Q2 2021 Consumer Portfolio Services Inc Earnings Call
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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.
Valuation of receivables because dependent on estimates of future.
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 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 that we had a really good quarter as probably one of the best quarters, We've had in 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 you can think of is all going about as well as we possibly could get it to go so that certainly makes it look good for this quarter and hopefully.
Going forward.
Sort of highlights of it.
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 is 39% growth quarter to quarter, and 112% euro year over year year over year, so pretty good numbers there.
Part of the reason that as you know.
More of a focus on data analytics, we have a brand new scorecards is working wonderfully well, it's probably the best one we've had it's a gen. Seven scorecard, we actually have a journey 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 had been very.
Very effective.
All the branches are performing wonderfully. So you know again, you're just going across the board everything is going well also we focus on efficiency coming out of it through the pandemic, we cut the workforce, but we've still been able to get all these good results. So we cut our workforce by 25% and literally we have lost nothing there. So we've been able to become more efficient.
More efficient through technology, we're doing a few things offshore and near shore. 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 of 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'll be helpful. In the future as we continue to grow on one last note in probably one of the most important you know whether it's because of the stimulus to just improve 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 that.
Forecasted cash flows over the last year. So we're in a very good well certainly in our strongest cash 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 moving up a little bit and focus on that some more but I'll go into little more detail on all these things after Jeff walks through the financials.
Alright, Thanks, Brad welcome everybody will begin with the revenues for our second quarter was $66.8 million at a 6% increase over our first quarter of this year and it's flat to slightly down compared to $67.3 million for the second quarter of 2020 year to date earnings of 129.
$9 million is down a little bit 6% compared to the first six months of 2020.
But what I like about this.
Picture this quarter as we have no marks in the fair value portfolio, which is kind of made the results a little bit noisy during 2020, where we took a mark to accommodate for Covid.
And also this quarter you know the legacy portfolio dwindling down at all it is now about $346 million.
16% of the total portfolio, it's still yielding 18%, but it's contributing.
Increasingly.
Every quarter smaller chunk of the revenue picture, whereby the fair value portfolio at $1.8 billion of growing its 84% of the portfolio.
<unk> 10, 9% of course, that's net of losses as you know from going along with fair value at us with us since 2018.
Moving on to the expenses for the quarter of $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, a year to date expenses are $108.1 million is a 17% decrease.
This compared to $133 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 provision for credit losses 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 Cecil for this portfolio in January 2020, but we did.
I'll provide for some additional pandemic related losses in the first three quarters of 2020, but now that the allowance for that portfolio. As you can see from elsewhere in our presentation 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.
Pretax earnings for the quarter of $13.9 million, that's a whopping 200 or excuse me, 76% increase over the first quarter.
And.
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.
2000, Twenty's so as Brad said, we're really pleased with the with the results. So far this year for all these reasons and.
We will talk a little bit more about a couple of these components as we move along our 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 on 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, we posted in the first quarter of this year and a 200% increase over the 13th we posted in the second quarter of 2020 year to date earnings per share diluted 59.
Which is just a penny more than the 58 since we put it in the first six months of 2020, but again last year's six month results about 37 cent benefit from that sort of onetime tax benefit.
Moving on to the balance sheet.
Something that you don't often see in our balance sheet is $43 million of unrestricted cash.
Good 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 of 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 and we're in the strongest liquidity position, we've ever been which allows us to rely less on warehouse financing.
So.
Youll 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 were 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 with our liquidity and use those lessons and incur less financing cost as a result of that the.
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 a residual financing.
At a lower APR then.
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 six 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 three 7% compared to four 5% in the second quarter of 2020.
And we will talk maybe a little more about this in a minute, but with every ABS deal, we're putting on really over the last.
Year, or so it's coming in at significantly lower blended cost than 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% from the first quarter of this year and almost flat up maybe just a little bit from there.
The second quarter of 2020, a year to date core operating expenses of $68.1 million was down 3% compared to the <unk>.
First six months of 2020, so we've touched on this we're starting to realize significant efficiencies and.
In technology.
Improving the operating leverage and I think the.
The best of this is yet to come I mean, our portfolio is actually shrinking which.
<unk>.
Because of the lack of growth prior to this quarter and so what's the portfolio begins to grow again I think we're going to continue to see signs of this improved leverage and this next ratios where that will really manifest itself core operating expenses as a percent of the managed portfolio were six 4% for the second quarter.
<unk>, which is really flat compared to the first quarter of this year and up a little bit compared to five 6%.
In the second quarter of 2020.
And 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 Leverages the portfolio begins to grow again.
Our return on managed assets for the quarter to 6%, which is a 73% increase over the first quarter of this year and a 225% increase over the second quarter of 2020 for the six months to 1% return on managed assets pretax compared to <unk> six for the first six months of.
2020, and so 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 <unk>.
The improvement in the credit performance of the portfolio as all segments of the portfolio.
Let's look at credit performance delinquency at the end of the quarter eight 3%.
Which is just up a little bit seasonally from the seven 8%, we put up at the end of the third quarter, but down significantly compared to nine 6%.
At the end of June in 2020.
Net.
Losses for the quarter net annualized losses for the quarter to 8%, which is down significantly from six three in the first quarter and seven four in the second quarter of last year and for the six months annualized losses for 4% again down significantly from $7 two in the first six months.
Of 2020, and we can attribute much of this improvement in the losses to whats been happening at the.
At the auctions for hold 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 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 <unk>.
Second quarter 2015.
The lowest DQ being the first quarter of this year.
We have the lowest quarterly net losses since sometime prior to 2013.
And in these.
These ratios year over year improvements on a smaller average portfolio compared to last year and so again, we couldnt be more pleased with the credit performance.
