Consumer Portfolio Services Q3 2024 Earnings Call Transcript

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November 1, 2024

There are 4 speakers on the call.

Operator

Good day, everyone, and welcome to the Consumer Portfolio Services 20 24 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.

Operator

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.

Operator

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.

Speaker 1

Thank you, and welcome everyone to our Q3 earnings call. Again, we had another good quarter. It's slightly lower than we expected. We're just basically trying to get comfortable with the credit so we can start growing again. From last year and is continuing to be basically strong from the Q2.

Speaker 1

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 and the first half of twenty twenty three, 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 is going to get a whole lot better. So we're looking forward to that. Basically, those are the highlights.

Speaker 1

Probably the other one will be the securitization 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.

Speaker 2

Thank you, Brad. Going over the financial results, revenues for the quarter $100,600,000 is up 9% from the $92,100,000 in the Q3 last year. For the year to date period, $288,200,000 of revenues is 11% higher than the 3 months the 3 quarters for 2023 of $260,000,000 The top line revenues growth is driven by very good origination volume for the quarter, dollars 446,000,000 is 38% higher than the $322,000,000 we did in the Q3 last year. For the year to date period, originations are $1,224,000,000 compared to 1.056, dollars which is 16% higher than last year. So the portfolio, the fair value portfolio, which drives our top line revenue is now $3,100,000,000 and we're yielding 11.3% on that portfolio.

Speaker 2

Remembering that the 11.3% yield is net of losses. The revenue for this quarter also includes a $5,500,000 markup to the fair value portfolio and that markup is a result of a better than expected performance on that portfolio. The prior period the prior year quarter also included a markup of $6,000,000 for the fair value portfolio. Expenses during the quarter $93,700,000 is up from $77,900,000 in the Q3 of last year. For the year to date period, expenses were $268,100,000 versus 208,800,000 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.

Speaker 2

The pretax earnings for the quarter $6,900,000 compared to $14,200,000 in the Q3 of last year. Year to date period pretax earnings $20,100,000 compared to $51,300,000 in the year to date period of 2023. Net income is $4,800,000 for the quarter, dollars 4,700,000 was the June quarter and that compares to $10,400,000 in the Q3 of last year. For the year to date period, dollars 14,100,000 of net income versus $38,200,000 in the year to date period last year. Diluted earnings per share is $0.20 per share compared to $0.19 last quarter and $0.41 per share last year.

Speaker 2

For the year to date period, dollars 0.58 compared to 1.51 dollars for the 9 months of 2023. Moving over to the balance sheet. As I mentioned earlier, our fair value portfolio is now $3,100,000,000 is 17% higher than the 2,670,000,000 dollars as of ninethirtytwenty 23. Our securitization balance, debt balance is 2,875,000,000 is 28% higher than the 2.243 as of ninethirty last year. So we've seen the portfolio grow faster than the debt balance is growing.

Speaker 2

Shareholders' equity is $285,100,000 for this quarter compared to $265,900,000 so 7% increase year over year. Going over other metrics, the net interest margin is $50,500,000 compared to $54,200,000 in the Q3 of last year. That's a 7% decrease. For the year to date period, net interest margin is 149,500,000 dollars is 3% lower than 153.7 percent for the 9 months of 2023. Core operating expenses for the quarter, 44.6 percent higher than the $42,000,000 last year.

Speaker 2

For the year to date period, core operating expenses is $134,000,000 is 9% higher than $123,100,000 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.

Speaker 3

Thanks, Danny. In originations and sales, like Danny mentioned, in Q3, we originated $446,000,000 in new contracts, which is a slight increase month over month over the $431,000,000 we did in Q2. Just want to note, in the month of October, we just had our best origination month of the year and actually the 2nd best month in the 33 year history of our company. Given our 2024 growth to date, we have been able to build our portfolio of receivables to $3,300,000,000 at quarter end, which is an increase of 12% over the portfolio size of $2,900,000,000 at the end of Q3, 2023. 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% 20%, so good year overall.

Speaker 3

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 been 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.

Speaker 3

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.

Speaker 3

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 $119,000,000 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 our 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.

Speaker 3

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 to get more business. In the same token, we've been able to raise our same day funding to 17.35 percent of deals funded, which is a significant improvement over our average same day funding of 6.5% in 2023.

Speaker 3

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.

Speaker 3

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 percent 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 1st 5 months of this year and have seemed to get it under control going forward through Q3. Taking a step further, looking at our C and Ls on a vintage basis, going all the way back to 2022, we have seen incremental improvements vintage over vintage from 2022 through the 1st 3 quarters of this year. So we're trending downward on the CNLs as we move forward through 2024 and into 2025.

Speaker 3

This is a testament to our early tightening of our credit in late 2022 and continuing into the Q1 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 twenty twenty three and into 2024.

Speaker 3

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 nearshore team to lessen the DQ role by hammering down on the potential DQ accounts. That's 1 to 29 accounts. Our extensions remain flat as a percentage of our portfolio. One note, given the 2 hurricanes that rolled through in Q3, we've seen minimal impact in both hurricanes in Florida and specifically North Carolina.

Speaker 3

A technology standpoint, we recently migrated our omnichannel collection system to the cloud, which provides us a more powerful auto dialer 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 market 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.

Speaker 3

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 $4,000,000 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.

Speaker 1

Thanks, Mike. So looking at the industry, I think probably what's kind of good about our industry is everybody's playing, everybody's kind of doing what they're supposed to be doing. There aren't any real problems. Most everyone is still working through the 2022, early 2023 originations, trying to get the credit back in line. As I mentioned, our credit now is we're very we feel very good about where we sit in the credit spectrum.

Speaker 1

One of the reasons we've been able to grow a lot is because we like where we sit and we're becoming a little more aggressive in the market. And the other players are still doing about the same thing. Some are aggressive, some are still trying to get through those problems. Either way, the health of the industry is very good. There have been no new entrants in our industry in a long time, which again, I think just shows that the industry has matured and only strong players are still here.

Speaker 1

And that's important because when someone blows up, it causes ripples within the whole industry. It also those kind of problems affect the ABS market. And since that's what we need every quarter, we want that market to stay strong. And as I mentioned, it is. I think in looking at the economy, everybody's going to say it's all about the election.

Speaker 1

And as much as it may be, I don't think whatever the result is, it will affect us in a tremendous way one way or another. As we've said numerous hundreds of times, what we care about is unemployment. Unemployment is in a great position today. I don't think that will change no matter who wins the election. I think the economy is in a very good position today.

Speaker 1

And so I think with a growing economy and very strong unemployment numbers, the backdrop for us in terms of going next year and you throw in the fact that the Fed has now lowered rates once and is expected to lower rates a few more times, we now are coming into a perfect kind of place in terms of we're comfortable with our credit, we're comfortable with our growth strategies and we're executing them. We're doing many other things in the sort of the backside of the business to improve things. So we as I mentioned before, we are trying to get positioned for next year. And I think we've done a wonderful job of doing that almost across the board. With the economy being strong, unemployment being good, the rates coming down and us being in a position to grow substantially in the New Year, we really the future looks quite bright for what we're doing.

Speaker 1

With that, I think we'll see how the rest plays out. We have 1 more quarter this year and then we're going to hopefully go off to a big start for next year. We look forward to speaking with everyone again sometime in February. Thank you for attending.

Operator

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.

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Earnings Conference Call
Consumer Portfolio Services Q3 2024
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