Consumer Portfolio Services Inc
NASDAQ:CPSS
Earnings Call Analysis
Q4-2023 Analysis
Consumer Portfolio Services Inc
Throughout 2023, the company prioritized credit performance improvement, slowing down to reassess the underwhelming performance of the 2022 vintage and thus calling 2023 a transitional year. In response to the credit quality concerns, the firm tightened credit criteria, enhanced its collection efforts, and was cautious with guaranteeing back-end profits—an approach that paid off by outperforming much of the industry in terms of credit handling. These changes point towards a conservative but ultimately more resilient risk management approach.
The company expanded its collections team and introduced new outreach programs to bolster collection performance. The investment in human capital—from 287 to 423 collectors—complemented with technology, as seen with the implementation of a new machine learning-based AI model for fraud detection, sets the stage for stronger operational resilience and potentially substantial cost savings.
Despite tightening lending standards, 2023 was a solid year for loan originations, second-best in the company’s history at $1.3 billion in contracts. This was part of a deliberate strategy to optimize credit quality, which, along with an increase in loan applications, indicates sustained demand in the subprime auto market. The firm's consistent credit tightening and the maintenance of prudent underwriting standards underscore its commitment to balance growth with credit risk.
Revenues showed upward momentum, with an 11% rise for the fourth quarter and an overall 7% increase for the year, totaling $352 million. The company's fair value portfolio saw an improvement, leading to a markup of $6 million in the fourth quarter. However, heightened interest expenses, attributed to rate increases, led to a 46% reduction in pretax earnings for the quarter and a 47% drop for the full year. Net income also declined significantly, signaling that profitability faced headwinds despite revenue growth.
On the balance sheet, finance receivables at fair value rose by 10%, and an increase in securitization debt was well-managed with lower leverage. The year concluded with the highest shareholders' equity in the company's history, a testament to its quarter-over-quarter profitability. Core operating expenses slightly increased but were offset by efficiency gains, as indicated by a reduction in annualized core operating expenses as a percentage of the managed portfolio. Return on managed assets for the year, however, saw a decline from the previous year.
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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-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 risks that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed on 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. 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 our fourth quarter and full year earnings call. Thinking about this call and what I should say, the real thing was '23 probably in retrospect, was what we'll 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 it 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 do slow things down and figure out what was going on. And so we did. So really, unfortunately, at some level, we spend -- 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 can then move forward and it took some time. One of the things we did immediately was we tightened the credit improve the model, beefed up the collection team and kind of went after making that '22 paper perform as best as we possibly could. And so unfortunately, at some level, we spent most of '23 waiting to see how '22 would do rather than try and grow real fast in '23 and not really know how we were going to improve. So what we did find out as the year went on and actually just the first or second quarter, as much as we were somewhat this made in our performance and how our credit was performing, we found out that almost everyone else in the industry was doing far, far worse. 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's, 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, I'm not going to go through the whole thing. I'll just go through a couple of highlights that we determined probably are the cause of why '22 wasn't as good and '23 ended up being better, or the 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 back-end profit to all the dealerships, being that we have been a long kind of forever around forever, we realized right away, that was kind of stupid. However, we looked at it a lot and it turns out, most people in the industry followed along that path. And eventually, we came up with a much tighter scale-back version of what we call the back-end profit program. And in the end, 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. So obviously, it was a good program in terms of the dealerships, to the dealership love making all this money for sure, no matter 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 a lot slower than everyone else. That turned out to be very significant in helping us do better in the whole process of the '22 paper. The other thing that happened is that everybody started growing a lot. The rates were 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 lenders who don't check things. One thing we've always done and we will continue to do, no matter how much of work it is, as we verify everything. We make sure our customers have a job. We 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 happen in our industry. So if you look at those few things, we went much slower into the guarantee back end than everyone else. We did it 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. We also realized 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, this is -- 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 and in terms of how we run our models and manage our portfolio. So as much as '23, it was kind of not the best year in terms of being able to grow and succeed and expand. Being able to say that we did it pretty much better than everyone else is kind of a pretty cool way to say that's how '23 went. Hopefully, now that '22 is getting behind us, '23 performance is certainly much better. All the changes we've made have been very good. It looks like we're kind of ready to go again. So -- but looking at '23, that's the story of how we did it. 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 is going to happen next after Mike and Danny go through their pieces. So I'll turn it over to Mike to do the operations review.
