Consumer Portfolio Services, Inc. ($CPSS)

Good day, everyone, and welcome to the Consumer Portfolio Services 2025 Fourth Quarter and Full Year 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, 2025, 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.

Thank you, and welcome, everyone, to the fourth quarter and year-end conference call. 2025 was a very good year. We might have actually expected it to be even better, but we didn't quite get the growth we were looking for, but still overall a very strong year. We focused on credit, we focused on keeping our margins. All in all, it was very good. A couple of highlights. We renewed -- or actually, we signed a new warehouse line with Capital One for $150 million. We also signed a $900 million prime forward flow commitment. Both of those will be very instrumental in how we grow and what we're going to do in 2026, but more highlight on that is the fact that credit is readily available. The company has done well enough to where lots of people, banks and such, not to mention the investors on the securitizations are very eager, either buy or bonds or lend us money. So we're in a very good spot in terms of moving into '26. '26 as a quick peak already looks like it could be very, very good. So '25 was really good. Again, we had focused on getting the '22 and '23 paper was not particularly profitable and didn't perform as well as we would have liked. I think at the beginning of '25, that was almost 40% or more of the portfolio. Today, it's 26%, we would expect that number to gradually decrease over the year to where it's de minimis by the end of '26. So getting that kind of piece of bad credit out of the portfolio is very good. Portfolio is nearly $4 billion. We expect that to grow substantially in the coming year. We've now reached the size where we're really at a good size in terms of our industry standing. Overall, we're in a very good position. Credit remains strong. Interest rates look good. We'll get back to that more. But for now, I'll turn it over to Danny to go through the financials.

Thank you, Brad. Looking at some of the numbers, revenues for the fourth quarter 109.4% is a 4% increase over the 105.3% in the fourth quarter of 2024. For the full year 2025, revenues were $434 million is a 10% increase over the $393 million in 2024. The interest income on our fair value portfolio is the main driver of that -- of our total revenues, and that is actually up 16% year-over-year. The fair value portfolio now sits at $3.6 billion and is yielding 11.4%, remembering that, that yield is net of expected losses. Outside of interest income, the other component of our revenues are our fair value marks. These are adjustments to our fair value portfolio that we occasionally record to revenues as needed. We had no marks in the fourth quarter of 2025 compared to $5 million in the fourth quarter the year before. For the full year, we had fair value marks of $6.5 million compared to $21 million in the prior year. In terms of expenses for the fourth quarter, $102.2 million is a 4% increase over the $98 million in the fourth quarter of '24. For the full year '25, expenses were $406 million, which is 11% higher than the $366 million in 2024. Biggest component of that increase is interest expense. Interest expense was $59 million in the fourth quarter. It's $53 million in the fourth quarter a year ago, and that's a 13% increase. That increase is largely due to our higher securitization debt balance from our higher loan portfolio. Our loan portfolio, which I'll cover when we look at the balance sheet, but the loan portfolio is -- actually, the securitization debt from that loan portfolio is up 15% year-over-year. Looking at pretax earnings, $7.2 million for the fourth quarter compared to $7.4 million in 2024. For the full year, pretax earnings is $28 million compared to $27.4 million for the full year 2024. If you look deeper into the numbers and exclude the fair value marks, pretax income would have been $7.2 million in the fourth quarter compared to $2.4 million in the fourth quarter of '24. So there is some significant improvement there if you strip out the marks and focus on interest income. For the full year, the pretax income would have been $21.5 million in 2025 compared to $6.4 million in 2024. So again, there's significant improvement in 2025 if you exclude the nonrecurring items. Net income for the quarter, $5 million compared to $5.1 million in the fourth quarter of '24 for the full year, net income, $19.3 million compared to $19.2 million in 2024. Similar trends for net income as pretax income. But again, if you exclude the fair value marks in 2024, which were higher than '25, there is significant improvement there. Diluted earnings per share, $0.21, is flat from the $0.21 in the fourth quarter last year for the full year $0.80 versus $0.79 in 2024. Moving now to the balance sheet. Our total cash is cash and restricted cash is finished the year at $172.2 million, which is up from $137.4 million at the end of 2024. Our fair value portfolio is up 10% to $3.655 billion compared to $3.3 billion at the end of 2024. Looking at our debt. I guess the biggest jump would be from our securitization debt we talked about earlier, 15% higher to $2.986 billion compared to $2.594 billion in the prior year. Moving to shareholders' equity. The $309.5 million ending balance for equity at the end of December 2025 is a 6% increase over $292.8 million at the end of 2024. Equity continues to climb and currently sits at an all-time high for us. This translates to a book value and measured on a fully diluted basis to about $13 a share. Looking at other important metrics. Our net interest margin, $50.1 million in the fourth quarter compared to $52.8 million in the fourth quarter of '24. Full year net interest margin $202.5 million, flat from $202.3 million in 2024. Again, the marks -- less marks in 2025 from the fair value portfolio has an impact on that. If you strip that out, the net interest margin would have been $50.1 million versus $47.8 million and for the full year, $196 million versus $181 million, which is an 8% increase year-over-year. Our core operating expenses, $43.4 million in the fourth quarter compared to $46.2 million is a 6% decrease. For the full year, core operating expenses of $177 million is down 2% from $180 million last year. So besides growing our auto loan portfolio and increasing our interest income. We've also put a lot of focus on improving operating efficiencies, which you can see in the decline in our core operating expenses as a percentage of the managed portfolio, which is now down to 4.8% from 5.6% a year ago. I will turn the call over to Mike.

