Consumer Portfolio Services, Inc. (CPSS) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Consumer Portfolio Services 2025 Second 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 are also 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, future 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.

Thank you, and welcome to our second quarter earnings call. Looking at the quarter, I think it's not quite business as usual, but we're continuing. We've kind of reached a new level in terms of originations. More recently, they're slightly flat, but still stronger than last year. So we've had a better first half this year than last year. The market appears to be a little cautious or flat currently. But nonetheless, it's still -- and we're on pace for a better year in originations this year than last year, and the second quarter shows that. We did just do another securitization, which as much as it was recently, we usually talk about this securitization during the previous quarter call. It was $418 million with a [ 5.43 ] all-in cost. What's good about that is the lowest coupon since 2022. So depending on what happens going forward, if there's some rate cuts, this is what would really, really help both our NIM in terms of what we're doing going forward. A couple of rate cuts down the road will be very, very helpful. But nonetheless, the second quarter securitization went off very well. The fact that, that market remains very strong is certainly key to our success going forward. We also continue to have an improvement in our operating expenses. OpEx is now the lowest it's been in the history of the company, at least in the last 10 years. We're pushing to continue that trend. And as we continue to grow, both with our cost-cutting measures and efficiency measures and the fact that we just -- we're growing, we'll make that number even better. So again, those are really good highlights. I think -- the other thing to talk about in terms of performance is the '22 and '23 portfolio of paper isn't the strongest to say the least. We've been kind of waiting for that to run off. It is now less than 35% of the overall portfolio, still very significant. But nonetheless, as more new paper gets on and the trending in the new paper both from '24 and '25 is significantly better so far. So as time goes by and we're able to replace, the portfolio becomes more sort of front-loaded with '24, '25 and '26 paper and the '22 and '23 paper continues to run off. You're going to get a little boost there that you really can't see because basically, the bad paper is going away and the good paper is replacing it. So again, a very strong trend in terms of the quarter's production. I'll have a few more comments on the industry. But for now, I'll turn it over to Danny for the financials.

Thank you, Brad. Going over the financial results for the quarter, starting with top line revenue. Revenues for the second quarter were $109.8 million. That is a 14% increase over the $95.9 million in the second quarter of last year. That revenue is primarily driven by our interest from the fair value portfolio, which is now at $3.6 billion and yielding 11.4%, remembering that, that yield is net of losses. The revenues for the quarter also include a $3 million fair value markup, which compares to a $5.5 million fair value markup in the prior year quarter. The fair value markup is a result of better-than-expected performance in our fair value portfolio. For the 6 months ended June 30, revenues were $216.6 million, which is a 15% increase over the $187.6 million last year. Moving on to expenses. For the quarter, $102.8 million is a 15% increase over the $89.2 million for the second quarter of last year. The primary driver for the increase in expenses are the increases in interest expense, which is up 26% year-over-year from $58.7 million this year -- or from $46.7 million last year to $58.7 million this year. That increase in interest expense is largely due to increases in the volume of our debt, including our securitization debt, but there's also increases in rate increases that are built into that interest expense increase. Total expense for the 6 months, $202.9 million is a 16% increase over the $174.4 million in the 6 months of 2024. Looking at pretax earnings, $7 million for the quarter is a 4% increase over the $6.7 million last year. And for the year-to-date period, $13.8 million this year compared to $13.2 million last year. Similarly, net income follows the same trends, $4.8 million for the quarter, $4.7 million last year and for the 6 months, $9.5 million versus $9.3 million. Diluted earnings per share, $0.20 a share for 2024 -- 2025 second quarter compared to $0.19 in the prior year quarter. For the 6 months, $0.39 versus $0.38. Moving on to the balance sheet. A couple of things of note. Our finance receivables at fair value now stands at $3.56 billion, which is a 20% increase over the $2.96 billion last year, driven by healthy origination levels, $433 million in new auto originations in the current quarter and puts us on pace for another strong year in loan originations. On the debt side, total debt, which includes our warehouse credit lines, residual interest financing, securitization, ABS debt and corporate long-term debt, $3.4 billion at the end of June this year compared to $2.9 billion last year at the same time, which is a 15% increase. So you'll see that our finance receivables are 20% higher year-over-year, but our debt is only 15% higher. So that shows that our leverage is improving. Moving on to shareholders' equity for the second quarter, we finished the quarter at $303.1 million, which is an 8% increase over the $280.3 million last year, and it's the first time our equity has eclipsed the $300 million mark. Other metrics, looking at our net interest margin, $51.1 million in the second quarter is 4% better than $49.2 million last year. For the year-to-date period, $103 million is also 4% better than $99 million last year. As Brad said, core operating expenses is now below 5% -- 4.9% in the second quarter, is a 14% improvement over the 5.7% last year. And our return on managed assets, 0.8% compared to 0.9% last year. For the year-to-date period, same number, 0.8% versus 0.9%. I will turn the call over to Mike.

