CPSS - NASDAQ

Good day, everyone, and welcome to the Consumer Portfolio Services 2023 First Quarter Operating Results Conference Call. Today's call is being recorded. Before we begin, management had 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, also are forward-looking statements. All such forward-looking statements are subject to risks that could cause actual results to differ materially from those I projected. I refer you to the company's annual report filed on March 15 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 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 first quarter conference call. We definitely spoke a little while ago, but not too long ago. So not that much has changed. But in terms of the first quarter, it's off to a very strong start. We're very happy with the results. I mean, I think the thing to sort of focus on in looking at the first quarter is that we've made a lot of changes in the last 2 quarters of 2022, mostly as a result of the Fed raising rates and the 2022 vintage has not really coming out of the gates as strongly as we might have hoped. As a result of that, though, we spent those 2 quarters and a good part of this quarter tightening our credit, raising our rates and fees and really sort of realigning everything we needed. One might have thought that would have had a negative effect on both growth and our attraction to dealers in the industry. That's not the case at all. We had a very strong quarter. Even with the tightening and the price increases, we've had strong growth in the first quarter, stronger than we would have expected. So all those things are very positive in terms of our first quarter of the year getting off to a good start. I think we also saw sort of a good thing is our DQ and losses have gone up a little bit, but we still are significantly below pre-pandemic levels, many of our friendly competitors probably couldn't say that. So again, we both are beginning to see we made the changes necessary as we start 2023, but we're also still beginning to see the real results of what we've done in terms of having a strong credit model, strong collection model and having an all kind of work to actually give us a great start to the year, but also to sort of to help take care of any inefficiencies or things that didn't work as well in 2022. So with that, I'm going to turn it over to Danny to the financial stuff and then Mike, and then I'll get back on a few comments on the industry and the macro.

Thank you, Brad. We'll go over the numbers. Revenues for the quarter, $83.1 million, which is slightly higher than the $83 million we posted in the December quarter, but it's up 12% over the $74.4 million in Q1 of last year. So what's -- drilling down on some of the details here. The fair value portfolio is now $2.8 billion, and that's yielding about 11.2%, remembering that, that yield is net of losses. Last year's number included a larger portion or larger benefit from the legacy portfolio, which was $190 million last year versus $71 million in this year. And that legacy portfolio last year was yielding 17%. So without that comparison, the revenue increase would have been even greater. Also included in revenues for last year was a fair value markup of $2.4 million. That was in Q1 of '22. We had no markup in Q1 of 2023. Moving down to expenses. The expenses for the quarter, $64.7 million, which is flat from the same $64.7 million number from Q4, but it's up 44% from the $45 million in Q1 of last year. These expenses include a negative provision from our legacy portfolio using CECL accounting, where we had originally estimated lifetime losses on the legacy portfolio that -- where those losses didn't materialize. So over time, we've been gradually reducing the amount of the excess reserves. And in the current quarter, that amount happened to be $9 million of negative provision. In the December quarter, it was $4.7 million and in the first quarter of last year, it was $9.4 million. Pretax earnings. I'll cover -- I guess, interest expense I can cover right now because that's a big component of the change in expenses. That interest expense component was -- has increased from $16.4 million last year to $32.8 million this year. So when we talk about net interest margins later on, we'll see that the -- there is some compression in the margins. Even though we've been raising our APRs on the loan originations for this year, just the way of fair value accounting works, it takes a little bit of time for the yield to catch up to the change in the interest rates on the debt. So there is some compression in the margins -- in net interest margins for the current quarter. Moving down to pretax earnings. $18.4 million in the current quarter is comparable to about flat to the $18.3 million in December but down from $29.3 million in the first quarter of last year. Also remembering in the first quarter of last year, that period benefited from exceptional credit performance even benefiting from some of the government stimulus that was occurring during that period. We had very high used car prices and very low interest rates. So those are the reasons why it's a tough comparison