concerning recovery metrics. In Q1, we strengthened our accounts receivable department, which is responsible for recovering charge-off balances. After introducing new initiatives and staff training, we have collected at least 40% of our total collections in the first three months, equating to what we achieved for the entire year of 2023, effectively offsetting our losses. On the technology front, we introduced our artificial intelligence scoring tool for fraud in Q1, which has greatly diminished synthetic fraud within our application pool, saving us over $1 million in this quarter and we expect further savings in the future. As previously mentioned in our last call, we launched our Gen 8 originations model in Q4 of 2023. After analyzing the originations from October 2023 produced via Gen 8, we observed a 200 basis point reduction in our delinquency rate. This is promising for lower delinquency going forward, which should lead to reduced charge-offs as a result of our AI model. With that, I’ll hand it back to Brad.
Thank you, Mike. Turning to the industry, as Mike pointed out, we've weathered the storm probably much better than most in our industry. We believe that given our positive growth, we will be able to maintain large margins while some of our fellow competitors face challenges getting through the issues with the '22 vintages. This situation creates opportunities for us to grow and retain good margins. There may also be chances to assist some of our weaker competitors. Looking at the economy, we are optimistic. We believe our industry is at the forefront of recession impacts, but our customers seem to be managing well. Unemployment, which we monitor closely, appears stable. We would love to continue growing and, should rate cuts occur in the future, we want to be positioned to increase our margins. Currently, we are not contemplating rate cuts, but if they occur down the line, achieving high volumes will be advantageous rather than waiting around. Overall, we are optimistic about the future, and things look good as we move into the second quarter. We will be back shortly with a report on our second quarter. Thank you all for joining us, and we’ll speak to you soon.
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.