Consumer Portfolio Services - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue rose 14.5% year over year to $105.3 million and increased 5% sequentially, while diluted EPS was $0.21 versus $0.29 in Q4 2023, reflecting higher interest expense and credit cost dynamics.
• Originations remained strong: $457.8 million in Q4 (52% above Q4 2023), driving a record portfolio balance of $3.491 billion; management signaled “cautious growth” with improving vintages and a set-up for more aggressive growth in 2025.
• Credit indicators were mixed: total delinquency plus repo ticked to 14.85% (from 14.55% YoY), net charge-offs rose to 8.02%, and recovery rates remained pressured (~27% vs historical 40–45%) due to macro/used-car dynamics and repo/auction constraints.
• Technology initiatives (AI fraud scoring, AI voice bot) are expected to reduce fraud losses ($4.6 million saved in 2024) and improve collections efficiency in 2025; management stressed ABS market access and favorable unemployment outlook as key tailwinds.
• No formal quantitative guidance was issued; management highlighted confidence in credit normalization, operating leverage as the portfolio grows, and strong capital markets access as catalysts into 2025.

What Went Well and What Went Wrong

What Went Well

• Record portfolio balance of $3.491 billion and continued origination momentum: Q4 purchases of $457.8 million; 2024 purchases of $1.682 billion (+24% YoY).
• Management emphasized credit model improvements and 2024 vintages performing better, setting up for growth in 2025: “We now have a better credit performance… set the stage for what could be a very good year in 2025”.
• Operational efficiencies: net interest margin dollars grew sequentially; core operating expenses as % of managed portfolio improved vs prior year; dealer funding times reduced and large dealer group penetration increased.

What Went Wrong

• Profitability compression: diluted EPS fell to $0.21 vs $0.29 in Q4 2023; pretax income declined to $7.35 million vs $9.84 million prior year quarter, with higher interest expense a key driver.
• Credit costs: net charge-offs and total delinquency+repo increased vs prior year, while recovery rates (~27%) remained well below historical norms due to inflation, elevated car values/LTVs in 2022–23 vintages, and repo/auction frictions.
• No explicit numerical guidance; reliance on qualitative outlook, leaving limited near-term visibility for estimates-driven investors.

Transcript

Operator (participant)

Good day, everyone, and welcome to the Consumer Portfolio Services 2024 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 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 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 would now like to turn the call over to Mr. Bradley.

Charles Bradley (Chairman of the Board and CEO)

Thank you, and welcome everyone to our fourth quarter and year-end conference call. I think in looking back on the fourth quarter and the whole year, 2024 was a year where we'll loosely call cautious growth while we waited to prove out the changes in credit. As most people know, and certainly everyone in the industry, 2022 was a very difficult year and even parts of 2023 in terms of credit performance. For the most part, we wanted to grow, but we did not want to run away with bad credit. Now it appears we thought sort of the first, certainly 2022 was not particularly great. The beginning of 2023 was not particularly great, but the end of 2023 has now proven to be much better, and all of 2024 is proving out to be much better.

We finally made a distinctive change in terms of the credit approach, which sets us up. Part of what we did while we were waiting for the credit to improve was to set ourselves up to be able to grow more aggressively in the coming year. We actually did all that. We now have a better credit performance. Our originations growth was not quite as strong as the year before, but still very good. Again, we've sort of set the stage for what could be a very good year in 2025. That was really the focus of 2024. I'll touch on some more highlights on that a little bit later, but for now, I'll turn the conference call over to Danny Bharwani.

