Consumer Portfolio Services, Inc.

Good day, everyone, and welcome to the Consumer Portfolio Services 2020 Third Quarter Operating Results Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements. Any statements made during this call that are not statements of historical facts may be deemed forward-looking statements. Statements regarding current or historical valuation of receivables because dependent on estimates of future events, 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 16th and its quarterly report filed May 5th and July 31st 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 are 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 our third quarter conference call. So I guess in the midst of the pandemic and all these other problems in the world, it's kind of a great thing that we actually had a very good quarter. So we must be doing something right in the fact that these are challenging times, and yet we put together a really, really solid quarter. Our earnings are way up, but just across the board, both in earnings. One thing we are doing is we're focused a little more on profitability rather than growth. Given the uncertain times, A quarter or so ago, at the beginning of this whole thing, call it February, March, April, we decided that rather than try and fight through the pandemic in terms of growth, we should focus on profitability. And so we have. And we are, in fact, beginning to grow again, and we would like to get a little more growth going as the next couple of quarters go by. But currently, profitability seems to be a very good focus for us, and it's working out tremendously well, along with strengthening all the departments top to bottom and cutting costs where we can. And as you can see in all the numbers, we've done a lot of that. The performance in the portfolio has been extraordinarily good. We're buying really good paper. Our collections forces are doing great. So our numbers are both, our charge-off and DQ numbers are very good this quarter, best in a long time. So really, across the board, it's real good. Wall Street's doing real well. We did a securitization. It was the cheapest money we've had in six years. And so, granted, that helps everyone. It helps all things, floats all boats. But for us, it's just one more thing that's working the right way. The auction recoveries, people were very worried that the auction prices were all going to be in trouble. We had one of the best auction recovery quarters we've had in years. So there's lots of things that are going probably maybe a little bit, not abnormally right like the auctions, but certainly they're helpful too. But even taking out sort of the things that might be momentarily related to what's going on with the pandemic and things. Still, the strength in terms of the paper we're originating, the way we're collecting the paper, our access to Wall Street and funds are all super strong and super good. So I'll talk more specifically about that and a few other things after Jeff goes through the financials.

Thanks, Brad. Welcome, everyone. Let's begin with the revenues. $70.7 million for the quarter. is a 5 percent increase over the June quarter this year and a 17 percent decrease compared to the third quarter of 2019. The nine-month revenues for this year, $208.7 million, a 20 percent decrease from the first nine months of 2019. And so, we continue our transition to the fair value portfolio. The legacy portfolio is down to about 26 percent of the total, just under $600 million. That legacy portfolio yielded almost 19% or around 19% in contributing to the revenues this quarter, so that was very good, actually. The fair value portfolio is now 74% of the total, $1.7 billion. That yielded 10.4%. Remember, please, that that yield is net of losses, which are baked into that number. And then you'll note that we did a booked a $3.1 million markdown on the fair value portfolio, which is essentially an estimate of future higher, somewhat higher credit losses related to the virus. Moving on to expenses, $64.8 million for the quarter. That's a 4% increase over the June quarter this year, but a 22% decrease compared to $82.7 million in the third quarter last year. For the nine months, $195.1 million in expenses, a 23% decrease compared to the first nine months of 2019. So there's a lot of moving parts in the expense side. The biggest reduction in expenses year over year is the provisions for credit losses, but we've also had significant reductions in most of the core operating categories year over year, employee costs and benefits. interest expense, really had a lot of good efficiencies and improvements in the expense side of the ledger. I mentioned the provisions for credit losses. We did book $7.4 million on the legacy portfolio this quarter. That's an increase compared to 3.1 that we recognized in the second quarter of this year, but a decrease of 19.9 compared to 19.9 million in the third quarter of last year. So for this year, provisions for credit loss has been $14.1 million, a 78% increase compared to $64.3 million for the first nine months of 2019. So recall that we adopted the CECL method of accounting for the legacy portfolio in January of this year. At that time, we booked what was intended to be a lifetime provisions for credit losses establish an allowance for lifetime losses. So all these 14.1 million of losses that we've recognized this year are what we would consider COVID-related for the legacy portfolio. Pre-tax earnings for the quarter, $5.9 million, 28% increase compared to the second quarter this year, and 111% increase compared to 2.8 million in the third quarter last year. For the year-to-date numbers, $13.6 million this year is a 64% increase compared to $8.3 million in the first nine months of 2019. Net income, $3.8 million for this quarter, a 27% increase compared to $3 million for the second quarter of this year, and a 111% increase compared to $1.8 million in the third quarter of 2019. Year-to-date net income, $117.5 million, a 224% increase compared to the first nine months of 2019. You may recall that this year we recognized a significant tax benefit in the first quarter, $8.8 million, resulting