Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2020 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 are not the 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 also are forward-looking statements. All such forward-looking statements are subject to risks could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 16th and its quarterly report filed May 5th 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 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, everyone, to the second quarter earnings call. I must note, I wonder how people in the conference call setup business get their jobs sometimes. Oh, my God. So it's been an interesting quarter. Certainly, this is the real COVID quarter because our first quarter ended in March, and March really showed no signs. This quarter has been a roller coaster of not knowing what's going to happen, whether things good or bad are going to happen. The good news is the quarter's turned out very well. We went from starting out in April with wondering whether we could do any more securitizations. We had to postpone our securitization. But the market recovered exceedingly quickly and we were able to get off the securitization without any problems and actually very good pricing. So that was a very big accomplishment. Everybody's worried about the volumes. Our volumes are off a bit. However, you know, we're still functioning and everything's going pretty well. I think generally people are being quite conservative right now, both in terms of how long this is all going to last, whether there's going to be a liquidity issue and everybody's sort of trying to maintain their liquidity and being cautious as are we. Collections was another big challenge. Our motto always is you can sleep in your car, you can't drive your house, but it really shows with the government checks and the unemployment benefits, our customers are using that money and they're paying us. People wondered how that would all work, but our collection efforts and our results have been really good this quarter, even though we're in the midst of all these problems. So that's another huge highlight of what's going on. You know, the earnings were good. It was the best earnings since fourth quarter of 2018. We're hoping that trend will continue. So, you know, at the end of the day, we don't really know what's going to happen. So we're going to move cautiously, preserve liquidity. We're buying a little tighter. We're getting good quality paper. So we're doing a bunch of things right, and the results are there to back it up. We went from having an enormous surge in extensions in April to almost back to normal, very much just flat in June. So for all intents and purposes, our collection efforts are back to the way they're supposed to be. The performance is obviously where they're supposed to be. So we've been very pleased with all those results. Again, still lots of unknowns, but we'll sort of talk about that a little more. I'll let Jeff run through the financials.

Thanks, Brad. Welcome, everyone. Let's begin with the revenues. Revenues for the quarter were $67.3 million. That's a 5% decrease from the first quarter this year and a 22% decrease from the second quarter of 2019. The six-month revenues were $138.1 million. That's a 21% decrease compared to the first six months of 2019. So I think the way to look at the revenues The revenues for the quarter, really think about it in terms of three components. Our legacy portfolio ended the quarter at $695 million, or 30% of our total managed portfolio, and that portfolio is yielding 18.5%. But then the more recent portfolio, the fair value portfolio, is $1.6 billion, 70% of the total. that portfolio is accounted for at fair value. So it's yielding about 10.2%. And remember that that yield is net of credit losses. So you have those two components, which we're gonna be with us for a while. And then the unusual component is a markdown, a negative revenue component of $9.5 million on the fair value portfolio, a markdown that we took as a result of the COVID event and the uncertainty surrounding that. and it's basically a combination of a couple of things but really essentially a COVID-related markdown of $9.5 million. You may recall we had a $10 million COVID-related markdown on the portfolio in the first quarter of this year. Moving on to the expenses, $62.6 million for the quarter. That's down 8% from the first quarter of this year of 67.7 and down 25% compared to the second quarter of 2019. The six-month expense numbers are $130.3 million, and that's a 23% reduction compared to the first six months of 2019. So the biggest difference in expenses year over year is really the provision for credit losses. which has not completely gone away but nearly gone away as a result of our adoption of CECL on the older portfolio, the legacy portfolio. But it's interesting to note on the sequential quarter, we did have some decreases in some of our core operating costs like, for example, our sales expenses and a number of expense categories that are tied to originations volumes and we had significantly lower originations volumes in Q2 as a result of the COVID event. Provisions for credit losses, $3.1 million for this quarter. That's down 14% from $3.6 million from the first quarter this year and down 85% compared to $20.5 million in the second quarter last year. Year-to-date provisions for credit losses, $6.7 million is an 85% decrease compared to the first six months of 2019. and so you recall we adopted CECL which is a lifetime allowance standard for the legacy portfolio. We did that back in January 2020 and the intent and expectation at that time was that there would be no further provisions for credit losses on that portfolio. The COVID event has caused us to consider that the losses on that portfolio will exceed what our January estimates were. And so we put $3.1 million into that allowance this quarter. And as I said, I think $3.6 million in the first quarter also for the legacy portfolio. Pre-tax earnings were $4.6 million. That's a 48% increase compared to 3.1 in the first quarter this year. and a 64% increase compared to the second quarter of last year. The year-to-date pre-tax