Consumer Portfolio Services, Inc.

Hi everyone and welcome to the Consumer Portfolio Services fourth quarter and four year 2020 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 or receivables because dependent on estimates of future events also are 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 the 16th and its quarterly report filed November the 3rd for further clarification. The company assumes no obligation to update publicly any forward-looking statements which 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. You may begin.

Thank you, and thank you, everyone, for joining us on our call. I think probably the best way to look at the fourth quarter is that it's the end of 2020 and everyone, certainly us included, are glad to be done with 2020. It's been, you know, certainly an up and down year and a difficult year in many ways, but in other ways it was quite good for us. And certainly the fourth quarter reflects that. You know, we had, if you take year over year, the fourth quarter DQ was 12 versus 15 and a half last year, so that was very strong. Losses, 5% versus 8%, also very strong. And the recoveries were, you know, not unusual, but what we'll call historically high, 42% versus a normal 33%. So lots of numbers went the right way. We have lots of good things that happened in the fourth quarter. We also renewed our Citibank warehouse line. We continue to have a very strong partnership with those folks. We do a lot of deals with them and have a good working relationship with And the line continues to improve each time we renew it. So we look forward to continuing to do our business with them. One thing we didn't do in fourth quarter, we didn't do an ABS deal. Given the pandemic and the cutback in volumes, we didn't have enough volume to really make it warrant doing a deal in the fourth quarter. However, we did one pretty darn quick in the first quarter of 2021. And that deal was probably the best ABS deal in the history of the company. with an all-in cost of 1.1%. So that part worked out really well. Probably the negative of the fourth quarter, and certainly for the year, which I'll talk about a bit later, is just the struggle for volume. Given the pandemic, given the financial markets sort of closing or slowing down dramatically for a little bit, and even just the foot traffic at dealerships, the struggle in 2020, and certainly in the fourth quarter continuing, was to get volume in here. But, you know, the flip side of that is we were able to really focus on cutting some expenses. We really focused on quality. If you look at the ABS performance for literally since 2018, it is substantially better every single year. And I'm not so sure there's too many companies out there that can say that. Certainly with a lower cost of funds coming along, that's going to sort of, you know, higher tide floats all boats. It's going to help out a few of our overly aggressive competitors. But nonetheless, it's still, in the long run, probably just as good for us. So I'll get more into the year after Jeff runs through the fourth quarter financials.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues. $62.4 million for the fourth quarter. That's a 12% decrease over the third quarter of this year and a 27% decrease over the fourth quarter of 2019. The full year revenues for 2020, $271.2 million is a 22% decrease compared to $345.8 million in the full year of 2019. So there's three important components when you kind of break this down, the revenues. First of all, the legacy portfolio now is around $500 million, representing 23% of the total portfolio and currently yielding 18.5%. The fair value portfolio, which is everything we've originated since January of 2018, is $1.7 billion, or 77% of the total portfolio, yielding 10.3%. And remember, too, and we've talked about this many times, obviously, the fair value portfolio yield is net of losses, which is why you see what looks like such a dramatic decrease in revenues year over year. The third component, this year anyway, is the markdowns we've taken in the fair value portfolio reflecting the COVID environment. $6.5 million markdown in the fourth quarter, $29.5 million for the full year. And so it can be a little confusing. This is a kind of a contra revenue item. So it detracts from the revenue rather than being an expense. Moving on to expenses, $56 million for the fourth quarter, That's a 14% reduction compared to 64.8 for the third quarter of this year, 34% reduction compared to 84.8 million in the fourth quarter of 2019. Full year expenses, 251 million is a 25% decrease compared to 336 million in 2019. And, you know, we've seen year-over-year reductions in almost every expense category, you know, due in part, as Brad alluded to, to lower originations volumes, but also due to some of the efficiencies that we've built in and technology investments that we made not only in 2020 but really in the last couple of years are really starting to pay dividends. And of course, the biggest decrease in expense comes from the provision for credit losses. If we look at that in a little more detail, so we actually had zero provision for credit losses in the fourth quarter compared to $7.4 million in the third quarter of 2020 and $21.5 million in the fourth quarter of 2019. For the full year, we had $14.1 million in provisions for credit losses compared to $86 million in the full year of 2019. And so remember also that we adopted CECL for the legacy portfolio in January 2020, at which time we established what we thought was a lifetime allowance for credit losses. And then, of course, the pandemic set in, and throughout the year, as you know from following this, we've been taking, except for the fourth quarter, we've been taking some additional provisions for credit losses, sort of pandemic-related provisions for credit losses, but none in the fourth quarter, as you see. Pre-tax earnings, $6.5 million for the fourth quarter. That's a 10% increase, over $5.9 million in the third quarter this