Thanks, Danny. Looking at our sales and originations, as Brad said, fairly flat in the second quarter of 2025, we originated $433 million of new contracts as compared to $431 million of new contracts in the second quarter of 2024. I will note, however, that the second quarter of '25 is our second best Q2 in our 34-year history. So good work there. Our second quarter of '25, that growth follows our year-over-year growth of '24 over '23 of 23.8%. So the first half of '25, we kind of produced the growth that we intended to do. At the end of the second quarter, our portfolio of assets under management stands at $3.708 billion, which is an increase from $3.173 billion at the end of the second quarter of 2025, a year-over-year increase of 16.8% in the portfolio. I think it's important to note that our growth in the second quarter came at a time when foot traffic was reported to be down at our dealership partners for a myriad of macroeconomic reasons and competition also heated up quite a bit in the second quarter to scoop up less of that demand for our product. But despite these growth roadblocks, we did hold strong to our tight credit box in the second quarter instead of relying on our strong brand of superior customer service and personal relationships with our dealer base to grow. To that extent, a few accomplishments. Our originations department set records to help us become one of the fastest funding finance companies in the market by setting a same-day funding rate of 29%. That is the best in our 34-year history. We set a second day funding rate of 57%, which is the best in our 34-year history. And we got our deal turn time down to 1.18 days, which is the best in our 34-year history. And to kind of put some finishing touches on our second quarter, we were putting the finishing touches on implementing an AI agent bot in certain processing tasks that should improve some of those metrics moving forward for the rest of the year. Not to be outdone, our sales department also contributed in the second quarter by increasing our capture rate to 6.71%, up from 5.96% and that is extremely helpful to our growth because we're facing fewer applications in the second quarter. So that kind of offsets the demand by increasing our capture rate. Sales management was also able to backfill all of our open territories, and we promoted several inside sales reps to enhance our coverage across the country. While we do have a list of between 5 to 10 new territories to open in the near future, we are currently running at full capacity in sales to cover the country. Turning to credit performance. The total DQ greater than 30 days for the second quarter, including repo inventory was 13.14% of the total portfolio as compared to 13.29% as of the second quarter of 2024. That is a slight improvement year-over-year. And that data is certainly a larger part of the trend of us lowering our DQ on a year-over-year basis. Of particular note, sort of looking at the first half of the year, we have seen improvement DQ sequentially month-over-month for 5 of those 6 months so far in 2025, so a good trend there. Total annualized net charge-offs for the second quarter were 7.45% of the average portfolio as compared to 7.26% for the second quarter of 2024. Sort of looking at the bigger picture of the vintage performance, we continue to see significant credit performance improvement starting with 2023 D and kind of continuing vintage over vintage through 2024. The 2024 vintage performance improvement is a direct result of our credit tightening that we did in early 2023 and continued throughout 2024. It's kind of early, but a sneak peek at the curves of our early 2025 vintages show a heightened chance of even better potential performance than the '24. So a good trend there as well. Another positive note, we saw an uptick in auction recoveries in the quarter, which we hope is a sign of things to come as lower recoveries over the last year has been a bit of a burden on our losses. We are encouraged that in addition to our responsible credit policy, which we've always done, our unique collection practices also contributed to the credit performance improvements. So kind of looking back in 2024, we had our supervisors collecting the toughest vintages. In 2025, we kind of switched that up to form a specialized team of our best staff collectors headed by the best supervisors on sort of specialized teams to tackle those toughest vintages. As we saw in the '24 performance, that strategy worked. And what we're seeing so far in the early '25, the sort of the team -- the team idea is working as well. In addition, the second quarter also saw our use of AI agents become in full blossom. With AI agents handling the outbound dialer calls, this has freed up our experienced human collectors to make more intensive manual efforts to collect the tougher accounts. So for example, our human collectors were able to have more time to make text message communications with our customers, nearly doubling the amount of those communications, which is kind of key to collecting the subprime debt because as we've learned over time, text messaging has turned out to be one of the best debt collection tactics in the space. A few early performance notes on our AI agent. They've helped reduce our potential DQ percentage, hitting a payment rate of 31%. The escalation to live agent transfer rate is low, indicating an increasing comfort with our bot -- with our customers. The right party conversion rate is strong at 48% and the right party connection rate is only less than 1% below our human right party connection rate. The RPC data is important to note because all of those metrics typically result in a payment, a promise to pay or a future date of payment. And finally, as I mentioned, the slight uptick in recoveries, even though sort of most of that performance is out of our control, we are working hard to improve a few things that we think we can control to improve those recoveries such as improving the timing of repossession and the sale of the vehicle to improve the recovery amount. Another factor to improve sale timing is the dearth of available repossession agents in the market that we faced or getting those cars repossessed later and sold later. We are fighting this dearth by forming direct relationships with smaller regional agents and trying to bypass the 3 or 4 major forwarding agents in the space. Kind of a few more notes before I hand it back to Brad. As he mentioned, our OpEx as a percentage of the portfolio was 4.8%. For the second quarter. I was scratching my head to think that we had a better quarter than that from an OpEx percentage, and I don't think we have. We do expect the OpEx to continue downward as our portfolio grows. And we're also continuing to strategically look for scale in our operations as we grow. Management remains mindful of the macroeconomic headwinds facing our business because as we know, it's not always what we buy, but the environment that we're buying in. We noted the recent job reports and ever so slight uptick in the unemployment rate. We're keeping our eye on the tariffs and the future rate cuts. For example, the CPI report came out this morning, which is pushing the odds of 3 or 4 rate cuts maybe for the rest of the year to be in our favor, which would help our business. We're also reflecting on what we're hearing from our dealership partners about foot traffic. And from our collection staff and what they're hearing in the trenches from our customers. Taken together, we're still continuing to be putting forward tactics of being one of the more responsible lenders in the space. As we grow the portfolio continually. So with that, I'll kick it back to Brad.

