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.