Consumer Portfolio Services, Inc.

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Good day, everyone, and welcome to the Consumer Portfolio Services 2022 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 valuation of receivables because dependent on estimates of future events are also 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 15th 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, 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. As you can tell from the press release, the numbers, we are certainly very happy with the results. They're literally the best results for a quarter we've had in the company. Broke lots of records. We had the most originations ever in a month, over 200 million in June. We also had the most originations in a quarter with 548 in the second quarter. Portfolio went over 2.5 billion. So, you know, during all these years, we kept saying, well, we needed to grow. We needed to do this. It's nice to say we're doing exactly what we've been planning on doing for several years in the sense of what we wanted to grow to, the way we wanted to run our portfolio, the kind of loans we wanted to buy, expansion of our deal base, all these different things. And so all those things are going exactly the way we wanted them to and probably even exceeding our expectations. The results in terms of the earnings are obviously very strong. Did a couple other sort of good things. We renewed both of our warehouse lines. and upsize them to $200 million apiece from $100 million each. So now we're in a position where we can continue to buy as much paper as we want, always being mindful that we want to buy the paper we want, not just buy a lot of paper. There's lots of other little highlights we can talk about, but I'll go through all of those after Jeff runs through the financials.

Thank you, Brad. Welcome, everybody. We'll begin with the revenues for the quarter, which were $82 million, with a 10% increase over $74.4 million in our first quarter this year, and a 23% increase over $66.8 million in the second quarter of 2021. The six-month revenues for this year, $156.4 million, a 20% increase over the first six months of 2021. And so, you know, we have the typical drivers of revenue. The legacy portfolio continues to shrink. It's currently at $152 million, represents only 6% of our total portfolio. It's yielding in the high teens, so it continues to perform strongly even as it winds down. The fair value portfolio is $2.4 billion, 94% of the total, yielding about 11.4%. And of course, that yield being on a fair value basis is net of the related credit losses. The revenues include for this quarter a markup of the fair value portfolio of $4.7 million, which represents essentially the reversal of some of the COVID markdowns that we took back in 20, and I think primarily during 2020, where we took these markdowns to the fair value portfolio. But those COVID losses simply haven't materialized. Also included in the revenue, we haven't talked about this much in the past, but about $1.2 million for the quarter represents revenue on our third-party portfolio, which has grown to about $100 million. And this is a partner for whom we originate some receivables that really are generated from our turndowns. And that portfolio is not on our balance sheet. We have no credit risk, but we're earning a very nice, as I said, this quarter $1.2 million. servicing and origination fees on that portfolio. That program has really been very successful. Moving to expenses, $47.8 million for the quarter. That's a 6% increase, slight increase over our first quarter of this year of $45 million, but a 10% decrease compared to $53 million in the second quarter of 2021. Six-month expenses, $92.8 million is a decrease of 14% compared to $108.1 million of expenses for the first six months of 2021. The expenses include a reversal of provision for credit losses on the CECL or the legacy portfolio. So this quarter, we reversed the allowance or reduced the allowance on the legacy portfolio by about $8 million. Again, just that portfolio continues to season out and it simply hasn't had as much credit losses as we previously predicted. The loss provision for the quarter, really just mentioned that, negative $8.0 million. That follows a $9.4 million reduction in the allowance or reversal of credit losses that we posted in the first quarter this year. So for the first six months, we've reduced the allowance on the old portfolio by $17.4 million, which has gone right into the P&L. Pre-tax earnings for the quarter, $34.2 million. 