Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2024 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. 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 third quarter earnings call. Again, we had another good quarter.

We're just basically trying to get comfortable with credit so we can start growing again.

year over year from last year, and it's continuing to be basically strong from the second quarter. 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 23, 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's going to get a whole lot better. So we're looking forward to that. Basically, those are the highlights. Probably the other one would 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.

Thank you, Brad. Going over the financial results, revenues for the quarter, $100.6 million is up 9% from the $92.1 in the third quarter last year. For the year-to-date period, 288.2 of revenues is 11% higher than the three months, the three quarters for 2023 of 260 million. The top line revenues growth is driven by very good origination volume for the quarter, 446 million is 38% higher than the 322 we did in the third quarter last year. For the year-to-date period, originations are $1.224 billion compared to $1.056, which is 16% higher than last year. So the portfolio, the fair value portfolio which drives our top line revenue is now $3.1 billion, and we're yielding 11.3% on that portfolio, remembering that the 11.3% yield is net of losses. The revenue for this quarter also includes a $5.5 million markup to the fair value portfolio, and that markup is a result of better than expected performance on that portfolio. The prior year quarter also included a markup of $6 million for the fair value portfolio. Expenses during the quarter, 93.7 is up from 77.9 in the third quarter of last year. For the year-to-date period, expenses were $268.1 million versus $208.8. 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. The pre-tax earnings for the quarter, $6.9 million. compared to 14.2 million in the third quarter of last year. Year-to-date period pre-tax earnings, 20.1 million compared to 51.3 in the year-to-date period of 2023. Net income is 4.8 million for the quarter. 4.7 was the June quarter, and that compares to 10.4 million in the third quarter of last year. For the year-to-date period, 14.1 million of net income. versus 38.2 million in the year-to-date period last year. Diluted earnings per share is 20 cents per share compared to 19 last quarter and 41 cents per share last year. For the year-to-date period, 58 cents compared to $1.51 for the nine months of 2023. Moving over to the balance sheet. As I mentioned earlier, our fair value portfolio is now $3.1 billion, is 17% higher than the $2.67 billion as of 9-30 of 2023. Our securitization balance, debt balance is $2.875 billion, is 28% higher than the $2.243 as of 9-30 last year. So we've seen the... We've seen the portfolio grow faster than the debt balance is growing. Shareholder's equity is $285.1 million for this quarter compared to $265.9. It's a 7% increase year over year. Going over other metrics, the net interest margin is $50.5 million compared to $54.2 in the third quarter of last year. That's a 7% decrease. For the year-to-date period, net interest margin is 149.5 million, is 3% lower than 153.7 for the nine months of 2023. Core operating expenses for the quarter, 44.6, 6% higher than the 42 million last year. For the year-to-date period, core operating expenses is 134 million, is 9% higher than 123.1 million 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.

In originations and sales, like Danny mentioned, in Q3 we originated $446 million in new contracts, which is a slight increase month over month over the $431 million we did in Q2. I just want to note in the month of October we just had our best origination month of the year and actually the second best month in the 33-year history of our company. Given our 24 growth to date, we have been able to build our portfolio of receivables to 3.3 billion at quarter end, which is an increase of 12% over the portfolio size of 2.9 billion at the end of Q3 23. 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% and 20%, so a good year overall. 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 had to minimally lower our price on the margins in various states and only to our best A- and B-grade dealers. 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. That's the best growth rate we've had in our sales force in a couple 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 million 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 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. 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% of deals funded, which is a significant improvement over our average same-day funding of 6.5% in 2023. 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 proof 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. 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 23. Delinquencies greater than 30 days, which includes repossession inventory, were 14.04% of the total portfolio as of the end of Q3 and that's compared to 12.31% as of the end of Q3 23. Diving a little deeper, we were able to knock down the DQ month over month for the first five months of this year and have seemed to get it under control going forward through Q3. Taking a step further, looking at our C&Ls on a vintage basis, going all the way back to 2022, We have seen incremental improvements, vintage over vintage, from 2022 through the first three quarters of this year, so we're trending downward on the C&Ls as we move forward through 2024 and into 2025. This is a testament to our early tightening of our credit in late 2022 and continuing into the first quarter of 2024. It also correlates to the implementation of our Gen 8 credit decision 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 2023 and into 2024. 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 two hurricanes that rolled through in Q3, we've seen minimal impact in both hurricanes in Florida and specifically North Carolina. From a technology standpoint, we recently migrated our omni-channel 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 touchpoint, 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 VoiceBot after a successful pilot. We expect the AI VoiceBot 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 marked 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. 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 million 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.

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 22, early 23 originations, trying to get their credit back in line. As I mentioned, our credit now is we feel very good about where we sit in the credit spectrum. 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. 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. That's important because when someone blows up, it causes ripples within the whole industry. 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. 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. 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 sort of the backside of the business to improve things. So as I mentioned before, we're 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, The future looks quite bright for what we're doing. With that, I think we'll see how the rest plays out. We have one more quarter this year, and then we're going to hopefully get off to a big start for next year. We look forward to speaking with everyone again sometime in February. Thank you for attending.

Thank you. This concludes today's teleconference. A replay will be available beginning two 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.