Business Overview
Consumer Portfolio Services, Inc. (CPSS) is a leading provider of indirect automobile financing solutions to subprime consumers in the United States. With a history spanning over three decades, the company has navigated the complexities of the subprime auto lending landscape, delivering consistent growth and weathering industry challenges.
Founded in California in March 1991, CPSS has established itself as a prominent player in the subprime auto finance market. The company's core business model revolves around purchasing retail installment sale contracts from franchised automobile dealers, providing indirect financing to consumers with limited credit histories or past credit issues. Through this strategy, CPSS serves as an alternative source of financing for dealers, facilitating sales to customers who might otherwise be unable to obtain traditional financing.
Since its inception through September 30, 2024, CPSS has originated a total of approximately $22.6 billion of automobile contracts, primarily by purchasing retail installment sales contracts from dealers, and to a lesser degree, by originating loans secured by automobiles directly with consumers. The company has also expanded its portfolio through strategic acquisitions, acquiring a total of approximately $822.3 million of automobile contracts in mergers and acquisitions in 2002, 2003, 2004, and 2011.
CPSS has demonstrated a remarkable ability to adapt to changing market conditions and overcome challenges. In 2022, the company faced difficult credit performance, which continued into the beginning of 2023. To address this issue, CPSS implemented changes to its credit approach, resulting in improved credit performance throughout 2024. The company has also completed 103 term securitizations of automobile contracts since 1994, all structured as secured financings, with 18 of those securitizations active as of September 30, 2024.
As of September 30, 2024, CPSS's managed portfolio outstanding was $3.33 billion, consisting of 194,430 automobile contracts. This represented a 13.2% increase in the dollar amount of the managed portfolio and a 9.4% increase in the number of contracts compared to the prior year period.
Financial Performance
Over the years, CPSS has demonstrated a remarkable ability to adapt to changing market conditions. In 2024, the company reported revenues of $393.5 million, a 12% increase from the previous year's $352 million. This growth was primarily driven by a 24% increase in loan originations, which reached $1.68 billion for the full year. The company's fair value portfolio, which accounts for loans originated since 2018, grew to $3.5 billion, yielding a robust 11.3% return.
CPSS's financial performance has been underpinned by its prudent risk management strategies. The company's credit quality metrics have shown consistent improvement, with net charge-offs as a percentage of the average servicing portfolio increasing slightly from 6.9% in 2023 to 7.3% in 2024. This achievement is particularly noteworthy given the challenges faced by the industry in the aftermath of the COVID-19 pandemic.
For the most recent quarter (Q4 2024), CPSS reported revenue of $105.3 million, a 14.5% increase from $92 million in Q4 2023. Net income for Q4 2024 was $5.1 million, compared to $7.2 million in Q4 2023. The company's annual net income for 2024 was $19.2 million, down from $45.3 million in 2023, with diluted earnings per share decreasing from $1.80 in 2023 to $0.79 in 2024.
The company's success can be attributed to its focus on responsible lending practices and the implementation of advanced technology solutions. CPSS has leveraged artificial intelligence and machine learning to enhance its fraud detection capabilities, saving the company an estimated $4.6 million in 2024 alone. Additionally, the company's investment in AI-powered collection strategies has enabled it to optimize the deployment of human collectors, leading to improved collection rates and credit performance.
In terms of credit performance, total delinquencies, including contracts in repossession, were 15.3% of the gross servicing portfolio as of September 30, 2024, up from 14.4% a year earlier. Net charge-offs as a percentage of the average servicing portfolio were 7.3% on an annualized basis for the three months ended September 30, 2024, up from 6.9% for the full year 2023.
Growth Strategies
CPSS's growth efforts have been accompanied by a strategic expansion of its sales force. In 2023, the company hired 25 new sales representatives, and in 2024, it added 42 more, laying the groundwork for future growth. These new hires have helped the company diversify its dealer network, with the proportion of originations from large dealer groups (defined as those with 10 or more car lots) increasing from 20% in 2023 to 28% in 2024.
Despite the challenges posed by macroeconomic factors, such as rising interest rates and inflationary pressures, CPSS has demonstrated its resilience. The company's focus on responsible lending, technological innovation, and strategic sales force expansion has enabled it to navigate the subprime auto lending landscape successfully.
To finance its automobile contract purchases, CPSS utilizes a combination of warehouse credit facilities and term securitization transactions. During the first nine months of 2024, the company completed four term securitizations totaling $1.45 billion in new securitization trust debt. As of September 30, 2024, CPSS had $2.88 billion in securitization trust debt outstanding.
Liquidity and Future Outlook
Looking ahead, CPSS is well-positioned to continue its growth trajectory. The company's strong liquidity position, with $137.4 million in cash and restricted cash at the end of 2024, provides ample resources to fund future contract purchases and support its expansion plans. This represents an increase from $125.5 million at the end of 2023. Additionally, the company's conservative approach to credit risk and its ability to adapt to changing market conditions suggest that CPSS is poised to capitalize on the opportunities in the subprime auto lending sector.
CPSS's financial stability is further evidenced by its debt/equity ratio of 10.89 as of September 30, 2024. The company has two revolving credit facilities totaling $400 million, with $294.2 million of aggregate available borrowings as of September 30, 2024, assuming the availability of sufficient eligible collateral. The current ratio and quick ratio both stand at 0.076 as of September 30, 2024.
In addition to the securitization trust debt, CPSS also had $105.8 million outstanding on its warehouse lines of credit and $24.3 million in subordinated renewable notes as of the end of the third quarter of 2024. The company's total debt outstanding was approximately $3.1 billion at September 30, 2024.
While CPSS did not provide specific forward-looking guidance for 2025, management indicated that they are set up for a "very good year in 2025" after a year of "cautious growth" in 2024. The credit performance of their 2024 vintages has been significantly better than the 2023 vintages, allowing them to be more aggressive in their growth plans for 2025. CPSS plans to continue tightening their credit model and focus on better performing geographic pockets and dealers in 2025, while also implementing new AI-driven technologies to improve fraud detection and collections.
The subprime auto lending industry has seen a compound annual growth rate (CAGR) of 7.2% from 2018 to 2023, providing a favorable backdrop for CPSS's growth strategies. As the company continues to execute on these strategies, investors can look forward to CPSS's continued success in the years to come.
In conclusion, Consumer Portfolio Services has established itself as a resilient and innovative player in the subprime auto lending market. With its focus on responsible growth, technological advancements, and strategic sales force expansion, CPSS has demonstrated its ability to navigate the complexities of the industry and deliver consistent financial performance. As the company continues to execute on its growth strategies and leverage its strong liquidity position, it is well-positioned to capitalize on the opportunities in the subprime auto lending sector and drive long-term value for its shareholders.