Consumer Portfolio Services, Inc. (CPSS) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Consumer Portfolio Services 2024 Second 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 fact 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 risks that could cause actual results to differ materially from those projected. I refer you to the company's Annual Report filed 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 here is Mr. Charles Bradley, Chief Executive Officer; Mr. Daniel 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 to our second quarter earnings call. Probably the best way to sum up the quarter, it was a good quarter, but we're still trying, we're beginning to make that transition from what we'll call watchful waiting on our portfolio to where we can start growing again. We probably need, in terms of being absolutely certain that credit has made the turn, another 6 to 9 months. But we have gotten to the point where we're confident enough in the performance of the pools that we started to grow this quarter. Our quarter-over-quarter growth is 25%, year-over-year is 36%. So really putting an effort to start growing again, mostly because we finally think we're looking at most of what would be the 23-C, 23-D and 24-A securitizations, 24-A being the newest that we're looking at, and the performance there has turned the corner enough to where we're confident that the overall performance going forward will be fine. And it's with that we've been able to start growing again. But still, even at that point, and at least in the second quarter, we're still concerned with making sure our credit is very good. We're working on expanding our footprint in terms of sales. And we, of course, anxiously awaiting some word on whether interest rates will be down towards the end of the year. So I think -- we'll go through some of the other highlights, but basically, we're about to turn the corner. We're really focused on growing again. And hopefully, this timing will all go together towards the end of the year when interest rates come down. I'll talk more about that, but for the moment, I'll turn it over to Danny for the financial stuff.

Thanks, Brad. Going over the financial results for the quarter. Revenues were $95.9 million, which is a 5% increase over the $91.7 million last quarter and a 13% increase over the $84.9 million in the June quarter last year. For the 6 months, $187.6 million, is a 12% increase over the $168 million last year. Included in the revenue numbers are a mark to a finance receivables on our fair value portfolio, I would say, mark that shows the -- $5.5 million mark shows the outperformance in that portfolio during the quarter. That compares to -- we didn't have a mark in the same quarter last year. And for the 6 months, that mark was $10.5 million, in the 6 months for 2024. Also included in the revenue numbers are the increase in interest income, driven by the growth, as Brad said, the growth in new loan originations. We originated $431.9 million in the second quarter, which is a 25% increase over our first quarter and a 36% increase over the $318.4 million last year. So those 2 facts are driving the increase in revenues. Moving over to expenses, $89.2 million for the quarter, is up 5% over the $85.2 million last quarter, compared to $66.3 million in the second quarter last year. For the 6 months, expenses were $174.4 million, which is a 33% increase over the $131 million for the 6 months last year. A couple of items to note for expenses. We had a reversal in the provision for losses on our legacy portfolio. You might recall our legacy portfolio is the loans we originated prior to 2018, which is mostly gone by now, it's mostly amortized. There's only about $13 million of that left. But during the quarter, we did reverse about $2 million of credit losses, that was previously reserved that was no longer required because the performance had been better than expected. That compares to a reversal of $9.7 million in the second quarter of last year. And for the 6 months period, that reversal was $3.6 million for the '24 quarter and $18.7 million last year. The other increase in expense, primarily driven by the increase in interest expense, which has increased to $46.7 million this quarter as compared to $35.7 million last year. Now obviously, the increase in interest rates had something to do with that increase in interest expense. But part of that increase is also due to portfolio growth, again driven by the higher origination levels during the year. Moving on to pretax income, $6.7 million, is comparable to the $6.6 million last quarter, versus $18.6 million last year. For the 6 months, pretax income was $13.2 million, down from $37 million last year. Similarly, net income is $4.7 million for the second quarter, down from $14 million the second quarter last year. For the 6 months period, net income is $9.3 million, down from $27.8 million last year. The same trends follow for earnings per share, $0.19 for the second quarter this year, down from $0.55 last year. For the 6 months, $0.38 per diluted share, compared to $1.09 last year. So again, these trends are all driven by the increase in interest expense and expenses overall, somewhat offset by the increase in revenues from the higher portfolio balance. Moving on to the balance sheet. Our finance receivables at fair value is $2.960 billion, is a 6% increase from the first quarter and a 13% increase from the $2.6 billion last year. Our total debt balance is $2.9 million (sic) [ $2.9 billion ] for -- as of June 2024, is up 16% from the $2.5 billion last year. And lastly on the balance sheet, our shareholders' equity, another record high for the company, $280.3 million, is up 10% from the $255 million last -- June of last year. Looking at other metrics. The net interest margin, $49.2 million in the second quarter, is flat from $49.2 million last year. For the 6 months, it's $99 million as compared to $99.5 million last year. Core operating expenses is down 1% this quarter from last quarter, but it's up 10% from the $40.3 million last year. On a year-to-date basis, core operating expenses were $89.3 million, is up 10% from the $81.2 million in the June quarter of last year. As a percentage of the managed portfolio, core operating expenses is down to 5.7% from 6% in the first quarter, but it's up from 5.5% in the second quarter of 2023. And lastly, the return on managed assets, 0.9% in the second quarter, compared to 2.6% in the second quarter last year. The same numbers for the year-to-date period, 0.9% for the 6 months compared to 2.6% for the 6 months of 2023. I'll turn the call over to Mike.

