Consumer Portfolio Services, Inc. Q4 FY2024 Earnings Call

Good day, everyone, and welcome to the Consumer Portfolio Services 2024 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 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 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 would now like to turn the call over to Mr. Bradley.

Thank you, and welcome everyone to our fourth quarter and year-end conference call. I think looking back on the fourth quarter and the whole year, 2024 was a year of what we will loosely call cautious growth. While we waited to prove out the changes in credit. As most people know and certainly everyone in the industry, 2022 was a very difficult year and even parts of 2023, in terms of credit performance. And so for the most part, we had bad credit. And so now it appears, you know, we thought sort of the first certainly, 2022 was not particularly great. The beginning of 2023 was not particularly great, but the end of 2023 has now proven to be much better. And all of 2024 is proving out to be much better. So we finally made a distinctive change in terms of our credit approach. Which sets us up. And part of what we did while we were waiting for the credit to improve was to set ourselves up to be able to grow more aggressively in the coming year. So we actually did all that. We now have better credit performance. Our originations growth was not quite as strong as the year before, but still very good. And again, we have sort of set the stage for what could be a very good year in 2025. But that was really the focus of 2024. I will touch on some more highlights on that a little bit later. But for now, I will turn the conference call over to Danny Bharwani.

Thank you, Brad. So revenues for the quarter were $105.3 million, which is a 5% increase over the $100.6 million of revenues in our third quarter. And it is a 14% increase from the $92 million for the fourth quarter of 2023. For the year, $393.5 million of revenues is a 12% increase over the $352 million revenues in 2023. This increase in revenues is being driven by strong growth in loan originations. For the quarter, we originated $458 million in new auto loans, which is a 52% increase over the $302 million in the fourth quarter of 2023. Loan originations for the year $1.68 billion is a 24% increase from the $1.36 billion in 2023. This is then in turn driving an increase in our fair value portfolio, which now sits at $3.5 billion and is yielding 11.3%. Remembering that this 11.3% yield is net of losses. The expenses for the quarter were $98 million compared to $82.1 million in the fourth quarter of 2023. For the year, expenses were $366.1 million, which is 26% higher than the $290.9 million in 2023. The expenses in the 2024 period compared to 2023 include adjustments to our CECL portfolio for excess loan provisions that amounted to $5.3 million in the 2024 period compared to $22.3 million in the 2023 period. So, there is a big decrease in these loan provision adjustments on our legacy CECL portfolio from 2023 to 2024. The other big driver of expenses is the interest expense, which continues to be higher than the prior year both on a quarter and year basis. This can largely be attributed to higher rates, but also in part to our portfolio growth, which is driving increasing our securitization debt. Pretax earnings for the quarter are $7.4 million, which is down 24% from $9.8 million in the fourth quarter of last year. For the year, $27.4 million of pretax earnings compared to $61.1 million in 2023. Net income for the quarter was $5.1 million; last year, in the fourth quarter, $7.2 million. For the year, net income was $19.2 million compared to $45.3 million in 2023. Same trends in earnings per share, diluted earnings per share for the quarter, $0.21, compared to $0.29 in the fourth quarter of last year. For the year, diluted earnings per share was $0.79 compared to $1.80 in the prior year. Moving on to the balance sheet, our cash, both unrestricted and restricted, is $137.4 million at the end of the year compared to $125.5 million in 2023. The biggest item on our balance sheet is our fair value portfolio, which is $3.314 billion in 2024 at the end of the year, 22% higher than the $2.723 billion at the end of 2023. Moving on to the liability section of the balance sheet, our total debt is $3.131 billion. It is also 22% higher than the $2.566 billion at the end of 2023. Shareholders' equity continues to increase, which is one area of strength in our balance sheet. We are at the highest level we have ever seen in the history of the company. $293 million in shareholders' equity is 7% higher than the $275 million at the end of 2023. Looking at other metrics, net interest margin is $52.8 million for the fourth quarter of 2024, which is 2% higher than $51.7 million in the fourth quarter of 2023. For the year, net interest margin is $202 million compared to $205.4 million. Core operating expenses on a percentage basis for the quarter was 5.4%, down from 5.9% in the fourth quarter of 2023. On an annualized basis for the year, it was 5.6% compared to 5.7% in the prior year. For core operating expenses as a percentage of the managed portfolio, and lastly, the return on managed assets was 0.9% for the fourth quarter, down slightly from 1.3% in the fourth quarter of last year. For the year 2024, it is also 0.9%, down from 2.1% in 2023. I will turn the call over to Mike.