year, and, well, a huge increase, over $1 million in the fourth quarter of 2019. Full-year pre-tax earnings, $20.1 million. is over 100% increase compared to 9.2 million for the full year of 2019. Net income, $4.1 million for the fourth quarter, 8% increase over the third quarter of 2020, and a huge increase over a really very small fourth quarter net income last year. Net income for the full year, $21.7 million. almost a 300% increase over the net income of $5.4 million in 2019. We've talked about this. Remember, too, that the net income for 2020 includes an $8.8 million tax benefit that we booked in Q1 of 2020 resulting from the CARES Act and how it affected our deferred tax asset. So those numbers are built in, obviously. Diluted earnings per share 17 cents for the fourth quarter. That's just a penny over the third quarter of this year and a significant increase over almost less than a penny in the fourth quarter of 2019. Full year diluted earnings per share, 90 cents for 2020 compared to 22 cents for the full year of 2019. And that tax benefit that I just alluded to that we booked in Q1 of 2020 represents 37 cents. to the bottom line for 2020. Moving on to the balance sheet, it doesn't necessarily come through when you just look at the cash numbers because we use more cash to hold receivables when we have it available, but we have a very strong liquidity position that's come about throughout 2020 as a result of better than expected credit performance in the ABS pools, which, you know, result in more releases of cash from those trusts. And then in turn, we can rely less on the warehouse financing, which helps us save a couple bucks on interest expense. So that's a very positive standpoint for the balance sheet. Moving on to the receivables portfolio, I've already talked about a couple of these percentages. The legacy portfolio down to 23%, and its remaining life CISO allowance now represents 16% of that active portfolio. So it's pretty robust, we feel, allowance for losses on that segment of the receivables. Looking at the liabilities, I mentioned lower warehouse usage due to the lower volumes and the strong liquidity position. The other thing you may notice is this residual financing transaction is kind of in its pay down mode. It's coming up on three years. from the time we originated it. And a lot of, almost with every quarter, one of the deals that's pledged to that facility is in a situation where we call the collateral. And so it's paying down and will continue to pay down as we move along. Moving on to some of the performance metrics, the net interest margin for the quarter was $39.5 million, a 14% decrease compared to the third quarter this year. 32% decrease compared to the fourth quarter of 2019. The full year net interest margin was $169.8 million, a 28% increase compared to the $235 million in the full year of 2019. And so as, again, we talked about this, with this transition to the fair value receivables taking over the majority of the portfolio, it's driving down sort of that top line as the losses are baked into the interest earnings on the fair value portfolio. Another component of this metric is the cost of the ABS debt. So the blended cost of all of our ABS debt was 4.3% for the fourth quarter, and that's down just a little bit compared to 4.4% in Q4 of 2019. Moving on to the risk adjusted NIM, $39.5 million for Q4 this year. And that's an increase of 3% from the third quarter of this year and an increase of 8% compared to the fourth quarter of 2019. Full-year risk-adjusted NIM, $155.7 million, a 4% increase compared to the full year of 2019. And as I think I mentioned before, the risk-adjusted NIM and the NIM will converge to be the same metric as soon as the legacy portfolio becomes immaterial. Core operating expenses for the quarter, $33 million. That's a 2% increase compared to $32.5 million in the fourth quarter this year, but an 8% decrease compared to $35.8 million for the fourth quarter of 2019. Full year core operating expenses, $135.6 million is a 3% decrease compared to $140.3 million in the full year of 2019. And so, and I think I mentioned this, our operating costs, have been impacted by somewhat lower originations volumes in 2020. But as I said, we've done a lot of things to improve our efficiencies, which are also influencing these numbers. Those expenses as a percentage of managed portfolio were 6% for the fourth quarter of this year. That's just up a little bit from 5.9% compared to the fourth quarter of 2019. Full year basis, 5.9%. compared to 5.8% for the full year of 2019. And I think one positive of this metric is those ratios are nearly flat despite the shrinking portfolio, because the portfolio has shrunk a little bit during 2020. Returned unmanaged assets, pre-tax return on managed assets, 1.2% in Q4. That's up a little bit from 1% for the third quarter of this year, and up huge compared to 0.1% in the fourth quarter of 2019. Annualized return, pre-tax return on managed assets, 0.9% for all of 2020, and that's really over double the 0.4% that we recognized in the full year of 2019. So good improvement in that important metric. Brad mentioned the credit performance, and this has really been kind of the weird pandemic silver lining is the current performance has been really much better than we would have expected a year ago when all this was setting in. 12% delinquency at the end of the year is a 300 basis points decrease compared to the 15.5% that we had at the end of the year in 2019. Annualized net losses for the year, 6.5% compared to almost 8% for the full year of 2019. And Brad also mentioned the returns at the auctions. We're still at 42% in the fourth quarter. That's down a little bit from the 45% from the third quarter this year. But as Brad alluded to, the normal levels of those are close to 33%. And eventually those markets will normalize, but it's been quite a benefit to this point. Brad already mentioned the great success of the 2021A transaction in January, so I can turn it back over to him.