Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2023 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 valuations are receivable because dependent on estimated 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 today is Mr. Charles Bradley. Chief Executive Officer, Mr. Danny Barwani, 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 the second quarter earnings call. It was another good quarter for us. We continue to move forward with what we consider should be a very strong year. Through the highlights, I guess, You have to sort of look back at what was happening in the last couple of years during the pandemic. The pandemic was sort of a really rare event in the 30 years plus we've been doing this. With all the influx of government money, it really changed the dynamics of everything. Everything performed great. People got somewhat aggressive, but it was a whole windfall across the industry. So 2022 became the first year where we got back to what we'll call pre-pandemic, sort of the normal situation. kind of business we should be doing. And as such, because some of the people in the industry got aggressive, and probably because of a few of the things that came out as a result of the pandemic government funding, 22 turned out to be a tougher year for just about everyone. So having said that, our 22 paper is doing quite well. It's not as great as we might have hoped, but it also is probably much stronger than most in the industry. So we're really pleased with how that's performing. It continues to be an ongoing struggle, but we're really making some progress in having that paper perform very well. 23 should be even better. And then going forward, we sort of have the new normal based on what happened after the pandemic. So again, it's kind of nice that we've got our hands around the performance. We're looking forward to improving. And again, 23, the rest of the year should be very good. Probably more important is the securitization market. It's kind of the lifeblood of how we run our business. And again, during the pandemic, during 20 and 21, we had some of the lowest cost of funds possible and certainly in a long, long time. And then, of course, they started going up very quickly. And we were able to go along with that in raising our prices. And so today, where we sit is even though the cost of funds is much more, we're also charging more. And so we've actually been able to absorb the entire cost of funds with really not a lot of problem in terms of our market share and our market performance. And now, with the last securitization, we've now had three securitizations in a row that actually have leveled out at what we'll call a flat or normal, what again we'll call a new normal cost of funds. And again, we're not as concerned with what the cost of funds is. We just don't need it to keep going up. And now with three securizations in a row at basically the same cost, we can say we probably reached that flattening we've been looking for. And somewhat more importantly, even though the rates have continued to go up, you know, not in the rapid rate they were, but even again last week, you know, the spreads have tightened enough to where we've been able to keep that cost of funds flat. That is very, very important. The other part of that that's even just as important is our last securitization was massively oversubscribed, up and down all tranches. So this securitization market is clearly working really well and fits perfectly with what we're doing. Again, that's sort of the backbone of how things work for us. So having that, again, prove itself out in the last couple quarters has been very, very important. Overall economy, hard to judge. There's a recession around the corner. Are they going to have a soft landing for the first time ever? That's always up for debate. Generally, we think the economy looks okay, but what we really, really care about is unemployment, which, again, we say all the time. Unemployment looks very good these days, continues to remain strong. It's probably one of the problems the government most would like to see go the other way. We don't. We think low unemployment is perfect. Even if it goes up a little bit, not a problem, as long as it doesn't go up a lot. So, again, as much as 23 has started off as not the most exciting year for us, It's still a very good year, and it is most important to get us back to a normalized run rate where we can, again, start looking to the future to grow, and that's exactly what we're going to do. I'll have a few more comments, but for now, I'm going to turn it over to Danny to go over the financials.