Thanks, Danny. I will run through some operational notes here. As Danny mentioned, we had a really good fourth quarter in originations, and that was a 41% increase over the fourth quarter of originations in 2023. Danny also mentioned we had a great originations year in 2024, which was actually a 24% increase in our originations in 2023. So 24% increase in growth was quite good. We ended the year 2024 with a portfolio balance of $3.41 billion, which is a company record, which is up from $3.32 billion at the end of 2023. The growth in originations increase was a result of a few factors. First, as Brad mentioned, we sort of set the growth up in 2024 and 2023 as we hired approximately 25 new sales reps in 2023 and opened some new territories. Typically, it takes about nine months for those reps to season, fill their pipeline, and develop the territory. We started to see the impact of those hires at the tail end of 2023 and mainly through the year 2024. Of note, in 2024, we hired 42 new sales reps and opened new territories in anticipation of our growth goals for 2025. So we are ramping up our market share and our sales reps a year in advance of our growth anticipation. Second, we were able to grow our large dealer group base, which we define as ten car lots per dealer. We took it from 20% of our originations to 28% of originations. We successfully landed several large dealer groups with over 100 car lots per dealer and also increased our business with our existing large dealer group base. We look forward to continued growth in this area in 2025. Third, we were able to grow organically with our existing sales rep force by increasing our funding dealers per rep. We want to get them close to 40 funding dealers per rep. We increased the number of reps that achieved that goal in 2024. We also increased our capture rate to 6%, which was roughly 4.5% in 2022. That is a solid area of organic growth. We doubled the amount of reps in our salesforce that are handling more than 80 contracts per month. Fourth, we were able to rely on our data analytics team to identify our top-performing 22 states in 2024 and offer better pricing to our top-grade A and B dealers. We plan to extend this strategy to the rest of the country in 2025. Finally, we strengthened our origination flow from our partnerships, particularly with our best partner, Ally. We also bolstered our customer service with our dealers, significantly enhancing our organic growth by lowering our funding time to less than two days, a dramatic change from 2022, which was hovering near four days. We similarly increased our same-day funding to 13% in 2024 compared to 7% in 2023, and we noted a similar increase in our second-day funding to 37% in 2024 compared to 20% in 2023. These metrics strengthen our brand with our dealers as offering one of the fastest funding lenders that provides superior customer service. This certainly helps dealers decide to engage with CPS for their applications. Turning to our risk profile, in 2024, we maintained a strong APR despite strong demand in the subprime, hovering just above 20%. Critically, our payment income and debt-to-income ratios were flat. Our average FICO score is 571. Our amount financed increased by $1,000 per deal to $22,300. Critically, just like our PTI and DTI, we managed to tighten our LTVs to 119. Switching to credit performance, our annual net charge-offs for Q4 2024 were 8.02% of the average portfolio, compared to 7.74% for the fourth quarter of 2023. We are still seeing the remnants of what Brad referred to as the second half of 2022 and the first half of 2023 vintages flowing through the portfolio, and we definitely expect these numbers to improve as the 2024 vintages flow through the portfolio. DQ greater than 30 days, which also includes repo inventory, stands at 14.85% of the total portfolio compared to 14.55% at the end of 2023. While the DQ went up a tick, it certainly did not rise to the level of our expectations, which is a great trend. In looking back at 2024, we managed to reduce the DQ month over month in seven of the twelve months of the year. Again, we expect the DQs to improve as the 2024 vintages begin to flow through the portfolio. We are moving in the right direction, as Brad said, with our 2024 vintages. The first half of the year is performing significantly better than 2023, with each vintage improving over time. This reflects our continued journey of responsible lending as we keep tightening our credit model even in the face of our growth efforts. We plan to continue tightening into 2025 while focusing on better-performing geographic areas within the remaining 28 states that we are assessing. Additionally, we aim to provide better pricing to our top-performing dealers while also tightening LTVs, PTI, DTI, and addressing non-performing areas of the country. Another positive trend we are seeing in the credit performance arena is in our POTS collection bucket, which is defined as our one to 29-day non-reportable bucket. The theory is that the better we collect in this bucket, the more we reduce our roll rate of accounts that flow to the 30-plus and 50-plus categories. We surpassed our POTS goal in most months in 2024. I would be remiss if I did not mention that January of 2025 was our best POTS collection month on record. Looking at our extensions, they increased slightly in 2024 compared to 2023, but historically they align with our extensions as a percentage of our portfolio and are consistent with our competitors. Our extensions are granted with the assistance of a proprietary AI model, providing more efficiency than ever before. Auction recoveries remain challenging as we are running around 30%, which is significantly lower than our historical norms of 40-45%. This situation is mostly caused by macro issues such as inflation, higher car values, and LTVs from those troubled 2022 and 2023 vintages that are still working their way through the auction process. We also noted that these vehicles have sustained more damage at the time of sale, likely due to higher mileage than we originally made. Further, we are still experiencing post-COVID scarcity of retail agents, resulting in delays in car repossession and subsequent sales, impacting recoveries. However, we anticipate improvements in recoveries. On a more positive note, looking at the all-important unemployment rate, our recent rating agency report prior to our January ABS deal cited a Department of Labor report indicating that the unemployment rate remains favorable at 4.4%, with projections indicating only a nominal increase to 4.6% through 2026. This strong guidance is arguably the most critical macro trend supporting customer strength and a healthy business profile. And lastly, I would like to highlight that our credit performance against our competition shows that we continue to outperform them by 200 to 400 basis points on charge-offs and lower DQs. Finally, regarding our ongoing journey to enhance our technology front-end and back-end processes, we continued to utilize AI-driven fraud scores in 2024 which helped eliminate applications with synthetic fraud right at the outset. In total, we saved $4.6 million in 2024 due to fraud-related savings. We are looking to implement an additional fraud score from one of the major credit bureaus that will have no overlap with our current fraud score, which we estimate will save us another $6 to $7 million in 2025, in addition to the roughly $5 million from the other score. By the end of 2024, we piloted a new AI voice bot that demonstrated remarkable success in matching human results, and our promise-to-pay metrics improved as well. I note that two of our competitors have been utilizing this AI voice bot for about a year now, hence the machine has learned how to collect subprime collections during that time, and we expect to implement this AI voice bot next week. This will enable us to effectively deploy our strategy of not necessarily replacing human collectors but rather reallocating them from simpler accounts to those that require more personal attention, which we strongly believe will enhance our credit performance as we progress through 2025.

