Consumer Portfolio Services, Inc.

Good day everyone and welcome to the Consumer Portfolio Services 2021 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 evaluation of receivables because dependent on estimates of future events also are forward-looking statements. All such forward-looking statements are subject to risk that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 10th for further clarification. The company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future further events or otherwise with us here now is Mr. Charles Bradley Chief Executive Officer and Mr. Jeff Fritz Chief Financial 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. The easy way to do this is we had a really good quarter. It's probably one of the best quarters we've had in the history of the company, not just because of the earnings but just the way the company is now functioning. We literally are firing on all cylinders across the board from marketing originations to collections, just about everything we can think of. It's all going about as well as we possibly can get it to go. So that certainly makes it look good for this quarter and hopefully quarters going forward Sort of highlights of it, you know, one of our things coming out of the pandemic was to focus on growth, and you can see by the numbers that we've done that. We originated, let's see, 286 million new contracts. That's 39% growth quarter to quarter and 112% year over year. So pretty good numbers there. You know, part of the reason that I, you know, more of a focus on data analytics. We have a brand-new scorecard that's working wonderfully well. It's probably the best one we've had. It's our Gen 7 scorecard. We actually have a Gen 8 in the works. So, again, we think that trend will continue, but it's been very helpful in terms of the marketing push. And, again, we have a continued focus on collections. We're using multiple new scorecards that have been very, very effective. All the branches are performing wonderfully. So, you know, again, you're just going across the board. Everything's going well. Also, we focus on efficiency coming out or through the pandemic. We cut the workforce, but we've still been able to get all these good results. So we cut the workforce by 25%, and literally we've lost nothing there. So we've been able to become more efficient through technology. We're doing a few things offshore and nearshore. So all these things are kind of coming together to really come up with performance. We also, as we pointed out in the press release, we raised $50 million in new capital, basically under the premise that the best time to raise capital is when you don't need it, and so we did. We got a nice rate on that, and that will be helpful in the future as we continue to grow. One last note, and probably one of the most important, You know, whether it's because of the stimulus or just improved collection processes, you know, over the last 12 months, our cash flow over forecast has been $65 million. So we've achieved $65 million over and above the forecasted cash flows over the last year. So we're in a very good group. We're certainly in the strongest cash position we've ever been in as a company. So all those things, like I said, just straight literally across the board. You know, stock price is finally moving up a little bit. I'm going to focus on that some more. And I'll go into a little more detail on all these things after Jeff walks through the financials.

