Q1 2023 Consumer Portfolio Services Inc Earnings Call

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Good day, everyone and welcome to the consumer portfolio services 2023 first 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. Also are 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 Andrew.

I'll 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 is Mr. Charles Bradley Chief Executive Officer, Mr. Danny Bar Wanni Chi.

Finance financial Officer, and Mr. Mike Levin, 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 first quarter Commscope.

We definitely spoke a little while ago, but not too long ago. So not that much has changed but in terms of the first quarter. It's off to a very strong start we're very we're very happy with the results I mean, I think the thing to sort of focus on and looking at the first quarter is that we've made a lot of changes in the last two quarters of 2022, mostly.

As a result of the fed raising rates and you know the 2022 vintages not really coming out of the gates as strongly as we might hope as a result of that we spent those two quarters and a good part of this quarter tightening our credit raising their rates and fees and really sort of realigning everything we need it one might have thought that would have.

Had a negative effect on both growth and attraction.

Attraction of dealers in the industry, that's not the case at all we had a very strong quarter, even with the tightening of the price increases we've had strong growth in the first quarter stronger than we would've expected. So all those things are very positive in terms of our first quarter of the year getting off to a good start.

We also as sort of a good thing is our DQ and losses have gone up a little bit, but we still are significantly below pre pandemic levels. Many of our friendly competitors, probably couldnt say that so again, we both are beginning to see we've made the changes necessary as we start 2023, but we're also still being you're beginning to see the <unk>.

Real results of what we've done in terms of having a strong credit model strong collection model and having it all kind of works to actually give us a great start to the year, but also just sort of you know to help take care of any you know inefficiencies or things that didn't work as well in 2022, so with that I'm going to turn it over to Danny to the financial stuff and then.

And then Mike and then I'll get back in a few comments on the industry and the macro.

Thank you Brad will go over the numbers our revenues for the quarter $83 1 million, which is slightly higher than the $83 million we posted in the.

December quarter.

But it is up 12% over the $74 4 million in Q1 of last year.

So what's our drilling down on some of the details here. The fair value portfolio is now $82 8 billion and that's yielding about 11, 2% remembering that that yield is net of losses.

Last year's number.

<unk> larger portion or a larger benefit from the legacy portfolio, which was 190 million last year versus 71, this year and that legacy portfolio last year was yielding 17% so without that comparison.

Revenue increase would have been even greater also included in our revenues for last year was the fair value markup of $2 4 million that was in Q1 of 'twenty. Two we had no markup in Q1 of 2023.

Moving down to expenses the expenses for the quarter $64 7 million, which is flat from the same 64 seven number from Q4, but it is up 44% from the $45 million.

In Q1 of last year.

These expenses include a negative provision.

From our legacy portfolio, using CSL accounting, where we had originally estimated.

Lifetime losses on the legacy portfolio that where.

Were those losses didn't materialize so over time, we've been gradually reducing the amount of the excess reserves.

And in the current quarter that abound happened to be $9 million of negative provision in the December quarter. It was $4 7 million in the first quarter of last year. It was $9 4 million.

Pre tax earnings.

I'll cover our <unk>.

Interest expense I can cover right now because that's a big component of the change in expenses.

Net interest expense component.

<unk> has increased from $16 4 million last year to $32 8 million this year.

So when we talk about net net interest margins later on.

We will see that there is some compression in the margins.

Even though we've.

<unk> been raising our APR on the loan originations for this year just the way of fair value accounting works. It takes a little bit of time for the <unk>.

The yield to catch up to the changes in the interest rates on the debt. So there is some compression in the margins.

And net interest margins for the current quarter moving down to pre tax earnings.

$18 4 million in the current quarter is comparable to about flat to the $18 $3 million in December .

But down from $29 3 million in the first quarter of last year.

Also remembering in the first quarter of last year that period benefited from.

Exceptional credit performance, even benefiting from some of the government stimulus that was occurring during that period, we had very high used car prices and very low interest rates. So those are the reasons why it's a tough comparison from the first quarter of last year to the first quarter of this year.

