Consumer Portfolio Services - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid top-line growth with revenues of $106.9M (+16.6% YoY), record portfolio balance ($3.615B), and strong originations ($451.2M), but diluted EPS of $0.19 was flat YoY and below consensus, reflecting higher interest expense tied to portfolio growth.
• EPS missed Street by $0.11 (0.19 vs 0.30), and revenue was modestly below the $110.0M consensus; interest expense rose to $54.9M with securitization debt up 20% YoY, partially offset by improving delinquency and charge-off trends; net interest margin held near $52M.
• Management emphasized credit-conscious growth, noting “delinquencies and charge-offs are down nominally” and highlighted successful May ABS (2025-B) with AAA senior classes; CPS also deployed an AI voice agent to enhance collections efficiency.
• Near-term stock reaction catalysts: continued originations momentum, improving credit KPIs, stable securitization market access/terms, and AI-driven servicing efficiency; watch for recovery rate trajectory and interest expense trends.

What Went Well and What Went Wrong

What Went Well

• Record portfolio balance ($3.615B) and strong new contract purchases ($451.2M), with CEO noting “highest amount in new loan originations for any first quarter in company history,” positioning CPS well for the year.
• Credit metrics improved: total delinquencies (incl. repos) 12.35% vs 12.39% YoY and annualized net charge-offs 7.54% vs 7.84% YoY; management: “delinquencies and charge-offs are down nominally”.
• Capital markets access remained robust: closed $419.95M 2025-B ABS with senior AAA ratings; coupon ~5.96% and structured to build overcollateralization to 8.65%/22% triggers.

What Went Wrong

• EPS and revenue both missed consensus; diluted EPS of $0.19 vs $0.30 estimate and revenue $106.9M vs $110.0M estimate; thin coverage (one estimate) magnifies perceived miss impact; interest expense rose to $54.9M with higher securitization debt balances.
• Recovery rates declined to 27.7% vs 33.3% in Q1 2024, reflecting macro pressure (used car values, damages, repo agent scarcity), keeping realized recoveries below historical 40–45% norms.
• Net interest margin percentage softened vs prior year periods (risk-adjusted margin 5.9% vs 6.9% YoY), with fair value mark-to-market ($3.5M) lower than last year ($5.0M), contributing to muted earnings leverage.

Transcript

Operator (participant)

Good day, everyone, and welcome to the Consumer Portfolio Services 2025 First 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, 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 12th 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 today are 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 would now turn the call over to Mr. Bradley.

Charles Bradley (CEO)

Thank you, and welcome to our first quarter conference call. I think the easy way to describe it is off to a good start. First quarter went well. A little bit late on the call, but been busy. We had very strong originations to start the year, up over $100 million. That bodes well for the rest of the year. I think our focus this year can be summed up as, given the uncertainty in the economy and sort of all the noise, we want to grow, and we are growing, but we want to do it in a very credit-conscious way. We want to continue to follow our credit by very good paper, kind of let the bad paper 2022 and 2023 get through the snake and move on as the portfolio becomes more and more high credit-worthy paper. In fact, that's exactly what we're doing.

You can see both delinquencies and charge-offs are down nominally for the quarter. We hope that trend will continue. Overall, so far, so good. It's now late enough to say we just did our second quarter securitization, and we're very happy that's done, given that we had a lot of uncertainty in the market in the last few weeks. It's good to get that done, and it was done well to boot. Very good. I'll have a few more comments, but I'm going to turn it over to Danny to go through the financials.

Danny Bharwani (CFO)

Thank you, Brad. Going over the results for the first quarter, we had revenues of $106.9 million, which is a 17% increase over the $91.7 million in the first quarter of 2024. Revenues are driven by interest on our fair value portfolio, which is now $3.6 billion, and that is yielding 11.4%. If you've been on these calls before, you'll remember that the 11.4% yield is net of losses. Included in revenues for the first quarter is a $3.5 million fair value markup in the first quarter of this year. In the first quarter of last year, that same markup was $5 million. These markups are a result of better-than-expected performance in our fair value portfolio. Looking at expenses, $100.1 million in the first quarter of 2025 is also a 17% increase over the $85.2 million last year.

The main driver of the increase in interest or in expenses is interest expense, which is $55 million this year and $42 million last year. While some of that rise in interest expense can be attributed to higher rates, really most of it can be attributed to our higher debt balance on our servicing securitization debt, which is attributable to growth in our loan portfolio and our total managed portfolio size, which is now up to $3.45 billion on the balance sheet. Looking at pre-tax earnings, $6.8 million for the quarter compared to $6.6 million last year is a 3% increase. Net income is $4.7 million compared to $4.6 million last year, which is a 2% increase. The $4.7 million of net income translates to diluted earnings per share of $0.19, which is flat from the first quarter of 2024.