earnings, $7.8 million is a 44% increase compared to the first six months of 2019. And so this is a positive pattern for us. For two consecutive quarters, we've had year-over-year improvement in our pre-tax earnings in spite of these COVID-related adjustments. And it's the first time really since we adopted the fair value on the newer portfolio that we've been able to show two consecutive quarters of year-over-year improvement in the pre-tax number. Net income for the quarter was $3 million. That's a 72% reduction compared to the first quarter of this year, which I'll talk about that in just a second. And it's a 67% increase compared to $1.8 million in net income in the second quarter of last year. Year-to-date net income, $13.8 million is a 294% increase compared to 3.5 million in net income for the first six months of last year. So you'll recall that in the first quarter of this year, we were closing the books right at the same time that the government was putting together the CARES Act in response to the COVID event. And so we booked an $8.8 million tax benefit in the first quarter of this year as a result of the way this CARES Act got put into place. So that's kind of rippling through those net income numbers. If we look at earnings per share, 13 cents for the quarter. That's up from 8 cents per share for the second quarter of last year. Year-to-date, 58 cents for the six months, and that's up significantly from 15 cents for the first six months of 2019. As I said, that tax benefit is rippling through there. Without the tax benefit in the first quarter, year-to-date EPS would be around 37 cents per share. Moving on to the balance sheet, not much going on there to talk about. You see the continued reduction, amortization, runoff of the legacy portfolio. and you may notice too that on the warehouse lines, we're only using 56.7 million of our $300 million in warehouse capacity because the volumes are still somewhat depressed as a result of the economy just kind of getting back on its feet a little bit. Moving on to some of the other metrics, net interest margin for the quarter, $40.8 million. That's down 7% from 43.8 in the first quarter. and down 30% compared to the second quarter of 2019. This is being influenced significantly as the fair value receivables become a continuously bigger and significant portion of the portfolio. And remember, they're coming out at a lower yield because the losses are baked in. And then, of course, the other component to the NIM being the cost of funds. The actual blended cost of all our ABS for the quarter was 4.5%, which is almost the same, I think, as it was a year ago as those ABS deals have come. We're going to talk about ABS here in a second when we move further down the list. The risk-adjusted NIM, which takes into consideration the provision for credit losses, $37.7 million for this quarter. that's down 6% compared to the first quarter of this year and almost flat compared to the second quarter of 2019, a year ago. Core operating expenses, $33.1 million. That's an 11% decrease from our first quarter of this year and a 6% decrease from the second quarter of 2018. For the six months, $70.1 million. is pretty close to flat, just a little bit more than the 69.7 core operating expenses that we had in the first six months of 2019. As I mentioned, we've got some significant expense categories that are driven directly by originations volumes, and so we saw some decreases in the second quarter as a result of that. Our core operating expenses as a percentage of the managed portfolio, 5.6%. That's down from 6.1% in the first quarter of this year and also down from 5.9% for the second quarter of last year. And so we're seeing, even on that metric managed portfolio basis, the impact of some of those reductions in the core operating expenses. The return on managed assets is 0.8% for the quarter. That's an increase compared to 0.5% for the first quarter of this year. and also an increase compared to 0.5% for the second quarter of 2019. And so again, we're seeing some good year over year improvement in that important metric. Moving on to credit performance, in spite of all this COVID concerns and everything that's happened and the uncertainty, we were very pleased with the credit performance for the quarter. The delinquency at 9.6% at the end of June is significantly lower than the March number of 12.4% and significantly lower than the 14.8% in delinquency that we had a year ago. And in fact, this is the lowest delinquency number we posted since the first quarter of 2018. And so it was a pleasant surprise. Obviously, we know that two things sort of COVID-related First, many of our customers certainly have benefited from the government assistance, and to the extent they've lost their jobs, they're getting the unemployment benefits and the bonus unemployment benefits. Frankly, we don't care where the money comes from. We're just pleased to see that customers have taken care of their car loans during the quarter. Brad mentioned extensions. We did grant significantly more extensions in the month of April. to give you an idea of just kind of some hard numbers. We granted 14,000 extensions on our portfolio in the month of April. In the month of May, it went down to 9,000. And in the month of June this year, the month just ended, we did 4,900 extensions. Well, that compares to 4,500 extensions in June of last year. So even though we had an extension spike right at the beginning of the crisis, It seems to have normalized, and we're granting what today and the month of June is really just a normal number of extensions. So we're very pleased with that. Net losses for the quarter, also down from the previous year, 7.4% for the quarter, just up a little bit from 7% in the first quarter this year, and down compared to 7.8% a year ago. We've talked with many of our business partners and constituents about auction liquidation numbers. We did 34% in the second quarter in terms of recoveries on our balance at the auctions. That's actually an improvement from the first quarter and about flat from a year ago. So in spite of all this turmoil and things that have happened, the values of the auctions have held up pretty well.