Consumer Portfolio Services - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue rose 7.8% year over year to $108.4M, while diluted EPS was flat at $0.20; pretax income improved modestly to $7.0M.
• Against Wall Street consensus, CPS missed on EPS ($0.20 vs $0.25*) and revenue ($108.4M vs $111.5M*); the quarter had no fair value mark, which reduced revenue comparability vs prior year.
• Credit metrics mixed: total delinquencies improved slightly YoY (13.96% vs 14.04%), but annualized net charge-offs elevated to 8.01% (vs 7.32% YoY) amid vintage mix and recoveries still in low-30s.
• Funding capacity strengthened: a $167.5M revolving credit facility closed post-quarter and a $418.33M ABS deal earlier in 2025, supporting liquidity and origination capacity.
• Stock reaction catalysts: estimate misses and elevated charge-offs could weigh near term; counter-catalysts include improving vintages, cost efficiencies, and potential margin tailwinds if interest rates decline.

What Went Well and What Went Wrong

What Went Well

• “We now have tons of funding” following the new revolving credit line and successful securitization despite industry noise (Tricolor), reinforcing access to capital.
• Operating efficiencies: core OpEx measured as % of managed portfolio fell to ~4.6% in Q3 from 5.4% YoY; headcount down ~3% YTD while portfolio reached an all-time high.
• Vintage quality improving: 2024 and early 2025 vintages show better default curves; troubled 2022-2023 vintages now below 30% of portfolio and running off.

What Went Wrong

• Annualized net charge-offs increased to 8.01% vs 7.32% YoY, reflecting still-elevated losses in older vintages and recoveries in low 30s.
• Net interest margin dipped YoY (Q3: $49.32M vs $50.52M YoY) largely due to higher interest expense from securitization debt growth and market costs.
• Growth tempered: contracts purchased fell sequentially (Q3: $391.1M vs Q2: $433.0M), with dealers reporting lower foot traffic and competition intensifying; management characterized 2025 growth as modest vs hopes.

Transcript

Speaker 2

Everyone, and welcome to the Consumer Portfolio Services 2025 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 depend on estimates of future events, also are forward-looking statements. All such forward-looking statements are subject to risk that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 12 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.

Speaker 1

Thank you. Good morning, everyone. Welcome to our third quarter conference call. I think, for the most part, it is three quarters in the books. The year is proceeding kind of pretty much exactly what we would expect, with a small exception that we have not really grown as much as we wanted. We had pretty high hopes for growth this year. We have had some growth, but very, what we will call, modest growth as opposed to more aggressive growth, which is probably okay. Generally speaking, if you look back at the last few calls, we have sort of been in not really a holding pattern, but in a wait-and-see pattern in two ways. We wanted to see, get sort of the 2022 and 2023 portion of the portfolio to shrink and see if we can get that reform as best we could, even though it was not a particularly great paper.

On the flip side, we wanted the 2024 and 2025 vintages to really prove out that we, in fact, have much better credit. I think, as I mentioned in previous calls, little by little, the 2024 and 2025 have all proven to be better. From 2023C on, from D through all the 2024 deals and the 2025 deals, each one has improved, better performance-wise, better than the previous one. It is still early, certainly for the 2025 deals, but it is the trend we wanted. It is a trend we have been kind of waiting to see before we tried to get overly aggressive. Again, on the other side, we wanted to keep the 2023 and the 2022 paper running off because that paper is not performing great.

Compared to others, it did fine, but compared to what we want, it has not done as well as we had hoped, and it is now become a smaller part of the portfolio. It is down below 30%. Certainly, as time goes by, that number goes down, the percentage of the good paper goes up, and the mix will change and probably create a very good forward-looking program as we go. In terms of the quarter, we did add a new credit line just after the quarter, so that was a big plus. We now have tons of funding. Also, we did a securitization in what could be termed somewhat more difficult and more difficult market due to the Tricolor problems. Good news on that front is we have always had a third-party custodian. We have never had control over our collateral. We have none of the issues that caused their problems.