from the CARES Act and how it changed the carrying value of our deferred tax assets. So those numbers, those net income numbers for this year include that $8.8 million tax benefit. Diluted earnings per share, 16 cents this quarter is a 23% increase over the 13 cents for the June quarter this year, and 100% increase compared to the 8 cents we earned in the third quarter of 2019. Year-to-date diluted earnings per share, 74 cents compared to 22 cents for the nine months of 2019. Remember that tax benefit reflects about 37 cents of this year's 74 cents of earnings per share. Moving on to the balance sheet, we continue to have a very strong liquidity position. It looks like there is a significant increase in restricted cash in the consecutive quarters and even the year-over-year quarters. About $60 million of that increase in restricted cash is a result of doing our securitization in September. We normally do our securitizations in the first month of the quarter, Because of the timing of the lower volumes and the pandemic this year, we did our securitization in September, and so we have this pre-funding $60 million, which essentially goes away in the month of October this year. Moving on to the finance receivables, these are the legacy portfolio receivables. You might note that the allowance there is now up to 16%. of that active portfolio, so it's got substantial lifetime losses set aside against it. On the debt side of the balance sheet, you may notice that warehouse balances are down. We've really had somewhat lower warehouse usage due to lower originations production and our strong liquidity position. Looking at some of the performance metrics, Net interest margin for the quarter was $45.8 million. That's a 12% increase over the June quarter this year of $40.8 million, and a decrease of 21% compared to the third quarter last year. Nine-month net interest margin of $130.4 million is a 26% decrease compared to last year's first nine months. So remember, we're still, the transition to fair value is really influencing these numbers, particularly the year-over-year numbers. It's helpful to note that the blended cost of all the ABS debt for this quarter was 4.4%, which is a decrease compared to 4.5% in the third quarter of last year. As you may recall, for the most part, we've done really well in the execution of the coupons, blended cost of funds for securitizations this year. The risk-adjusted margin... is $38.4 million for the quarter. That's a 2% increase over the June quarter, and also a 2% increase over the third quarter last year. And year-to-date risk-adjusted NIM, $116.2 million is a 3% increase over last year. And so this is being influenced by the lower provisions for credit losses this year, but also the lower interest rates on the debt, as I mentioned. Core operating expenses. For the quarter, $32.5 million is a decrease of 2% compared to the second quarter of this year, $33.1 million, and a decrease of 7% compared to the third quarter of 2019. Year-to-date core operating expenses, $102.6 million is a 2% decrease compared to the first nine months of 2019. So our operating costs, this year they've been somewhat influenced by the low originations volumes but also influenced by investments we've made in technologies, which have made us more efficient, particularly in the servicing side of the business, and we're really starting to see some benefit from those changes. As a percentage, the core operating expenses for the quarter were 5.7%. That's a 2% increase over 5.6% in the June quarter this year, but a 2% decrease compared to 5.8% for the third quarter last year. On a year-to-date basis, it's also 5.8 percent, which is about the same compared to last year. So, this metric is showing a year-over-year improvement, even though we have a slightly smaller portfolio due to the lower growth this year. The return on managed assets pre-tax, 1 percent for the quarter. That's a 25 percent increase compared to the second quarter of this year, and 100 percent increase compared to 0.5 in the third quarter of last year. and on a year-to-date basis 0.8% return on managed assets pre-tax compared to 0.5% for the nine months ended September of 2019. So this encompasses all these things, the better efficiencies and the core operating expenses, lower interest expense, and lower provisions for credit losses. Brad mentioned the credit performance. We're just really pleased with the credit performance these last two quarters in particular. The delinquencies were 10.3%, which is almost a 500 basis point reduction compared to September of 2019. The net losses for the quarter, 6.4%. Again, a significant reduction compared to 8.07% for September of 2019. And the year-to-date losses, 6.9%. Again, a reduction compared to 7.9%. for the first nine months of 2019. Brad mentioned the auctions. The general talk on the street is dealers are finding it difficult to get inventory, and it's pushed up the values at the auctions. We got a return of 45.1% of our collateral at the auctions this quarter. That's up from 34% in the second quarter and also up from 34% a year ago. I did a little math, and I can tell you that if the auction values for this quarter were the same as they have historically been around that 34%, we would have incurred $2 million more in charge-offs this last quarter. And even though these numbers are, you know, exceptionally good and probably going to revert to the mean at some point, you know, that's $2 million that we saved and we'll never have to give back. On the ABS market, we just did our securitization a couple of weeks ago, 2020C. It was a $252 million deal. We had great demand across the capital structure. All classes of bonds were significantly oversubscribed. And the combination of the low, low benchmarks and the very tight spreads resulted in a blended yield of 2.39%. which, as Brad just mentioned, is the lowest we've seen since 2014. Another benefit of this deal, or positive of this most recent deal, is we were able to structure in a Class F single B bond, which brought the leverage and the advance rate back to the better levels that we prefer. With that, I'll turn it back over to Brad.