Q2 2023 Consumer Portfolio Services Inc Earnings Call
Yeah.
Good day, everyone and welcome to the consumer portfolio services 2023 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 facts may be deemed forward looking statements statements regarding current or historical valuations are receivables because dependent or estimate it.
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 15th 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 today is Mr. Charles Bradley.
Chief Executive Officer, Mr. Danny Bahrani, Chief Financial Officer, and Mr. Michael <unk>, President and Chief operating officer of questions before they go to San Francisco I will now turn the call over to Mr. Bradley.
Thank you and welcome everyone to the second quarter earnings call.
Another good quarter for us.
Move forward with what we consider there should be a very strong year.
Through the highlights I guess, you have to sort of look back at what was happening in the last couple of years during the pandemic. The pandemic was sort of a really a rare event in the 30 years plus we've been doing this with all the influx of government money it really changed the dynamics of everything everything performed great.
People got somewhat aggressive, but it was a whole windfall across the industry. So 2022 became at first year when we got back to what we would call pre pandemic.
Sort of the normal.
Kind of business, we should be doing and as such because some of the people in the industry got aggressive and probably because a few of the things that came out as a result of the pandemic government funding 22 turned out to be a tougher year for just about everyone. So having said that R 22 papers doing quite well, it's not as great as we.
Might have hoped but it also is probably much stronger than most in the industry. So we're really pleased with how that's performing it continues to be an ongoing struggle, but you know, we're really making some progress in having that paper performed very well 23 should be even better and then going forward, we sort of have a new normal and based on what happened after the pandemic. So.
Again, it's kind of nice that we've got it got.
We got our hands around the performance and we're looking forward to improving and again 23, the rest of the year should be very good.
Probably more important is the securitization market is kind of the lifeblood of how we run our business and again during the pandemic during 2020, one with some of the lowest cost of funds possible and certainly in a long long time, and then of course, they started going up very quickly and we were able to go along with that and raising our prices and so today.
Where are we said is even though the cost of funds is much more we were also charging more and so we've actually been able to absorb the entire cost of funds was really not a lot of problem in terms of our market share and our market performance and now with Alaska Iridization. We've now had three securitizations in a row it actually have leveled out at a number.
What I would call them flat or normal what we began will call the new normal cost of funds and again, we're not as concerned with what the cost of funds is we just don't needed to keep going up and now with <unk> in a row at basically the same cost. We can say, we probably reached at flattening, we'd been looking for and some of them more importantly, even.
Though the rates have continued to go up you know not in a rapid rate they were but even again last week.
You know the spreads have tightened and after we've been able to keep that cost of funds flat and that is very very important. The other part of that that's even just as important is our last conversation was massively oversubscribed up and down all tranches. So the securitization market is clearly working really well and fits perfectly with what we're doing again, that's sort of the back.
On how things work for us so having that again proved itself out in the last couple of quarters has been very very important.
Overall economy are hard to judge it can be there is a recession around the corner or they're going to have a soft landing for the first time ever.
As always up for debate generally we think the economy looks okay, but what we really really care about is unemployment, which can we say all the time unemployment looks very good. These days continues to remain strong as probably one of the problems. The government most would like to see go the other way. We don't we think I've been blown employment is perfect. Even if it goes up a little bit not a problem.
As long as it doesn't go up a lot. So again as much as 23 has started off and not the most exciting year for us it's still a very good year and it.
As most important to get us back to a normalized run rate, where we can again start looking to the future to grow and that's exactly what we're gonna do I have a few more comments, but for now I'm going to turn it over to Danny go over the financials. Thank you Brad let's go over let's start with revenues our revenues for the quarter $84 9 million that's up 4%.
Currently 82 million in the prior year June June quarter for the year to date period, a $168 million is up 7% from the 156.4 for 2022, the fair value portfolio is not really the key driver of that.
Revenue yield, it's yielding 11, 4% overall, the legacy portfolio, which is accounted for under CSO not only has about $50 million left so it's really not really contributing anything meaningful.
Interest income.
The other thing of note.
The revenue change as the prior year had a fair value Mark.
A $4 7 million in the second quarter of 'twenty two and.
$7 1 million total fair value Mark ups for the six month period.
You remove those markups the revenue increase is actually 10% for the quarter and 13% for the year to date period.
Moving onto expenses $66 3 million.
In the June quarter is up slightly from the $64 7 million in March and up 39% from the $47 8 million.
In June of 2022.
Year to date expenses are $131 million for the current year up 41% from $92 8 million in June and year to date period of 2022.
