Consumer Portfolio Services' (CPSS) CEO Charles Bradley on Q2 2016 Results - Earnings Call Transcript

| About: Consumer Portfolio (CPSS)

Consumer Portfolio Services, Inc. (NASDAQ:CPSS)

Q2 2016 Earnings Conference Call

July 28, 2016 1:00 PM ET

Executives

Charles Bradley – President and Chief Executive Officer

Jeff Fritz – Executive Vice President and Chief Financial Officer

Analysts

David Scharf – JMP

John Hecht – Jefferies

Mitchell Sacks – Grand Slam Asset

Operator

Good day, everyone, and welcome to the Consumer Portfolio Services 2016 First 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the Company’s SEC filings for further clarification.

The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise. With us here now is Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Fritz, Chief Financial Officer.

I will now turn the call over to Mr. Bradley.

Charles Bradley

Thank you and welcome to our second quarter conference call for 2016. I actually was sitting around trying to think about what we should talk about on the conference call, and basically it has been somewhat of a boring, normal quarter, which I guess in some ways is a good thing. The quarter went very much as expected. We continued with a small increase in originations, and our goal this year has been to grow what we will call moderately. We’re not trying to emphasize growth. We are certainly not trying to decrease growth, but again we are sort of trying to pick up the business where we can without pushing for it or stretching for it. And that, as you can see, has worked rather well and, thus, the quarter has worked out as we would have planned it to.

In terms of collections – in terms of originations, we have now gotten a staffing level in originations where we can service everything very efficiently. The dealer service is great. The dealer response to that service is excellent. So that is working as expected as well. Collection appears to be finally starting to normalize. It improved a little bit off of the first quarter. But, again, I think that is going to be a long-term project to get it back to where we want it to be. But I think we are finally making some inroads in those directions – in that direction.

Options continue to fluctuate slightly. They are a little lighter this quarter. Pretty much as expected. We think probably that might – that trend might continue a little bit. But towards the end of the year or early next, it should improve. But I guess the important part is the quarter went as we thought it would. Again, boring is good in a sense.

But I am going to turn it over to Jeff to go through the financials, and then we will talk about all those areas more specifically.

Jeff Fritz

Thanks, Brad. Welcome, everyone. We will begin with the revenues. The revenues for our second quarter were $104.9 million. That is a 4% increase over our first quarter of this year and a 19% increase compared to $88.4 million for the second quarter of 2015. For the six month, revenues were $205.6 million compared to $174.4 million in the six months ended June of 2015. As Brad said, really, nothing unusual going on here. The portfolio grew about by about 4% for the quarter and 19% compared to where we were at June of 2015.

On the expenses, total expenses $92.6 million for the second quarter. That is a 5% increase over the first quarter of this year and a 27% increase compared to the second quarter of 2015. Year to date, $181 million compared to $144 million last year. Again, really nothing unusual with the second-quarter expenses. We did take on some more space. We expanded our footprint, expanded some seats in the Irvine location, but that was something we had planned for some time. Actually, we took it down a little bit earlier about three months earlier than we originally planned. So we do have some additional occupancy expenses beginning with the second quarter.

Provision for loan losses, $44.4 million for the quarter. That is virtually flat with the first quarter of this year and a 24% increase compared to last year. On a year-to-date basis, provision for loan losses is $88.6 million compared to about $69 million in the prior year. In terms of the bookkeeping and the methodology for our provisions for loan losses and our allowance, no changes to any of those areas for the quarter, and we continue to maintain a consistent approach there.

Pretax earnings, $12.3 million for the quarter. That is just a slight increase of about 1% compared to the first quarter this year, and it is down about 19% compared to $15.2 million in the second quarter of 2015. On a year-to-date basis, we are at $24.6 million pretax, and that is down a little bit compared to $29.9 million a year ago. Net income, $7.3 million for this second quarter. That is, again, up slightly compared to $7.2 million in the first quarter this year and down about 14% compared to $8.5 million for the second quarter of 2015. The year-to-date six months net income, $14.5 million, down slightly from $16.9 million for the first month of 2015.

