Consumer Portfolio Services Inc (CPSS) 2026 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2026 Third 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 16, 2026, 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 our third quarter earnings call. As you can see, if you read the press release and the information we've released, it was a very good quarter. Probably one of the best quarters all around that the company has had in a very long time. But I guess, on one hand, you could sort of say this is good. But this is from our point of view, at least internally, this is kind of what we've been working for, for 2 years now.

We've had really good growth now. And -- but when you look at the growth, it's very important like it last year. And if you play back all the phone calls from conference calls from last year, last year, in 2025, we were supposed to grow. We built for growth. We set up for growth, and we didn't get very much growth. And I think as I pointed out, it was a very disappointing year in 2025 in terms of actual growth.

But what's important about looking at what we did this year versus last year is we hired the people necessary for that growth. We were set up towards the end of last year, so that we could do $200 million to $250 million originations a month, and it didn't happen. So what if you do, you can't lay everybody off, we just spend all to time training them, but they were ready to go.

In terms of collectors. We've been adding efficiencies and collections, whether it's using more near shore, using more bot-related AI kind of things. So even our collections arm and the other company is also very well set up to grow. So when the growth came this year, it actually worked out perfectly.

We are all set up to handle it both upfront. We set out last year, one of our goals at the end of last year was to hire a lot more marketing reps in the field. We increased that by 50% or 60% during the first part of this year. So all of everything we did last year have actually kicked into motion this year. It's provided the growth has provided the efficiencies. So now we're making more money.

And also, the collections are strong, as strong as they've been somewhat interesting there is the paper from '22 and '23 that wasn't very good paper is now almost run off completely so that we now have a much stronger portfolio in terms of cost efficiencies, collection efficiencies and the credit models are performing really well. So we really have A lot of the -- kind of everything we want is finally fallen together in a really good way.

So in terms of some of the questions we hear occasionally is all this growth a problem. And of course, it's not a problem if you set it up correctly. And being in the business for as long as we have, we've been able to put the right controls in place in terms of what we buy. We're not buying any more aggressively today than we were last year. The difference is we have a much wider net in terms of their dealership base, in terms of the people we use in the marketplace, we've been able to find some holes in -- not holes, but spots in a model where we can actually buy a little bit deeper, but get a better result and a couple of places where we cut the price to get more paper we really like.

So there's lots of different things you can do in the overall picture to establish the growth. And of course, with all the growth, we get more efficiencies, better earnings, all the things we would expect. So it's been really good across the board that way. In terms of sort of the Wall Street end of things, we've also had a very good quarter there. We upsized our Citibank warehouse line from $335 million to $508 million.

And more recently, we upsized our Capital One line from $390 million to $518 million. And thus, we now have over $1 billion of warehousing for the first time in the history of the company, which will provide us a very good spot to start from as we move forward and hopefully grow a little bit more next year. And we want to double the business and growth next year? No. We want to continue to grow in a strategic, organized fashion? Yes. So we now have a warehouse to do that.

We also did another residual financing for $80 million the third quarter, and we used a bunch of that money to pay back $60 million of a prior more expensive residual financing. And it's kind of good we did it at that point because the rates have gone up. So it was pretty clever that we did it then rather than waiting until now. So that's also improved our cost of funds going forward.

So generally speaking, we also did another securitization, one of the -- that would have been the largest ever. We've done recently won just in the fourth quarter that's bigger, but you'll get the theme will be each of those securitizations going forward sold probably it will be a little bigger than the last. But overall, those were all the positive. Interest rates are up. We've been able to adjust our margins accordingly by improving increasing some of the APRs and fees, so that we're not really giving up a straight margin by having the rates go up.

But overall, we're able to keep pace and keep a consistent margin even with rising interest rates. I'll talk a little bit more about the industry and the overall picture after they do the financials and the operations.

So I'll turn it over to Danny.

Thank you, Brad. Revenues for the quarter $131.9 million is up 22% from $108.4 million last year. For the 9-month period, $365.6 million is up 12% from $325 million last year. These increases in revenues are primarily driven by the increase in our loan portfolio, which we account for using the fair value method. Our fair value loan portfolio has now grown to $4.6 billion and is yielding 11.3%, remembering that this yield is net of credit losses.

Expenses for the quarter of $121.8 million is up 20% from $111.4 million last year. For the 9-month period, $338 million of expenses is up 11% from $304 million last year. This increase in expenses is primarily due to the increase in interest expense and an increase in the variable expenses that is required for the growth in our loan portfolio.