A quick look at the ABS markets.
Our second quarter ABS transaction, we concluded in April 2021, B, and we continued to see strong demand across the cap structure.
Resulting in a blended yield for that securitization of 165% and it's not this is not the second transaction I mentioned, it's not a second quarter event, but we just closed in July our third quarter securitization 2021 C.
And because of lowered benchmarks and continued strong demand, we actually have a blended cost of funds on that transaction of 155%.
And so as Brad said I mean, these are all really positive trends in numbers.
We couldnt 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 are growing a lot as you can see and it's a question is how are we growing.
The new scorecard certainly helps.
We've done 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.
It's just the whole theory of boots on the ground, we found new territories, we use 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 who are 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 a new Gen seven scorecard, which is certainly helping the credits it's improved both on our capture.
And in our approval rates.
We've been able to get increased volume, we're still maintaining the credit from the model.
Currently we have 6000 active dealers our target is to get to 10000 active dealers. So again as much as we are 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 from a servicing numbers.
<unk> is great and the losses are as good as ive ever probably been.
Again, Thats certainly has something to do with the stimulus packages as much as a company you didn't get a whole lot of money from the government.
Easy to say that everyone of our customers certainly did and we did see our fair share of that stimulus money coming back but that stimulus is sort of in the later days if not entirely gone at this point.
We would begin to attribute more and more of that to our strong coach models were strong origination models.
To continue this performance.
And collections, we do revenue question scorecard, we put an extension scorecard and we also put in a new communication system, which gives us a more powerful powered Iowa.
So it gives us better text and chat avenues to access our customers and all of 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 or customers use and so we've done a pretty good job of that as Jeff mentioned the auction numbers 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.
Memory that they used to be in the high forties was an extreme so now almost 12 points ahead of that normal is around 33% to 35.
Let's see closings.
We as I mentioned, we've been able to become much more efficient with the sales force cutting that by 25% that we estimate to be a $5 million annual savings and now we're focused on the real estate, we actually just put in a hybrid work schedule where people work at the time at home and have time in the office if that works out the way we think it will it allow us to cut our real estate.
Our commercial real estate footprint substantially lots of our real estate comes up. This next summer so summer of 'twenty two we've already changed one of the branches and saved about $1 million 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.
<unk> people and technology.
I mentioned the cash.
Probably the stimulus continues as childcare credits certainly is going to keep things rolling.
But again I think it's still a combination of both.
Out of the system is 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 theres very few new entrants in the industry five years or so ago. There was a whole bunch of most of them didn't make it but it really hasnt been a lot of new folks coming in.
There's a few people come in from sort of the we'll call. It the fintech play, but not really just straight originators and so.
So that part is good.
It helps the industry and I mentioned with the lower cost of funds. There is some competition and this happened sort of in 2014 or so.
The big banks reached in her reached down into the credits a little bit and so thats happening and you can always tell because it puts pressure on euro interest rates and so what we can charge our APR for the customers. So we're about 19% number might drop a little bit as we continue to just sort of play in the market, but with a low cost of funds or anything else. It's not really a problem for us to do that is.
Well.
And 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.
Our economy I think the economy looks good beginning.
Beginning to worry about inflation, but we probably think there's at least another 18 months couple of years to run before we have a problem. So again. This is a time, where I think the company can really thrive and we really do have just about all cylinders working perfectly all the branches working perfectly our modeling is all working right. So and of course with a low cost funds with us.
Being able to generate so much extra capital 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.
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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 on that on the heels of stimulus at this point.
Or do you see capex kind of payments going out.
Do you see any impact.
In July from the chat and how.
Would you expect.
That change in that.
Payment to really impact the seasonality of your business this year.
Well, that's something we think about constantly normally summer 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.
We're still growing even as even more than the second quarter shows.
I think.
Everybody keeps saying well, it's all because of the stimulus, but a lot of the stimulus the real sort of cash money to everyone stopped months ago, and so maybe the child credit helps some.
But I think.
People going back to work certainly helps but I.
I would imagine it would be very hard to imagine that's keeping these.
Really good numbers forever, but I think somewhere in the middle between what we used to do and today. There is no problem at all and I think we're in a good position to do that and I think because of the way.
Technology, we're using the improvements we've made and like I said across all aspects of the company even without the stimulus.
I think we do just fine.
The auction prices certainly are going to change they may not change this year, but they will certainly change at some point 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 given that up and of course cost of funds at some point is going to go up to 30 years of the company we've averaged something in the <unk>.
Four to five range for cost of funds cost of funds of one and a half our model is not built to run in the one five cost of funds or models built to run at a $4 five cost of funds.
We will 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 quick follow up for modeling.
That's right.
Credit normalizes.
They never essentially guidance.
How do we think about potential fair value marks.
There's been a lot is happening.
Go above what you guys have contemplated in your model just sharing a fair a fair value mark not necessarily just that they'd have to go up is that right yes.
Yes, that's right.
Theoretically the fair value Mark could be 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 I mean, we're still even the receivables that we put on the books today, we're using more or less the same.
Estimated <unk> that we were using for cohorts.
In 2019 before we saw the benefit of the pandemic and so we're we feel very good about that component of the estimates the other potential mark comes from more market conditions like if we've found for example, and we don't foresee this that there was a <unk>.
<unk> change in the future.
And 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 in out from that direction right now.
Got it very helpful. Thanks for answering my questions.
Youre welcome.
Thank you and as a reminder to ask a question press star one on your Touchtone telephone.
We have a question from Jeff Zhang with JMP Securities. Your line is open.
Yeah.
Hey, guys. Thank you for taking my questions. It.
It looks like volumes really strong for the quarter are the strongest in five years is that a good quarterly.
Level that we should be looking at for.