Okay. Hello everybody and welcome to Sidoti's June Small Cap Conference. My name is Brendan McCarthy. I'm an analyst here at Sidoti, and presenting with us we have Consumer Portfolio Services. Leading the discussions from the company will be Mike Lavin, President, COO, and CLO. Before I hand it over to Mike, a quick reminder. The Q&A tab is located right at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save some time for Q&A at the end. With that said, Mike, take it away.
Good afternoon. Thanks for joining the conference, giving me this platform. For those of you that know CPS, thanks for coming to get an update. Those that don't know CPS, thanks for coming to hear our story. So CPS is a subprime auto finance company that's an indirect lender. We purchase contracts directly from dealers across 50 states. We were founded in 1991. We went public in 1992. Our ticker symbol is CPSS. So we've been in the business for 33 years. We've been public for 32 years. I've probably seen maybe 15 sort of startup subprime auto finance companies come and go in my 22 years here. So our long history has been a strength in the industry. Today we have about 1,000 employees that spread across five branches across the country.
Florida, Virginia, Chicago, Las Vegas and here in Newport Beach, California where I'm at. We are headquartered in Las Vegas, Nevada. Over our 33 years in business, we've originated close to $20 billion in subprime auto loans. Currently we have about $3.3 billion outstandings in subprime auto. That's an all time record high for us in our 33 years. One thing that investors and our bond purchasers love about CPS is our 33 years in the space, which is very rare and our management tenure, our average management tenure here is roughly 24 years. We're led by our CEO who's been CEO for 32 years. Our CFO has been here for 26 years and of course I've been here for 22 years. One thing that's interesting about CPS is that our insiders, our internal management team owns roughly 48% of the diluted shares.
I would say at this point management is definitely aligned with our shareholders and we have probably more skin in the game in this space than any other company in our market. A couple items to note. We are publicly traded, but we are not owned by a private equity firm or a hedge fund or a billionaire. What that means is there's no pressure to grow, even though we're a public company. That allows us to make internal business decisions based on responsibility in our credit and not loosening credit and giving up portfolio performance for the sake of growth. I like to say in this space we're definitely the tortoise and not the hare. Which probably explains why we've posted 51 straight profitable quarters. That's quite good in our space. Another key element in our business model is we consistently access the ABS market with securitizations.
We typically bundle our quarterly originations into bonds and sell them on the ABS market. We do 4 securitizations per year and over our 33 years we've done 101 ABS deals, which is quite jaw dropping. An interesting note on our ABS deals: our bond investors have gotten their principal and interest back on every single one of those 101 ABS deals. That's through 2 recessions and COVID. Another interesting thing about our business, the subprime space, competition is quite light. There is probably 6 competitors in our space. We're probably in the middle, maybe 3 or 4 in the middle of that market. Demand for subprime auto is quite strong these days. We originated $1.85 billion in 2022. We then originated $1.35 billion in 2023.
That's a $500 million pullback which was done on purpose as we tightened our credit box as portfolio performance eroded a little bit. And then so far in 2024, we're off to a great start and we're tracking for another growth projection likely to meet our 2022 record setting year. Interestingly enough, the demand for subprime auto, we got more applications for subprime auto in 2023 than we got in 2022. And so far in 2024, we're getting more applications for subprime auto loans than we got in 2023. So competition's light demand is strong and there's enough business for everybody in the marketplace. The other thing that's interesting about subprime auto is, is there's a high barrier to entry. The business is capital intensive, the business is highly regulated and probably the toughest barrier to entry is fostering those relationships with dealerships.
Those dealerships are still very old school and that they value personal relationships. In our 33 years we have posted, we have been able to garner, you know, relationships with 14,000 dealers in 50 states. Of those 14,000, 9,000 give us applications on any given day. It's nearly impossible for a startup to make headway into the subprime auto space like that. The other interesting thing moving forward is, you know, what sort of gives us our advantage in the market space. I would say that, you know, one thing that I've hit on is our experience. The other thing that I've hit that we do is we've been sort of on the new frontier of technology in our space. So in terms of experience, like I said, 33 years, 23-year average tenure, we've been able to foster those relationships in terms of technology.
We were one of the first in our space to use AI and machine learning with our originations model, otherwise known as our buy box. In that instance, we get up to 8,000 applications a day. Each application hits our buy box and our scoring algorithm grades that application within seconds. That algorithm makes an approval or denial. And if it's an approval, the algorithm determines the APR, the term, the down payment, and other structural elements of the deal. None of our competition sort of started using algorithms on the auto side before we did. We update that algorithm every 12-18 months. We just put in our new algorithm last October and we're seeing a higher approval percentage, a higher capture, and better performance in our paper over the last five years.
