CPSS - NASDAQ

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, because dependent on estimates of future events, are also forward-looking statements. All such forward-looking statements are subject to risk 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.

Thank you, and welcome, everyone, to our Third Quarter Earnings Call. Again, we had another good quarter, and slightly [Audio Gap] we're just basically trying to get comfortable with the credit, so we can start growing again, [Audio Gap] year-over-year from last year, and it's continuing to be basically strong from the second quarter. Another highlight would be, we think at this point, 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 is what we'll loosely call a problematic paper for us and everyone else, is down to less than 33% of the portfolio. So as that runs off and the new paper comes in, everything's going to get a whole lot better, so we're looking forward to that. Basically those are the highlights. Probably the other one would be the securization. With the rate drop, we're now getting a 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.

Thank you, Brad. Going over the financial results, revenues for the quarter, $100.6 million is up 9% from the $92.1 in the third quarter last year. For the year-to-date period, $288.2 of revenues is 11% higher than the three months -- the three quarters for 2023 of $260 million. The top line revenue growth is driven by a very good origination volume for the quarter, $446 million is 38% higher than the $322 we did in the third quarter last year. For the year-to-date period, originations are $1.224 billion compared to $1.056, 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, and that markup is a result of better than expected performance on that portfolio. The prior period -- the prior year quarter also included a markup of $6 million for the fair value portfolio. Expenses during the quarter, $93.7, is up from $77.9 in the third quarter of last year. For the year-to-date period, expenses were $268.1 million versus $208.8, and those expenses are primarily driven higher by increases in interest expense, which is a function of both higher interest rates, but also because we have a larger portfolio and have a larger securitization and credit line debt balance. The pre-tax earnings for the quarter, $6.9 million compared to $14.2 million in the third quarter of last year. Year-to-date period, pre-tax earnings, $20.1 million compared to $51.3 in the year-to-date period of 2023. Net income is $4.8 million for the quarter, $4.7 was the June quarter, and that compares to $10.4 million in the third quarter of last year. For the year-to-date period, $14.1 million of net income versus $38.2 million in the year-to-date period last year. Diluted earnings per share is $0.20 per share compared to $19 last quarter and $0.41 per share last year. For the year-to-date period, $0.58 compared to $1.51 for the nine months of 2023. Moving over to the balance sheet, as I mentioned earlier, our fair value portfolio is now $3.1 billion, is 17% higher than the $2.67 billion as of 9/30 of 2023. Our securitization balance, debt balance is $2.875 billion, is 28% higher than the $2.243 as of 9/30 last year. So we've seen the portfolio grow faster than the debt balance is growing. Shareholders' equity is $285.1 million for this quarter compared to $265.9, so 7% increase year-over-year. Going over other metrics, the net interest margin is $50.5 million compared to $54.2 in the third quarter of last year, that's a 7% decrease. For the year-to-date period, net interest margin is $149.5 million, is 3% lower than $153.7 for the nine months of 2023. Core operating expenses for the quarter, $44.6, 6% higher than the $42 million last year. For the year-to-date period, core operating expenses is $134 million, is 9% higher than $123.1 million for 2023. And 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, that's a 5% decrease. On an annualized basis, core operating expenses were flat at 5.7%. I will turn it over to Mike.