Interest expense, for example, was $70 million compared to $59 million last year, which is a 19% increase. And because revenues are rising faster than expenses, our pretax income grew from $7 million in the third quarter of last year, to $10.1 million this year, which is a 44% increase.

For the 9-month period, pretax income is up 29% and from last year, $27.1 million this year versus $20.8 million last year. Net income likewise is up this year. Net income for the third quarter was $7 million, which is up 42% from the $4.9 million last year and $18.7 million for the 9 months, compared to $14.3 million for the same period last year, which is an increase of 31%.

Earnings per share is up 50% from $0.20 last year in the third quarter to 30% in the third quarter of this year. And for the 9 months, it's up 36% from $0.59 last year to $0.80 this year. The percentage increase in EPS is higher than the increase in the after-tax income mostly because fewer shares are now outstanding because of our share buybacks during the quarter.

Moving to the balance sheet. Cash of $180.1 million is up 19% from $151.9 million last year. Our finance receivables at fair value is $4.6 billion in September 2026. Compared to $3.6 billion last year, which is a 28% increase. This increase in our fair value portfolio is due to strong origination volumes in the third quarter and really since the start of the year. The $815 million of new auto loans we originated during the third quarter is our highest ever, and that compares to $391 million in the third quarter of last year.

Debt is now $4.4 million. That's total debt, including warehouse, residual securitization and other long-term debt. That's 28% higher than the $3.5 billion last year, and this increase is in line with the increase in assets on our balance sheet.

Shareholders' equity is up 5% from $324 million -- or $324 million this year from $308 million last year. Looking at other metrics. Net interest margin, $58.6 million for the quarter is up 22% from 48.1% last year. For the 9 months, $161 million compared to $141.7 , which is a 14% increase.

Core operating expenses were $51.3 million is up 21% from $42.3 million last year. For the year-to-date period, $143.7 million is up 9% from $131.6 million last year and core operating expenses as a percentage of managed portfolio is flat at 4.5% for the quarter and down from 4.8% to 4.6% in the year-to-date period, which is a 5% improvement.

And finally, our return on managed assets is 0.9% this year compared to 0.8% in the third quarter of last year and it's the same 0.9% and 0.8% for the 3 months year-to-date period as well.

I will turn the call over to Mike.

Thank you, Danny. Just one other little bit note on our originations. The originations of $815 million versus $391 million is 108.5% increase. And as Danny noted, that is our biggest quarter in our 35-year history.

Contract purchases for the 9 months ended September 30, 2026. And was $2.11 billion compared to $1.28 billion for the 9 months ended September 30, 2025. In just 9 months, we have already surpassed our previous origination record of $2 billion in 2022.

As I noted in our last call, we have accomplished our growth by expanding our sales force driving up our dealer base and applications received. One other key metric that we drove up is our capture rate, which has slowly grown from the high 5s to just over 7%. So the math says more reps equals more dealers, equals more applications. And when you mix in a higher capture rate, you've got your record-setting growth.

A little more specifics on the sales growth. At the end of last year, we had 93 total sales reps. And now we have approximately 150 total sales reps, an increase of 60% and since the beginning of the year. That has translated to adding nearly 6,100 dealership partners in the last 12 months, increasing the dealership base by 90% from approximately 6,800 dealers that we had at the end of the third quarter of last year to nearly 12,900 dealers now.

With that, we've received 1.3 million applications in the quarter, up from $758,000 in the prior quarter. Most of the new dealership partners are franchised outer dealerships as we continue to range from a split of 65 franchise dealers versus 35% non-franchise dealers after the growth. That's key as most of our deals remain in the upper tier programs. And of course, we experienced less fraud with those franchise dealership paper.

Typically, there's a few ways to grow: one, lower the APR in fees; two, loosen the credit box; and three hire more sales reps, new territories, new dealer partners for us. We chose the third method. It's a little bit more expensive, but we did this consciously so we could grow without altering the credit tightening trend that we continued since mid-2023.

Thus, it is important to note that we continue to underwrite a tight credit box despite our growth. Our payment to income and our debt-to-income ratios, which marked the ability of the consumer to pay remained flat through the economic headwinds and over our growth for the last 6 to 9 months. And further and notably, we have grown well experienced an approval rate that has dropped from the low 50s to the low 40s in the last 6 months. This means that we remain somewhat picky on the contracts we purchase. We're getting a proportional amount of good applications. And most important, we're growing without making credit concessions.