from the first quarter of last year to the first quarter of this year. Net income is roughly in line with the trends in pretax income, $13.8 million versus $14.1 million in the December quarter and $21.1 million in the first quarter of last year. That's a 35% decrease. The same trends in earnings per share, $0.54 in the current quarter, $0.59 in the fourth quarter and $0.75 for the first quarter of last year. Looking at the balance sheet, a couple of things of note. The finance receivable portfolio grew by 4% from the December quarter. So it's now $2.575 million versus $2.476 million in the fourth quarter, but it's 35% higher than the first quarter of last year when it was $1.9 -- $1,903 million. That is driven by the healthy origination levels we continue to have -- we continue to see from last year and continuing into this year where we originated $415 million in the first quarter compared to $410 million in the prior year first quarter. Moving down to securitization debt. Our securitization debt is $2,175 million compared to $2,108 million in the fourth quarter and $1,813 million last year. So the securitization debt is up 3% over the sequential quarter and up 20% year-over-year. Relating that to the increase in the fair value portfolio, which saw a 4% sequential increase and a 35% sequential increase from last year shows that we're able to maintain our liquidity position despite lower leverage on the loan portfolio. Looking at the net interest margin, $50.3 million in the current quarter, $54.1 million in December versus $58 million last year. That's a 13% decrease. Like I said, the cost of funds on our debt has increased, in part due to the increase in interest rates and the Fed continuing to raise rates, while the yield on our loan portfolio on fair value accounting will manifest through higher yields in the future. Looking at core operating expenses, $40.9 million is about flat to the $40.6 million in the December quarter, but it's 8% higher than the $38 million in the first quarter of last year. Looking at that number as a percentage of the managed portfolio, however, shows that the core operating expenses is 5.7% in the current quarter is down from the 6.7% -- 15% decrease from the 6.7% in the first quarter of last year. And lastly, our return on managed assets 2.6% in the current quarter is flat from Q4, 2.6%, but down from 5.2% in the first quarter of last year, primarily due to the decrease of the compression in the net interest margin. I will turn the call over to Mike.

Thanks, Danny. From an operations standpoint, as we reported in our last call, 2022 was a record-setting year for us originating $1.85 billion, which was our best year in our 31-year history, and we were able to grow our originations 67% year-over-year. So far, 2023 is off to a great start as we originated $415 million in originations in the first quarter, that is down 4% quarter-over-quarter, but up 2% over the first quarter in 2022. So we are tracking nicely so far in 2023. The key to that metric is demand for our financial products remain strong. We had over 30,000 apps in Q1, which is a 20% increase quarter-over-quarter and a 41% increase year-over-year. Now we expect greater demand for our financial products in February and March due to tax refund season, but we saw a greater influx of apps despite that seasonality. Yet, with all that said, we also reported on our last call that we aggressively tightened credit the second half of 2022. We continue to do that in Q1 in the areas that we consider most important. As a result, our approval rate dropped from 72% in the first half of 2022 to 65% in the second half of 2022 and in quarter 1, it dropped down to 59%. That drop is by design and as a result of our credit tightening. So in the first quarter, we continue to further narrow the consumers that we lend to in order to focus on originating only the upper tranche of the subprime market. Demand was so high that we feel like we're continuing and improving to buy the best subprime paper available in the market. We've been able to hold down to strong APR with the quarter average -- with Q1 quarter average at 21.5%. That's up from 20.15% quarter-over-quarter and very much over 16.14% year-over-year. This aggressive rate rise helps maintain our yield in the face of higher cost of funds that Brad mentioned and perhaps a slight uptick in the losses. One thing we're looking at right now is to maintain affordability for the car payments for our customers. We look at metrics like debt to income, payment to income and looking at our latest risk profile, all those numbers are in line with our 2022 trends. We also look at the payment amount. And for the first quarter of 2023, the average payment was $525, which is below the average used car payment of $544 and that car payment of $544 is an industry average, which includes near prime and prime paper. So our subprime payment of $524 looks strong against the industry average. Switching over to portfolio performance. There's certainly some macroeconomic issues that are weighing on some of our more recent vintages. Inflation and rising interest rates are stressing affordability factors, but