Transcript
Good day everyone, and welcome to the Consumer Portfolio Services 2024 Second 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 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 to our second quarter earnings call. Probably the best way to sum up the quarter is that it was a good quarter, but we’re still trying. We’re beginning to make that transition from what we’ll call watchful waiting on our portfolio to where we can start growing again. We probably need, in terms of being absolutely certain that credit is made, another six to nine months, but we have gotten to the point where we’re confident enough in the performance of the pools that we’ve restarted to grow this quarter. Our quarter-over-quarter growth is 25%, and year-over-year it’s 36%, so we are really making an effort to start growing again. This is mostly because we finally think we’re looking at most of what would be the 23-C, 23-D and 24-A securitizations, with 24-A being the newest that we’re looking at. The performance there has turned a corner enough to where we’re confident that the overall performance going forward will be fine. With that, we’ve been able to start growing again. Still, even at that point, at least in the second quarter, we’re still concerned with making sure our credit is very good. We’re working on expanding our footprint in terms of sales and we, of course, anxiously await some word on whether interest rates will go down towards the end of the year. So, I think we’ll go through some of the other highlights, but basically, we’re about to turn the corner. We’re really focused on growing again, and hopefully this timing will all come together towards the end of the year when interest rates come down. I’ll talk more about that, but for the moment I’ll turn it over to Danny for the financial stuff.
Thanks, Brad. Going over the financial results for the quarter, revenues were $95.9 million, which is a 5% increase over the $91.7 million last quarter and a 13% increase over the $84.9 million in the June quarter last year. For the six months, $187.6 million is a 12% increase over the $168 million last year. Included in the revenue numbers is a mark to finance receivables on our fair value portfolio, which shows a $5.5 million mark that indicates the outperformance of that portfolio during the quarter. That compares to no mark in the same quarter last year, and for the six months, that mark was $10.5 million for 2024. Also included in the revenue numbers is the increase in interest income, driven by the growth, as Brad said, in new loan originations. We originated $431.9 million in the second quarter, which is a 25% increase over our first quarter and a 36% increase over the $318.4 million last year. So, those two facts are driving the increase in revenues. Moving over to expenses, $89.2 million for the quarter is up 5% over the $85.2 million last quarter, compared to $66.3 million in the second quarter last year. For the six months, expenses were $174.4 million, which is a 33% increase over the $131 million for the six months last year. A couple of items to note for expenses: we had a reversal in the provision for losses on our legacy portfolio. You might recall our legacy portfolio is the loans we originated prior to 2018, which is mostly gone now and is mostly amortized. There’s only about $13 million of that left. But during the quarter, we did reverse about $2 million of credit losses. This was no longer required because the performance had been better than expected. That compares to a reversal of $9.7 million in the second quarter of last year. For the six-month period, that reversal was $3.6 million for the 2024 quarter and $18.7 million last year. The other increase in expense is primarily driven by the increase in interest expense, which has increased to $46.7 million this quarter, compared to $35.7 million last year. Now, obviously, the increase in interest rates has contributed to this increase in interest expense, but part of that increase is also due to portfolio growth, again driven by the higher origination levels during the year. Moving on to pretax income, $6.7 million is comparable to the $6.6 million last quarter and versus $18.6 million last year. For the six months, pretax income was $13.2 million, down from $37 million last year. Similarly, net income is $4.7 million for the second quarter, down from $14 million in the second quarter last year. For the six-month period, net income is $9.3 million, down from $27.8 million last year. The same trends follow for earnings per share: $0.19 for the second quarter this year, down from $0.55 last year. For the six months, $0.38 per diluted share compared to $1.09 last year. So again, these trends are all driven by the increase in interest expense and overall expenses, somewhat offset by the increase in revenues from the higher portfolio balance. Moving on to the balance sheet, our finance receivables at fair value is $2.960 billion, which is a 6% increase from the first quarter and a 13% increase from the $2.6 billion last year. Our total debt balance is $2.9 billion as of June 2024, which is up 16% from the $2.5 billion last year. Lastly, on the balance sheet, our shareholders' equity, another record high for the company, is $280.3 million, which is up 10% from the $255 million in June of last year. Looking at other metrics, the net interest margin is $49.2 million in the second quarter, which is flat from $49.2 million last year. For the six months, it’s $99 million as compared to $99.5 million last year. Core operating expenses are down 1% this quarter from last quarter, but it’s up 10% from the $40.3 million last year. On a year-to-date basis, core operating expenses were $89.3 million, which is up 10% from the $81.2 million in the June quarter of last year. As a percentage of the managed portfolio, core operating expenses are down to 5.7% from 6% in the first quarter, but it’s up from 5.5% in the second quarter of 2023. Lastly, the return on managed assets is 0.9% in the second quarter compared to 2.6% in the second quarter last year. The same figures for the year-to-date period: 0.9% for the six months compared to 2.6% for the six months of 2023. I’ll turn the call over to Mike.