We've made a dedicated effort before AI was sort of the end all, be all in the marketplace. We sort of layered in that AI into our servicing, into our servicing department with collection scorecards where the machine is telling our collectors, you know, who to call, when to call and how to call them, email, text, chat, etc. We also have an extension scorecard where the machine tells the collector when to give an extension to a customer and when not. That way we get more bang for our buck on extensions. We've also spread the AI to our sales department where the algorithm grades our dealers A, B, C and D. And depending on where the dealer falls in the spectrum, they may get some credit concessions, they may get less stipulations. It all depends on the performance of the portfolio that the dealer gives to us.
Finally, you know, our heavy use of algorithms is still weighed with the human touch, the art of doing subprime auto. So, you know, we still have 150 people in originations that underwrite these deals, you know, from start to finish from a processor through a quality control. And then we still have about 400 debt collectors that service the paper and have talk-offs with the customer. You simply can't replace a human with AI. In our business it's a balance and we believe we've had that. In terms of the subprime market space, there's about $1.3 trillion in outstandings and auto loans. Of that, 14% is the subprime space. And when you consider there's only, you know, 6 true competitors, there's quite a bit of market space for all of us.
Enough business for all of us. We do business in 50 states. California, Texas, Ohio, Pennsylvania, and Florida, our highest concentration states. We offer 8 lending programs. But we are known for sort of taking the upper band of the subprime space. And that's primarily because we target franchise dealers instead of independent non-franchise dealers. A franchise dealer being, you know, Mike Lavin Ford, an independent dealer being, you know, Mike Lavin's Used Cars, et cetera. So 80% of our business is with franchise dealers and 20% is with independent dealers. Some credit characteristics of our customer. Our average APR is 21%. We feel like that APR is kind of at the top of the market right now. We've held that APR for the last 18 months. We've held that APR with strong demand.
There's been really no need to lower our APR to get more business, which helps our yield, which helps our ROA. Our average FICO is 570. Our LTV or loan to value, which is probably the best metric that forecast losses is at 118. Our term is about 68 months. We generally don't go past 72 months. You'll never see us go to 84 months. The average amount financed is $21,000. Our growth prospects right now are great. Like I said, we did $1.85 billion in 2022, $1.35 billion in 2023 and we're off to a great start in 2024. Looking and pacing to get back to that record, that record year of 2022. Concentrating on our typical collateral mix. We generally do a lot of Kias, a lot of Hyundais, a lot of Hondas and a lot of Toyotas.
Generally the cars are roughly 2-4 years old and have roughly 60,000-70,000 miles on them. In terms of credit performance, which is what our investors have been focusing on the last six months. It's no secret that the 2022 originations performance has been tough. The 2023 originations, the first half of the year have been a little less tough. We've seen some drastic improvement on the second half of 2023, and we're getting back to normalization here in 2024. Our Wall Street bankers that we have great relationships with and our bond investors at the conferences has routinely told us that our portfolio performance is the best among those six competitors. For example, our 2022 vintages, our CNLs are supposed to finish around 19.5%. That is somewhat historically high for us.
But when you consider that our competitors are in the mid-20s, we're doing quite well. I attribute that to again, the analogy of we're being the tortoise and not the hare and being responsible on our credit levers, sort of getting to our economics. We sort of evaluate our economic performance based on profit and based on net interest margin and return on assets. We've never really been a monstrous growth company up until the last five years when we really have focused on growth. Thankfully, we've gotten growth and profit and ROI at the same time. So it's been a nice perfect storm for us again. 51 straight profitable quarters. We had a net profit in 2022 of $86 million and we had a net profit in 2023 of $45 million. Why the drop off? We've been crushed by interest expense.
Our cost of funds on our ABS deals have gone up from roughly the average cost of funds is roughly 4%. It jacked up to 8% and now we've got it down to 6.5%. And we see. We see our cost of funds lowering year-over-year, quarter-over-quarter going forward. For example, our interest expense in 2022 is $87 million and that went up to $146 million in 2023. That sounds dramatic, but we remain profitable and we were actually growing at the same time. Our revenues for 2022 were $329 million and our revenues for 2023 were $350 million. And right now in 2024, we're pacing for higher revenue year-over-year. Our cash position remains quite good.