Diluted earnings per share, $0.25 for the quarter. That is $0.01 increase compared to the first quarter of this year, and it is down a little bit compared to $0.27 in the second quarter of 2015. And on a year-to-date basis, we are at $0.49 compared to $0.53 for the first six months of 2015.

Moving on to the balance sheet, we are maintaining sort of the normal liquidity levels and cash levels. A couple of things on the balance sheet that – especially if you are comparing the two yearly periods, June of 2015 to June of 2016. There is a significantly lower restricted cash balances beginning this year as a result of our change and the timing of our securitizations. And so we do our securitizations now on sort of the first month, the calendar month of every quarter, as opposed to the last month of every calendar quarter. And so we don’t have that be restricted cash balance, which represented essentially the pre-funding portion of the securitization.

You can see the finance receivables have increased about 6% compared to the first quarter and 24% compared to last year. And on the debt side, the other thing that you might notice comparing the two year-over-year periods is that as a result of the timing of the securitizations, we generally have significantly higher warehouse debt on the balance sheet at the end of the calendar quarter compared to the prior year. So you see like $165 million of warehouse debt at the end of June 2016, and that is about a month’s worth of production for us, more than we had in the balance sheet for warehouse debt a year ago.

Other than that, not very much else happening on the balance sheet. You can see that the residual interest financing continues to pay down, according to its terms. That may be gone here by the end of the year.

Moving on to some of the performance metrics, the net interest margin for the period, $85.2 million. That is about a 3% increase over $82.8 million in the first quarter of this year and a 14% increase compared to $74.7 million in the second quarter of 2015. That, of course, is primarily driven by – well, it is driven by a couple of components. The interest income on the portfolio and the thing that has been moving a little bit has been our cost of funds. And so we’ve generally experienced higher cost of funds in the ABS transactions over the previous 12 months, and we probably will talk about that more with some of Brad’s further comments. But I can tell you that the ABS cost of funds for the quarter was about 3.3% compared to 2.8% in the second quarter of 2015.

The risk-adjusted NIM, which takes into consideration the provisions for credit losses, $40.8 million for the quarter. That is up about 6% from $38.6 million in our first quarter of 2016 and up about 5% compared to $39 million in the second quarter of last year. Again, most of those – that growth is pretty much in line with the growth of the portfolio.

Our core operating expenses have generally, in a scenario where we feel we’ve generally done pretty well, keeping them in line, even as the portfolio has grown, $28.5 million for the quarter. That is about an 8% growth over the first quarter this year and 20% compared to $23.8 million last year. Maybe more telling are these ratios. Those core operating expenses as a percentage of the managed portfolio, 5.1% for the second quarter, just a tick-up from 5.0% in the first quarter of this year, but a decrease compared to 5.3% in the second quarter of last year. And on a six-month annualized basis, again, 5.1% for 2016, a significant decrease compared to 5.6% for the same six-month period, in 2015. Again, we feel like we are doing a pretty good job of squeezing the most efficiency out of machines as we possibly can.

The return on managed assets pretax as a percentage of the average managed portfolio, 2.2% for the quarter, down a tick from 2.3% in the first quarter and down compared to 3.4% a year ago. And that squeezing of that margin is a combination of the somewhat higher debt costs this year and somewhat higher provisions for credit losses, although both of those being offset somewhat by the better operating efficiency and leverage.

Quick look at the credit performance metrics. The delinquency about 8.6% at the end of June 30, 2016. That is down a little bit compared to 8.9% in the first quarter and up compared to 7.5% a year ago. Our net losses for the quarter annualized 6.9%, up somewhat from 7.6% in the first quarter and up again a little bit from 6.6% in the – well, it is actually down sequentially and up year over year compared to 6.6% a year ago. The annualized net losses for the six-month period, 7.2% in 2016 compared to 6.6% a year ago.