The main reason for that increase as Brad alluded to is the increase in interest expense.
Mainly from the securitization debt part of the increase is due to the larger debt balance by itself.
The main contributor is really the rise in the cost of clients.
The expenses for the year also includes an adjustment to loss provision and this relates to the reserves. We had posted on our legacy portfolio that has the portfolio that's not accounted for under fair value.
It's accounted for under Cecil.
All periods reflect an adjustment to this loss reserves to the legacy portfolio was $9 7 million in the June quarter versus $8 million in the June quarter of last year for the year to date period that loss provision adjustment of $18 7 million, which compares to 17.
$4 million for the year to date period last year and that again that works as a reduction to expense driven by a reduction to the reserves and the legacy portfolio.
Pretax earnings for the quarter $18 6 million is down 46% from $34 2 million in the second quarter of last year for the year to date period $37 million pre tax earnings compared to $63 5 million in the year to date period for 2020.
Sue.
Again, mainly driven by the increase in interest rates is causing the rise in expenses.
The same trends follow for net income of $14 million for the second quarter. This year $25 3 million last year for the six month period. This year $27 8 million of net income.
Versus $46 4 million or 40% reduction.
Compared to the two quarters of 2022.
Diluted earnings per share at <unk> 55 for the second quarter compared to <unk> 91 in the second quarter last year.
<unk> nine for the year to date period compared to $1 66.
Year to date periods for 2022.
I won't go over all of that necessarily all the components of the balance sheet, but I'll point out a couple of things of note.
The fair value receivables line, which is $2 $6 billion.
20%.
For the current June quarter compared to last year.
Comparing that to the 15% increase in our securitization debt is showing that we're.
We're not our leverages down because of the structures of our Securitizations were simply not leveraging as much as we used to in the past.
And our growth in the fair value receivables are outpacing the growth of the debt, which which makes our balance sheet stronger.
Another item of note in the balance sheet as of shareholders' equity.
June of this year, we posted our highest average shareholders equity balance.
$255 million, that's up 29% from the $198 million in the same point a year ago.
And that's driven by a.
47 consecutive quarters of pre tax profit that we've been able to generate.
We are one year shy or having 12 full years of pretax profits.
Positive pre tax profits.
Thats contributing to our the strength of our balance sheet and the rise in our shareholders' equity.
Looking at some other metrics.
The net interest margin was $49 2 million in the current quarter, that's down 2% from $50 3 million in the March quarter, but it's down 22% from the $63 3 million.
Last year.
The.
The compression in the net interest margin is partly driven by the rise in interest rates compared to the slower rise and the yield on our fair value portfolio. So the yield and the fair value portfolio will take a little bit longer to manifest and catch up to the rise in the interest rates and match for them.
Moment, that's causing compression in net interest margins.
Our core operating expenses of $43 million in the quarter, that's down 1% from $40 nine in the March quarter, and that's up 9% from $37 million in the second quarter of last year.
Measured against the.
<unk> portfolio of that core operating expenses now five 5% compared to $5 seven in the prior quarter and down from 6% last year. So we're beginning to see the growth in the portfolio and our.
Are you intelligence and keeping our expenses flat.
We're starting to see some improvement in the operating leverage metric.
And finally return on managed assets to 6% is the same as two 6% in the March quarter.
From the five 5%.
In the second quarter of last year for the year to date periods. The return on managed assets.
Also two 6% also down from five 4% last year, primarily due to the NIM compression that we discussed earlier.
I will like to turn the call over to Mike. Thanks, Danny in originations for the second quarter remains solid as we purchased $318 million of new contracts that compares to $415 million in Q1.
And a whopping $548 million during the second quarter of 2022 now that reduction in volume was purpose fall as we scaled back due to certain macroeconomic headwinds.
We continue to operate with a tighter credit box and we kept a keen eye on the affordability of our products for our consumers.
In terms of affordability.
We continue to hold firm on our payment to income and debt to income ratios.
The PTA trended down for the quarter, which is good and the DTI remained flat, which considering inflation and the raising rates is good for our customers.
One key metric we are tracking right now is the average monthly payment, which for Q2 was $530.
Remained relatively flat over Q1.
And that payment actually is well below the industry average in our space and is a good indicator that our credit box is maintaining affordability for our customers.
As I reported last quarter the demand for our product remains strong we're getting roughly 8000 applications a day, which is slightly less than Q1.
But thats expected due to seasonality tax season in Q1 et cetera.
Our approval rate ticked up a bit in Q2, which is get it moving from 59% to 62%.