17% increase over the first quarter of this year of $29.3 million, and 146% increase over the $13.9 million we posted in the second quarter last year. For the first six months this year, pre-tax earnings of $63.5 million, which is a 191% increase over the $21.8 million we posted in the first six months of last year. Net income for the quarter, $25.3 million, 20% increase over our first quarter this year of 21.1 million and 161% increase over the 9.7 million in net income that we had in the second quarter of last year. For the first six months, net income $46.4 million, a 211% increase over the 14.9 million we posted in the first six months of 2021. Diluted earnings per share, 91 cents this quarter, compared to 75 cents in our first quarter of this year, that's a 21% sequential quarter increase, and a 133% increase compared to the 39 cents we posted for the second quarter of 2021. Year-to-date diluted earnings per share, $1.66 is a 181% increase over the 59 cents for the first six months of 2021. Moving on to the balance sheet, We continue to have really strong credit performance in the portfolio that has contributed over the last couple of years to a strong liquidity position. The trusts are all performing. Credit enhancements are fully funded, leading to a good liquidity position for us. As I said, the legacy portfolio is winding down. And I mentioned the legacy allowance. Even though we've reversed a significant portion of that this year, reduced it this year to reflect the better credit performance, the CECL allowance or the legacy allowance is still 24% of that dwindling legacy portfolio. And as I mentioned, we have about $100 million in portfolio that we're servicing that's not reflected on the balance sheet. Not much change to the debt picture on the balance sheet. Brad mentioned that we've doubled the capacity of the two warehouse lines from 100 million each to 200 million each. So we have plenty of warehouse capacity to take advantage of the marketplace and the growth that we've experienced. Moving on to some other performance metrics. The net interest margin for the quarter was 63.3 million. That's a 9% increase over the first quarter this year of 58 million and a 32% increase over 47.8 million in NIM in the second quarter of 2021. For six months, the net interest margin is $121.2 million, a 35% increase over the first six months of 2021. And so that's largely being driven by a lower blended cost of funds on our ABS portfolio. It was only 3.1% this quarter compared to 3.7% in the second quarter of 2021. although we're starting to see the pendulum on cost of funds swing back a little bit, and we'll talk about that in a minute. Core operating expenses, $37 million for the quarter. That's down 3% from our first quarter of this year of 38 million, and it's up just slightly from 34 million in core operating expenses in the second quarter of last year. Year-to-date core operating expenses, $75 million. is up 10% from 68 million in the first six months of last year. So like year over year, we've seen sort of a nominal increase in these core expenses, but it's pretty nominal, especially in light of the fact that we've grown the portfolio over 20% and we've doubled the quarterly originations volume compared to a year ago. So we're really starting to see some operating leverage, which we've been predicting for some time. Those core operating expenses as a percent of the managed portfolio were 6% in the second quarter of this year, and that's down compared to 6.7% in the first quarter of this year, and it's down 6% compared to 6.4% in the second quarter of 2021. So we're seeing exactly what I was just alluding to, better operating leverage as the portfolio grows. Return on managed assets, pre-tax return on managed assets, 5.5% for the quarter. That's a 6% increase compared to our first quarter of this year and 112% increase over the 2.6% that we posted in the second quarter of last year. So primarily, a couple things going on here. The revenue's growing as we described from the growth of portfolio. We've also seen As we discussed, the reversal of provisions for credit losses and legacy portfolios certainly have contributed to this as well over the last six months. Credit performance metrics. The delinquency ended June 30th this year at 9.7%. That's up from 8.5% in the March quarter and also up a little bit from 8.3% in the second quarter of last year as of June 30th last year. So we're seeing what we would describe or observe as seasonal softening in credit performance metrics. Not unexpected this time of year. We're still seeing very strong performance on the credit losses. The annualized loss rate for the quarter was 3.57%. That's up just slightly from 3.3% in the first quarter this year and 2.8% a year ago. Annualized net losses for the first six months is 2.3%, 2.4%, and that's actually down compared to 4.4% in the first six months of last year. Contributing significantly to this strong credit performance is continued good returns at the auctions. Those levels have come down a little bit. We recovered 56.7% of our loan balance in the second quarter this year, and that's off a little bit from 61.4% in the first quarter of this year but it's very close to the 57.8 percent that we realized in the second quarter of last year so you know that pendulum is likely to swing back a little bit from you know record highs just a few months ago but we expect it to normalize rather slowly looking briefly at the ABS market during the quarter in April we completed our 2022 B securitization where we observe somewhat higher spreads and benchmarks compared to the previous recent securitizations. So we had a blended yield of about 4.8% on those bonds. Our 2022 C transaction is in process right now, so we're actually in the market with our bankers selling those bonds. We're seeing strong demand across the cap structure, but with the slightly wider spreads and benchmarks, you know, we expected

And with that, I'll turn it back over to Brad.