Danny Bharwani (CFO)

Thank you, Brad. Revenues for the quarter were $105.3 million, which is a 5% increase over the $100.6 million of revenues in our third quarter. It is a 14% increase from the $92 million for the fourth quarter of 2023. For the year, $393.5 million of revenues is a 12% increase over the $352 million revenues in 2023. These increases in revenues are being driven by strong growth in loan originations. For the quarter, we originated $458 million in new auto loans, which is a 52% increase over the $302 million in the fourth quarter of 2023. Loan originations for the year, $1.68 billion, is a 24% increase from the $1.36 billion in 2023. This is then in turn driving an increase in our fair value portfolio, which now sits at $3.5 billion and is yielding 11.3%. Remember that this 11.3% yield is net of losses.

The expenses for the quarter were $98 million compared to $82.1 million in the fourth quarter of 2023. For the year, expenses were $366.1 million, which is 26% higher than the $290.9 million in 2023. The expenses for the year period 2024 versus 2023 include adjustments to our CSO portfolio for excess loan provisions. That amounted to $5.3 million in the 2024 period compared to $22.3 million in the 2023 period. There is a big decrease in these loan provision adjustments on our legacy CSO portfolio from 2023 to 2024. The other big driver of expenses is the interest expense, which still continues to be higher than the prior year, both on a quarter and year basis. This can largely be attributed to higher rates, but also in part to our portfolio growth, which is driving an increase in our securitization debt.

Pre-tax earnings for the quarter, $7.4 million, is down 24% from $9.8 million in the fourth quarter of last year. For the year, $27.4 million of pre-tax earnings compared to $61.1 million in 2023. Net income for the quarter, $5.1 million in the fourth quarter. Last year's fourth quarter, $7.2 million. For the year, net income was $19.2 million compared to $45.3 million in 2023. Same trends in earnings per share. Diluted earnings per share for the quarter, $0.21, $0.29 in the fourth quarter of last year. For the year, $0.79 diluted earnings per share compared to $1.80 in the prior year. Moving on to the balance sheet, our cash, unrestricted and restricted cash is $137.4 million at the end of the year compared to $125.5 million in 2023. The biggest other item on our balance sheet is obviously our fair value portfolio.

That is $3.314 billion in 2024 at the end of 2024. It's 22% higher than the $2.723 billion at the end of 2023. Moving on to the liability section of the balance sheet, our total debt is $3.131 billion, is also 22% higher than the $2.566 billion at the end of 2023. Shareholders' equity continues to increase. This is one area of strength in our balance sheet. We are at the highest level we've ever seen in the history of the company. $293 million of shareholders' equity is 7% higher than the $275 million at the end of 2023. Looking at other metrics, net interest margin is $52.8 million for the fourth quarter of 2024, is 2% higher than $51.7 million in the fourth quarter of 2023. For the year, net interest margin is $202 million compared to $205.4 million.

Core operating expenses on a percentage basis for the quarter was 5.4%. That's down from the 5.9% in the fourth quarter of 2023. On an annualized basis for the year, 5.6% compared to 5.7% in the prior year for core operating expense as a percentage of the managed portfolio. Lastly, the return on managed assets, 0.9% for the fourth quarter, is down slightly from 1.3% in the fourth quarter of last year. For the year, 2024 is also 0.9%, is down from 2.1% in 2023. I will turn over the call to Mike.

Mike Lavin (President and COO)

Thanks, Danny. I'll run through some operational notes here. As Danny mentioned, we had a really good fourth quarter in originations, and that was a 41% increase over the fourth quarter of originations in 2023. As Danny also mentioned, we had a great originations year in 2024, which was actually a 24% increase in growth from our originations in 2023. A 24% increase in growth was quite good. We ended the year 2024 with a portfolio balance of $3.41 billion, which is a company record, which is up from $3.32 billion at the end of 2023. The growth and originations increase was a result of a few factors. First, as Brad mentioned, we sort of set the growth up in 2024 and 2023 as we hired approximately 25 new sales reps in 2023 and opened some new territories.