Thanks, Danny. In operations, I have a couple of follow-up comments regarding originations and sales. The demand for subprime business remains strong. We received 310,000 applications in the second quarter of 2024, which compares to 281,000 applications in the second quarter of 2023. That’s a 10% increase in applications year-over-year, despite the fact that we did $500 million less in 2023 than what we’re projected to do this year. In terms of sales, we hired 14 new representatives in the second quarter, increasing from 72 representatives to 86, which is a 19% increase. As Brad and Danny mentioned, as we continue to grow the business, we will also continue to grow our outside sales and our inside sales teams with a goal to reach around 110 representatives by the end of the year and further expand that team as we move into 2025. One aspect of growing the business in the second quarter and beyond is that we continue to expand our large dealer group base, which consists of dealer groups with more than ten rooftops under their umbrella. We reached 99 large dealer groups in the second quarter, up from 76 in the second quarter of 2023 and 61 in the second quarter of 2022. All told, that’s a 62% increase over the last two years in our large dealer group additions. This expansion has allowed us to add roughly 900 rooftops to our dealer base while only increasing by about 30 dealerships in total—this is incredibly efficient. This meaningful increase in large dealer groups has increased our footprint from 17% of our business in 2022 to 26% as of the end of the second quarter. We are well on our way to meeting our goal of reaching 30% by the end of the year. Additionally, as part of our large dealer group base, we continue to originate volume from major rental car companies, including Enterprise, Hertz, and Avis. A few other organic metrics of growth: we were able to grow our dealer loyalty in the second quarter, which reflects how many deals per dealer we conduct on a monthly basis. We increased our capture percentage in the second quarter, raised our average funding dealers per representative, and lowered our funding time to get the dealers paid to just over two days. That’s the fastest it’s been in company history. We all know that dealers appreciate being paid quickly, and that goes to our efforts to enhance customer service to the dealerships. Regarding our current risk profile, we’re maintaining a strong 20.49% APR, and we’ve been able to sustain that APR during our growth phase so far in 2024. Our FICO score has increased to 578, which is higher than our historical FICO of 565. This reflects our emphasis on acquiring more upper-tier paper, thus zeroing in on the upper tranche of the subprime bracket. Our LTVs remained flat in the second quarter, running around 119%, down from 120% in 2023 and down from 125% in 2022. We’ve made some progress reducing our LTVs in moving from 2022 into the second quarter of 2024. Notably, we were able to improve our debt-to-income and payment-to-income ratios in the second quarter compared to our first quarter. Overall, we maintain a strong risk profile during our growth cycle. Switching to portfolio performance, DQ greater than 30 days for the second quarter was 13.29%, compared to 11.72% in the second quarter of 2023. However, we have been able to lower the DQ month-over-month for the first six weeks of 2024, suggesting some positive trends in reducing the DQ thus far this year. Annualized net charge-offs for the second quarter stood at 7.2%, compared to 6.29% in the second quarter of 2023. Similar to our DQ, we’ve moderately lowered our charge-offs month-over-month in the first six months of 2024, indicating good trends in the charge-off rate up to now. Our extensions remained flat in the second quarter, and when comparing those extensions with our competitors, we remain at the market average. We continue to see remarkable success in the use of our extensions. Our extension model utilizes algorithms to provide those extensions, and we recently conducted a study on extensions granted in December of 2023. This study compared accounts that did receive extensions with those that did not, and we found a 41% decrease in charge-offs for accounts that received extensions. So our extension methodology is