All right. Thank you, Jeff. Going through a few of these things in a little more detail. In terms of marketing, our focus has always been to grow the market, the dealer base, add the reps we need. We've reached a point where we have probably the right amount of reps in the field. We continue to, you know, occasionally lose one, add one. But for the most part, that's remained flat. What we have done, though, is we've increased our funding dealer base by 50% year over year from 2,000 dealers to 3,000 dealers. And that is something we're going to focus on more or continue to focus on. What we really want is we want more penetration out of each of those dealers rather than just keep throwing a big wide net. Obviously, it's far more effective. It's more of a relationship that we want. So it's working very well. But really, that's going to continue to be the focus and one of the reasons I think we've been able to grow the business significantly. Looking at originations, our scorecards are performing very, very well. We're buying really good quality paper. Even with sort of the money from the pandemic and all that, you know, our paper is still performing very, very well. And we would say that's a lot because of the paper we buy. We still continue to be sticklers for Stips and stuff. But, you know, that I think is what keeps us from running into problems that, you know, historically other folks have had. So again, between us, continuing to be credit minded and looking for proof of things as opposed to others and keeping our strong credit models that's doing very well. Collections, same thing. We spent a lot of time in the last couple of years developing scoring models for all areas in our collection department. We think that's really paying dividends, both in terms of not having to hire, as Jeff mentioned earlier, we're getting much better leverage in terms of our people and the systems It's almost startling to see how much technology over the years, since we've been here a long time, that we can do so much more business now with really the same amount of people and sort of in a relative way far fewer people. So again, as we continue to grow, the critical mass is really beginning to pay off. As we continue to grow more, it'll be even better. But you can really, really leverage your technology at this point and with our portfolio size. As Jeff mentioned also, and also, you know, the DQ went up a little bit. It's probably mostly seasonal, and it's well within, if not below, the range we really would expect our portfolio to perform at. So we're very comfortable in that area as well. In terms of the auctions, they have moderated slightly. We still think, in the end of the day, it's going to be a long time before the manufacturers can produce enough cars to catch up to that market. I mean, you know, eventually it will happen, but it's certainly not going to happen, we don't think, this year and probably not next. So that gives us sort of a very strong cushion in terms of credit performance and how we sell cars at the auction. So again, another very strong thing. In terms of looking at the industry, it's kind of interesting these days. There really aren't a lot of new entrants. There really haven't been any new entrants in well over a year, if not several. Certainly, you can almost go back to the pandemic and say you haven't had any real new entrance of any size or magnitude for at least three years. I think that's kind of very good for the industry. It means the people in the industry are strong. With any kind of luck, it'll all hang together and it'll all work out. We don't really want a lot of disruption in the industry. But I think the barriers to entry these days are exceedingly strong. And so the real example of that is the FinTechs. There's lots of FinTechs trying to start up, and they all think in about 10 minutes they're going to be able to build these massive portfolios. But in the end, as much as we back in the day thought maybe you could do things without having to have a dealership presence, but you really can't. And so there's sort of two problems with what we'll call a FinTech slight invasion of our industry. You know, one is it's still, in the end of the day, it's a boots on the ground kind of operation. You have to be in those dealerships. getting a relationship with these dealers. And that's something that fintechs obviously are avoiding. And when they figure out they need it, it's going to take a lot of time. Secondarily, a lot of those models that they're using were built during the pandemic, which probably was, you know, the most opportune time for subprime borrowers ever since they were all receiving money from the government. So it'll be interesting to see. I think at the end of the day, people should realize we're much more of a fintech than lots of fintechs, and we have the operations and the people to run the machines, which you really need both. So we don't really call ourselves a fintech, but if you want to compare us to one, that would be easy to do. Lastly, sort of looking in terms of the securitization market, as Jeff pointed out, It is really strong considering the sort of the economy we seem to be in. It's very important to us and also very good that it's this strong. I mean, as Jeff mentioned, we have a deal in the market. It's doing really, really well. So, you know, that continues even in sort of a downturn in the industry, not in the industry, but in the economy like we're experiencing now, that market is still exceedingly strong. Certainly the price has swung a little bit up, but it's only really getting sort of in the range of what we would expect it over the years as a normal cost of funds in our industry. And so that's really good as well. So we're not, you know, we're very happy with the way that's working. And lastly is the economy. Certainly the economy's become sort of sluggish. We're kind of waiting for the supply chain, you know, this, that, and the other thing. You know, we would sort of be looking for what we hope to be a soft landing. Unemployment is what we care about most. And certainly in a very odd sense where the unemployment's remaining low and the amount of jobs out there is still a lot more than unemployment. So, you know, we think that protects us in that area. I think the problem is a lot of people are kind of sitting at home waiting to get more checks, but eventually they'll go back to work. But more importantly, when our people, if they happen to lose their jobs, there are jobs out there they can have. So again, we look at that as one of the really important things, and particularly in this economic environment, that, you know, our folks can go out and get jobs when they need one. You know, inflation, you know, we don't like inflation any more than the next person. However, people are going to stop spending or cut back on things. One thing they're not going to cut back on is their car. They have to have their car to get around. They have to have their car to get to work. So as much as inflation is not great for customers in general, we think in the end we're in one of the more protected spots. In the last big and the great recession, everybody said they'd keep their houses and not their cars. We told everybody it was the opposite, and we were right. We would stand on the same thinking today in that the last thing they're going to give up is their car. So that's about it for the quarter. We are very, very pleased with the results. We're very, very pleased with the way the company is running right now, the way we're growing literally across all fronts. So thank you all for joining us, and we'll look forward to talking to you again next quarter.

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

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