Consumer Portfolio Services, Inc.

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 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 is Mr. Charles Bradley, Chief Executive Officer, Mr. 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.

Thank you and welcome everyone to our fourth quarter and full year earnings call. You know, 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 slow things down and figure out what was going on. And so we did. So really, unfortunately, at some level, we spent, 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 could then move forward. And it took some time. One of the things we did immediately was we tightened the credit, improved 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 gonna 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 dismayed 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've determined probably are the cause of why 22 wasn't as good and 23 ended up being better or 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 had been 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, scaled-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 were guaranteeing the profits to the dealer. Obviously, it was a good program in terms of the dealerships, because the dealership loved 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. process of the 22 paper. The other thing that happened is everybody started growing a lot. The rates were really low. Business was 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 work it is, is 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, You know, we went much slower into the guaranteed back end than everyone else. We did it much more cautiously than everybody else. And we also continued 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, maybe quicker, but certainly very quickly. And so we were pulling back much faster than some other folks. So as a result, and this is, you know, 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 was kind of a, you know, not the best year in terms of being able to grow and succeed and expand, you know, 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. 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. To sort of follow up on what Brad was talking about in terms of portfolio performance, since that is the number one priority at 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 of finance and jacked up the car payments, putting stress on the consumer. But in fairness, that's been balanced out with fantastic unemployment numbers. That is probably the most critical metric to judging the viability of our business, and that is near a 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 helped 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 routinely 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're 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 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 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, in 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 1-29 Day Bucket. had its best performance in two 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 on 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 signups. 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 near shore operation. We didn't necessarily add more near shore collectors, but we reassigned our strategies. So what we're doing is we're putting the near shore 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 you know but for the unique approaches we've taken our 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 capped 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 in 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 slide up tick 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 that 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, or I'm sorry, our payment to income And debt-to-income ratios remain the same and have remained the same over the last five to seven 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 three months is more and more credit unions are actually leaving the space, which is freeing 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 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 relies and is based on the last two 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 five 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 seven to eight years is texting is probably the best collection tactic. We believe we've 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 four of our five leases within the last quarter, believe it or not. And we're looking at a $10.8 million savings in that real estate footprint over the next four 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.