CPSS - NASDAQ

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 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 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, to a point where we're now turning the corner on what's been a very big struggle for most everyone 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. But somewhat more importantly, as I just said earlier, we've now sort of turned the corner. The new paper is performing much better. We're beginning to be able to grow again. A couple of highlights. We did raise $50 million in new residual money to use for growth capital and originations in the first quarter beginning to really take off again. So really, everything is going the right way. One other note is we renewed one of our $200 million warehouse lines. So the first quarter is really going to be sort of the jump-off point for this year in kind of getting back to where we buy very good paper, it performs very well, and we get to grow again, hopefully, at some point, rather aggressively. We'll touch on all those areas a little bit 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 that's yielding 11.3%. If you've been on these calls before you're aware that, that 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, $85.2 million versus $64.7 million last year in the first quarter. A couple of things of 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 in part 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 number -- that contribution for the reversal of the loss provision last year was $9 million, and this year, in the first quarter, it's $1.6 million. So that portfolio is going to run off over the next 2 or 3 quarters, and then we will not have much of that legacy portfolio remaining by the time we get to the end of the year. Our pretax earnings for the quarter, $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, is down from $13.8 million in the first quarter of last year. And 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, $2.791 billion in the first quarter is up 8% from the $2.575 in the first quarter of last year. Our securitization debt balance is $2.277 billion, which is up 5% from the $2.175 billion in the first quarter of last year. So 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 is making -- shows some strength in our balance sheet. Shareholders' equity is up to $279.1 million in the first quarter at the end of the first quarter. That's a 22% increase from the $228.4 million in March of last year. And that's driven by -- this would mark our 50th consecutive quarter of pretax profit. That's over 12 years of pretax profitability, and that's helping to 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% at the -- for the first quarter of 2023. That's it for the financial numbers. I will turn the call over to Mike.

