Q4 2023 Consumer Portfolio Services Inc Earnings Call

Participants

Charles Bradley; Board Member; Consumer Portfolio Services Inc

Mike Lavin; President & Chief Operating Officer; Consumer Portfolio Services Inc

Danny Bharwani; Chief Financial Officer; Consumer Portfolio Services Inc

Presentation

Operator

Good day, everyone, and welcome to the Consumer Portfolio Services 2023 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. Any statements made during this call that are not statements of historical facts may be deemed wonderful statements regarding current or historical valuation of receivables because dependent on estimates of future So forward looking still all such forward-looking statements are subject to risks that could cause actual results to differ materially from those. I refer you to the Company's annual report filed on March 15th. For further clarification Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, further events or other with us here is Mr. Charles Bradley, Chief Executive Officer, Mr. Danny Bonnie, Chief Financial. I'm Mr. Mike President and Chief Operating Officer of Consumer Portfolio. I will now turn the call over to.

Charles Bradley

Thank you and welcome everyone to our Fourth Quarter and Full Year Earnings Call. I'm thinking about this call and what I should say add the real thing was 23, probably in retrospect was what will loosely call a transitional year for us. And in terms of where we want to go with the company, somewhat of a neutral year and harkens back to, I think in late January of 23, when we were looking at our credit performance, we were somewhat surprised and or dismayed, if not shocked that the 22 vintages weren't performing as well as we thought they would. And at that point, we decided we needed to slow things down and figure out what was going on and so we did. So really, unfortunately, at some level we spent I mean, there's good news, bad news. Bad news is we spent most of 23 evaluating the 22 performance and figuring out what went wrong and how to make it better so that we could then move forward and it took some time. One of things we did immediately was we tightened the credit will improve the model, beefed up the collection team and kind of went after making at 22 pay-per-performance best as we possibly could. And so unfortunately, some of our we spent most of 23 waiting to see how 22 into it rather than trying to grow real fast in 23. And that really know how we were going to improve. So what we did find out as the year went on and actually just a first or second quarter as much as we were somewhat dismayed in our performance and how our credit was performing. We found out that almost everyone else industry was doing far far worse. And so that was a bit of an interesting sort of revelation that as much as we didn't like our paper, our paper was doing way better than almost everyone else is, and that is true today. So the question we get all the time is why why did that happen and why did we do better? So as much as it's kind of difficult at the moment to go through the whole thing, I'll just go through a couple of highlights that we determine probably are the cause of why 22 wasn't as good and 23 ended up being better or things we fixed in 23. One of the first things was somebody in our industry came up with a not so brilliant idea of guaranteeing backend from profit to all the dealerships being that we have in a long kind of forever around forever. We realized right away. That was kind of stupid. However, we looked at it in that light and turns out most people in the industry followed along that path. And eventually we came up with a much tighter scaled-back version of what we call the end profit program. And then that probably helped us one of the things that that program did is it boosted LTVs loan-to-values significantly when you're guaranteeing the profits of the year, obviously, it was good program in terms of the dealerships, the dealership low, making us money for sure, an amount of what contract they were writing. We were obviously very skeptical. And so we did it a little bit differently and didn't do it as dramatically as everyone else. And we certainly did it was slower than everyone else. And that turned out to be very significant in helping us do better in the home process of the 22 paper thing that happened is everybody started growing a lot of the rates, really low business is booming. The auction values were great and for some unknown reason a lot of our friends decided to stop fully verifying stipulations, things like proof of income, meaning like I don't know, they had a job things like where do they live, how long have they had a job and dealerships being wonderful folks sort of maybe tend to take advantage of deal of lenders who don't check things. One thing we've always done and we will continue to do no matter how much work it is. As we verify everything we make sure our customers have a job to make sure that they're living where they live. We do a full credit check and everything, and we do it verbally over the phone and for whatever reason, that tends to protect us dramatically in terms of some of the problems that happened in our industry. So if you look at those few things, we went much slower into the guarantee backend than everyone else. We did much more cautiously than everybody else. And we also continue to check all of the steps that you normally would have and some of our friendly competitors did not. And we also realize things weren't what we thought they would be much maybe quicker, but certainly very quickly. And so we were pulling back much faster than some other folks. So as a result of this, as you know, in the 30 years I've been with this company, we've never had a time where our Company stands out so much better than almost everyone else in terms of credit performance, in terms of how we run our models and manage our portfolio. So much as 23 was kind of a not the best year in terms of we want to grow and succeed and expand. And being able to say that we did it pretty much better than everyone else is kind of pretty cool way to say that 23 went and hopefully now that 22 is getting behind us, 23 performance is certainly much better. Some of the changes we made have been very good on. It looks like we're kind of ready to go again. So but looking at 23, that's the story of how we did at fourth quarter. It's sort of the end of when we're beginning to get things going again. So we'll see how it goes. I'll talk more about that and sort of what we think's going to happen next after Mike and Danny go through their pieces I'll turn it over to Mike to do the operations review.