I think Brad alluded briefly to the recovery percentages at the auctions. Pretty flat from first quarter to second quarter, around 39% and maybe down just a tick, and down significantly from last year, where they were 44.8%, and we saw that pretty significant reduction throughout 2015. But since the end of 2015, we have seen those numbers seem to stabilize somewhat as that part of business – that market seems to have normalized.

A quick look at the ABS results, our asset-backed securitizations, the deal we did in the second quarter, we actually completed in April, our 16-B transaction, $332.7 million. It is pretty much the same structure as we have had for some time. Two AAA ratings at the top of the cap structure. We did garner 22 total investors a little bit higher – a few higher investors than we had in the first-quarter transaction, including eight new investors.

And so we continue to see a lot of liquidity and demand in the asset-backed market. Brad might talk a little bit more about the other press release we just issued yesterday, which is really our third quarter securitization transaction, which closed, coincidentally, also this week. But we saw even better execution in terms of subscription levels and demand in the July transaction compared to the April, and the April was better than a January. And so I think the signal they are is that those, as I said, that market continues to be very receptive to our bonds.

And I think, with that, I can turn it back over to Brad.

Charles Bradley

Okay. Thank you, Jeff, and running through sort of the operations part of the business, in marketing, we continue to grow marketing gradually. We have just over 100 marketing folks. We seem to be seeing maybe a slight easing of competition in the marketplace with. It would appear that some of the larger players are sort of trying to maintain business close to growth. So we haven’t seen any irrational competition in the market lately. We really haven’t seen any for a while now, and I think that is a very good thing. I think everyone is sort of settling in on whatever level they are at.

I think – I will get into that a little bit later in the industry, but anyhow, I think in terms of what we do, we are continuing to let our force grow. We are continuing to keep the training going. Down the road if the market changes and we have some opportunities, I think we will be well suited on the marketing end to take advantage of them.

In terms of originations, as I mentioned, we grew in staff originations to $125 million a month. Currently, we are more in the $100 million to $110 million range. So the dealer services result picks up. I think that is a very good thing in terms of working with the dealers, letting them know we are there to help them. It gives them a better feel. It also gives us opportunity to work with the dealers and make sure they understand the program or to give them a better understanding of the program so it becomes more user-friendly for them. It is odd, but this dealer service part of originations is an integral part of the success of the Company in terms of having us be a user-friendly avenue for the dealers, not to mention our sort of tried and true being a stable source in a place they know the way we are going to buy and how we are going to buy. And so between the two, I think that enhances the marketing effort even further.

In terms of collections, collections continues to be the area where we have the most focus and loosely saying the most work to do. I think we have done that with a combination of adding more folks. We have expanded some branches. Somewhat more importantly is, as we have mentioned in prior calls, is sort of getting our arms around on how to work with what we will loosely call the new dynamic of customers and how they respond. As we also have said, it used to be you can call the customer at their home, and the phone nailed to the wall would be the one that rings, and they would pretty much have to answer it because they couldn’t tell who it was anyway. That is clearly gone out the window.

Today, it is all mobile devices. It is all about texting. It is all about the customer being able to answer the phone when they want, if they want, and so the difference is somewhat startling from 20 years ago. And even from a couple of years ago, when mobile devices or what we what we will loosely call the iPhone took over. And now we spend a lot of time in technology and coming up with texting platforms. We have put these platforms into play about literally over the last few months. That might be one of the bigger things we did in the second quarter, certainly in terms of collections, and the results continue to be very promising and ongoing. Ironically, as much as you might think that calling the person sometimes, if not a lot, would be the best way to get them to pay. A text message seems to be working almost more effectively than a phone call.