Net income is roughly in line with the trends in pretax income $13 8 million.

This $14 one in the December quarter, and 21, one in the first quarter of last year. That's a 35% decrease the same trends in earnings per share 54 cents in the current quarter 59 in the fourth quarter and 75.

For the first quarter of last year looking at the balance sheet, a couple of things I'd note the <unk>.

Finance receivable portfolio grew by 4%.

From the December quarter, so its now to 575 million versus $2 $4 76 in the fourth quarter, but it's 35% higher than the first quarter of last year. When it was one nine.

1000 $903 million.

That is driven by the healthy origination levels. We continue to have we continue to see from last year.

Continuing into this year, where we originated $415 million.

In the first quarter compared to $410 million in the prior year first quarter.

Moving down to securitization debt our securitization debt is.

2170, $5 million compared to 2000 $108 million in the fourth quarter and 1000 $813 million last year. So the securitization debt is up 3% over the sequential quarter and a 20% year over year.

Relating that to the increase in the fair value portfolio, which saw a 4% sequential increase and a 35% sequential increase from last year shows that we're able to maintain our liquidity position despite lower leverage on the loan portfolio.

Looking at the net interest margin $53 million in the current quarter 54.1 in December versus $58 million last year. That's a 13% decrease like I said the cost of funds on our debt has increased.

In part due to the increase in interest rates from the fed continuing to raise rates, while the yield on our loan portfolio on fair value accounting will manifest through higher yields in the future.

Looking at core operating expenses $40 9 million.

It was about flat to the $40 6 million in the December quarter, but its 8% higher than the $38 million in that in the first quarter of last year.

Looking at that number as a percentage of the managed portfolio. However shows that the core operating expenses is five 7% in the current quarter is down from the six 7%.

A 15% decrease from the six 7%.

In the first quarter of last year and lastly, our return on managed assets two 6% in the current quarter is flat from Q4 to six.

But down from five 2% in the first quarter of last year, primarily due to the decrease or the compression in the net interest margin.

I will turn the call over to Mike.

Thanks Danny.

From an operation standpoint, as we reported in our last call two.

2022 was a record setting year for us originating.

$1 85 billion.

Which was our best year in our 31 year history, and we were able to grow our originations 67% year over year. So.

So far 2023.

Is off to a great start as.

As we originated 415.

Million in originations in the first quarter that is down 4% quarter over quarter, but up 2% over the first quarter in 2022.

So we are tracking nicely so far in 2023.

The key to that metric as demand for our financial products remained strong we had over 30000 apps in Q1, which is a 20% increase quarter over quarter and a 41% increase year over year now we expect greater demand for our financial products in February and March due to tax refund season.

But we saw.

A greater influx of apps despite that seasonality.

Yes, with all that said, we also reported in our last call that we aggressively tightened credit the second half of 2022.

We can we continue to do that in Q1 and the areas that we consider most important as a result, our approval rate dropped from 72% in the first half of 2022% to 65% in the second half of 2022 and in quarter, one it dropped down to 59%.

Drop is by design and as a result of our credit tightening.

So in the first quarter.

We continue to further narrow the consumers that we lend to in order to focus on originating only the upper tranche at a subprime market.

Demand was so high that we feel like we.

We're continuing and improving to buy the best subprime paper available on the market.

We've been able to hold down a strong APR with the quarter average with Q1 quarter average at 2021, 5%.

That's up from 21, 5% quarter over quarter.

And very much over $16, one 4% year over year.

This aggressive rate rise helps maintain our yield in the face of higher cost of funds that Brad mentioned, and perhaps a slight slight uptick in the losses.

One thing we're looking at right now is to maintain affordability for the car payments for our for our customers.

We look at metrics like debt to income payment to income.

Looking at our latest risk profile all of those numbers are in line with our 2022 trends.

We also look at the payment amount and for the first quarter of 2023. The average payment was 525, which is below the average used car payment of $5 44, and that car payment of 544 is an industry average, which includes near prime and prime paper.

So our subprime payment of 524 looks strong against the industry average.

Switching over to portfolio performance.