In subprime auto, with doing our 4 securitizations a year, we have restricted cash, of which about $350 million in restricted cash trapped in our deals, which gets released after we pay our investors their principal and interest. So turning to the balance sheet, it's fairly clean. We haven't sold any equity, we haven't taken on any debt. The only thing on our balance sheet is about $20 million in retail notes. And we recently did a residual financing where we didn't sell the residual but we sort of pledged the residual to raise $50 million which should help with our growth. So the other thing, the other way we evaluate the performance of our company is sort of our net interest margin or ROI or I'm sorry, our ROA. Our return on assets historically has ranged from 1%-3%.
3% is kind of the golden number in our space. In 2022 we achieved our ROA of 4.6%. In 2023 was right around 2.5%. This year we think we're going to meet or beat the 2023 ROA. A couple of the keys to the net interest margin are holding a high APR, which we have at 21%. On the other hand it's keeping the cost of funds down. Right now, like I said, the cost of funds are somewhat historically high, going to 8% which sort of killed us in 2023. We've got that down to 6.5% here in 2024 and looking for that to dip into the low sixes, maybe upper fives as the year goes on. In terms of our stock, as of this morning we're trading at $9 a share.
Our diluted book value is 11.75. So amazingly we're, we're trading below book value. The other thing to add in terms of shareholder value is we have looked at dividends in the past but instead of, we've had a share buyback program for the last three years. So we're buying back as many shares as humanly possible. So with that Reader's Digest version on CPSS, I'll kick it back to Brendan.
Great, thank you Mike. We can now get into the Q&A portion here. Since you were just touching on it, maybe we could talk about valuation. You know, looking at the P/E, looks like, you know, fairly low here, right around four times. What do you think the investors are missing about the story here?
I think the investors have always looked at CPS as kind of a slow moving non growth sort of long term play. And you know, we've actually hit record setting growth levels the last three or four years. So we're almost turning into a growth company. And when you're, when you consider that we're trading below our book value and when you consider that one of our competitors got bought a couple years ago at 1.2 times book, there's a lot of upside in CPS.
Great, great. We have a question from our audience. What are you seeing? I guess what trends are you seeing on delinquencies and defaults just over the past couple months or, you know, past 12 months or so.
So DQs in 2023 were incrementally going up month-over-month and quarter-over-quarter. Those DQs weren't necessarily translating into losses though, because we found that a majority of our delinquent customers were sort of living in the, in the 60-day delinquent bucket. So they kept making their payments, but they were kind of swimming in that delinquent bucket and not moving to, you know, the 90-day to 120-day, you know, charge-off repossession level. What we've seen in 2024 actually is the delinquency is incrementally moving down month-over-month and it will move down quarter-over-quarter. So what we're seeing is a better slice of customer in 2024. We're seeing that unemployment is staying steady and that's a key driver of the health of the subprime business is unemployment. And you haven't seen that really go up.
It's still near historical lows and you see the average living wage moving up too. When you're lending to the average Joe like we are, those two facets are trending nicely and we're seeing that with lower delinquency month-over-month.
That's helpful. And talking about the cost of funds, I know you mentioned there's been a substantial increase there that's pressured the business. But what are your expectations there? You know, I think you mentioned that you expect that cost to ultimately decline and is that squarely based off, you know, lower interest rate environment?
So the ABS market somewhat goes hand in hand with the Fed rates. We can definitely see, well, what I read yesterday, maybe one cut this year that will help, that will help our cost of funds to go down, obviously. Rate cuts. They were saying next year that will obviously help our cost of funds going down. But also, you know, the health of the subprime market also affects, you know, the cost of funds. In the ABS market. What I'm happy about is the ABS pricing. The cost of funds has gone down deal over deal over deal the last time and so it's trending in the right direction versus in 2023 it was trending upwards. I mean, you know, in 2022 the cost of funds was right around 3% and then it goes up to 8%.
That's a part of the business that we really don't have a lot of control over, unfortunately.
Got it. That makes sense. And maybe from a more broad perspective. Can you talk about the cyclicality of the business? I think on one end, if you think about elevated inflation we've seen recently, that's obviously pressured subprime consumers, but it might have even widened the addressable market. You just talk about the cyclicality of the business in general.