As much as we can tell everybody that, it still put a little bit of a cloud in the industry while we're trying to get a securitization done. It's important that even so, we were pretty easily able to get the securitization done, slightly more expensive than we had hoped. Nonetheless, as I've said numerous times, getting securitization done, getting them done is the most important thing we have to do. You have to be able to securitize the paper, otherwise we have serious problems. Overall, quarters worked fine. I'll get back to some more specifics on that after we go through the rest of the material. I'm going to turn it over to Danny to go through the financials.

Speaker 0

Thank you, Brad. Going over the financials, revenues for the quarter, $108.4 million, is up 8% from the third quarter of last year, which was $100.6 million. For the nine months ending September 2025, revenues were $325.1 million, which is a 13% increase over the $288 million in the nine months ending September 2024. Two things of note driving revenue. Our fair value portfolio is now up to $3.6 billion. That is yielding 11.4% net of losses. The other thing of note for top-line revenue is that we did not have a fair value mark this quarter. We did have a $5.5 million mark in the third quarter of last year. Moving to expenses, $101.4 million in the third quarter this year is also up 8% over the $93.7 million in the third quarter of 2024.

For the nine months ending September 25, $304.3 million of expenses is up 14% from the $268.1 million last year. Interest expense is the main driver of the increase in expenses, and it's largely due to our increasing securitization debt as the volume has picked up over the last year. Pretax earnings is $7 million compared to $6.9 million last year. For the nine months, $21 million of pretax earnings is up 4% from $20.1 million in 2024. Likewise, net income of $4.9 million is also 2% higher than the third quarter of last year. The nine months ending September 25, net income was $14.3 million, is up 1% from $14.1 million last year. Finally, diluted earnings per share, $0.20 per share, is flat from last year. For the nine months, $0.59 compared to $0.58 last year.

Moving to the balance sheet, cash and restricted cash is $151.9 million for the third quarter of this year. Finance receivables, which is mostly now our fair value portfolio, that is up 16%. So the fair value portfolio is $3.62 billion as of this quarter compared to $3.13 billion last year. That is up 16%, largely due to origination volumes, as Brad alluded to earlier. Our origination volumes of $391.1 million for the third quarter and $1.275 billion for the nine months ending September 25 is driving that increase in our fair value portfolio. Moving down the balance sheet, our total debt, which is the sum of our warehouse line credit debt, our residual interest financing, securitization debt, and long-term debt is $3.4 billion this quarter compared to $3.1 billion last year. That is an 11% increase.

What's happening is we've got a 16% increase on the asset side in our fair value portfolio and only an 11% increase in the debt. That's showing that we're able to manage with less leverage and is improving our balance sheet. That can be seen in our shareholders' equity number. $307.6 million this quarter is up 8% from the $285.1 million last year. Looking at other metrics, the net interest margin of $49.3 million this quarter compared to $50.5 million last year. For the nine months, $152.3 million of net interest margin this year compared to $149.5 million last year. Our core operating expenses of $43 million is down 4% from the $44.6 million in the third quarter of last year. For the nine months, it's flat, $134 million this year and last year.

However, measured as a percentage of the managed portfolio, the core operating expense is down 4.6% this quarter compared to 5.4% in the third quarter of last year. We are starting to see some improving efficiencies as we are able to manage the cost side of the business to allow the portfolio to grow without really seeing increases in cost. Lastly, the return on managed assets is flat, 0.8% this quarter compared to 0.8% in the third quarter of last year. I will turn the call over to Mike.

Speaker 3

Thanks, Danny. In terms of operations, again, in the third quarter of 2025, we originated $391 million of new contracts. For the first nine months of the year, we purchased $1.275 billion of new contracts compared to $1.224 billion during the first nine months of 2024, which is a 4% increase year over year. Our year-to-date originations are in line with our 2024 originations. While not the rocket growth that we had hoped, if things go right, 2025 will end up being our second best year in our 34-year history. Growth remains somewhat difficult as our focus has been on providing an affordable product for subprime consumers who are facing macroeconomic headwinds like high interest rates and things like that. With this in mind, we have continued to tighten our credit box in 2025.

