Earnings Call Transcript - CPSS Q3 2024

Operator, Operator

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

Charles Bradley, CEO

Thank you, and welcome, everyone, to our Third Quarter Earnings Call. Again, we had another good quarter, and we're just basically trying to get comfortable with the credit, so we can start growing again, year-over-year from last year, and it's continuing to be strong from the second quarter. Another highlight would be, as I mentioned, we're comfortable with the credit going forward, and somewhat importantly, the paper from 2022 in the first half of 2023, which we will loosely call problematic paper for us and everyone else, is down to less than 33% of the portfolio. As that runs off and the new paper comes in, everything is going to get a lot better, so we're looking forward to that. Probably the other one would be the securitization. With the rate drop, we're now getting better execution. That market still remains very strong, so it's very positive for us going forward. I'll make some other comments, but for now, I'll turn it over to Danny to go through the financials.

Danny Barwani, CFO

Thank you, Brad. Going over the financial results, revenues for the quarter were $100.6 million, which is up 9% from the $92.1 million in the third quarter last year. For the year-to-date period, $288.2 million of revenues is 11% higher than the three quarters of 2023, which totaled $260 million. The top line revenue growth is driven by a very good origination volume for the quarter, at $446 million, which is 38% higher than the $322 million we did in the third quarter last year. For the year-to-date period, originations are $1.224 billion compared to $1.056 billion, which is 16% higher than last year. So, the fair value portfolio, which drives our top line revenue, is now $3.1 billion, and we're yielding 11.3% on that portfolio, remembering that the 11.3% yield is net of losses. The revenue for this quarter also includes a $5.5 million markup to the fair value portfolio, a result of better than expected performance on that portfolio. The prior year quarter also included a markup of $6 million for the fair value portfolio. Expenses during the quarter totaled $93.7 million, up from $77.9 million in the third quarter of last year. For the year-to-date period, expenses were $268.1 million versus $208.8 million, primarily driven higher by increases in interest expenses. The pre-tax earnings for the quarter were $6.9 million compared to $14.2 million in the third quarter of last year. Year-to-date, pre-tax earnings are $20.1 million compared to $51.3 million in the same period of 2023. Net income for the quarter is $4.8 million, which compares to $10.4 million in the third quarter of last year. For the year-to-date period, net income is $14.1 million compared to $38.2 million in the same period last year. Diluted earnings per share is $0.20 per share compared to $0.41 per share last year. Moving over to the balance sheet, as I mentioned earlier, our fair value portfolio is now $3.1 billion, which is 17% higher than the $2.67 billion as of September 30th, 2023. Our securitization debt balance is $2.875 billion, which is 28% higher than the $2.243 billion as of September 30th last year. Shareholders' equity stands at $285.1 million for this quarter compared to $265.9 million, resulting in a 7% increase year-over-year. Other metrics include a net interest margin of $50.5 million compared to $54.2 million in the third quarter of last year, which is a 7% decrease. Moving to core operating expenses, for the quarter, they were $44.6 million, 6% higher than the $42 million last year. For the year-to-date period, core operating expenses are $134 million, 9% higher than $123.1 million for 2023. The core operating expenses as a percentage of the managed portfolio is now down to 5.4% in the current quarter compared to 5.7% last year, a 5% decrease. I will turn it over to Mike.

