Consumer Portfolio Services, Inc. (NASDAQ:CPSS) Q4 2023 Earnings Call Transcript

Consumer Portfolio Services, Inc. (NASDAQ:CPSS) Q4 2023 Earnings Call Transcript March 18, 2024

Consumer Portfolio Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 valuations 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 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 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.

Charles 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, we 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 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 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 determined probably are the cause of why ’22 wasn’t as good and ’23 ended up being better — on 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.

See also 11 Best Electrical Infrastructure Stocks to Buy Now and 10 Best Commodity ETFs.

Q&A Session

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 because 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 Dan go through their pieces. So I’ll turn it over to Mike to do the operations review.

Michael Lavin: Thanks, Brad. Just sort of follow-up on what Brad was talking about in terms of portfolio performance. since that is the number one 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 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 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.