Mike Lavin

Thanks, Brad. I'm just sort of follow up on what Brad was talking about in terms of portfolio performance since that is the number one priority at the Company right now.
I'll also add that there were some macro economic issues that we're sort of weighing on the vintages 2022 and early 2023. Obviously, inflation and rising interest rates were headwinds that we could not control along with the guaranteed back end problem that that Brad talked about. It jacked up the amount financed and jacked up the car payments. I'm putting stress on the consumer, but in fairness, that's been balanced out with a fantastic unemployment numbers. That is probably the most critical metric to judging the viability of our business, and that is near historical low and also the ever the other bullet that can really hurt the a recession. And I think that most economic pundits, our opining that we are going to avoid a recession soft or hard, so low unemployment, no recession still means that our business is quite viable as Brad alluded to, the 2022 vintages started off challenging, but seem to have leveled out at the end of 2023. Our servicing practices definitely helped that. I'll talk about that in a minute. Likewise, the first half of 20 into 2023 vintages are equally challenging. But again, we've seen steady improvement on those vintages, and we expect them to be more in line with our historical CML's. Some anecdotally, anecdotally, we were recently at a major asset-backed security conference, and we routinely heard from investors and bankers that are 2022 vintages in 2023 vintages, far outweighed our portfolio, our competitors' performance in the space. So even though we are quite thrilled with the challenges that 2022 and 2023, early 2023 had on. We are very pleased with our performance in our space. And for the fourth quarter, DQ, including repossession inventory ended up at 14.55% of the total total portfolio as compared to 12.68% in the same quarter of 2020 to the all important annualized net charge-offs metric in the fourth quarter was ended up at 7.74% of the portfolio as compared to 5.83% in the same quarter in 2022 extensions were up slightly in the quarter, but well within our historical numbers. Our extensions to active account ratio is actually a little bit below our historical numbers on the recovery front, we generally want to see recoveries in the low 40s. They've dropped a bit into the high 30s as used car prices dropped hurting us at the auction and there remains a dearth of repo agents who left the industry during COVID. This affects the timing of our retail repo and sale come with that being said, and canvassing and benchmarking the market, we believe our repo and sale timing remains the best in the industry and regardless of where we're at in the recoveries. Another great collection trend for us that we saw towards the end of the year is our parts group. That's our potential delinquencies. One to 29 day bucket had its best performance in two years. This is important because the better you do in the pots, the better you do in the later buckets as the roll rate consequentially affected. Another good trend we saw in our collection practices is our right party contact has gone from 4% to 8%. This correlates to more promises to pay and the more promises to pay you have the more dollars you collect. So that's a very good trend. And we also put in a new outreach program early in the collection stage where we introduce ourselves to our customers. But the main thing we're trying to do in this introductory is to get our customers to sign up for recurring payments. This has been an initial successes. We've seen a 25% increase in our recurring payment sign-ups. This very much helps our collection performance. As Brad alluded to, we definitely beefed up our collection staff in 2023. We took it from 287 collectors to 423 collectors. This has lowered the accounts per collector from six 75 to a much more comfortable 515. This allows the collector to have more time to work the accounts and equally important, Skip trace problem accounts manually.
One of the final things we did is we also beefed up our nearshore operation. We didn't necessarily add more nearshore collectors, but we reassigned our strategies. So what we're doing is we're putting the nearshore collectors and the power dialer, which frees up our domestic collectors to do more manual collecting. All of these servicing tactics are unique to us, and we think that. But for the unique approaches we've taken our servicing, the performance would have been slightly worse. So we're happy with our servicing performance.