Mike Lavin, President and COO

Thanks, Danny. In originations and sales, as Danny mentioned, in Q3 we originated $446 million in new contracts, which is a slight increase month-over-month over the $431 million we achieved in Q2. I just want to note that in the month of October, we recorded our best origination month of the year, and actually the second-best month in the 33-year history of our company. Given our growth-to-date in 2024, we have been able to build our portfolio receivables to $3.3 billion at quarter end, which is an increase of 12% over the portfolio size of $2.9 billion at the end of Q3 2023. If we maintain our current origination pace for the remainder of the year, we will achieve a year-over-year growth rate of between 18% and 20%, indicating a strong year overall. It's important to emphasize that we have achieved this growth without loosening our credit; specifically, we haven't raised our loan-to-value ratios or altered our payment-to-income or debt-to-income ratios. That's very difficult to do in our space. Furthermore, we've achieved this growth while maintaining a strong average APR that is running just north of 20%. In fact, we have only minimally lowered our prices on the margins in various states and only for our best A and B grade dealers. The growth has come organically through improving metrics such as funding dealers, dealer loyalty, and our current roster of 103 sales representatives. We've been expanding our sales force, adding roughly 17 sales reps and establishing or strengthening 12 new geographic territories in Q3. This year, we've added 23 sales reps in total, achieving the best growth rate in our sales force in a couple of years. We are also starting to see the results of our multi-year initiative to add more large dealer group business to our portfolio. We achieved $119 million in large dealer group originations in Q3, which is a 21% increase over Q2 and an astonishing 40% increase over Q1. We've increased our large dealer group representation from 21% of originations at the beginning of the year to approximately 28% at the end of Q3. I believe there is significant room for improvement in this area as we move forward. We are also striving to provide frictionless transactions for our dealers, aligning with our brand's commitment to delivering the best customer service in the industry. We have lowered our funding time to an all-time low of 1.79 funding days, a drastic reduction from our historical average of around 3.5 funding days. The quicker dealers receive their funds, the more business opportunities we create. Concurrently, we've increased our same-day funding to 17.35% of deals funded, a substantial improvement over our average same-day funding of 6.5% in 2023. Achieving these results has been facilitated by the use of AI at the front end of our business, speeding up processing. We can check proof of income quickly, navigate verifications, and improve stipulations—all using AI without human intervention and with precise accuracy. Additionally, we have noted a higher penetration of e-contracting in our business this year, which we anticipate will rise. Regarding portfolio performance, our annualized net charge-offs for Q3 were 7.53% of the portfolio compared to 6.86% for Q3 2023. Delinquencies greater than 30 days, which include repossession inventory, were 14.04% of the total portfolio as of the end of Q3, compared to 12.31% as of the end of Q3 2023. Delving deeper, we managed to reduce the delinquency rate month-over-month for the first five months of this year and have maintained control through Q3. Analyzing our charge-offs on a vintage basis from 2022, we've observed incremental improvements vintage-over-vintage through the first three quarters of this year, indicating a downward trend in charge-offs moving forward through 2024 and into 2025. This is a testament to our proactive tightening of credit in late 2022 and into the first quarter of 2024, coupled with the implementation of our Gen 8 credit decisioning model introduced in October 2023. Moreover, our servicing department's hard work has made a significant impact. We've tightened our collection model by hiring more collectors in the second half of 2023 and into 2024, allowing us to reallocate veteran collectors from early, simpler accounts to challenging vintages and leveraging our small near-shore team to reduce delinquency roll by focusing on riskier accounts. One note: Despite the two hurricanes that impacted Q3, we have seen minimal effect from the hurricanes in Florida and specifically North Carolina. From a technology perspective, we recently shifted our omnichannel collection system to the cloud, enhancing our autodialer capabilities and improving communication with our customers through text, email, and chat. We expect to see an uptick in collections as a result of this migration. Additionally, cloud migration will enable us to launch our AI voice bot following its successful pilot. We anticipate that the AI voice bot will further allow us to reallocate veteran collectors to tougher accounts, enhance call efficiency, and promote self-service payments. Lastly, our portfolio performance, in comparison to our competitors, shows that market analysis by certain bankers indicates we are consistently outperforming our peers by up to 5% in charge-offs starting from 2022 to the present. One last point before I hand it back to Brad: In our ongoing fight against fraud, we integrated a new AI fraud score earlier this year, which we estimate has saved us nearly $4 million in losses to date. Those savings will multiply as we advance, and we're currently testing another AI fraud score that we believe will further reduce losses moving forward. With that, I'll pass it back to Brad.

Charles Bradley, CEO

Thanks, Mike. Looking at the industry, I think what's good about our industry is that everyone is participating; everyone is doing what they're supposed to be doing. There aren't any real problems. Most players are still managing 2022 and early 2023 originations, trying to get their credit back in order. As I mentioned, we feel very good about where we sit in the credit spectrum, and one reason we've been able to grow significantly is due to our position; we are becoming a bit more aggressive in the market. Other players are either maintaining their positions or still trying to resolve existing issues. Overall, the health of the industry is very good. There have been no new entrants in our industry in quite some time, which further indicates that the industry has matured, leaving only the strong players in the field. This is crucial because when a player falters, it can send ripples throughout the industry, ultimately affecting the asset-backed securities market, which is vital for our quarterly operations. As I noted, that market remains strong. Regarding the economy, while everyone may suggest that it's all about the upcoming election, I believe any outcome will not influence our operations dramatically. As we've mentioned countless times before, our key concern is unemployment, which is currently in excellent condition. I don't anticipate that will change regardless of the election results. The economy is in a very strong position today, and with low unemployment, I foresee a robust backdrop for us in the coming year. Adding to this favorable environment, the Federal Reserve has lowered rates once and is expected to make further cuts. We now find ourselves in an ideal situation: we're comfortable with our credit, our growth strategies are sound, and we're executing excellently. We are implementing many improvements at the backend of the business. As I've noted before, we're positioning ourselves for the upcoming year, and I believe we've done exceptionally well across the board. With a strong economy, favorable unemployment rates, decreasing interest rates, and our readiness to grow significantly in the new year, the future looks very bright for what lies ahead. With that, let’s see how everything unfolds. We have one more quarter to go this year, and then we can look forward to a strong start next year. We look forward to speaking with everyone again sometime in February. Thank you for attending.

Operator, Operator

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.