Earnings Call Transcript - CPSS Q1 2025

Operator, Operator

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 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 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 that it's off to a good start. The first quarter went well. I apologize for being a little late on the call, but we have 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, buy very good paper, let the bad paper of '22 and '23 get through, and move on as the portfolio becomes more and more high creditworthy 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. But overall, so far, so good. It's now late enough to say we just completed 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. 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, while 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 '25 is also a 17% increase over the $85.2 million last year, with the main driver of the increase in expenses being interest expense, which is $55 million this year compared to $42 million last year. While some of that rise in interest expense can be attributed to higher rates, most of it can really be attributed to our higher debt balance on our servicing securitization debt, which is tied to growth in our loan portfolio and our total managed portfolio size, now up to $3.45 billion on the balance sheet. Looking at pretax earnings, we reported $6.8 million for the quarter compared to $6.6 million last year, reflecting a 3% increase, and 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, 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, and 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. Our securitization debt sits at $2.74 billion, which is 20% higher than the $2.27 billion from March of 2024. Shareholders' equity totaled $298.4 million at the end of this first quarter, a record high for the company, up 7% from $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 totaled $46.1 million, a 3% increase from $44.9 million last year. As a percentage of the managed portfolio, those core operating expenses were 5.2%, an improvement over the 6% in the first quarter of last year. And 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.

Michael Lavin, COO

Thanks, Danny. In sales and originations, following up on what Brad said, in the first quarter of 2025, we originated $451 million in new contracts, compared to $457 million in new contracts in the fourth quarter and more significantly, $346 million over the first quarter in 2024. That is a year-over-year increase of 31.5% in growth. It's worth noting that this growth follows our year-over-year growth of 23.8% at the end of 2024. At the end of the first quarter, our portfolio assets under management stand at $3.45 billion, which is up from $3 billion year-over-year. As Danny said, there's been a 24% increase in the growth of our portfolio. So, as you can see from our originations growth and our portfolio growth, the business has certainly taken on a hockey stick trajectory, which we are working hard to maintain and improve upon. 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. This has allowed us to enter new territories and expand our dealer base. We expect further maturation of that group going forward into 2025. Our growth also results from strategic credit moves we made throughout 2024 and even into the first quarter of 2025, while still maintaining our long-standing reputation as a responsible lender. We have been able to both tighten our credit and improve our credit terms at the same time, based on the particular state of our customers and the regions they reside in. So it’s been sort of a double whammy: tightening and improving credit simultaneously. Despite that, we're still hiring experienced reps in new territories that we deem fruitful. We see a path to more growth through our relationships with large dealer groups and strategic partners like our strong relationship with Ally and our growing relationship with Hyundai. Despite our growth, our credit profile remains strong. We've managed to hold our average APR to 20.32% and pushed our LTVs down to around 117% and 118%. Additionally, in this time of uncertainty regarding inflation, we've managed to drive our average payment down to $535, which is lower than the average used car payment. Turning to credit performance, total delinquency for the first quarter, including repo inventory, stood at 12.35% of the total portfolio compared to 12.39% in the first quarter of 2024, reflecting a slight improvement year-over-year. One point I'd like to make about the first quarter of 2025 is that we saw sequential improvement month-over-month, from January to February to March, in delinquency rates. The total annualized net charge-offs for the first quarter were 7.5% of the average portfolio, down from 7.84% in the first quarter of 2024. This aligns with our slight improvement in delinquency. The improvements in delinquency and charge-offs are evident when looking at our sequential credit performance of the origination pools since the fourth quarter of 2023, continuing through 2024, and we expect this trend to persist into the first pool of 2025. Each C&L by pool has improved quarter-over-quarter for the last 16 to 18 months. The C&L trend is further supported by our analysis of defaults in the 90-plus bucket, indicating that defaults have improved significantly when observing the more mature pools from 2023C, 2023D, and especially 2024A. We expect that trend to continue throughout our pools in 2024. Another interesting point: benchmarking our credit performance against the industry reveals that looking at our 2024 performance metrics, we are outperforming our closest competitors in the market, sometimes by a significant margin. Overall, we launched our AI voice agent with great success in the first quarter, currently only operating on our auto dialer. However, Phase II will include AI voice agents on inbound calls, chats, and text messages, allowing us to reallocate our human collectors to tackle the hardest accounts, of which the AI voice agent will handle the rest. We continue implementing a unique servicing strategy, ensuring our best collectors prioritize the most challenging accounts, now organized into special teams led by our most capable middle management members. We maintain a workforce of around 950 employees, and despite the growth that Brad and I discussed earlier, we've driven our managed portfolio relative to headcount to an all-time high. This progress has enabled us to reduce operating expenses quarter-over-quarter and year-over-year. Our operational efficiency continues to improve due to the growth of the portfolio and our pursuit of better expense management strategies. One more big-picture thought is we always view unemployment as one of the barometers of the health of our business and our customers. As of our last analysis, unemployment stands at 4.2%, which is still historically low. The Department of Labor forecasts it may rise to no more than 4.6% by the end of 2026. So, that barometer, despite the uncertainties, tariffs, and macroeconomic headwinds, remains healthy for us. With that, I'll turn it back to Brad.

Charles Bradley, CEO

Thank you, Mike. Following up on all the previous comments you've heard, what we're trying to do is take a step back and look at our environment. Right now, interest rates are higher than they were. While we don't expect them to go up, we aren't sure they will go down either. What we can't control are interest rates, but we can control how much the portfolio can grow and how much we can earn just by sitting still. We can control our losses. Our focus is on both growth and maintaining good credit while managing our margins. We're attempting to maintain our margins and be frugal with our expenses while ensuring we're buying quality credit. It appears we're accomplishing these goals as 2025 begins. We want to see the portfolio continue to grow, and when interest rates hopefully decrease, we will benefit from reduced losses. One challenge is that while we're acquiring quality credit, the performance impact on our earnings isn't visible immediately. With fair value accounting, we have to wait to see how the portfolio performs. The early signs are quite good. So, how do we move forward? We grow the portfolio as much as we can with high-quality credit and wait for interest rates to decrease so we can expand further and benefit. Even if rates don't fall, we will leverage our credit profile as it aligns with our profit and loss. Additionally, we are still navigating through the challenges posed by the paper we originated in '22 and early '23. The good news is that portion of the portfolio is now less than 30% and continues to run off. The quality portion of the portfolio now exceeds 50%. In terms of the industry, many companies face similar circumstances. However, we believe we might be in a better position regarding credit. Recovery rates have declined, impacting overall recoveries and subsequently our losses. The recovery rates appear to be improving, which will positively affect us in the future. We haven't seen new entrants into our industry; strong players have remained while weak players have exited. The industry outlook appears stable. Considering the uncertain market dynamics, we executed our first quarter deal in 2025 in early January and our second quarter deal in early May, with almost identical rates earned on both transactions, only 10 basis points apart. Despite the significant uncertainties since the beginning of the year, we have effectively navigated the securitization market, allowing us to secure deals at acceptable rates. We would naturally like to improve these rates and believe it is possible in time. However, for now, we are satisfied. Remember, two critical factors we need to monitor are our ability to securitize and a strong economy, particularly characterized by low unemployment rates. We believe the situation is favorable for us. We are optimistic about the industry, the economy, and would anticipate that rates will likely decrease rather than increase, which will benefit us. Our strategy moving forward is to keep growing, remain conservative in our credit performance, and put our best efforts into collecting both old and new paper as we forge ahead. Thank you all for joining us today, and we look forward to speaking with you again in the next quarter.

Operator, Operator

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.