Thank you, Brad. Let's go over. Let's start with revenues. Revenues for the quarter, $84.9 million. That's up 4% from the $82 million in the prior year, June quarter. For the year-to-date period, 168 million is up 7% from the 156.4 for 2022. The fair value portfolio is not really the key driver of that revenue yield. It's yielding 11.4% overall. The legacy portfolio, which is accounted for under CECL, now only has about $50 million left. So it's really not really contributing anything meaningful to interest income. The other thing I'll note with the revenue change is the prior year had a fair value markup of 4.7 million in the second quarter of 22 and 7.1 million total fair value markups for the six-month period. If you remove those markups, the revenue increase is actually 10% for the quarter and 13% for the year-to-date period. Moving on to expenses, 66.3 million in the June quarter is up slightly from the 64.7 million in March, and up 39% from the 47.8 million in June of 2022. The year-to-date expenses are 131 million for the current year, up 41% from 92.8 million in the year-to-date period of 2022. The main reason for that increase, as Brad alluded to, is the increase in interest expense, mainly from the securitization debt. Part of the increase is due to the larger debt balance by itself, but the main contributor is really the rise in the cost of funds. The expenses for the year also includes an adjustment to loss provision, and this relates to the reserves we had posted on our legacy portfolio. That is the portfolio that's not accounted for under fair value. Rather, it's accounted for under CECL. All periods reflect an adjustment to this loss reserve to the legacy portfolio. It was 9.7 million in the June quarter versus 8 million in the June quarter of last year. For the year-to-date period, that loss provision adjustment is 18.7 million, which compares to 17.4 million for the year-to-date period last year. And again, that works as a reduction to expense driven by a reduction to the reserves in the legacy portfolio. Pre-tax earnings for the quarter, 18.6 million is down 46% from 34.2 million in the second quarter of last year. For the year-to-date period, 37 million pre-tax earnings compared to 63.5 million in the year-to-date period for 2022. Again, mainly driven by the increase in interest rates causing the rise in expenses. The same trends follow for net income, $14 million for the second quarter this year, $25.3 million last year. For the six-month period this year, $27.8 million of net income versus $46.4 million or a 40% reduction compared to the two quarters of 2022. Diluted earnings per share is $0.55 for the second quarter compared to $0.91 in the second quarter last year, $1.09 for the year-to-date period compared to $1.66 in the year-to-date period for 2022. I won't go over necessarily all the components of the balance sheet, but I'll point out a couple of things of note. The fair value receivables line, which is $2.6 billion, is up 20% for the current June quarter compared to last year. Comparing that to the 15% increase in our securitization debt is showing that our leverage is down because of the structures of our securitizations. We're simply not leveraging as much as we used to in the past. and our growth in fair value receivables are outpacing the growth of the debt, which makes our balance sheet stronger. Another item of note in the balance sheet is the shareholders' equity. June of this year, we posted our highest ever shareholders' equity balance of $255 million. That's up 29% from the $198 million in the same point a year ago. And that's driven by the 47 consecutive quarters of pre-tax profit that we've been able to generate. We are one year shy of having 12 full years of positive pre-tax profits. That's contributing to the strength of our balance sheet and the rise in our shareholders' equity. Looking at some other metrics, the net interest margin is $49.2 million in the current quarter. That's down 2% from $50.3 million in the March quarter, but it's down 22% from the $63.3 million last year. The compression in the net interest margin is partly driven by the rise in interest rates compared to the slower rise in the yield on our fair value portfolio. So the yield in the fair value portfolio will take a little bit longer to manifest and catch up to the rise in the interest rates. For the moment, that's causing compression in the net interest margins. Our core operating expenses are $40.3 million in the quarter. That's down 1% from $40.9 in the March quarter, and it's up 9% from $37 million in the second quarter of last year. Measured against the managed portfolio, that core operating expense is now compared to 5.7 in the prior quarter and down from 6% last year. So we're beginning to see the growth in the portfolio and our diligence in keeping our expenses flat. We're starting to see some improvement in the operating leverage metric. And finally, return on managed assets. 2.6% is the same as 2.6% in the March quarter, down from the 5.5% in the second quarter of last year. For the year-to-date period, the return on managed assets was also 2.6%, also down from 5.4% last year, primarily due to the NIM compression that we discussed earlier. I will turn the call over to Mike.