On a separate note, we have a prime product that we introduced at the beginning of this year, and it's grown quarter-over-quarter. And along the same lines, we launched a new refinance product that is experiencing pretty nice growth since its inception.

And finally, in terms of fraud, which has been a big-ticket industry issue, we do have three top-of-the-line AI-based fraud prevention products from third-party vendors, including 2 of the top 3 credit bureaus that fight all types of fraud, including ID theft, synthetic fraud and income and employment fraud. And actually, we're set to add a fourth towards the end of the fourth quarter of this year. So we're pretty well equipped to fight fraud here at the company.

As Danny noted, our OpEx is flat to down a little bit prior year over prior year. We're always looking to take steps to further lower our OpEx. For example, with our growth, we're adding 5,500 new accounts per month, of which we are leveraging our nearshore and AI platforms to lower our servicing costs as we scale. It's important to note that when benchmarked against our competitors, our level of nearshore collections is quite low. So there's a lot of room to grow that upwards and still remain a domestic collection company.

Turning to credit performance. Our total DQ greater than 30 days, including repositioned inventory for the third quarter decreased to 12.26% compared to 13.9% in the year prior in the year period. Each quarter this year has decreased as compared to the prior year, evidencing a trend of DQ contraction. And another good sign that total annualized net charge-offs for the third quarter decreased to 7.26% compared to 8.01% in the year prior period.

Like our DQ, each quarter this year has seen a decrease in charge-offs as compared to the prior year. Another good performance trend in contraction. Further, repossessions and extensions were both down as compared to the prior years.

In terms of extensions, we did a data dive and found good results in that 3 out of every 4 extensions did not result in repossessions and 2 out of every 3 extensions did not result in a charge-off. We've been using an extension model for years that we hired a big consulting firm to help us develop and that makes the extension decision more scientific and less subjective for the collector. And we're getting a lot of bang for our buck and our extensions, now and going forward.

Turning to recoveries. The net recovery rates on repossessed collateral sold at wholesale auction increased to 32% in the third quarter compared to 28% in the prior year period. Now that's not at our historical average at the low 40s, but we expect the recovery rates to increase as the '22 and '23 portfolio flushes out of the portfolio. And as Brad noted, currently, the '22 and '23 only make up 14% of our portfolio. So good times ahead on recoveries.

My final note, which I always note is the ever-important unemployment rate ended the third quarter at 4.2% and as compared to 4.4% for the prior year period. That signals a relatively strong labor market. I also looked in the Department of Labor estimates that the unemployment rate will slightly bump up to 4.4%, which is still historically low.

So with those comments, I'll kick it back to Brad.

Thanks, Mike. And looking at the industry, I think the best way to describe the industry is fairly unchanged. You have now five or six large players, not counting banks. And I think because of the size of those players, including us, that the barriers to entry now are becoming larger and larger for any new company to come in, they would need a significant amount of equity capital they would need to be able to get their portfolio, without a $1 billion portfolio, not really in the running at all. And there really aren't a lot of players that even fall into that category to now.

Now there's a few, maybe a handful that are probably $1 billion or less. But when you start getting to $2 billion or more, you really find out who's there at all. So I think that's a very strong part of the industry. It's good because the large players are all doing well. You should keep out other players for the foreseeable future.

As Mike pointed out in flat excuse me, unemployment is 1 of the main things we watch, unemployment appears to be relatively strong. No problems there inflation and interest rates. So the two kind of bogeys we're keeping a real close eye on, having interest rates go up, it hurts your margins. We can adapt to that rather easily and continue to. So we're not overly concerned. And more importantly, as we get bigger and interest rates eventually someday come down, and that will be very good for the company in terms of profitability.

So overall, I think we're not too worried. I think we've made real strides this year in terms of growth. We've been able to handle the growth very efficiently and effectively, I think we'll go ahead and finish out the year. Fourth quarter is a little bit lighter, so we'll see how it goes. But overall, the year is going very, very well.

Third quarter following the second quarter. The second quarter, as you recall, is when we started to grow. We've now had a full 6 or 7 months of very strong growth, we very efficient and very controlled. So we're very happy with where we sit and look forward to the future.

Thank you all for joining us on the call. We look forward to talking to you next year.

Ladies and gentlemen, this concludes 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.