Switching to originations, the fourth quarter remained solid as we purchased 301 million of new contracts. That compares to $322 million in Q3 of 2023 and 428 million during the fourth quarter of 2022. For the year, we did $1.3 billion in new contracts, which compares to $1.8 billion in 2022. The pullback from 2022 to 2023 was purposeful and intentional and definitely a function of our consistent credit tightening, which we think we began first in the market in March of 2022. We continued that tightening in 2023 and actually continue tightening as we head into 2024. And specifically, we tightened the LTV cap payments, which is important in certain programs segments. We tightened job stability and residence requirements and we made less exceptions on deals that were declined, while this has lowered our overall approval percentage on more significantly. And more importantly, we've knocked down the LTVs, which is a leading metric to predicting losses. And while 2022 is a record year for us. And certainly, we were excited and pleased despite the pullback in 2023, it actually ended up being the second best originations year in our 30 plus history. So all things considered quite a good year in the originations volume to that effect. And again, despite the pullback, we were able to grow the total managed portfolio, which now stands at 3.195 billion, which is an increase from 3 billion at the end of 2022. So we're pleased with that from the view of the slide. If the slight uptick quarter over quarter reflects strong demand in the subprime auto business space. And actually, we received more applications in 2023 than we did in our record year of 2022. One of the worst things that we could say in this call that subprime auto market is downsizing. That's just not true with our applications volume. The subprime auto market is certainly very strong. What are the things that we're looking at in terms of portfolio performance in originations is affordability for our customers. We continue to hold firm on our payment to debt or I'm sorry, our payment to income and debt to income ratios remain the same and have remained the same over the last five to seven years. That's good. Our monthly payment remained relatively low for our space at around $535 This compares to the average subprime payment of around $600. And of course, the new car payment around $775. So we're keeping an eye on affordability in our space. We continue to hold a strong APR in the fourth quarter as we registered an average APR of 21%, which is about on pace for where we were at at the end of 2022 in terms of competition, there's more than enough business for everybody in our space. One interesting thing that we see is we don't necessarily lose some lose business to our direct competitors that sit on top of us in the space, but we actually lose business to credit unions. But what we've seen is a wave of credit unions come into this space. They see that with their low interest rates, they don't get they don't make money, they get killed on the analysis. And then they exit the space and then a whole new wave of credit unions come in and learn the same thing. But we have seen in the last three months as more and more credit unions are actually leaving the space, which is freeing up more business for the rest of the normal competitors in our market harm.
Turning to a couple of technology updates. We put in our brand-new Generation eight machine learning-based AI model in October of 2023 from this model as a fresh is an update and a refresh of our Gen seven model that launched in 2021. We remained on schedule with refreshing our model every 18 months or so. And this model on relies and is based on the last two years of originations, obviously making account further COVID related portfolio performance and utilizes new alternative data. We've got a new fraud score that we think will save us hundreds of thousand dollars a month in synthetic fraud avoidance, and we believe that this is our Best Buy Box yet. The initial results from this model is quite quite positive. And we also continue to use our business with air platforms to increase efficiency and accuracy. This is not a new. This is not a new thing for us. We've been we've been sort of on a bandwagon for the last five years. Obviously, we use machine learning in our in our originations model. We have a new well. We've been using it for about a year. It's an AI machine learning base and document document review. I live in our originations, which is increasing efficiency. We are testing new AI, voice bots and new AI textbooks. What we've learned in the last seven, eight years is texting is probably the best collection tactic. We believe we've found the best voice bot in the market and, you know, connecting that voice bot to to our texting platform should certainly help our collections performance on.
One other thing of note on is our real estate platform. We were we were lucky enough to have most of our leases come up for renewal post COVID. So we were able to leverage the softening commercial real estate market and we renewed or moved four of our five leases within the last within the last quarter, believe it or not. And we're looking at a $10.8 million savings in those in that real estate footprint over the next four years. We've also leveraged what we think are best in class work-from-home platform to reduce our space as well.
So with that, I'll turn it back to Danny.