Thank you, Danny. The first quarter was a terrific quarter in originations as we purchased $346 million of new contracts. That compares to $301 million in the fourth quarter of 2023 and $415 million during the first quarter of 2023. More good news. Our portfolio grew to $3.02 billion as of March 31, 2024. I note that's the highest portfolio amount in our 33-year history, and that's an increase from $2.97 billion as of December 31, 2023, and an increase from $2.86 billion as of March 31, 2023. As Brad said, the first quarter showed a positive growth trend. We did $102 million in January, then upped that to $105 million in February, and upped that to $139 million in March. The trick is to hold that volume, and we're optimistic we can do so. We used several credit initiatives to nudge our growth in the first quarter, which worked, but it is critical to note that none of those credit initiatives touched our LTV, our loan to value, which is the key credit metric that predicts losses. Didn't affect our price and didn't affect our fees. So all good news there. Those initiatives helped increase our organic growth of contracts through increasing our capture rate, our funding dealers and our dealer loyalty. One of the things that we've been focusing on for the last 2 years is to onboard and service more large dealer groups, which is defined by a dealer group with more than 15 dealers under their umbrella. When we launched that initiative in early 2023, the large dealer groups made up 17% of our business, and at the end of the first quarter, that has grown to 22%. That is exponential growth because instead of adding just one dealer, we're adding between [ 15 ] and 200 dealers per dealership. We currently have 70 sales reps. 42 in the field, 28 inside. We hired a new class of reps in the first quarter and will likely do more as the year heads out. This has and will help our growth going forward. We continued our ironclad partnerships with [indiscernible] and Pagaya in the first quarter, resulting in added origination volume and with Pagaya solid on gained profits. Another thing of note, we continue to build our customer service platform in originations. In the first quarter, we lowered our [ package ] return rate to an all-time low. We lowered our deal funding time to less than 3 days, and we significantly reduced our underwriting errors. All of these are metrics that encourage the dealers to send their applications and do business with CPS. In terms of competition, we continue to see waves of credit unions come in and out of the space with lower rates, and then they pull out of the space when the losses don't meet their expectations. Demand remains strong, and so there's enough business for the 5 or 6 of us that sort of dominate the market. Again, the sort of silver bullets for us and our friendly competitors are things like a recession and the unemployment rate. So far, there has been no recession. And even though unemployment ticked up just a bit, it hasn't affected our demand or our near-term portfolio performance. Taking a quick check on our Q1 risk profile. We continue to hold a strong APR at 21%. Probably the best thing in our risk profile is we've driven down our LTV from 125 to -- and it fluctuates between 118 and 119. Our payment-to-income ratio and our debt-to-income ratio, which we use in our scoring model, remains flat, which is great, and the amount of finance remains flat quarter-over-quarter at $20,500. Switching to portfolio performance. For the first quarter, DQ, including repossession inventory, ended up at 14.55% of the total portfolio as compared to 12.68% in the same quarter in 2022. Annualized net charge-offs for the first quarter were 7.84% of the total portfolio as compared to 7.74% as of the fourth quarter of 2023 and 5.20% in the same quarter in 2023. The positive news is that we indeed have turned the corner in terms of performance, as we've lowered our DQ compared to our previous quarter, and we've also lowered our charge-offs as compared to our previous quarter. So year-over-year, it's ticked up, but quarter-over-quarter, we've driven those metrics down. We've done this while utilizing less extensions, which is interesting. In terms of our vintages, it's no secret that the 2022 vintages have been challenging for the industry. We believe sort of as of the end of quarter 1, we've got our arms around the 2022 vintages. We've employed more collectors to collect those vintages, and we've been utilizing unique collection strategies to control those key metrics and flatten out those curves. The first 2 of our 2023 vintages were also challenging, albeit a little slightly more -- slightly less challenging, I should say. But the most critical thing to look at in our 2023 vintages is that our 2023-C vintage is doing much, much better. The 2023-D, while it's a little early to judge, is also looking to be much better, and those 2023 vintages might just normalize into our historical CNLs. Looking at how we stack up in the industry, we are reportedly, according to the investment bankers that we work with and the investors and our securitization bonds who follow the industry, note that we're outperforming all of our competitors in CNL performance on the 2022 and 2023 vintages and also our DQ. And interestingly enough, we're outperforming our competitors when it comes to the all-important recovery metric. One thing to note is in the first quarter, we bolstered our ARD department, which is in charge of collecting our charge-off balances. And after employing a few new initiatives and training up the staff, we've collected at least 40% so far in 3 months of what we collected all of 2023, and all of those collections go right to offset our losses. In terms of technology, we deployed our artificial intelligence scoring tool for fraud in the first quarter, which has significantly reduced synthetic fraud in our application base. That has already saved us over $1 million in the first quarter, and looking -- and we expect to save many more millions going forward on that, using that AI fraud tool. As I mentioned in our last call, we launched our gen 8 originations model in the fourth quarter of 2023. We have now had a chance to analyze the October 2023 originations where we originated those originations with gen 8. We also originated that paper with gen 7, and gen 8 has organically lowered our DQ by 200 basis points. So that bodes well for our DQ going forward, which also translates -- should translate to lower CNLs just through our AI model. And with that, I'll kick it back to Brad.

Thank you, Mike. Turning to the industry. As Mike pointed out, we -- and I guess I pointed out as well, we weathered the storm probably much better than most in our industry. And we think at this point, given how our growth is going yet, we'll be able to hang on to very large margins that some of our fellow friendly industry players are either easing back or going slow to get through the problems we've had with the '22 vintages. That creates an opportunity for us to grow and hang on to big margins. And so that's good. And it also might create some opportunities for a few of the weaker fellow folks out there that may or may not be able to get through the production problems of '21, '22. So we'll wait and see, but we're always looking for opportunities in the industry and maybe helping out some of our fellow competitors. In looking at the economy, generally speaking, we're quite optimistic. We think our industry is very much the tip of the spear on recessions and yet our customers seem to be doing just fine. Unemployment is certainly the thing we watch and care about the most, and unemployment looks fine. What we would love to do, of course, is keep things growing, get the volumes up to where when and if they get a rate cut, we then get to pick up that extra margin and really just enhance what we're doing. We're not really thinking of doing rates cut currently, but down the road, there could be, so doing large volumes when those come will be much better than just sitting around waiting for them to then grow. So again, we're kind of optimistic on all those different fronts. We're almost well into our second quarter. Those things look good as well. So we'll be back rather shortly to report in the second quarter a little bit. So with that, thank you all for joining us, and we'll speak to you soon.