All right. Thanks, Brad. Welcome, everybody. We'll begin with the revenues. For our second quarter, $66.8 million. That's a 6% increase over our first quarter of this year, and it's flat, slightly down compared to $67.3 million for the second quarter of 2020. Year-to-date earnings, $129.9 million is down a little bit, 6%, compared to the first six months of 2020. And what I like about this picture this quarter is we have no marks in the fair value portfolio, which has kind of made the results a little bit noisy during 2020, where we took marks to accommodate for COVID. And also this quarter, the legacy portfolio dwindling down. It is now about $346 million, 16% of the total portfolio. It's still yielding 18 percent, but it's contributing, you know, increasingly every quarter a smaller chunk of the revenue picture, where by the fair value portfolio at $1.8 billion and growing, it's 84 percent of the portfolio. It's yielding 10.9 percent. Of course, that's net of losses, as you know, from going along with fair value with us since 2018. Moving on to the expenses, for the quarter, $52.9 million. That's a 4% decrease over our first quarter of this year and a 15% decrease compared to $62.6 million in expenses for the second quarter of 2020. Year-to-date expenses, $108.1 million is a 17% decrease compared to $130.3 million for the first six months of 2020. Brad alluded to this. We had a significant staff reduction in 2020. Cost-wise, we've had year-over-year reductions in virtually every operating expense category, particularly interest expense and provisions for credit losses. Well, let's move on to provisions for credit losses at zero. And so this is actually the third consecutive quarter, finally, where we've had zero provisions for credit losses on the legacy portfolio. And as you know, we adopted CECL for this portfolio in January 2020. But we did provide for some additional pandemic-related losses in the first three quarters of 2020. But now the allowance for that portfolio, as you can see from elsewhere in our presentations, is above 20%. And so it's got a substantial allowance. And the credit performance actually has improved. So we're in very good shape on that segment of the business. Pre-tax earnings for the quarter, $13.9 million. That's a whopping 200, excuse me, 76% increase over the first quarter and a 200% increase over the 4.6 million pre-tax earnings of the second quarter of 2020. Year-to-date pre-tax earnings, $21.8 million is a 179% increase over the first six months of 2020. So as Brad said, we're really pleased with the results so far this year for all these reasons, and we'll talk a little bit more about a couple of these components as we move along. Net income for the quarter, $9.7 million, 87% increase over the first quarter of this year, and a 223% increase over the second quarter of 2020. Year-to-date net income, $14.9 million, an 8% increase over $13.8 million for the first six months of last year. One thing you may recall in the net income picture, the last year's results included an $8.8 million tax benefit that we recorded in the first quarter of 2020, which was triggered from the CARES Act. Diluted earnings per share, 39 cents for the quarter. That's an 86% increase over the 21 cents we posted in the first quarter of this year. and a 200% increase over the 13 cents we posted in the second quarter of 2020. Year-to-date earnings per share diluted 59 cents, which is just a penny more than the 58 cents we put in the first six months of 2020. But again, last year's six-month results have a 37-cent benefit from that sort of one-time tax benefit. Moving on to the balance sheet, Something that you don't often see on our balance sheet is $43 million of unrestricted cash. Brad alluded to the residual financing that we conducted in the second quarter and closed right at the end of the second quarter, $50 million in new residual financing. This is a significant liquidity event for us. In addition to the cash we've built up over the last year from better than expected credit performance, we're in the strongest liquidity position we've ever been. which allows us to rely less on warehouse financing, and so you'll see that on the balance sheet, too, when we look down at the liabilities. The finance receivables portfolio, I mentioned legacy is shrinking now 16% of the total, and it has that very substantial allowance for losses of about 21% against it. You can look on the warehouse lines. You see that, you know, at 77 million, we're not using the warehouse lines very significantly. We have 200 million of capacity, but we're able to hold almost a whole month of production with our liquidity and use those less and incur less financing costs as a result of that. The residual financing line now contains two components, right? So we have this 2018 residual financing facility that's amortizing rapidly. It's down around $16 or $17 million at the end of the quarter, and then we have this new $50 million residual financing at a lower APR than the one from 2018. Looking at some of the operating metrics, the net interest margin for the quarter was $47.8 million. That's a 13% increase over $42.2 million. in the first quarter of this year and a 17% increase over $40.8 million in the second quarter of last year. For the six months, the net interest margin is $90 million, a 6% increase over $84.6 for the first six months of last year. And this is really all about sort of what's happening in the ABS markets. The actual blended cost of all of our ABS debt for the quarter was 3.7%. compared to 4.5 percent in the second quarter of 2020. And we'll talk maybe a little more about this in a minute, but with every ABS deal we're putting on really over the last, you know, year or so, it's coming in at significantly lower blended costs than, you know, the older deals that are amortizing very rapidly. Core operating expenses for the quarter were $33.9 million. That's down just a little bit, 1 percent, from the first quarter of this year. and almost flat up maybe just a little bit from the second quarter of 2020. Year-to-date core operating expenses, 68.1 million is down 3% compared to the first six months of 2020. So we've touched on this. We're starting to realize significant efficiencies in technology and improving the operating leverage. And I think the best of this is yet to come. I mean, our portfolio is actually shrinking which is, you know, because of the lack of growth prior to this quarter. And so, once the portfolio begins to grow again, I think we're going to continue to see signs of this improved leverage. And this next ratio is where that will really manifest itself. Core operating expenses as a percent of the managed portfolio were 6.4 percent for our second quarter, which is really flat compared to the first quarter this year. and up a little bit compared to 5.6 percent in the second quarter of 2020. And, you know, as I said, the portfolio is shrinking, kind of penalizes this metrics significantly. And so, again, we're in a position to really take advantage of the operating leverage as the portfolio begins to grow again. Return on managed assets for the quarter, 2.6 percent, which is a 73 percent increase over the first quarter of this year. and a 225% increase over the second quarter of 2020. For the six months, 2.1% return on managed assets pre-tax compared to 0.6 for the first six months of 2020. And so, you know, you can really see these gains primarily resulting from the gains in the net interest margin, the lower cost of funds, and also impacted by the improvement in the credit performance of the portfolios, all segments of the portfolio. Let's look at credit performance. The delinquency at the end of the quarter, 8.3%, which is just up a little bit seasonally from the 7.8% we put up at the end of the third quarter, but down significantly compared to 9.6% at the end of June in 2020. Net losses for the quarter, net annualized losses for the quarter, 2.8%, which is down significantly from 6.3 in the first quarter and 7.4 in the second quarter of last year. And for the six months, annualized losses, 4.4%, again, down significantly from 7.2 in the first six months of last year. of 2020. And we can attribute much of this improvement in the losses to what's been happening at the auctions for vehicles that we sell on a wholesale basis at the auctions. And this is pretty widely known by now, but we recovered 57.8% of our balances at the auctions in the second quarter of this year. And I'm I'm sure that that's an all-time high for the company, even significantly higher than the 43.3% that was probably an all-time high for the first quarter of this year. And so all those things, the DQ is the second lowest since the second quarter of 2015, the lowest DQ being the first quarter of this year. We have the lowest quarterly net losses since sometime prior to 2013. And these ratios, these year-over-year improvements, are on a smaller average portfolio compared to last year. And so, again, we couldn't be more pleased with the credit performance. A quick look at the ABS markets. Our second quarter ABS transaction we concluded in April 2021B, and we continue to see strong demand across the cap structure, resulting in a blended yield for that securitization of 1.65%. And this is not the second transaction I'll mention. It's not a second quarter event, but we just closed in July our third quarter securitization, 2021C. And because of lowered benchmarks and continued strong demand, we actually have a blended cost of funds on that transaction of 1.55%. And so, as Brad said, I mean, these are all really positive trends and numbers, and we couldn't be more pleased. I'm going to turn it back over to him now.