Looking at the balance sheet, unrestricted and restricted cash of $183.5 million is greater than the $151 million last year. Our finance receivables at fair value is now $3.45 billion, which is 24% higher than the $2.79 billion as of March 31, 2024. Looking at our securitization debt, the $2.74 billion of securitization debt is 20% higher than the $2.27 billion from March of 2024. Shareholders' equity, $298.4 million at the end of this first quarter, a record high for the company, 7% higher than the $279.1 million last year. Looking at other metrics, net interest margin is $52 million, 4% higher than the $49.8 million last year. Core operating expenses, $46.1 million, which is 3% higher than the $44.9 million last year. As a percentage of the managed portfolio, those core operating expenses were 5.2%, which is an improvement over the 6% in the first quarter of last year.

Lastly, the return on managed assets is 0.8% in the first quarter of this year compared to 0.9% in the first quarter of last year. I will turn the call over to Mike.

Mike Lavin (President and COO)

Thanks, Danny. In sales and originations, following what Brad said, in the first quarter of 2025, we originated $451 million of new contracts as compared to $457 million of new contracts in the fourth quarter, and more significantly, compared to $346 million over the first quarter in 2024. That is a year-over-year increase of 31.5% in growth. One important note is that growth follows our year-over-year growth for the year-end of 2024 of 23.8%. Some good growth numbers there. At the end of the first quarter, our portfolio assets under management stand at $3.45 billion. That's up from $3 billion year-over-year, and as Danny said, there's a 24% increase in the growth of our portfolio. As you can see from our originations growth and our portfolio growth, the business certainly has a sort of a hockey stick trajectory, which we are working hard to maintain and improve on.

A few operational notes on sales and originations. Our growth is partially a result of the maturation of the slew of experienced sales reps we hired in late 2023 and throughout 2024. That allowed us to enter new territories and expand our dealer base. We expect further maturation of that group going forward here in 2025. Our growth is also partially a result of strategic credit moves that we made throughout 2024 and even into the first quarter of 2025. While still maintaining our sort of brand, our 34-year history brand as a responsible lender, we were able to surgically both tighten our credit and improve our credit terms at the same time. That was depending on what state the customer was in, and we even dug deeper and looked at the regions that those customers related were residing in those states.

Sort of a double whammy, tightening and improving credit at the same time. Despite that, we're also, of note, we're still hiring experienced reps in new territories we deem fruitful, and we see a path to more growth through our relationships with large dealer groups and our other strategic partners, like our strong relationship with Ally and our growing relationship with Hyundai. Despite our growth, our credit profile has remained strong as we've been able to hold our average APR to 20.32%. We've been able to push our LTVs down to around 117-118%. Of note, in this time of uncertainty and inflation, we've been able to drive our average payment down to $535, which is lower than the average used car payment.

Turning to credit performance, total GQ for the first quarter, including repo inventory, was 12.35% of the total portfolio as compared to 12.39% as of the first quarter of 2024. That is a slight improvement year-over-year. One note I would like to make about the first quarter in 2025 is that we saw sequential improvement month over month. From January to February to March, we saw improvement in GQ every month. The total annualized net charge-offs for the first quarter were 7.5% of the average portfolio as compared to 7.84% of the first quarter of 2024. Again, like GQ, that is a slight improvement year-over-year. The GQ and charge-off improvements that we talked about are evident when you actually look at our sequential credit performance of the origination pools starting in the fourth quarter of 2023, marching through 2024, and we think into the first pool of 2025.

Each C&L by pool has improved quarter over quarter, pretty much without fail for the last 16-18 months. The C&L trend is further supported by our analysis of defaults, which is an account in a 90-plus bucket, which is a good indication. As with our C&L analysis, the defaults have improved significantly when looking at the more mature pools of 2023-C, 2023-D, and especially 2024-A. We expect that trend to continue with the pools throughout 2024. Another interesting note, benchmarking our credit performance against the industry, third-party data revealed that in looking at our 2024 A-vintage, which is really the sweet spot of making analysis like that, we are outperforming our closest competitors that sit right on top of us in the market, and in some cases, by quite a bit. We are happy about that. A few operational notes on credit performance.