Typically, it takes about nine months for those reps to season and get their pipeline full and develop the territory. We started to see the impact of those hires at the tail end of 2023 and mostly through the year of 2024. Of note, in 2024, we hired 42 new sales reps and opened new territories in anticipation of our growth goals for 2025. We're cycling up or we're ramping up our market share and our sales reps a year in advance of our growth anticipation. Second, we were able to grow our large dealer group base, which we define as 10 car lots per dealer, 10 car lots plus per dealer. We took it from 20% of our originations to 28% of our originations.

We were able to land several large dealer groups with over 100 car lots per dealer and also increased our business with our existing large dealer group base. We look forward to continued growth in this area in 2025. Third, we were able to grow organically with our existing sales rep force by increasing our funding dealers per rep. We want to get them close to 40 funding dealers per rep, and we increased the number of reps that achieved that goal in 2024. We also increased our capture rate to 6%, and it was roughly 4.5% in 2022. That is a good area of organic growth. We doubled the amount of reps on our sales force that have or that are doing more than 80 contracts per month.

Fourth, we were able to rely on our data analytics team to identify our top performing 22 states in 2024 and offer better pricing to our top grade A and B dealers. We look to do this to the rest of the country in 2025. Finally, we were able to strengthen our origination flow from our partnerships, particularly with our best partner, Ally. We were able to also bolster our customer service with our dealers, which also certainly helps with our organic growth by lowering our funding time to less than two days, which is a dramatic change from 2022, which was hovering near four days. We were also able to increase our same-day funding to 13% in 2024 as compared to 7% in 2023. We similarly increased our second-day funding to 37% in 2024 as compared to 20% in 2023.

These metrics strengthen our brand with our dealers as offering one of the fastest funding lenders that gives superior customer service. This certainly helps the dealers click on CPS to get the first look at the applications. Turning to our risk profile, in 2024, we were able to hold a strong APR despite strong demand in the subprime, hovering just above 20%. Critically, our payment to income and debt to income ratios were flat. Our average FICO score is 571. Our amount financed actually crept up $1,000 a deal to $22,300. Again, critically, just like our PTI and DTI, we were able to hammer down our LTVs to 119%. Switching to credit performance, our annual net charge-offs for Q4 2024 were 8.02% of the average portfolio as compared to 7.74% for the fourth quarter of 2023.

We are still seeing the remnants of what Brad referred to as the second half of 2022 and first half of 2023 vintages flowing through the portfolio. We definitely expect these numbers to improve as the 2024 vintages flow through the portfolio. DQ, greater than 30 days, which also includes repo inventory, were 14.85% of the total portfolio as compared to 14.55% at the end of 2023. While the DQ went up a tick, it certainly did not rise to the level of our expectations, which is a great trend. Actually, looking back at 2024, we were able to reduce the DQ month over month in seven of the 12 months of the year. We expect the DQs to improve as the 2024 vintages begin to flow through the portfolio.

We are moving in the right direction, as Brad said, with our 2024 vintages, as the first half of the year is performing significantly better than 2023, with each vintage performing vintage over vintage over vintage. This reflects our continued journey of responsible lending and that we continue to tighten our credit model even in the face of our efforts to grow. We continue to tighten into 2025, like I said, looking for those better performing geographic pockets within the remaining 28 states that we're looking at and looking to give better pricing to our better performing dealers on the one hand and looking to tighten LTVs, PTI, DTI in the non-performing pockets of the country. Another good trend we are seeing in the credit performance arena is in our POTS collection bucket. The POTS collection bucket is defined as our 1-29-day non-reportable bucket.

The theory is the better we collect in these buckets, the more we reduce our roll rate of accounts that roll to the 30%+ and the 60%+. We beat our POTS goal most months in 2024, and I would be remiss if I did not note that January of 2025 was our best POTS collection month on record. Looking at our extensions, they ticked up a bit in 2024 numerically as compared to 2023, but are historically in line with our extensions as a percentage of our portfolio and certainly in line with our competitors. Our extensions are granted with the assistance of a proprietary AI model. We get more bang for our buck on our extensions than we ever have. Auction recoveries remain tough as we are running around 30%, which is quite a bit off our historical norm of 40%-45%.