Okay, so looking at some of these numbers a little more in detail, certainly we're growing a lot, as you can see. And the question is, how are we growing? The new scorecard certainly helps. We've expanded our sales force. We've probably grown at 30% in the last two quarters, and we're still not done. We're probably going to grow at another 40% or 50% over the next couple of quarters. But that's just the whole theory of boots on the ground. We've found new territories. We've used a lot of our new modeling methods and data collection methods to find better territories to go into. And we have had to give up some interest rate because lots of other folks with these low interest rates are quite competitive. But still, it seems to be with our credit performance is doing just fine. As I mentioned, we have the new Gen 7 scorecard, which is certainly helping the credits. It's improved both our capture and our approval rates. So we've been able to get increased volume. We're still maintaining the credit from the model. Currently, we have 6,000 active dealers. Our target is to get to 10,000 active dealers. So, again, as much as we're doing well, we would hope this is just the beginning of doing a lot better as we continue to expand our sales force, the improved metrics and modeling, continue to keep buying good paper. And so, again, the results should follow. Looking at servicing, as Jeff pointed out, some of the servicing numbers, the DQ is great and the losses are as good as they've ever probably been. Again, that certainly has something to do with the stimulus packages. As much as a company didn't get a whole lot of money from the government, it's easy to say that every one of our customers certainly did, and we did see our fair share of that stimulus money coming back. But that stimulus has sort of been, in the later days, not entirely gone at this point. So we would begin to attribute more and more of that to our strong collection models or strong origination models to continue this performance. In collections, we do have a new collection scorecard. We put an extension scorecard in. We also put in a new communication system, which gives us a more powerful power dialer. It also gives us better text and chat avenues to access our customers. All these things are things you've got to keep moving with to keep up with everyone else and to keep up with the technology and the kind of technologies your customers use. And so we've done a pretty good job of that. As Jeff mentioned, the auction numbers are ridiculous. I don't think it's that big a number to help us, but it certainly doesn't hurt us. It certainly is the best we've ever done in the auctions. Remembering that it used to be in the high 40s was an extreme, so now we're almost 12 points ahead of that. And normal is around 33 to 35. Let's see, a couple other things. As I mentioned, we've been able to become much more efficient with the sales force, cutting that by 25%. We estimate to be a $5 million annual savings. Now we're focused on the real estate. We actually just put in a hybrid work schedule where people work half the time at home and half the time in the office. If that works out the way we think it will, it will allow us to cut our real estate, you know, our commercial real estate footprint substantially. Lots of our real estate comes up this next summer, so the summer of 22. We've already changed one of the branches and saved about a million dollars a year in that occupancy cost. So, again, we think there's even more to find in terms of becoming more efficient, both in terms of space, people, and technology. I mentioned the cash. You know, Probably the stimulus continues as child care credit certainly is going to keep things rolling. Again, I think it's still a combination of both. A lot of the systems are working really well. We have a very seasoned force of employees. So we think we have a lot going our own way, not to mention the government kicking in and helping. In terms of the industry, it is interesting now there are very few new entrants in the industry. Five years or so ago, there was a whole bunch, and most of them didn't make it. But there really hasn't been a lot of new folks coming in. There's a few people coming in from sort of we'll call it the fintech play, but not really just straight originators. And so, you know, that part is good. I think it helps the industry. I mentioned with the lower cost of funds, you know, there is some competition. And this happened, you know, sort of in 2014 or so where the big banks reached in or reached down into the credits a little bit. And so that's happening. You can always tell because it puts pressure on your interest rates. And so what we can charge our APRs for the customers. So we're about 19%. That number might drop a little bit as we continue to just sort of play in the market. But with the low cost of funds and everything else, it's not really a problem for us to do that as well. And, you know, again, when the industry sort of settles down without all the stimulus, which may or may never happen, but then I think the cost of funds goes back up and we still get to do just what we want to do. I think the economy looks good. I'm beginning to worry about inflation, but we probably think there's at least another 18 months, couple years to run before we have a problem. So, again, this is a time where I think the company can really thrive. We really do have just about all cylinders working perfectly, all the branches working perfectly, the modeling is all working great. And, of course, with the low-cost funds, us being able to generate so much extra capital You know, we are in a very strong position to do sort of a lot of stuff, a lot of good stuff over the next coming quarters. With that, I'll open it up for questions.