functioning well. As Brad mentioned, we are quickly exiting or flushing through the challenges stemming from the 2022 vintages. The second half of 2023 indicates market improvement, and while it’s still early, the 2024s appear promising. We are cautiously optimistic that the CNLs will return to historical norms. In terms of technology, we are continually integrating AI-based technologies into both our front-end and back-end operations. Regarding our latest project, we completed the pilot of a conversational AI voice bot, which is utilized by some of our competitors in the industry. We expect to fully launch this AI voice bot in August, likely to leverage it in collecting our potential delinquencies, specifically those at 1 to 29 days. We anticipate this will reduce our roll rate and enhance our collections in later buckets. The pilot testing revealed incredible efficiency in making a high volume of calls, establishing right-party contacts, converting those contacts to promises to pay, and achieving real-time payments 10% of the time. We are excited about that initiative. Another noteworthy development this quarter was the launch of our second phase of the document processing AI bot in originations. The first phase has been implemented for the last year, and the second phase focuses on verifying proof of income upfront. This allows us to process the deal more quickly and pay the dealer faster while also increasing accuracy and detecting fraud upfront. A few other miscellaneous updates: in the second quarter, or in the first six months of 2024, we significantly reduced our occupancy costs by renegotiating and renewing four of our five leases. Our fifth lease is currently up for renewal, and we are actively addressing that. All in all, positive developments. With that, I’ll hand it back to Brad.
Thanks, Mike. Looking at the industry, we sit in a pretty good place. By and large, everyone in our industry is dealing with the performance problems created in 2022 and 2023. As we mentioned in previous calls, we’ve done better than most, if not even better than that. So we’re very comfortable with how those pools are performing, and we think it will take some time for others to work through it. We’ll see how that affects the industry. I think it can only be positive; as a few of the weaker players exit, the larger players will take over. We don’t face that problem. One key point we’ve highlighted in the past is that barriers to entry in our industry now are quite high. Nobody has entered this market in the last five or almost ten years. This fact gives us a competitive advantage, especially for those doing credit assessment better than most, like us. Our primary focus now is growth. We aim to position ourselves so that we are experiencing considerable growth and real production as we roll into the new year while benefiting from declining interest rates, at which point we’ll begin making significant profits again. So, that is the plan. In terms of the economy, our top concern is unemployment. Currently, unemployment seems to be stable, and we believe the economy appears healthy. We’ll see what the elections may bring, but we are likely more interested in what the rates will do. Given the current economic conditions, it seems that eventually, they’ll begin to lower rates, which will greatly benefit us. Therefore, our goal is to prepare for that time in two ways: first, by ensuring that credit is exactly where we anticipate it to be, and second, by positioning ourselves for growth, allowing us to finance a significant number of loans as interest rates decline. The second quarter, like the first, was not overwhelmingly exciting; it felt like building blocks. We are laying the groundwork so that when the time is right, we’ll be in the best possible position to take advantage of it both economically and financially. We have a strong cash position, and having completed that residual deal, a significant amount of money is tied up in our securitizations, which is now starting to flow out. Overall, we are in a very good position to capitalize on the forthcoming quarters. Thank you all for attending; we’ll see you next quarter.
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. Please disconnect your lines at this time and have a wonderful day.