Thanks, Mike. In terms of the industry, as noted, there's kind of a light foot traffic in the dealerships these days. Probably people are waiting to see what both interest rates are going to do and the economy is going to do. We seem to be handling that rather well. I think in terms of the industry itself, we keep reading about some potential M&A activity. That would be helpful for our comps and helping what we look for. So we'll see if that ever turns anything. And as I mentioned, the interest rates are supremely important. We'll see what happens. The good news is we don't particularly think interest rates are going to go up. We hope they go down. How much we'll see. But anything -- any movement downward helps us. Equally as important is the unemployment rate, which at the moment seems fine. As much as job hiring was down and revised a bit a bunch, unemployment is what we really care about. So hopefully, it doesn't get to the point where unemployment begins to go up. But as long as those kind of trends hold, we should be fine. And as mentioned numerous times by everyone, our focus going forward will be on the efficiencies, continued growth and collecting the aged portfolio the best we can to have the impact going forward as small as possible. But generally speaking, overall, I think -- the economy, everybody is kind of curious what's going to happen both with interest rates and whether we -- whether the economy is actually stalling or whether it's going to be fine. My feeling is that they cut interest rates even a little bit, the economy will do just fine. All those are good things for us. It's kind of like the way to look at it kind of the overall picture. You care -- what we've always said is we care most about unemployment. Unemployment appears fine, at least for now. We don't like higher interest rates. No one's mentioning interest rates going up. In terms of our collection and our efficiencies are all doing good and improving along with our growth. So again, we're kind of in a position where in the second quarter, -- the first 2 quarters has gone very well, but the future looks bright in terms of mostly positive things should happen rather than negative things. And those positive being the old portfolio runs off, our efficiencies continue to improve are hopeful and the economy continues to do well, the interest rates come down, and we get to grow a lot. So we'll see. But again, thank you all for joining us. We will talk to you next quarter.

Thank you. This concludes today's teleconference. A replay will be available beginning 2 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.