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touchtone telephone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to provide optimum sound quality. Thank you. Our first question comes from Kyle Joseph with Jefferies. Your line is open.

Hey, good afternoon, guys. Congrats on a good quarter, and thanks for taking my questions. First question, obviously we're on the heels of stimulus at this point, but started to see child tax credit payments going out. Did you see any impact in July from those checks, and how would you expect the change in that payment to really impact the seasonality of your business this year?

Well, that's, of course, something we think about constantly. Normally summer is sort of a tough time for this kind of industry, and we're not having a bad summer at all. July is just as good as June, probably even a little better um you know we're still growing even even more than the second quarter shows um you know i think you know everybody keeps saying well it's all because of the stimulus but you know a lot of the stimulus the real sort of cash money to everyone stopped months ago and so maybe the child credit helps some um but you know i think you know people going back to work certainly helps but uh I would imagine, you know, it would be very hard to imagine us keeping these, you know, really good numbers forever, but I think somewhere in the middle between what we used to do and today, there's no problem at all, and I think we're in a good position to do that. I think because of the way, you know, the technology we're using, the improvements we made, like I said, across all aspects of the company, even without the stimulus, I think we did just fine. You know, the auction prices certainly are going to change. They may not change this year, but but they'll certainly change at some point, and that will hurt us a little, but we've done some work on that. It's not as big a factor as some people think, so we don't have any problem giving that up. And, of course, cost of funds at some point is going to go up too. But, you know, for the 30 years of the company, we've averaged something in the four to five range for cost of funds. Cost of funds is one and a half. Our model is not built to run at a one and a half cost of funds. Our model is built to run at a four and a half cost of funds. So certainly we'll take all the benefit from the difference right now, but, again, we're certainly ready to run it the other way as well. Got it.