Thanks, Danny. In operations, a couple of follow-up comments in originations and sales. The demand for subprime business remained strong. We received 310,000 apps in the second quarter of 2024. That compares to 281,000 apps in the second quarter of 2023. That's a 10% increase in apps year-over-year. That's in light of the fact that we did $500 million less in 2023 than what we're projected to do this year. In terms of sales, we hired 4 new reps in the second quarter, going from 72 reps to 86 reps. That's a 19% increase. And as Brad and Danny mentioned, as we continue to grow the business, we will continue to grow our outside sales and our inside sales team with the goal to be around 110 reps at the end of the year, and growing that rep force even further as we dig into 2025. One aspect of growing the business in the second quarter and beyond was we continue to expand our large dealer group base. That's dealer groups with more than 10 rooftops under their umbrella. We reached 99 large dealer groups in the second quarter, taking that from 76 in the second quarter of 2023 and 61 in the second quarter of 2022. All told, that's a 62% increase over the last 2 years in our large dealer group additions. What that's done is that it's allowed us to add roughly 900 rooftops to our dealer base with only increasing, say, 30 dealerships in total. That's super efficient. That's a meaningful increase in large dealer groups as we have taken our -- that footprint from 17% of our business in 2022 to 26% of our business as of the end of the second quarter. We are well on our way to meeting our goal of that being 30% by the end of the year. As part of that large dealer group base, we continue to originate volume from the major rental car companies, including Enterprise, Hertz and Avis. A few other organic metrics of growth. We were able to grow our dealer loyalty in the second quarter. That's how many deals per dealer we do on a monthly basis. So we're able to grow that. We were able to increase our capture percentage in the second quarter. We were able to increase our average funding dealers per rep in the second quarter, quarter-over-quarter and year-over-year. And we were able to lower our funding time to get the dealers paid to just over 2 days. That's the fastest it's been in company history, and we all know that dealers like to get paid fast. And that goes to our efforts to increase our customer service to the dealerships. In terms of our current risk profile, we're holding a strong 20.49% APR. And that's a -- we've been able to hold that APR strong during our growth inflection so far in 2024. Our FICOs increased to 578, which is higher than our historical FICO of 565. That's reflected of our emphasis on getting more upper-tier paper. So we're earmarking the upper tranche of the subprime branch. Our LTVs remained flat in the second quarter, running around 119, which is down from 120 in 2023 and down from 125 in 2022. So we've made some progress in hammering down our LTVs moving from '22 into the second quarter of '24. Of exceptional note, we were able to lower our debt to income and our payment to income in the second quarter over our first quarter. So overall, we have a strong risk profile during our growth cycle. Switching to portfolio performance. DQ greater than 30 days for the second quarter was 13.29%. That's compared to 11.72% in the second quarter of 2023. That said, so far in 2024, we've been able to lower the DQ month-over-month for the first 6 weeks of 2024. So we're seeing some positive trends in lowering the DQ so far in 2024. Annualized net charge-offs for the second quarter was 7.2%. That's compared to 6.29% in the second quarter of 2023. As with our DQ, we have also been able to moderately lower our charge-offs month-over-month in the first 6 months of 2024. So good trends in the charge-off rate so far in 2024 as well. Our extensions remained flat in the second quarter. And benchmarking those extensions with our competitors, we remain at market average. We continue to see remarkable success in the use of our extensions. We do have an extension model that uses algorithms to provide those extensions. And we recently did a study of extensions granted in December of '23 and compared those to accounts that did not get an extension in '23, and ran that study through June of '24. And we found that the accounts that did get extensions versus the accounts that didn't get extensions saw a 41% decrease in charge-offs. So our extension methodology