Thanks, Danny. A few operational notes today. In the fourth quarter of 2025, we originated $363 million of new contracts. For the full year of 2025, we purchased $1.638 billion of new contracts compared to $1.682 billion during the same period in 2024. So a pretty good year, as Brad said, but a little flat. In 2025, ended up being our third best origination year in our 35-year history. This, despite our continued practice of originating with the tight credit box which we did in '25, we heard from the trenches that dealers were reporting lower foot traffic, and we saw at times increased and in some cases, irrational competition for less business. So overall, when you consider all the factors that were against us, $1.62 billion was a pretty good year. In the fourth quarter of 2025, we grew our portfolio of assets under management from $3.76 billion to $3.779 billion. And for the full year, we grew the portfolio from $3.4 billion to $3.7 billion, which is an increase of 8.24%. Our focus in Q4 and as we turn to the new year is to grow via one, hiring new sales reps and having new territories. I think the second one is adding more active dealers to our funding dealer pool, we've been successful at doing that in the fourth quarter. We added about 1,000 in January -- or I'm sorry, in December alone. Three, we have a goal to drive our applications from 250,000 a month to $325,000 a month. And four, we started doing this in the fourth quarter and into this year so far as mixing some strategic risk initiatives that we've seen be successful so far. Also in the fourth quarter, we implemented our Generation 9 credit scoring model that as with our previous generation models utilizes AI and machine learning and its development, we have done that at least so far, the new model has increased our approvals 11%. So they were running in the low 40 percentile and now they're running in the low 50 percentiles. It's kept our capture flat, which is good news. And doing the math, it's increased our total fundings about 8.4% just by implementing that new model. Also in the fourth quarter, as Brad alluded to a little more detail on the partnership regarding the prime program. We partnered with a large credit union to source, originate and service prime auto loans. As part of that deal, we get an origination fee and a servicing fee to sell that credit union prime auto loans that we source. Interestingly, the credit union has committed to buying up the $50 million a month, $600 million annually over 18 months, $900 million commitment. But it's important to note that we think that the growth will be a slow buildup as we kind of have to rebrand ourselves to our dealer base as more of a full-spectrum lender considering we've been a subprime lender for 35 years. We're getting good feedback from the dealers. We're growing month-over-month. But again, it's going to be a slow build. I kind of compare it to when we started our Meta near-prime program years ago. It didn't come out of the gates too strong, but eventually, it's now 5% to 6% of our originations, and we're kind of hoping the prime program gets to be about the same. Just sort of following up on what Danny said on our OpEx, we were able to decrease it year-over-year from 24% to 25% by 14%. One note is on the employee cost front, we were able to lower our employee cost as a percent of the portfolio from 2.6% in 2024 to 2.4% in 2025. And we did this despite growing the portfolio 8.24%. That's a little more evidence that we've properly scaled the business. We're at the right size and as we continue to grow in 2026, we look for that OpEx to continue to trend downward. Turning to credit performance. The total DQ greater than 30 days for the full year 2025 was 14.77% as compared to 14.5% for the full year 2024. The total annualized net charge-offs for the full year 2025 was 7.76% as compared to 7.62% for the full year 2024. Further, repossessions were down a little bit year-over-year. Potential DQs, which we call pots were down year-over-year and extensions remain at our historical average as a percent of the portfolio. Our extensions are also about the same as benchmarked against our competitors. in the subprime space. So taken together, our improved portfolio performance in 2025 was quite an accomplishment considering the macroeconomic headwinds we faced in servicing with affordability, stubborn inflation, increased interest rates, some stagnant wage growth affecting some of our customers' cash flow. We found that using the right collection techniques and processes, along with our customers still prioritizing their car payments sort of fought off those trends. I mean, to lower delinquency year-over-year in this environment is quite a tip of the hat to our servicing department. Looking more closely at the vintage performance, we continue to see significant positive credit performance, sort of starting with our 2023 D vintage and continuing vintage over vintage through 2025. Now that it has more time to season, we're sort of looking at the 2024 vintage performance as being a positive result. Probably due to our credit timing that we took in early 2023, and we continue to do today. It's early, but a steep peak at our '25 vintages shows even better potential for that performance than the '24s. As Brad alluded to, the troubled 2022 vintage and 2023 vintages are running off quickly. And as compared to our competitors' credit performance of the Intech's data that our bond investors use to evaluate the space reveals that we remain among the very best credit performers in the subprime space when you compare us apples-to-apples to our competitors. Finally, turning to recoveries. They remain somewhat relatively light settling into the 28% to 30% range. We typically want them to be in the low 40s, but our analysis suggests that there is a light at the end of the tunnel our data revealed that recoveries for vehicles from the 2022 and 2023 vintages. Those cars are actually dragging down our overall recoveries. So for example, in Q4 2025, looking at Q4, vehicles from the 2022 vintage were at -- were recovering at about 20.5% and vehicles from the 2023 vintage were recovering 22.9% on the recovery. Compare that to recoveries on the '24 vintages are more palatable at 36.3% and recoveries for the '25 vintage, at least so far, are hitting 43.4%. So we feel once the 2022 and 2023 vintages sort of flesh out, as Brad said, by the end of this year, our recoveries will get back to normal. And as everybody knows, recoveries are a critical part of reducing our losses and increasing our net income. And with that, I'll throw it back to Brad.