Yeah, I actually don't think the subprime business is cyclical at all. And it's kind of a Steady Eddie in performance. I cite our 101 ABS deals and the fact that our investors have gotten their P&I back on every single deal. And I would also say that during the Great Recession of 2007, 2008, all the mortgage bond holders got destroyed and all the auto ABS holders got all their P&I back, at least from us. And so the business really doesn't go up and down. The performance stays pretty steady. And you know, our ROA has stayed pretty steady in our 30 years. So, you know, our profitability over those 51 quarters has gone up, you know, quarter-over-quarter. So there's, there's not much of this in our profitability. It's more like this. And so, and so, you know, it's pretty Steady Eddie.
Got it. Got it. Maybe we could take a look at the portfolio level. The franchise loans versus the independent dealer loans. What's the breakdown there in the portfolio and I guess how's that breakdown trended in the past and which is more profitable for the company?
So right now we're doing about 80% with franchise dealers and 20% with independents. What we found is with franchise dealers, you don't get as much APR, but the paper performs better. On the other hand, if you can, if you can find the right non-franchise or independent dealers, certainly though that paper is more profitable, the key is that paper doesn't perform as well. And so the key is finding those independent dealers that find the right customers. And that's truly a secret sauce. We maybe like a year ago we were 60-40 franchise with non-franchise, but we've moved as performance has gotten a little more shaky. We've moved more conservatively towards franchise dealers in the past six months.
Got it. So do you think it's fair to say that's a, you know, maybe active investment decision the company makes, you know, depending on the economic cycle? Maybe.
Definitely.
Yeah.
I have a team of data scientists that report to me and I look at the program mix between franchise and non-franchise all the time, and I'll get a ping from one of our data scientists about the mix. All I need to say is let's move 10 basis points up and they come up with some credit levers to get that done.
Got it, got it. Now looking on the franchise side, I think you mentioned roughly 14,000 contracts with dealer networks across the country. How many states are you in and are you actively looking to expand those states or state presence? And is there like a regulatory element to that as well?
So we are in 50 states. Our high concentration states have basically been the same for the last 10-15 years. But we do jump in and out of states based on their performance. For example, California is a high concentration state. The paper also performs very well in California. We kind of found out that our market share in California was dropping. We went to our data scientists to try and figure out how to get more market share in California. We ended up lowering the price, lowering the APR in California and you know, sort of targeting those A and B dealers to get the volume up on. On the flip side of that, we found that Illinois is a poor performing state and so we tightened credit in Illinois to get less deals.
Highly regulated states like Massachusetts and New York are definitely not a point of emphasis for us. In fact, if we didn't do business in those two states, I'd be quite happy.
Got it. Maybe you could talk about the selling cycle on used cars. How's that process been shaping up, you know, recently?
From everything that we've seen is used car, used car sales are up. They're predicted to remain steady. However, about 12 months ago, the average amount financed on those used cars was $23,500. That's dropped. And now we're at about $21,000 for the amount financed. So steady, if not rising, used car sales. But the amount financed on those particular sales have dropped.
How has the subprime auto market evolved in recent years and what trends do you see shaping the market in the future?
I think the subprime market has evolved to be a tight knit group of competitors where there's enough business for everybody. It's kind of like, you know, we all sort of tighten credit at the same time. We all kind of loosen credit at the same time. We all track our portfolio performance quite closely and that affects the credit levers that we take, you know, in terms of going forward. I mentioned that there's a high barrier to entry to the space. So I don't see any disruption from any startup anytime soon. The space is definitely ripe for M&A possibilities. CPS obviously is an attractive target. Trading under book with that sale comp out there. I think other companies might be in the same position.
I think those, at least those two magic bullets to subprime being a recession and being unemployment both trend favorably for CPS and the rest of the market going forward, so that it remains healthy and demand remains strong.
Got it. Maybe time for one more question here. You mentioned potentially, you know, or potential activity in M&A. What are the company's capital allocation priorities at the moment? Do you think you would go out and make an acquisition or is more so. Or are you more so focused on balance sheet expansion?
Well, I would put the M&A for CPS as kind of the baseball trade deadline where some teams are sellers and buyers at the same time. You just got to see how, how the market plays out. And I would say CPS would be a buyer and a seller at the same time depending on the opportunities that come our way. We're in the best position we've ever been in to be a buyer or a seller. So we're just going to see what the market dictates. Great.
Well Mike, we really appreciate the time and the overview today.
Cool.
I know there may have been some questions we didn't get to. If anybody has any follow up questions, please feel free to reach out to Sidoti directly or you can reach out to Consumer Portfolio Services. Mike, thanks again.
All right, have a good rest of the day. Thank you everyone.
Take care everybody.