This is mostly caused by macro issues due to inflation, the higher car values and LTVs in those troubled 2022 and 2023 vintages working themselves through the auction. We also found that the vehicles have more damage at the time of sale, probably due to the higher car years that we originated and the higher miles. We are still facing this sort of post-COVID scarcity of repo agents where we are not getting our cars repossessed on time and they are not getting to the auction on time, which is delaying the sales and lessening the recoveries. We are seeing trends that should tick up the recoveries this year.

On a more positive note, looking at the all-important unemployment rate, our recent rating agency report before our January ABS deal cited a Department of Labor report that the unemployment remains in our favor at 4.4% and more eye-opening projected only a nominal increase of that unemployment rate to 4.6% running all the way through 2026. That strong guidance is probably the most important macro trend we can point to as to the strength of our customer and health of our business. Last but not least, I'd like to highlight that our credit performance as benchmarked against our competition reveals that we are continuing to outperform our competition by between 200 and 400 basis points on CNLs and lower DQs.

Finally, turning to our continued journey to advance the technology in the front end and back end of our business, we continued to utilize AI-driven fraud scores in 2024, which eliminated applications with synthetic fraud at the outset of the application process, and we saved $4.6 million in 2024 in fraud savings. We're looking to layer in another fraud score by one of the big three credit bureaus that actually has no overlap with our current fraud score, which we think will save us another $6 million-$7 million in 2025, in addition to the roughly $5 million from the other score. At the tail end of 2024, we piloted a new AI voice bot that had incredible success matching human results with promises to pay received and the hang-up rate. I'll note that two of our competitors have been using this AI voice bot for about a year.

The machine has learned how to collect subprime collections on someone else's dime, and we expect to implement that AI voice bot next week. This will allow us to implement our strategy of not necessarily replacing human collectors, but we think the better use of the AI technology is to reallocate our human collectors from working the easier accounts and putting the human collectors on the harder accounts, which certainly needs human interaction working. We believe this will ultimately help our credit performance as we move through 2025. With that, I'll kick the call back to Brad.

Charles Bradley (Chairman of the Board and CEO)

Thanks, Mike. Looking back, you can tell we did a lot in 2024 in terms of setting ourselves for future growth, even though we did grow quite substantially in 2024.

Again, probably the primary focus in 2024 was to make sure that the credit performance was going to be what we expected. Currently, portfolios over almost 60% is from 2024 forward, all better credit than before. The 2022 vintages, which are probably the weakest, is around 20%. As that peels off, both that paper did not perform as well, but also is expensive in terms of the capital markets. We are in a good trend in terms of that disappearing as the new better paper, performing paper, lower cost of funds paper occupies more and more of the portfolio. That was really an important part. It seems to have worked really well for us. As I also mentioned, we spent a lot of time gearing up for growth this year. That should work out just fine. In terms of the capital markets, securitization is doing very well.

We continue to have very good success with all the securitizations. Capital markets remain very strong. It appears there's very good access to money in terms of growth capital, which is necessary for us to keep going. In many different fronts, we're in a very good spot as we ended 2024 and move into 2025. I think going forward, we should hopefully put the 2022 vintages and their performance behind us. Almost by the end of 2025, certainly they'll be gone and not important to the extent we layer in another very good growth year in 2025. The NIM is going to continue to improve. We're going to benefit from the structure we've already put in place so that as the portfolio grows, the expenses should be even a less percentage as we go forward. Again, across all fronts, we're in very good shape.

We're not particularly worried about the economy. It remains strong. As Mike pointed out, the unemployment rate looks very favorable going forward, something we care about almost more than anything else. All good, all steam ahead. With that, we look forward to having the next call in April, which is not too far away. Thank you all for attending today and have a wonderful day.

Operator (participant)

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.