That, combined with dealers reporting lower foot traffic and increased competition for less business, has made our growth prospect kind of tough in the first nine months of the year. Like I just said, 2025 should be the second best year in our history. Keeping things in perspective, it is going to be a really good year. One thing to note, we continue to originate loans at the upper level of the subprime spectrum, with 90% of our originations coming from franchise dealers and only 10% coming from the riskier independent dealers. Our tight credit box has allowed us to originate better paper within our upper-tier programs. This is important while still holding a 20% APR. That bodes well for our NIM, which Danny just covered, and almost equally important, our credit performance, which Brad mentioned.

We have had to pivot to organic growth, given our tight credit. To do that, we are adding new dealers to our dealer list to increase applications. We have improved our capture rate this year from the high fours to now over 6%. With more applications and a higher capture rate, that has led to more organic originations. We have also put a specific focus on large dealer groups, which we define as having a dealer that has 10 or more dealerships under their umbrella. We started this initiative with a special internal unit focusing on large dealer groups about two or three years ago. At the time, large dealer group originations only comprised 17% of our overall originations. As of the end of the third quarter of this year, it now comprises 31% of our originations.

We have done a good job building our large dealer groups. We also continue to rely on our personal relationships with dealers to feed our originations. The retail auto industry is still surprisingly based on personal relationships, even though the technology has grown. We currently have 100 reps that are personally visiting and calling on our dealer clients daily. One thing that we have been able to do at the end of the third quarter is we have cut our funding time down to one day. We have cut it about one day year over year. Dealers appreciate our personal service and certainly our fast funding. It seems like the little things matter when competing for business when we have such a tight credit box. On an operational front as well, as Danny noted, we have been able to lower our OPEX substantially year over year.

About 18 months ago, it was sitting at 6% of the managed portfolio. As of the end of the third quarter, we're down to 4.5%. One of the areas of improvement for us has been to lower our employee costs, which, besides interest expense, account for a large portion of our expenses. We've actually been able to shrink our headcount 3% from the beginning of this year to the end of the third quarter, all the while growing our portfolio to an all-time high and really heading towards our second-best year in our history. The percentage of employees of the portfolio balance has dropped from 28% to 24% year over year. Turning to credit performance, the total DQ greater than 30 days for the third quarter, which also includes repo inventory, was 13.96% of the total portfolio as compared to 14.04% as of the third quarter of 2024.

That's a slight improvement year over year and follows a trend that we have seen sequentially month over month. The total annualized net charge-offs for the third quarter were 8.01% of the average portfolio as compared to 7.32% for the third quarter of 2024. Looking at the vintage performance, we continue to see significant credit performance, as Brad alluded to, with 2023C and continuing vintage over vintage through 2024. We believe that the 2024 vintages and our early look at the 2025s is a result of our ongoing credit tightening, which we started at the end of 2022 and ratcheted it up quite a bit in 2023 and 2024. Of note is that the troubled 2022 and 2023 vintages now are below 30% of our portfolio and running off quite quickly.

That and the performance of the 2024s and our initial look at the 2025s is showing us a light at the end of the credit performance tunnel. The other thing we do internally to analyze credit performance is we study the default curves, which, depending on who you ask, may be a more accurate metric to judge performance as those curves do not account for recoveries and other loss mitigation tools. Those curves reveal that there is a significant difference between the early 2023s and the better-performing 2024s and 2025s. Comparing us to our competitors' credit performance, the index data shows that we remain among the very best credit performers in the subprime space when looking at apples-to-apples comparisons. Finally, turning to recoveries, they do remain relatively light, settling in the low 30s.

We have seen a little bit of an uptick in the third quarter, but we typically want to be in the low to mid-40s. Our analysis suggests that improvement is definitely on the way. Our data revealed that the recoveries from the 2022 and 2023 vintages are dragging down the overall recoveries. In the third quarter, vehicles from the 2022 vintages were getting 19% recovery, and vehicles from the 2023 vintages were at a 23% recovery. However, on a positive note, recoveries from the 2024 vintage were at a more palatable 36%, and recoveries from the 2025 vintage so far were at the historical average of 42%. Once the 2022 and 2023s flush out of the system, we see the recoveries increasing back to historical norms. One more last bit. One of the key economic factors that we think about with the business is the unemployment rate.