The average amount financed for the quarter was 20800, which is down about $1000 quarter over quarter and down 2500 in Q2.
2022 and of course that is directly related to the cost of used cars.
Most important we continue to hold a strong APR Q2, where we registered an average APR of 21, 46%, which.
Which is about one point higher quarter over quarter and significantly higher than the average APR in Q2 of 2022, which was $16 three 3%.
So the important thing to know about our March towards a higher APR is that we did that despite tightening our credit box in early February of 2022, and continuing to tighten into 2023.
In terms of competition, we saw more banks sort of smaller banks and regional competitors completely pull out of the space.
And we've seen in the last quarter some of our friendly competitors cutting back on their originations.
That sort of correlates into our continued strong demand.
There remains a tremendous upside for us in the market to grow as we currently have 14800 dealers that could incentives and application and of that 8385 dealers that do send us an application and of that roughly 4400 dealers funded.
Contract with us.
On a circular basis in the second quarter of.
This year.
To that end, we continue to look to deploy sales reps two territories are sufficient population and historically good portfolio performance.
Moving to portfolio performance.
There certainly is some macroeconomic issues that are weighing in on some of our more recent vintages as Brad acknowledged.
Inflation and rising interest rates are headwinds that remain in the market that were there.
In the beginning of the year in the last half of last year.
But as also Brad mentioned, that's balanced out with a fantastic unemployment rate, which is definitely more of an important metric for us.
So in the quarter, our DQ, including Repossession inventory ended up at 11, 72% of the total total portfolio as compared to $9, 71% in the same quarter in 2022.
Our annualized net charge offs for the quarter were $6 two 9% of the portfolio as compared to $3 five 1% in the same quarter in 2022 extensions and repossessions were up slightly in the quarter.
Good news on the recovery front.
Which of course helps offset losses as recoveries climbed to $44 one 9% in the quarter, which continued the trend of rising recovery rates.
That of course is well below the COVID-19 related.
Historical recovery rates, but.
They dipped from this in the 60 percentile down into the 30 percentile and now they are again rising from about 41% where they were at the beginning of the year to now in the mid <unk>. So that's a good trend.
So.
In the quarter, we continued to employ several unique strategic changes to improve our performance.
One good trend for us as we were successful in hiring a good amount of collectors in what otherwise is a tough labor market.
That will allow us to lower our accounts per collector and when we do that that tends to improve performance. We also continue to leverage our nearshore collection program with great success a.
A couple of miscellaneous items.
As our nearly five year journey to Sunset, our legacy technology to employ a best practices technology stack is.
<unk> is nearly complete.
Bonds of our system are set.
But we continue to add more artificial intelligence driven technologies, mostly from third party vendors on the margins to make our business more efficient.
For our dealers and our customers for example.
In the quarter, we launched an AI driven technology and in originations that is designed to cut down on processing time, which we think will allow us to fund faster for the dealers, which is really what they care about.
Some ancillary benefits of that is that will continue to help lower our operation expense and originations.
In servicing we are nearly complete with the pilot of an artificial intelligence driven bot.
That streamlines, our collectors workflows that is allowing us to employ more efficient collection strategies like more calls per hour of our contacts per hour.
To be employed which we think will improve performance and like the originations AI product should help our operating expense percentage in servicing so with that I'll kick it back to Brad.
Thank you Mike.
I think you can tell overall.
Much as we'd like to exciting years 23 has been slightly kind of rebuilding years. So we set ourselves up for the future again, we had all the benefits of the pandemic.
In 'twenty, one 'twenty two is sort of let's figure out what normal is going to be and then 'twenty three is to make sure that you've got your hands around 22, and you move forward in 'twenty three so at this point, we're halfway through the year, obviously little bit more than halfway through the year and we think we are exactly where we want to be in that sense and so now we're back to the motor that's grow let's get bigger.
As to other things we can.
Again important things and that is we know that the financial markets are healthy we know that our cost of funds should be relatively flat and potentially down depending on which side of the recession soft landing you take.
Again, knowing those those things in terms of our performance in terms of our cost of funds in terms of the economy. Those are the things we've been sort of waiting on and at this point, we probably feel like we have our arms around that and we can move forward. So over the rest of this year and into next will be let's get going again and see how much we can grow and build out our portfolio.
With that I think thats, all we have for today and we look forward to speaking you in the next quarter. Thank you all for attending.
Thank you. This concludes today's teleconference. A replay will be available beginning two hours from now for 12 months via the Companys website at.
At Www Dot consumer portfolio Dot com. Please disconnect your lines at this time and have a wonderful day.
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