Down the road, when they get a little bit more a delinquent, the phone call becomes more effective because they actually want to talk to you as they are starting to worry about maybe losing their car. But in the initial part, this 30 to 60 days where things have really changed in terms of sort of providing an easier option for customers to pay so that – as opposed to just calling them all the time, which used to be the old dynamic. And so we are seeing really good success with that, but it is an interesting thing in that the front end delinquency tends to run higher because they are paying you the way they want to pay you and when they want to pay you as opposed to us being able to sort of push them to pay whenever we get them on the phone.

Anyway, it is sort of an interesting new change. We have adapted to it rather well, and I think we can expect to see even better results down the road as more of our customers get used to the texting platform and more of our collections folks get used to it as well. So, again, it is relatively new, but it looks very good, and it certainly seems to be the wave of the future in terms of how you work on our customers. Remember, though, in sort of the overall picture is about a third of our customers you almost never have to call. They pay almost like clockwork every month.

Another third need to be reminded. Now that reminder now becomes a text message rather than a phone call. That is just fine with us. And that certainly seems to be the possible play here, is in that 30 to 60, that one payment – the two payment folks, if you can just get a hold of them texting, you can get the payments you want. And then, the same old third of the portfolio is the one you need to really work on, and now that is going to be a combination of both texting and phone call. But overall, we think the project is looking well. We think collections is at least stabilizing, if not slightly improving, and again we would hope to continue that trend as we go forward.

In terms of the industry, the industry is also kind of interesting. First, in the regulatory front, it has been gotten to be very quiet. I think the CFPB has talked to most everyone. And so I think they are now – it used to be all about the impact in terms of whether they are making loans with too high interest rates. That turned out not to be as big an area to now, the CFPB is focused on questionable practices. That is an area that we did some work with the FTC on almost five years ago, that we are very comfortable with what we have done there. But I think, like I said, most everyone is now focused on questionable practices. The CFPB doesn’t seem to be quite as active as they have been in the past. So that is probably an overall good thing.

In terms of the competition, it is also a little bit of interesting in that a lot of folks, as I think most folks know, some of the bigger companies have sort of started to slow down and even sort of try to normalize their portfolio and not really looking to grow as much as they are to get the portfolio to perform better, and that comment almost extends from both the very large players in the marketplace to the very small players in the marketplace. A lot of the small players in both cases – a lot of folks have grown a lot, and a lot of folks are now trying to make sure that portfolio is performing the right way.

Where we see an interesting position in that we grew a lot, too, but we grew a lot in 2012 and 2013, less so in 2014 and 2015, and now we are at a nice slow trending growth today. And I am not sure that will benefit us better or whatever, but we are not having the issues that a lot of the other folks are. There is some talk that access to the capital markets could get tougher for some of the smaller guys who have had poor performance. It is hard to tell. But it seems the net result is competition has eased a bit. A lot of folks are not quite licking their wounds, but they are trying to fix some of their collection procedures and such so that the portfolio performs better, maybe sort of reload the scorecards, whatever it is. Not being involved in that is kind of a good thing for CPS. Watching how that unfolds would be an interesting thing for the industry.

In terms of the ABS market, as Jeff pointed out, the trend was rather up for the last few quarters. The last couple of quarters it seems to have gotten better. We did, in fact, close our deal yesterday or early this week for our July transaction with exceedingly better results in terms of the appetite on Wall Street for the paper, the demand, the number of investors involved. It was pretty much a 180 from the last few quarters where everybody said this market is getting tougher and investors are demanding higher yields.

It’s going to have this huge impact on everyone. Well, this last deal was a huge turn from that in that there was lots of investor demand in terms of what is being included in the deal, the pricing has improved. That trend continues even if it is just for some of the bigger, more established players including us, so that would be a tremendously helpful thing. Because, obviously, when the trends go up, we put in our projections that the cost of funds will go up. To the extent they miraculously start to come down again, that would be a huge boon to how we do things and not to mention would certainly help the industry as well.

Having said that, some of the folks that are having problems out there with the way the paper performs could face more scrutiny, higher pricing, and maybe less participation in the ABS market, and again, that might create some opportunities for us and others.