Right now, it stands at 4.3% as of the end of August of 2025. Various governmental agencies expect the unemployment rate to rise to only about 4.5% in 2026. This compares to the long-run national average unemployment rate of 5.5% and a rate over 6% being considered elevated in recession risk. We are still in a good spot with unemployment risk. With that, I'll send it back to Brad.

Speaker 1

Thanks, Mike. In terms of looking at the industry, the big news in the industry is basically the Tricolor collapse. As I mentioned earlier, that was really God knows what they were doing, but they shouldn't have been doing it. It really comes down to they were custodian for their own contracts and double-pledged them, all sorts of stupid stuff. We don't have, we were never in that position. We and many of the companies like us in our industry have custodians who take care of all the contracts, but not having a custodian in place was a mistake for Tricolor and that should have been taken care of. Anyway, we don't have those issues. It did have an effect on the industry, scared a bunch of people, particularly a bunch of investors, and certainly those involved with Tricolor.

Good news is, even with those kinds of problems, we were able to get our securitization done. The market remains stable. I think this will pass. I think it's good that people check on a bunch of stuff to make sure everyone else has custodians and these kinds of things can't happen in the future. Beyond that, it is kind of slow across the industry. It's a little interesting that we're sort of a little disappointed in our growth, and yet we're probably, as everybody's mentioned previously, the second strongest year we've had in our history. We want more. We want better. We've also noticed the banks moving in a little bit. Capital One is making a little more of a presence. Santander is being a little more aggressive, and the credit unions are back a little bit.

All those things probably put a slight amount of pressure in terms of growth. As I've mentioned, we're really, and I think everyone in the call has repeated, we're still trying to get, we want the 2022 and 2023 paper gone. We want the 2024 and 2025 paper to show us how good the credit is. As Mike pointed out, if you look at the defaults, the paper is even better than it looks. All those things are very, very positive in terms of where we're going to go going forward. I think lower interest rates, I mean, there's really a bunch of things going our way. All we need, Tricolor will go by the wayside soon enough. Interest rates have been coming down twice already. Rumor is they'll keep coming down. Those go straight to the bottom line for the most part.

We're going to try and maintain our APRs and put most of that into the margin, improved margin. We continue to cut expenses every possible corner. We're doing all the things we're supposed to be doing. As Mike mentioned, unemployment, I tell people that our company is we see the tip of the spear in terms of recession. Our customers are literally right out in front. When we hear from them, it's not so much, "Gee, I can't pay." We kind of expect that occasionally from some customers. It's when they say, "I don't have a job. I can't pay. Come pick up the car," that you have a problem. We are not hearing any of that. Same old things. Times are tough. The economy is kind of loose right now. Some of our customers are having difficulty, but none of them are saying, "Hey, I'm out.

Come get the car." That's when you know there's problems. Unemployment going up is the real killer for us. It's not. We're not overly worried about it going up a little bit. We think that's a very strong indicator. If you take the interest rates, you take the unemployment position, you take interest rates should spur the economy a little bit. You take the fact that we're moving the non-performing or non-earnings-paying part of the portfolio off the balance sheet and putting on more and more good paper, it really kind of sets us up in a real good spot in terms of going forward. Not only that, but in 2022, 2023, we had to post a lot of cash in our securitizations. That cash will start rolling back out of those securitizations as they run off, mostly towards the beginning to mid next year.

Not only should we have sort of an earnings boost from lower interest rates, hopefully get some more growth, better credit performance overall in the portfolio as the old stuff runs off, but we actually should be beginning to improve our cash position as well. Of course, it all sets up for what could be a very good year next year. We will see. We need the economy to hang in and start improving. We need all the things I just said to come true. I think we are in a very good position to really start growing with our better credit, knowing the credits performed in 2024 and 2025, and again, 2023, 2023, 2022, 2023 going away. It is as positive an outlook as we probably could have going into the fourth quarter.

Fourth quarters tend to be a little bit slow, but then you bounce into the first two quarters, and those are always good. Anyway, we appreciate everyone's attention and the call, and we'll look forward to speaking again in February. Thank you.

Speaker 2

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.