is working. As Brad said, generally speaking, we're sort of quickly exiting or fleshing through the challenging '22 vintages. The second half of '23 is showing marked improvement. And while it's early in the game, the '24s are looking great, and we're cautiously optimistic that the CNLs will return to the historical norms. Turning to technology. We continue to layer in AI-based technologies into our operations, in the front end of the business and the back end of the business. Our latest project, we completed our pilot of a conversational AI voice bot, that is actually used by a few of our competitors in the industry. We expect to fully launch this AI voice bot in August. We're probably going to use it on collecting our potential delinquencies, that's 1 to 29 days. And we expect that will reduce our roll rate and help our collections in the later buckets. The pilot testing revealed incredible efficiency in making a high volume of calls, establishing right party contact, and converting that RPC to promises to pay, and at least 10% of the time, in real-time payments on the spot. So we're excited about that. The other thing we did in the quarter was we launched our second phase of our document processing AI bot in originations. We've had the first phase implemented for the last year. The second phase concentrates on checking proof of income upfront, which allows us to process the deal faster and pay the dealer faster. And it's also more accurate and detects fraud upfront. A few miscellaneous things. In the second quarter -- or actually in the first 6 months of '24, we were able to reduce our occupancy costs significantly by renegotiating and renewing 4 of our 5 leases. Our fifth lease is up for renewal now, and we are working on that as we speak. So all good things. And with that, I'll kick it back to Brad.

Thanks, Mike. Looking at the industry, we sit in a pretty good place. By and large, everyone in our industry is trying to deal with the performance problems created in 2022 and '23. As we mentioned in previous calls, we've done better than most, if not even better than that. So we're very comfortable with how those pools are performing. We think it's going to take some time for some other folks to work through it. We'll see how that affects the industry. I think it can only affect it positively if -- and as a few of the weaker players go away, the big players will pick them up. So we don't have that problem. One of the things we have pointed out in the past is the barriers to entry in our industry now are very extreme. No one has come in in the last 5 or almost 10 years. And so I think that gives people here a leg up, gives people who are doing the credit better than most, like us, an even bigger leg up. And so the real trick now is we're focused on growth. We want to get in a position where we're growing a lot and we have real production as we roll into the new year and hopefully experience some declining interest rates. And then we'll start making lots of money again. So that's really the plan. I think in terms of the economy, our #1 thing is unemployment. Unemployment seems to be fine. We think the economy looks healthy. We'll see what the elections do. But probably we're even more interested in what the rates will do. So with the current economic conditions, it would appear that sooner or later they'll begin to lower rates. And that's where it really helps us. So our goal is to do probably 2 things in preparation for that time. One is to make sure that our credit is exactly where we think it's going. And two, to get in a growth position where we're funding lots and lots of loans as we roll into declining interest rates. So the second quarter, somewhat like the first quarter, not all exciting, but it's like building blocks. We're building things so that, when the time is right, we'll be in the best possible position to take advantage of it both economically and financially. We're strong on cash having done that residual deal. We have lots of money tied up in our securitizations. That money is beginning to flow out. So we're really in a very good position to take advantage of the next few quarters. So with that, we'll let it go, and we'll see you next quarter. Thank you all for attending.

Thank you. This concludes today's teleconference. A replay will be available beginning 2 hours from now for 12 months via the company's website at www.consumerportfolio.com. Please disconnect your lines at this time, and have a wonderful day.