Thanks, Brad. Just sort of follow-up on what Brad was talking about in terms of portfolio performance, since that is the #1 priority of the company right now. I'll also add that there were some macroeconomic issues that were 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 problems that Brad talked about, it jacked up the amount finance and jacked up the car payments, 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 other bullet that can really hurt the business is a recession. And I think that most economic pundits are 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 help that. I'll talk about that in a minute. Likewise, the first half of the 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 CNLs. Anecdotally, we were recently at a major asset-backed security conference, and we were [ truly ] heard from investors and bankers that our 2022 vintages and 2023 vintages far outweighed our competitors' performance in the space. So even though we aren't quite thrilled with the challenges that 2022 and 2023 -- early 2023 had, we are very pleased with our performance in our space. For the fourth quarter, DQ, including repossession inventory ended up at 14.55% of the total portfolio as compared to 12.68% in the same quarter of 2022. 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 repo and sale. With that being said, and canvassing and benchmarking the market, we believe our repo and sale timing remains the best in the industry 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 [ Pots ] Group. That's our potential delinquencies 1- to 29-day bucket, had its best performance in 2 years. This is important because the better you do in the [ pots ], the better you do in the later buckets as the roll rate is 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. 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 success as 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 675 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 on 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 are servicing the performance would have been slightly worse. So we're happy with our servicing performance. Switching to originations. The fourth quarter remains 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. Specifically, we tightened the LTV. We kept payments, which is important in certain program 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, more significantly and more importantly, we've knocked down the LTVs, which is a leading metric to predicting losses. While 2022 was 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 on 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. The slight uptick quarter-over-quarter reflects strong demand in the subprime auto business space. 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 is the subprime auto market is downsizing. That's just not true with our applications volume. The subprime auto market is certainly very strong. One of the things that we're looking at in terms of portfolio performance and in our originations is affordability for our customer. We continue to hold firm on our payment to debt -- I'm sorry, our payment-to-income and debt-to-income ratios remain the same and have remained the same over the last 5 to 7 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 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 the space. They see that with their low interest rates, they don't make money, they get killed on C&Ls 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 3 months is more and more credit unions are actually leaving the space, which is firing up more business for the rest of the normal competitors in our market. Turning to a couple of technology updates. We put in our brand new generation 8 machine learning-based AI model in October of 2023. This model is a fresh -- is an update and a refresh of our Gen 7 model that launched in 2021. We remained on schedule with refreshing our model every 18 months or so. This model realizes and is based on the last 2 years of originations, obviously, making account for the 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 positive. We also continue to infuse our business with AI platforms to increase efficiency and accuracy. This is not a new thing for us. We've been sort of on the AI bandwagon for the last 5 years. Obviously, we use machine learning in our originations model. We have a new -- well, we've been using it for about a year. It's an AI machine learning based document, document review AI in our originations, which is increasing efficiency. We are testing new AI voice bots and new AI text bots. What we've learned in the last 7 to 8 years is texting is probably the best collection tactic. We believe we found the best voice bot in the market. And connecting that voice bot to our texting platform should certainly help our collections performance. One other thing of note is our real estate platform. 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 4 of our 5 leases 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 4 years. We've also leveraged what we think a best-in-class work from home platform to reduce our space as well. So with that, I'll turn it back to Danny.
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, is a 7% increase over the full year revenue of $329.7 million 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 -- for the full year, it was $12 million in markups 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 million in the fourth quarter '22. For the full year, $290.9 million in expenses is 36% higher than the $213.5 million in 2022. A couple of things of note under expenses. We continue to see reverse -- negative loss provisions from our CECL 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 better 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 compared 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 expense was $146.6 million compared to $87.5 million in 2022. Largely, those increase in interest expense is largely attributable to higher rates, but there's 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 million. 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 million 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. A 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 billion at the end of '22. Doing the math, that's a 7% increase on the debt compared to a 10% increase on fair value assets. So we're able to manage with lower leverage on -- and building up our balance sheet is certainly a sign of strength for our balance sheet. Looking at shareholders' equity at the end of the year, $274.7 million is the highest in our history. That's 20% higher than the $228.4 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 $51.7 million is 4% less than the $54.1 million a year ago. For the year period, our net interest margin is $205.4 million is 15% lower than 2022. Core operating expenses are $43.5 million is 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 million in 2022 as an 8% increase. Our return on -- our annualized core operating expenses as a percentage of the managed portfolio 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 Brad.
Thank you, Danny. As you can hear from both the reports that as much as '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 is still struggling with the '22 paper. And even in some cases, some people's '23 paper has not started out particularly well either. But our [ sensors ] is, we're kind of happy where we sit there. And I think it's going to create some opportunities for the company and that people are certainly going to be kind of conservative going forward, at least until they understand that their models are working again where they've corrected their model 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's certainly will be some opportunities that probably 1 or 2 of the folks won't make it. That might be interesting opportunity wise, but also the fact that we can start growing again 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. Also, you would think at some point down the road, they had 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, in '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 like we might get somewhere there. But generally speaking, we think it's going to be a decent economy, if not a good economy. So we're happy along those fronts. Almost most important by far in any of that is unemployment. Unemployment looks great. Unemployment is the one thing that can cause our 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 amount of time so we can get growing again and to really take advantage of the position we're in. So -- and we said that '22 was tough, '23 was sort of that transition from making '22 go away and getting things ready to go for '24. So now that we're in '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 certainly think '23 and everything we've done during '23 has well positioned us for '24 to be a very good year. I 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 so. Thank you.
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.