Thanks, Mike. So looking back, you can tell we did a lot in 2024 to set ourselves up for future growth, even though we did grow quite substantially in 2024. Again, probably the primary focus in 2024 was to ensure that the credit performance met our expectations. Currently, the portfolio is composed of almost 60% newer accounts, which are performing better than before. The 2022 vintages, which are probably the weakest, account for around 20%. As that segment ages out, not only will that outdated paper not perform as well, but it is also costly in terms of capital markets. So we are moving in a favorable direction in that respect. The lower cost-of-funds paper will occupy an increasing share of our portfolio. That was a critical piece for us. This, along with a strong capital market environment, has positioned us very well as we end 2024 and enter 2025. I think going forward, we should anticipate putting the 2022 vintages and their performance challenges behind us by the end of 2025, and we'll be in an even more advantageous position for another solid growth year in 2025. The net interest margin will continue to improve, and we expect to benefit from the structure we have established, meaning as the portfolio grows, expenses should represent an even smaller percentage of our overall operation moving forward. Overall, I am optimistic across all fronts and not particularly worried about the economy as it continues to strengthen. As Mike pointed out, unemployment trends look very favorable for us moving forward, a critical factor that we focus on. So, all good, all steam ahead. With that, I look forward to our next call in April, which isn’t too far away. Thank you all for attending today, and have a wonderful day.

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