that's also balanced out with good unemployment numbers that historically has been the critical factor in portfolio performance. For the quarter, DQ including repossession inventory ended up at 9.92% of the total portfolio as compared to 8.59% in the same quarter in 2022. Annualized net charge-offs for the quarter ended up at 5.2% of the portfolio as compared to 3.29% in the same quarter of 2022. Extensions and repossessions were up slightly over the quarter. On the good news front, recoveries for the quarter ended up at 41.81% which is below the record level of 61.37% for the same quarter in 2022. Interestingly, we saw recoveries increase month over month over month in Q1, and so they look to be stabilizing going forward. That's always good for managing our losses. In terms of strategic initiatives to improve our performance, we took several actions in the quarter, one from the most basic strategy of hiring more collectors to lessen the account loads, so they can dig deeper into the accounts and do some earlier skip work to some more proprietary strategies that have worked so far in the quarter. Turning to technology. We continue our 5-year quest to invest in new technologies, specifically artificial intelligence-driven technology that aims to make our business more efficient for us, for our dealers and our customers. In the quarter, we made great progress on 2 such technologies, one on the origination side to streamline underwriting, using artificial intelligence and one on the servicing side to make collections more efficient using artificial intelligence. We continue to promote our dealer portal which provides the dealer an easier way to do business with us. On the personnel front, as I mentioned, we hired a boatload of collectors to help with our portfolio performance. That left us with 794 total employees, housing 5 offices across the country. We feel that we remain at scale to do $150 million a month, $200 million a month, $125 million a month. It's taken us a few years, but we've gotten to scale. So with that, I'll toss it back, Brad.

Thank you, Mike. Silicon industry, we think we sit in a very good spot in the industry. And of course, one of the questions is why? I think coming out of 2022, where we've seen some of the problems in terms of the rapid growth across industry in '22 and we'll probably give a lot of credit to our model. But Mike mentioned one of the indicators in the payment. With the inflation problems out there and the customers having more things to try and worry about, one of the things we managed to do is keep our payment for our customers down. A lot of the other folks -- and you can tell by the numbers, a lot of the other folks, the payment -- the customer payments all went up a lot. And I think over time, that's going to cause problems in terms of the performance. So us being able to manage that issue among others, has really helped keep us in line with what we're doing. So I think 2023 is going to be an interesting year for our industry, but I think where CPS sits today is one of the most advantageous positions we could be in. So we're good with that. This deal of famous NFL owners phrase and in terms of the economy and all, we care about the unemployment rate, we care about the securitization market, and nothing else. I mean the rest doesn't matter. Those are the ones we really care about. And so unemployments remain really low. No one really is forecasting unemployment to go up very much. We did another securitization just the other day. That market remains strong, particularly at the bottom end of the stack. In other words, the sort of lower grade bonds, BB, BBB, those are very popular. Those are very good indications that, that market is very strong and healthy. So to the extent we care about anything, that's it. Everything else is about making sure the models work, making sure we can maintain our performance. The fact that we still are below industry's levels or pre-pandemic levels in both DQ and losses is also very important. There was a time where the used car market pricing came down a little bit. We expected it to hold up, and then it bounced right back up. So even that area is working very well. So in terms of the industry, it all looks good. In terms of the overall economy, as I said, we really only care about unemployment. One would hope that things will go okay. People are concerned with the mid-bank, small bank problems. But again, it doesn't really seem to be affecting the large banks. And the large banks are some of the major players in doing securitizations. So you'd have to have a real problem at the banking level before it really got to a point it would bother us. So sort of top-down looks very healthy in terms of where we care about the industry and the economy. We really like our position within our industry. And again, going back to all the things that Mike, We've made a lot of the right moves along the way in the last 12 months or so. So we're kind of proud of that accomplishment. We think it bodes well for our progress in 2023. And so just to see how it goes. Thank you all for joining us today, and we look forward to talking to you next quarter.