So it is kind of like, as I mentioned in the past, we look at the industry in our timing in three cycles. Cycle one was in the 1990s where everybody grew real fast and the industry created some of their own problems. Cycle two is where the banks stepped in, and then we had the whole mortgage mess in 2007. So we are in cycle three. Cycle three looks a lot more like cycle one than cycle two.

Meaning that a lot of the players in our own industry are the ones having the problems. And this is one of the things we sort of wanted to stay away from and have. So we are more on the sidelines in terms of watching everyone else have some issues. Again, if you recall, at the end of cycle one, there is lots of acquisition opportunities for folks like us and others, and so we will sort of see how that plays out. But we might be sort of nearing the end of what resembles cycle one again. So we will see.

In terms of the stock market, unfortunately, it is the same old story. We are doing well. A lot of the folks are not doing quite as well. It has put a burden on the market, both in the regulatory environment, that fear that there is a recession coming. Those are sort of the three I generally refer to as why we are not going anywhere. The regulatory environment, as much as it has seemed to soften, builds a fear for people who invest heavily in the industry. The fact that lots of the big players and lots of players in the industry are all having some issues is another reason people are not particularly interesting in investing in the industry today, and the fear that there will be a recession in two seconds and reading all the press about us being just as bad as subprime mortgage, which, of course, isn’t true. Those are the reasons that people have shied from the market.

Having said that, we now trade with a $7 book value, $7 per share book value, which we think is terrific. We think it is shocking that our share price could be such in relation to that, but nonetheless, that is just the way it is. But along those lines, we have continued our share repurchase program. In the second quarter, we bought 850,000 shares. The quarter before, 700,000 shares. The quarter before that, nearly 600,000 shares. So we continue to buy shares in the open market as fast and as seriously as we can.

I think since we started this project, a little over a year ago, we have bought 2.5 million shares, so we bought in almost 10% of the Company. That program will continue as much as we can keep pushing it. Someday when people realize how well we are doing and maybe relax about the state of the industry, that stock price, hopefully, will begin to reflect what it should.

Anyway, with that, we will open it up for questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for question. [Operator Instructions] Thank you. Our first question comes from David Scharf at JMP. Your line is open.

David Scharf

Hi, good morning. Thanks for taking my question. Brad, wondering if you can maybe put some color around your comments on the competitive environment and some potential easing. In particular, are you seeing that manifest in more looks in terms of applications per dealer that you see, or similarly, are you seeing a higher take rate? Just trying to get a sense for what metrics give you a sense that things are getting just a little bit less frothy out there?

Charles Bradley

Probably, the obvious one is the pricing. We have been able to create increase price a little bit. I think the long-term trend over the last few years is we have lowered price, almost somewhat significantly over the last three years, I guess. In the last two quarters, we have been able to raise price and not affect our business at all. So I think that would be the obviously obvious way to say that competition has eased.

But in terms of your specific question, we haven’t really seen that much and increased application flow or an increased capture rate. We have mostly seen – almost at some level that people are leaving us alone. We can sort of create our organic growth as much as we want. We are not seeing people trying to come in and steal it from us.

So, in terms of colors, it is more that – and loosely saying, everybody is trying to stick to their knitting. I think our big friends are doing what they are doing and we are doing what we are doing, and maybe some of the little guys are having some issues. It is little hard to tell. We do see a little bit of – maybe one of the reasons we are not actually getting growth, per se, out of it is because you can see some of the bigger players have grown, and this will be more like from the banking side. It looks a little bit like some of the banks are beginning to play a little bit more on the high-end, and in the lower end, credit unions are always increasingly trying to get into the business.

So to the extent those guys are moving in a little bit, then that might account for us not quite growing in the application capture rate, but on another side, we are not seeing – and we are certainly not hearing from the marketing force that so and so big player is coming in and cutting price and taking all the business. So that is probably the best color I can give you. One might hope at some point that our application flow increases and our capture increases. We really don’t need the application flow to increase per se. We could use the capture to increase. Neither one has happened particularly right now.