And then just a quick follow-up for modeling, making sure I got this right. You know, as credit normalizes, if it ever eventually does, how we think about potential fair value marks, and would it just be that losses have to go above what you guys have contemplated in your model to trigger a fair value mark? No. necessarily just that they'd have to go up. Is that right, Jeff?

Yeah, that's right. Theoretically, the fair value mark could come about from a couple of different reasons. One would be a significant change in credit performance from the initial estimates. We feel pretty good about that. We're still Even the receivables that we put on the books today, we're using, you know, more or less the same estimated CNLs that, you know, we were using for cohorts, you know, back in 2019 before we saw the benefit of the pandemic. And so, you know, we feel, you know, very good about that component of the estimates. The other potential mark comes from more market conditions. Like if we found, for example, and we don't foresee this, that there was a drastic change in the future in what companies like us pay and what we have to pay to get the paper in the front door. Theoretically, that could trigger a mark on the stuff that's on the books. But the market, even though there's some ebbs and flows, it's pretty stable. So probably not looking for much from that direction right now.

Got it. Very helpful. Thanks for answering my questions. You're welcome. Thank you.

Thank you. And as a reminder, to ask a question, press star 1 on your touchtone telephone. We have a question from Jeff Zhang with JMP Securities. Your line is open.

Hey, guys. Thank you for taking my questions. It looks like balling is really strong for the quarter. The strongest is five years. Is that a good quarterly level that we should be looking at for the remainder of the year and into next year?

I would think so. I mean, certainly we're almost halfway through the third quarter and the volumes look about the same. So, you know, I think it's going to be a combination. Normally things slow down in the summer. That's not so much the case this year. Certainly a lot, the lack of cars out there may have a damping effect down the road, but one would guess that Detroit will start ramping up rather quickly so they can have a great year next year. So, you know, I think there might be a little bit of a dip, but You know, from what we've done in the second quarter and what we see in the third quarter, we would probably feel fairly safe saying we think the production will continue along this trend. You know, remembering, too, as I said earlier, our whole focus is on continuing that trend and making it even bigger. So, yes, I think it's a very safe bet to say originations volumes in the second quarter should continue the rest of the year.

Got it. That's great, Kyler. Thanks for that. And then just a quick follow-up. I thought I heard you guys say the yield on the fair value portfolio is 10.9% for the quarter. That seems to be quite a bit to pick up from last quarter. Should we expect that number to take up for the balance of the year?

I think what we've seen is that sort of our economic model targets an 11% yield on the fair value portfolio. And, you know, what we've seen when we first started the fair value cohorts back in 2018, many of those first year and a half or so cohorts were less than 11%, you know, because of the pricing and what we paid for them at the time. And so we've marked, some of the marks we've taken have actually moved up those coupons. And some of the negative marks, like over the last year, were sort of offset by increasing the yields on some of the older cohorts that were, you know, kind of below the current market prices. So I think that like for modeling purposes, you kind of probably want to be in that neighborhood of, you know, 10.9 or 11.

Got it. Thank you for taking my questions. Appreciate it.

You're welcome.

Thank you. There are no further questions at this time. I will turn the floor back over to Speaker Mr. Charles Bradley for any closing remarks.

Thank you. And probably last but not least and certainly most important in some ways is we certainly care about the stock price. It's something I didn't mention too much. It has moved up somewhat substantially in the last couple of quarters. Our goal is still to continue to come up with ways to create more shareholder value and I think our book value today sits at $650 per share. You know, certainly that's a place to start. But, you know, we need to keep doing that. Now that we have a lot of cash, we're certainly buying shares. We buy the max amount of shares we can buy in the market every day. We'll continue to do that. I think we bought around 160,000 shares this past quarter. You know, so we're doing everything we can that way in terms of repurchasing shares. We will continue to focus on shareholder value and increasing it as we go forward riding what we'll call very significant progress in terms of the overall operation of the company. With that, I will look forward to talking to you at the end of next quarter, and thank you all for attending the call.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until August 19, 2021. By dialing 855-859-2056 or 404 537-3406, with conference identification number 1592925. A broadcast of the conference call will also be available live and for 90 days after the call via the company's website at www.consumerportfolio.com. Please disconnect your line at this time and have a wonderful day.