Thanks, Danny. In originations, the second quarter remained solid as we purchased 318 million of new contracts. That compares to 415 million in Q1 and a whopping 548 million during the second quarter of 2022. Now, that reduction in volume was purposeful as we scaled back due to certain macroeconomic headwinds. We continue to operate with a tighter credit box. And we kept a keen eye on the affordability of our product for our consumers. In terms of affordability, we continue to hold firm on our payment to income and debt to income ratios. The PTI trended down for the quarter, which is good. And the DTI remained flat, which, considering inflation and the raising rates, is good for our customers. One key metric we're tracking right now is the average monthly payment, which for Q2 was $530. That remained relatively flat over Q1. And that payment actually is well below the industry average in our space and is a good indicator that our credit box is maintaining affordability for our customers. As I reported last quarter, the demand for our product remains strong. We're getting roughly 8,000 applications a day, which is slightly less than Q1. But that's expected due to seasonality, tax season in Q1, et cetera. Our approval rate ticked up a bit in Q2, which is good, moving from 59% to 62%. The average amount financed for the quarter was $20,800, which is down about $1,000 quarter over quarter and down $2,500 in Q2 of 2022. And, of course, that is directly related to the cost of used cars. Most important, we continue to hold a strong APR in Q2, where we registered an average APR of 21.46%, which is about a point higher quarter over quarter and significantly higher than the average APR in Q2 of 2022, which was 16.33%. So the important thing to know about our march towards a higher APR is that we did that despite tightening our credit box in early February of 2022 and continuing to tighten into 2023. In terms of competition, we saw more banks, sort of smaller banks, and regional competitors completely pull out of the space. And we've seen in the last quarter some of our friendly competitors cutting back on their originations. That sort of correlates into our continued strong demand. There remains a tremendous upside for us in the market to grow as we currently have 14,800 dealers that could send us an application. And of that, 8,385 dealers that do send us an application. And of that, roughly 4,400 dealers funded a contract with us in a circular basis in the second quarter of this year. To that end, we continue to look to deploy sales reps to territories with sufficient population and historically good portfolio performance. Moving to portfolio performance, there certainly is some macroeconomic issues that are weighing in on some of our more recent vintages, as Brad acknowledged. Inflation and raising interest rates are headwinds that remain in the market, that were there in the beginning of the year, in the last half of last year. But as also Brad mentioned, that's balanced out with a fantastic unemployment rate, which is definitely more of an important metric for us. So in the quarter, our DQ, including repossession inventory, ended up at 11.72% of the total portfolio as compared to 9.71% in the same quarter in 2022. Our annualized net charge-offs for the quarter were 6.29% of the portfolio as compared to 3.51% in the same quarter in 2022. Extensions and repossessions were up slightly in the quarter. Good news on the recovery front, which of course helps offset losses, is recoveries climbed to 44.19% in the quarter, which continued the trend of rising recovery rates. That, of course, is well below the COVID-related historical recovery rates, but they dipped from this in the 60 percentile down into the 30 percentile, and now they're, again, rising from about 41 percent where they were at the beginning of the year to now in the mid-40s. So that's a good trend. So in the quarter, we continue to employ several unique strategic changes to improve our performance. One good trend for us is we were successful in hiring a good amount of collectors in what otherwise is a tough labor market. That will allow us to lower our accounts per collector, and when we do that, that tends to improve performance. We also continue to leverage our nearshore collection program with great success. A couple miscellaneous items. is our nearly five-year journey to sunset our legacy technology to employ a best practices technology stack is nearly complete. The bones of our system are set, but we continue to add more artificial intelligence-driven technologies, mostly from third-party vendors on the margins, to make our business more efficient for our dealers and our customers. For example, In the quarter, we launched an AI-driven technology and originations that is designed to cut down on processing time, which we think will allow us to fund faster for the dealers, which is really what they care about. Some ancillary benefits of that is it will continue to help lower our operation expense and originations. In servicing, we are nearly complete with a pilot of an artificial intelligence-driven bot. that streamlines the collector's workflows, that is allowing us to employ more efficient collection strategies like more calls per hour, more contacts per hour to be employed, which we think will improve performance. And like the Originations AI product, should help our operating expense percentage in servicing. So with that, I'll kick it back to Brad.

Thank you, Mike. So I think you can tell overall, as much as we like exciting years, 23 has been slightly a kind of rebuilding year. So we set ourselves up for the future. Again, we had all the benefits of the pandemic in 20 and 21. 22 was sort of the let's figure out what the normal is going to be. And then 23 is make sure that you've got your hands around 22 and you move forward in 23. So at this point, we're halfway through the year, obviously a little bit more than halfway through the year. And we think we're exactly where we want to be in that sense. And so now we're back to the mode of let's grow, let's get bigger, let's do all things we can. Again, important things in that is we know that the financial markets are healthy. We know that our cost of funds should be relatively flat and potentially down, depending on which side of the recession soft landing you take. So again, knowing those things in terms of our performance, in terms of our cost of funds, in terms of the economy, Those are the things we've been sort of waiting on, and at this point we probably feel like we have our arms around that and we can move forward. So for the rest of this year and into next, let's get going again and see how much we can grow and build out our portfolio. With that, I think that's all we have for today, and we'll look forward to speaking to you in the next quarter. Thank you all for attending.

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.