And the other point to make is we are sitting in July, and the summer is historically pretty much the slowest part of the year. So it’s little hard to tell. A better time to tell would be maybe in the fall, but certainly early next year.

David Scharf

Got it. So, as I digest all of these moving pieces, in addition to your comment that from a staffing perspective it sounds like you are where you need to be, is the $100 million a month on average the way we ought to be thinking about how you are thinking about the business over the next 12 months, per se?

Charles Bradley

Yes. I think that is a good baseline. You might lower it a little bit in the summer and then increase it in a little bit of some of the busier times of the year. This will be one of those nice things where I say, yes, we think $100 million is the right number – somewhere, $100 million, $110 million for the next 12 months and then be out there in two quarters or so say, well, $135 million seems to be a good number, too. But it will really depend on what the market does.

It is funny because the first two quarters are the growth quarters, and the third quarter and the fourth quarter are the slow quarters and then you start all over again. And so right now, it is rather hard to crystal ball what the first couple of quarters will be like next year. But, if things kind of roll along the way they are, there is a chance that we – because that is really when you will see what is changed in the marketplace in terms of competition, is when the business rolls in, because, for whatever reason that some people buy cars and that is when the market seems to accelerate a bit, that is when we will see whether we get to pick up the new business because, let’s say, there’s companies out there saying, we just want to maintain $100 million a month or whatever the number is, then, they may not try to buy into that new business so much.

They might actually try and raise prices and tame credit. If they do, then we would see a very large increase in our business because we are not really looking to do that. But it is very hard to grow the business when that business is soft in the summer. So that is what really you will see. But, yes, you could use $100 million as a proxy for now with the small proviso that things could change when you get into the February/March/April time period next year.

David Scharf

Got it. That’s helpful. And just switching to the collections front, I appreciate the color. Today, of all days, the CFPB finally came out with rules – proposed rules for the third-party collection industry. Outsourcing it and selling debt, I guess, they are reserving rules for actual credit grantors for their in-house operations. I don’t suspect you have poured through the 120-page document, but I am wondering if anybody in the auto industry is hearing about what potential rules regarding contact and frequency of contact and so forth, whether there might be some changes…

Charles Bradley

Certainly, I can’t speak for the CFPB and nor would I want to, but I certainly talk to enough folks in the industry to get the general gist of what the CFPB – this is almost where we are going to work backwards. We know the CFPB has visited most everyone, and certainly we have an idea of what they have looked at. And so we could probably make a list of 10 things they were most interested in, and one might surmise that that will eventually be what they come out with.

So, having said that, and, again, using our experience, it is certainly – third-party questions is a little bit different because they are trying very hard to protect the customer even more because they don’t want somebody to show up who doesn’t care. We have a much more vested interest in having our customer be treated kindly and fairly because we want him to pay for a good long time. [Indiscernible] some third-party collector is just collecting for a fee, he might be – he might treat the customer differently. So those rules for those guys could be substantially different than our rules.

Having said that, I think the collection practices that I mentioned earlier has certainly been the focus of the CFPB as opposed to this [indiscernible] impact, which was their sort of initial focus. So, in questioning practices, a lot of it comes down to how do you contact the borrower, how many times you contact the borrower, what do you say to the borrower, and so it wouldn’t be shocking at all if you had them come up with some sort of framework on that.

The good news is, one might expect that us and everyone else is already following most all that framework anyway. So we would hope that since – we would hope that they would develop that framework from the examinations of all of our friendly competitors along with ourselves, and that framework will be sort of a nexus of everything that came out of it. And then, having said that, we should all be working within it already because they have all showed up already. So I am not going to say it is going to be a big nothing, but one might surmise that is how this thing is going to develop.