In the first quarter, we launched our AI voice agent with great success. Right now, we only have the voice agents working on our auto dialer, but we have started phase two of that implementation to have the AI voice agents on inbound calls, chats, and text messages. This will allow us to reallocate our human collectors to work the hardest accounts, of which the AI voice agent is generally less reliant to do. We continue sort of a unique servicing strategy to have our best collectors work the hardest accounts, surgically assigning them to the more challenging vintages. These collectors are now organized in special teams led by our best members of middle management. A few other notes, we continue to employ a base of around 950 employees, despite the growth that Brad and I spoke about earlier.

That's led to our managed portfolio relative to headcount to be at an all-time best. We're certainly doing more with less these days. That has helped us drive down our OPEX quarter over quarter and year over year. We continue to drive the OPEX lower between two things. Obviously, the growth of the portfolio, and we continue to look for better expense efficiencies. One more big-picture thought is we always look at unemployment as one of the barometers of the health of our business and our customer. As of our last reading, it's down to 4.2%, which is still historically low. I note that the Department of Labor is predicting an increase to nothing more than 4.6% unemployment at the year-end of 2026.

At least that barometer, given the uncertainty, tariffs, things that are going on, macroeconomic headwinds in our economy, we're looking at the unemployment rate as a healthy barometer of our business. With that, I'll kick it back to Brad.

Charles Bradley (CEO)

Thank you, Mike. Looking sort of again, following up on all the comments you've already heard, what we're trying to do, if you sort of take a step back and look at our environment, right now, the interest rates are higher than they were. We don't expect them to go up, but we probably aren't sure they're going to go down. We can't control interest rates. What we can do is control how big the portfolio can get, how much money we can make just sitting still. We can control the losses. What we focused on is both growth and good credit, and maintaining our margins. The way we can maintain our margins is to continue to be very frugal in terms of our expenses, and then try and make sure we're buying the best credit. It appears we're doing all those things today.

What we want to do, though, is get to the position where the portfolio continues to grow, which it is, and then when down the road, interest rates hopefully come down some, and then the sort of benefits of our losses. One of the things that happens currently is as much as we're buying a lot of good paper, you do not really see the performance and get the sort of the push-through in terms of earnings right away. Using fair value accounting, you kind of have to wait and see how the portfolio performs. The early signs are quite good. So what can you do?

We grow the portfolio as much as we can with as much credit-worthy paper as we can, and then wait for the rates to come down to where we're in a position where we can grow even more, take advantage of the rates, but even if the rates don't come down, take advantage of our creditworthiness as it comes through and pushes through the P&L. The other part of this, of course, is we're still sort of trying to get through the slings and arrows of the paper we originated in 2022 and very early 2023. The good news is that portion of the portfolio is now less than 30% and continues to run off. The good part of the portfolio is now in excess of 50%.

We're kind of making the move we want in terms of getting through the bad paper that, as much as our paper did much better than most, it still isn't the greatest paper in the world, and we just assume when it runs off. That's really what we're trying to do. So far, so good. As 2025 starts off, we've done all those things in a very good way in the first quarter. In terms of looking at the industry, again, everybody's a little bit in the same position as has been mentioned. We might be in a better spot in terms of credit and what we've done and how it's panned out. The recovery rates are down. That hasn't helped in terms of our recoveries and therefore affecting our losses.

The recovery rates appear to be peaking up a little bit, and that, again, will help down the road. No new entrants into our industry. We've been saying that now for probably a couple of years. That's real good. Strong players stay. No new players. Weak players are gone. The industry looks solid overall. You look at very sort of uncertain markets. I think the interesting part is we did our first quarter deal in 2025 in early January, and we did our second quarter deal in early May. In those four months, the rate we earned on both those deals is almost identical within 10 basis points of each other.

As much as there's been tons of uncertainty since the beginning of the year recently, we've been still able to secure the market has remained strong enough for us to get our deals done at an acceptable rate. We would like it to be better, and in time, it may be. At the moment, it's good. Remember, the life book, two of the most important things we need to do, we need to be able to securitize. We like the economy to be strong, and most importantly, low unemployment rates. We think the situation is good for us. We like the industry. We like the economy. We think if anything, rates will go down, not up. That'll be good for us. We'll take advantage. What are we going to do? We're going to continue to grow.

We're going to try and be very conservative in terms of our credit performance. We're going to continue to put all efforts into collecting both the old paper and the new and push forward. Thank you all for joining us today, and we'll be back in another quarter.

Operator (participant)

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