Thank you, Mike. Switching over to taking a look at our industry. Normally, there's not a lot going on in the industry. As we've sort of pointed out already that it was a little bit slow. Traffic was down in the dealerships. That seems to have changed in '26 so far. But the interesting notes were GLS, one of our friendly competitors, got purchased I think that's a good -- it was a very good valuation or extremely good valuation. So having that happen was interesting. Also flagship, which kind of had been sinking for a while was purchased also, but again, more at a discount, I think flagship for all intents purposes, had ceased originations when they were sold but that would be some M&A movement in the industry. And lastly, Prestige, more recently, stopped originating loans as well. And you don't really see a lot in our industry. More importantly, seen almost no new entrants into our industry in like 5 years. So it's gotten to the point where, unless you really have some size which we'll call a minimum of $1 billion portfolio really in a tough competitive standpoint within the industry. So being at 4 and on our way growing puts us in a very good spot. Having a couple of our competitors go away and maybe try and reinvent themselves is fine. Certainly, Prestige is not -- and then having the sale for GLS puts a valuation on some of -- on the industry players, all good news across that board. I think the industry is very solid without having people blow up. The [ trichlor ] thing was a bump in the road, but really had nothing to do with the real industry. It did affect the market slightly for us in doing securitization. Other than that had no impact whatsoever. So we're moving into the future, what we care about, as we've mentioned many times, the interest rates and unemployment. We believe the interest rate environment is very positive. If anything, the interest rates may come down as opposed to go up. Down is obviously way better. As long as they're not going up, we're kind of fine with where they are, but it would be nice if they came down a little bit more because those pretty much go straight to the bottom line, those improvements. Unemployment seems to be relatively steady. Unemployment could bounce around a little bit, and we really wouldn't be affected we really don't want employment to skyrocket. Obviously, that could trigger sort of a recession, which is all bad. But we don't really see any of that. We see unemployment holding steady. We see interest rates steady or coming down. It really sets us up for a very good environment right now generally, other than the Iran war, which hopefully will go away pretty soon. The economy seems very stable and very strong. Again, we would think 2026 and beyond looks very positive in terms of where we're going with the company. So having said that, I mean, our goal in '26 is to focus on growth. We want those margins to improve through better interest rates. We want the overall portfolio performance to improve by getting rid of that '22 and '23 paper. We believe a good economy is good. We think we're, as I mentioned earlier, in a great position to raise money. We did a residual deal recently, which was cheaper by a bunch than the last couple we've done. So again, there's a lot of favorable headwinds -- or excuse me, tailwinds as we move into '26. So we're really looking forward to see what we can do this year. Now a bunch of stuff going the right way. We've raised the money. We have the warehousing. The credit model looks great. We're very positive in terms of where things go from here. With that, thank you all for attending the conference and the conference call, and we'll speak to you in a month or 2. Thank you.

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