Thanks, Danny. In originations and sales, like Danny mentioned, in Q3 we originated $446 million in new contracts, which is a slight increase month-over-month over the $431 million we did in Q2. I just want to note, in the month of October, we just had our best origination month of the year, and actually the second best month in the 33-year history of our company. Given our '24 growth-to-date, 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 '23. If we continue at our current origination pace for the remainder of the year, we will have achieved a year-over-year growth rate of between 18% and 20%, so a good year overall. It's important to note, very important to note actually, that we have achieved this growth without loosening our credit. To be more specific, we've done this without raising our LTVs or changing our payment to income or debt to income ratios. That's very, very hard to do in our space. To take it a step further, we've achieved that growth while maintaining a strong average APR that is running just north of 20%. In fact, we've only had to minimally lower our price on the margins in various states and only to our best A and B grade dealers. So we're running a strong APR, growing and not loosening our credit at the same time. The growth has come organically through improving metrics such as funding dealers, dealer loyalty and capture with our current roster of 103 sales reps. We've been marching up our sales force. We added roughly 17 sales reps and added or fortified 12 new geographic territories in Q3. We've actually added 23 sales reps so far in '24. That's the best growth rate we've had in our sales force in a couple of years. We're also starting to see results of our multi-year initiative to add more large dealer group business to our portfolio. We did 119 million in large dealer group originations in Q3, which is a 21% increase over Q2 and a whopping 40% increase over Q1. We have taken our large dealer group from 21% of originations at the beginning of the year to roughly 28% at the end of Q3. I also believe that there's significant room for improvement in this area of the business as we move forward. We also continue to bolster our efforts to provide our dealers with frictionless transactions. This goes to our brand and our stated purpose of having the best customer service in the industry. We've been able to lower our funding time to an all-time low of 1.79 funding days, which is a dramatic drop from our historical average of roughly 3.5 funding days. The faster the dealer can get their money, the more chances we're going to get more business. In the same token, we've been able to raise our same-day funding to 17.35% of deals funded, which is a significant improvement over our average same-day funding of 6.5% in 2023. Again, the faster the dealer gets their money, the more apt we are to get more business from that dealer. We have been able to achieve some of these results using AI on the front end of our business, which is speeding up processing. We're being able to check proof of income really quickly. We're able to get through verifications and improve stipulations, all with AI and without human interaction and with precise accuracy. The other thing that's helped is we've seen a higher penetration of e-contracting in our business so far this year, and we expect that to get higher moving forward. Switching over to portfolio performance, our annualized net charge-offs for Q3 were 7.53% of the portfolio as compared to 6.86% for Q3 of 2023. Delinquencies greater than 30 days, which includes repossession inventory, were 14.04% of the total portfolio as of the end of Q3, and that's compared to 12.31% as of the end of Q3 2023. Diving a little deeper, we were able to knock down the DQ month-over-month for the first five months of this year and have seemed to get it under control going forward through Q3. Taking a step further, looking at our CNLs on a vintage basis, going all the way back to 2022, we have seen incremental improvements, vintage-over-vintage, from 2022 through the first three quarters of this year, so we're trending downward on the CNLs as we move forward through 2024 and into 2025. This is a testament to our early tightening of our credit in late 2022 and continuing into the first quarter of 2024. It also correlates to the implementation of our Gen 8 credit decisioning model that we set forth in October of 2023, and of course, I would be remiss without mentioning that it is also related to good old-fashioned hard work by our servicing department. To that end, we have tightened our collection model. We've hired more collectors in the back half of 2023 and into 2024. This has allowed us to reallocate veteran collectors from the earlier, easier accounts to the tougher vintages, and we've been able to leverage our small and near-shore team to lessen the DQ roll by hammering down on the potential DQ accounts. That's one to 29 accounts. Our extensions remain flat as a percentage of our portfolio. One note, given the two hurricanes that rolled through in Q3, we've seen minimal impact in both hurricanes in Florida and specifically North Carolina. From a technology standpoint, we recently migrated our omnichannel collection system to the cloud, which provides us a more powerful autodialer and will allow us to better communicate with our customers via text, which is by far the most important touch point, and also email and chat. We should see some collection lift from this migration moving forward. The cloud migration will also allow us to launch our AI voice Bot after a successful pilot. We expect the AI voice Bot to further allow us to reallocate those veteran collectors to tougher accounts and increase our call efficiency and promote self-service payments. Finally, looking at our portfolio performance as marked against our competitors, market analysis by certain bankers reveals that we are consistently outperforming our peers by up to 5% in the CNL starting from 2022 to present. One final note before I take it back to Brad. In our ongoing battle against fraud, we integrated a new AI fraud score earlier this year that we estimate has saved us nearly $4 million in losses to date. Those savings will compound as we move forward, and we're also currently piloting another AI fraud score that we believe will further lower losses going forward. And with that, I'll pass it back to Brad.