David Scharf

Got it. Got it. Well, and then lastly, following up on the collections front, maybe a question for Jeff. This is three quarters in a row where the recovery rate has been relatively stable, as you noted. Auction prices seem to have stabilized quite a bit since the big drop earlier in the year. But the net charge-off rates really had unusual variability bouncing around from Q3 to Q4 to Q1 and Q2. And, obviously, there’s some seasonal aspects. But just given the particular – this bouncing from Q4 to Q1 to Q2, really trying to get a sense for how we should think about the back half of the year.

Jeff Fritz

Well, I think that what we have seen – not only on the servicing side, but on the originations side over the last couple of years, is that what used to be a pretty predictable calendar seasonality on really both ends of the business has moved around a little bit. It is just not as consistent, the ebbs and flows of the business during the calendar year as it used to be for many, many years. And part of that, I think, is the way the tax refund season isn’t like a pinpoint you can put on the calendar like you used to be able to do.

And so we saw kind of softer or worse credit performance metrics in our first quarter this year than we typically would expect, and we would expect to see a little better improvement going from Q4 to Q1 than we saw this year. And then, as you pointed out, we saw a little bit of improvement going from Q1 to Q2, which may be is a little unusually expected to be more flat. But I think that, looking forward, our business has really kind of normalized. Yes, we are growing, but we are not growing at such a rate that we have like this growth dilution in the denominator, which tends to make those credit metrics a little harder to interpret.

So I think that, while there is going to be fluctuations from quarter to quarter in these numbers – these credit metrics, there is probably still going to be a softening in Q4, some improvement in Q2 and Q1, but I think that overall where we are and how we are growing the business, we are probably at numbers that we would expect to sustain reasonably, maybe going up just slightly on annualized charge-off rates as the portfolio continues to season. Because even though we are growing, the portfolio is aging somewhat and, as it ages, until it gets out to be like 24 months of seasoning or whatever, generally these credit performance metrics are going to trend upward.

David Scharf

Got it. Got it. Thank you very much.

Jeff Fritz

Thank you.

Operator

Thank you. And our next question comes from John Hecht from Jefferies. Your line is open.

John Hecht

Thanks, guys. Yes, I guess Jeff, you just answered some of this question, that there is some seasoning effect in the portfolios, and NCOs may creep up a little bit. But, if you look at the ALL balance relative to the portfolio and understanding that you guys reserve for like a forward charge-off threshold, would it insinuate that you generally anticipate the kind of charge-off trajectory to be somewhat stable with the current rate? I understand there are probably some influences seasoning and stuff in there, but is that accurate? You are kind of based on frequency rates, the early rates and so forth that you guys generally think that the credit cycles were kind of in a period of credit cycles where things are what you would call stable on a loss basis?

Jeff Fritz

Yes, I think that would be our perspective is that barring a macro change in the economy, if you see rapid increase in unemployment or something like that, if we continue to turn around at these sort of growth rates and we continue to – as Brad alluded to, we are doing some things on the technology front and the servicing side, which seems to have helped us compared to maybe where we were a year ago, we feel like we’re in a reasonably good place right now from a servicing and credit performance standpoint.

John Hecht

Okay. And then, Brad, you talked about the ability to raise pricing and referred to the competition in that regard. What about loan-to-value in term? What is going on with that stuff right now?

Charles Bradley

Glad you asked. Because we look at those numbers a lot, and at some level we sort of let the machine do what the machine is supposed to do. But it is good to say, boy, we are really consistent. Our loan-to-value – I am looking at a three-year run, and our loan-to-value hasn’t changed at all. I mean, it has bounced around a little bit in the interim, but we are within 10 basis points of where we were three years ago.