There is certainly some macroeconomic issues that are weighing on some of our more recent vintages inflation and rising interest rates are stressing.

Portability factors, but that's also balanced out with good unemployment numbers.

That historically has been the critical factor and portfolio performance.

For the for the for the quarter DQ, including repossession.

Inventory ended up at $9, 90% of the total portfolio as compared to $8 five 9% in the same quarter in 2022 and.

Annualized net charge offs for the quarter ended up at five 2% of the portfolio as compared to three 9% in the same quarter of 2022 extensions and repossessions were up slightly over the quarter.

And the good news front.

Recoveries for the quarter ended up at 40, 181%, which is below the record level of 60, 137% for the same quarter in 2022.

Interestingly, we saw recoveries increase month over month over month in Q1.

And so they look to be stabilizing going forward, that's always good for managing our losses.

In terms of strategic initiatives to improve our performance.

We took several actions in the quarter one from the most basic strategy of hiring more collectors to lessen the account loads. So they can dig deeper into the accounts and do some earlier skip work.

To some more proprietary strategies that have worked.

Work, so far in the quarter.

Turning to technology.

Continue our five year quest to invest in new technology specifically.

Artificial intelligence driven technology that aims to make our business more efficient for us for our dealers and our customers.

In the quarter, we made great progress on two such technologies.

On the origination side to streamline underwriting.

Using artificial intelligence and one on the servicing side to make collections more efficient.

Using artificial intelligence.

We continue to promote our dealer portal.

Which provides a dealer and easier way to do business with us.

On the personnel front.

As I mentioned.

We hired.

A boatload of collectors to help with our portfolio performance.

That left US with 794 total employees housing five offices across the country.

We feel that we remain at scale.

To do $150 million, a month 200 million amount to $125 million in months.

It's taken us taken us a few years, but we've got to scale, so with that ill toss it back to Brad.

Thank you Mike.

So again the industry, we think we sit in a very good spot in the industry.

And of course, one of the questions is why I think.

Out of 2022, where we've seen some of the problems in terms of the rapid growth across the industry in 'twenty two.

We give a lot of credit to our model, but Mike mentioned, one of the indicators in the payment.

With the inflation problems out there and the customers, having more things to try and worry about.

One of the things we managed to do is keep our payment for our customers down what are the other folks and you can tell by the numbers.

A lot of the other folks the payment for the customer payments all went up a lot and I think over time, that's going to cause problems in terms of the performance. So that's being able to manage that issue. Among others has really helped keep us in line with what we're doing so.

2023 reason can be an interesting year for that for our industry, but I think where Cps sits today is one of the most advantageous positions we could be and so we're good with that.

There's still a famous NFL owners phrase in terms of the economy and all we care about the unemployment rate, we care about the securitization market and nothing else I mean, the rest doesn't matter those are the ones, we really care about and so unemployment remain really low no. One really is forecasting unemployment.

Very much we did another securitization just the other day that market remains strong, particularly at the bottom end of the stack in other words, the sort of lower grade bonds that will be triple b.

Those were very popular and those are very good indications that that market is very strong and healthy so to extent, we care about anything that's it.

Alex is about making sure the models work, making sure we can maintain our performance. The fact that we still are below industry levels of pre pandemic levels in both DQ and losses is also very important.

There was a time where the.

On the used car market pricing came down a little bit we expected it to hold up and then it bounced right back up so even that area is working very well so in terms of the industry. It all looks good in terms of the overall economy as I said, we really only care about unemployment.

One would hope that things will go okay.

People are concerned with the mid bank small bank problems, but again, it doesn't really seem to be affecting the large banks and the large banks or some of the major players and doing securitizations. So you'd have to have a real problem at the banking level before it really got to a point it would bother us so sort of top down looks very healthy in terms of where it.

We care about the industry and the economy.

We really like our position within our industry and again going back to all the things that Mike went through.

We've made a lot of the right moves along the way in the last 12 months or so so we're kind of proud of that accomplishment.

It bodes well for our progress in 2023, and so just to see how it goes.

Thank you all for joining us today, and we look forward to talking to you next quarter.

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

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