Danny Bharwani

Thanks, Mike. I'll go over the financial results for the revenues for the fourth quarter 92 million, that's an 11% increase over the $83 million from the fourth quarter of 2022. For the full year, revenues were 352 million, a 7% increase over the full year revenue of 329.7 in 2022, of course, our largest component of revenue is interest income. The fair value portfolio is now up to 2.7 billion and that portfolio is yielding 11.3% remembering that that yield is net of credit losses. Also included in revenues for the quarter and for the year are marks to our fair value portfolio. In the fourth quarter, we booked a markup of 6 million to that fair value portfolio. That's compared to or for the full year, it was 12 million in markup for the fair value portfolio. That's compared to $15.3 million in fair value markups for the prior year 2022 period. The markup is a result of better than expected performance in that fair value portfolio.
Looking at expenses, $82.1 million for the fourth quarter is 27% higher than the 64.7 in the fourth quarter 22 for the full year $290.9 million in expenses is 36% higher than the 213.5 in 2022. A couple of things of note under expenses, we continue to see reverse negative loss provisions from our L. portfolio. That's the portfolio that we originated prior to 2018. That's not accounted for under fair value. We booked a lifetime loss reserve on that portfolio and the results are coming in on that a better need than we expected. So we're able to reverse any loss reserves that are no longer required. That number was $1.6 million in the fourth quarter, $22.3 million for the full year. And those numbers compare to $4.7 million in the fourth quarter of 22 and 28.1 million for the full year 22. Also another large mover in terms of expenses is interest expense that has increased to $40.2 million in the fourth quarter from $28.9 million in the fourth quarter of last year. For the full year interest expenses of $146.6 million compared to $87.5 million in 2022. Largely those increase in interest expense is largely attributable to higher rates, but there some smaller component of that that can be attributed to portfolio growth.
Pretax earnings, $9.8 million for the fourth quarter compared to 18.3 plan. It's a 46% reduction from the prior year fourth quarter. For the year, $61.1 million is a 47% reduction from $116.2 million in 2022. Likewise, net income follows those same trends, $7.2 million for the quarter compared to 14.1 a year ago quarter for the year 2023, $45.3 million of net income versus $86 million in 2022.
Moving over to the balance sheet. Couple of things of note here. Our finance receivables at fair value now at $2.7 million, like I said earlier, 2.7 billion excuse me, is 10% higher than the 2.5 billion where we were at the end of 2022.
Looking at our debt balance, the one thing of note here is our securitization debt is 2.265 billion at the end of 23 versus 2.1 at the end of 22. Doing the math that's a 7% increase on the debt compared to a 10% increase on that fair value assets. So we're able to manage with the with lower leverage on and building up our balance sheet is that certainly a sign of strength for our balance sheet.
Looking at the shareholders' equity at the end of the year, 274.7 is the highest in our history. That's 20% higher than the $28.4 million at the end of 2022. And that's driven by 49 consecutive quarters of pretax profit that we've been able to generate over the last 12 years and change.
Looking at other metrics, our net interest margin of 51.74% less than the 54.1 a year ago. For the year period, our net interest margin is 205.4 is 15% lower than 2022. Core operating expenses are $43.5 million, 7% higher than the 40.6 million in the fourth quarter of 22. For the year, core operating expenses is 166.6 million for 23 versus 154.1 in 2022 is an 8% increase. Our return on our annualized core operating expenses as a percentage of the managed portfolio, it is now 5.9% for the fourth quarter of 23 is flat from the fourth quarter of 22. But on an annualized basis, the 23 period came in at 5.7 is a reduction from the 6.1% we saw in 2022. So we're starting to see some operating leverage improvement as the portfolio grows.
Our return on managed assets for the quarter, 1.3 for the year, it's 2.1 versus 4.6% in 2022.
That's it for the financial results. I'll turn the call over to Brett.

Charles Bradley

Thank you, Danny. As you are going to hear from both the reports that as much as 23 or 22 wasn't the best of the years. We've done quite well through it in many different areas.
Looking at the industry. It's kind of about that. Everyone's still struggling with the 22 paper. And even in some cases, some people's 23 paper has not started out particularly well, either, but on ours and ours is we're kind of happy where we sit there and I think it can create some opportunities for the Company and that our people are certainly going to be kind of conservative going forward, at least until they understand that their models are working again, but they've corrected their models sufficiently to where people can grow again. So we might have a little bit of a head start in terms of getting back in the game than some of our friendly competitors. There certainly will be some opportunities that probably one or two of the folks won't make it that might be interesting opportunity wise, but also the fact that we can start growing and sort of put 22 behind us and be proud of what we did in 22. But again, in terms of our what we want the company to do, we'd like to get back to that game much more than we have been. And also you would think at some point down the road at some lower rates and with a lower rate environment, obviously our margins improve our performance will be great that way. So towards the end of this year and 24, that might be a benefit as well in terms of the overall economy, who knows whether we'll have a hypothetical soft landing, but certainly looking likely make it somewhere there. But generally speaking, we think it's going to be a decent economy, if not a good economy. So we're happy on those fronts. And almost most important by far in any of that is unemployment. Unemployment looks great. And unemployment is the one thing that can cause or industry problems. It does not appear to be a problem at all. It shouldn't be a problem for a long time or at least significantly many time. So we can get growing again and really take advantage of the position we're in. And so having said that 22 is top 23 was sort of that transition for making 20 to go away and getting things ready to go for 24 to now that we're into 24. Hopefully, it's all full steam ahead and a bright future. And again, so it's still kind of remarkable that through all that our company has done so well in terms of how our paper performed in 22 and even 23. So we were super, super proud of our people and what we've done to do it. And I certainly think 23 and everything we've done during 23 has well positioned us for 24 to be a very good year. Want to thank you all for joining us today, and we'll be back to you rather soon with our first quarter report in a month or two a month or so. Thank you.

Operator

Thank you.
This concludes today's teleconference. A replay will be available beginning two hours from now for 12 months via the company, w. w. w. dot consumer portfolio.com. Please disconnect.
Your lines at this time and have a wonderful day.