So – and, I think, we are up a point or so from where we were two years ago. So I think one of the things that maybe has led to some of our success is we have bought pretty much the same way all the time. Our loan-to-value sits at 114.5 this quarter. I think the lowest it has ever been is 113 and change. The highest it has ever been is 115 and change. Maybe we would like to tighten it up just a tad. Maybe 114 even is the optimal number, but I don’t know what all our friendly competitors do. I guess that that number jumps around a whole lot more with some other folks. +

And that kind of idea would also trend in terms of our payment to income, our debt ratios, all those things we have held very consistent over the years, and so it is almost at some level, a lot of our performance is the result of either maybe a change in the mix of what we buy, the high-end paper versus the low-end paper, or whether outside economic forces like recessions. So one of the real strengths of what we do is we buy very consistently and have, and so hopefully we will continue to.

John Hecht

Great. Thanks very much. That’s all I have got.

Charles Bradley

Thank you, John.

Operator

Thank you. [Operator Instructions] And our next question comes from Mitchell Sacks, Grand Slam Asset. Your line is open.

Mitchell Sacks

Hey guys, very nice quarter.

Charles Bradley

Thank you.

Mitchell Sacks

With respect to G&A, I know you guys talked a little bit about sort of increasing your square footage. Can you just walk through the increase on the G&A side?

Jeff Fritz

Well, I think that, in the second quarter, we – well, I will wind it back. So going back a year ago, we added a pretty significant amount of space in our Irvine campus, enough space for a couple of hundred seats. Maybe 250 seats. And we took half of that right at that time, in like July of 2015. And then we were anticipating taking the other half. The other half was finished, but we didn’t use it and didn’t have to pay for it until like July of 2016 until right now.

But then we ended up – we grew enough there, and the way we kind of managed departments and had the people sort of sit in groups or whatnot, it turned out it was more useful to take that space early, which we were allowed to do, but then we had to pay for it earlier. So that was a second-quarter event. Just a slight increase in the occupancy expenses. And then, we have a couple of things on the horizon. We are also going to take some more space in that Irvine facility later this year, like in the September/October timeframe, and we are looking – I haven’t made any final decisions, but we are evaluating some more space here in the Las Vegas area as some space became available. There is always space available.

But a couple of other entities – companies not directly in our space but who have collectors and servicing folks have shut down operations here over the last year or so. And we have hired a few of those people. And there is more of those people available. We have done very well. We like the kinds of servicing people we have hired here in this area. And so we are looking at some more space to take advantage of that labor pool.

Mitchell Sacks

Okay, super. Thanks.

Jeff Fritz

Yep.

Operator

Thank you. [Operator Instructions] This concludes today’s Q&A session. I would now like to turn the call back over to Mr. Charles Bradley for closing remarks.

Charles Bradley

So, anyway, in this particular instance, I think boring is good. We have what we will loosely call a boring quarter, but a very successful one, nonetheless. I think our goal for the rest of the year is to continue to run not quite status quo, but sort of in an opportunistic way. To the extent we get some opportunities to grow here and there, we will. I think our industry is bouncing around a little bit internally, and so we will have to see how that shakes out. Hopefully, that will generate some more opportunities for us.

But I think the important part is, we are sort of – we can stick to our knitting and sort of see what everybody else does. That is probably the real thing to take away from this call is CPS is doing everything the way we want to. It is working very well. We are being very successful at it, particularly compared to some other folks in the industry. So it is not the time for us to go out and try and grow a ton or do something odd.

To the extent there is a recession down the road, then we can look for that as more opportunities coming along from that. But, at this point, we are in the position – we are on the right side of the fence in terms of doing things well, and we can sort of see what happens with everything else. So boring is, in fact, good in that way. We don’t have to explain anything. We can keep doing what we’re doing and doing it well.

So, again, thank you for attending the conference call, and we will see you next quarter.

Operator

Thank you. This does conclude today’s teleconference. A replay will be available during – beginning two hours from now until August 1, 2016, at 11:50 PM by dialing 855-859-2056 or 404-537-3406 with conference identification number 51614443. A broadcast of the conference call will also be available live for 90 days after the call 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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