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Consumer Portfolio Services tightened credit considerably and raised interest rates in 2022 to protect margins amid rising costs of funds.
“We grew dramatically for the first six months [of 2022], and somewhere around six months the cost of funds grew, inflation was getting out of hand and we had to do one of the most abrupt pivots you could ever imagine in terms of slowing the growth down and making sure we’re keeping our margins intact,” said Chief Executive Charles Bradley during Wednesday’s earnings call.
CPS raised rates “as quickly and as aggressively as we could. … That has the effect of slowing business down,” Bradley said. “We were able to tighten credit dramatically and quickly, and we were able to raise rates through the entire rest of the year.”
The lender’s APR rose to 21% at yearend 2022 compared with 15.99% in February 2022, Mike Lavin, president, chief operating officer and chief legal officer, said on the call, noting CPS also raised dealer fees throughout the year.
“We began to tighten credit halfway through the year and we did so by setting low [loan-to-value] caps, reducing our back-end allowance and eliminating numerous exceptions that we might have made on some declines,” he said. “Our overall [loan approval] percentage dropped as we’re being more selective on originations, but the strong demand for our product more than made up for our credit pullback.”
Originations up YoY
CPS’ originations fell 8.6% sequentially in the fourth quarter to $428.1 million, but jumped 30.5% year over year, according to the Q4 earnings release. Full-year 2022 originations tallied $1.85 billion, up 61.8% YoY.
“Our total managed portfolio eclipsed $3 billion for the first time, and our earnings for the year are the highest ever in our history,” Bradley said. The year “showed us that we could grow aggressively and do it in the right way, and, if necessary, slow down and still maintain our performance, volume and margins.”
Outstandings totaled $2.8 billion as of Dec. 31, 2022, an increase of 4% quarter over quarter and up 26.5% YoY, according to the release. Receivables measured at fair value increased 41.2% YoY to $2.5 billion.
Delinquent loans tick up
Delinquencies 30-plus days past due came in at 11.12% in Q4, up 162 basis points YoY, according to the release. Net charge-offs stood at 5.83% of the total portfolio, compared with 2.57% in Q4 2021. Recovery rates fell to 43.6% in Q4, compared with 63.3% a year earlier.
Extensions landed at 2.98% of the outstanding portfolio at yearend 2022, marking CPS’ “second-best year ever when it comes to extension usage,” Lavin said, crediting CPS’ AI and machine learning-based scoring model.
Meanwhile, during the year CPS increased its warehouse lines of credit to $400 million, leaving the lender with “plenty of warehouse capacity,” Danny Bharwani, chief financial officer, said on the call. CPS doubled its credit facility with Ares Agent Services to $200 million in July.
Consumer Portfolio Services [Nasdaq: CPSS] shares were trading up 1.78% from market open at $9.70 as of market close today. CPS has a market capitalization of $198.3 million.
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