Consumer Portfolio Services Inc (CPSS) 2020 Q2 法說會逐字稿

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 in this call are not the statements of historical facts may be deemed forward-looking statements. Statements regarding current or historical valuation of receivables because Mike is 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 16 and and its quarterly report filed May 5 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether it's 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 on the conference call set up business get their job sometimes. But nonetheless. 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 rollercoaster of not knowing what's going to happen, whether things good or bad or going to happen. The good news is the quarter is turned up very well. We went from starting out in April with wondering whether we could do any more securitizations. We had a postpone securitization, but the market recovered exceedingly quickly, and we're able to get off the securitization without any problems and actually very good pricing. So that was a very big accomplishment. Everybody is worried about the volumes. Our volumes are off a bit. However, we're still functioning and everything is 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 everybody is sort of trying to maintain the liquidity and being cautious and as our way.

Collections was another big challenge. I -- 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. The earnings were good. It was the best earnings since fourth quarter of 2018. We're hoping that trend will continue. So 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 where 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 6-month earnings -- revenues were $138.1 million. That's a 21% decrease compared to the first 6 months of 2019. So I think the way to look at the revenues for the quarter, really, think about it in terms of 3 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 2 components, which are going to 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 -- it's 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 expenses. $62.6 million for the quarter. That's down 8% from the first quarter of this year of $67.7 million and down 25% compared to the second quarter of 2019. The 6-month expense numbers are $130.3 million, and that's a 23% reduction for the first 6 -- compared to the first 6 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. 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 loss is $6.7 million is an 85% decrease compared to the first 6 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. However, 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.

Pretax earnings were $4.6 million, that's a 48% increase compared to $3.1 million for the first -- in the first quarter this year and a 64% increase compared to the second quarter of last year. The year-to-date pretax earnings, $7.8 million is a 44% increase compared to the first 6 months of 2019. And so this is a positive pattern for us for 2 consecutive quarters. We've had year-over-year improvement in our pretax 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 2 consecutive quarters of year-over-year improvement in the pretax 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-dated net income, $13.8 million, is a 294% increase compared to $3.5 million in net income for the first 6 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. We look at earnings per share, $0.13 for the quarter. That's up from $0.08 per share for the second quarter of last year. Year-to-date, $0.58 for the 6 months. And that's up significantly from $0.15 for the first 6 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 $0.37 per share.

Moving on to the balance sheet and 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 of 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 million 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 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 of 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 deals, the 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 2019. For the 6 months, $70.1 million is pretty close to flat, just a little bit more than the $69.7 million in core operating expenses that we had in the first 6 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 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 -- well, 2 things sort of COVID related. First, many of our customers certainly benefited from the government assistance and to the extent they've lost their jobs, they're getting the unemployment benefits and the bonus and employment 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. In the month of June this year, the month just ended, we did 4,900 extensions. While 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. And so we're, again, we're very pleased to see that. Brad mentioned our ABS transaction, we normally would have done our second quarter ABS transaction in April. Well, in April, those markets were completely shut down and so we just bided our time. We kept in touch with our partners, our Wall Street partners and the investment banks. And we saw that window begin to open up in late May. We let a couple of our -- or we've waited while a couple of our peers in subprime auto went out and did their securitizations. And then we took advantage in June early June, and we did our securitization. And we had -- we're again, pleasantly surprised at the resiliency of these markets we did 5 classes of bonds. The lowest subscription level was 4x oversubscribed, and we had 1 tranche that was 11x oversubscribed and so it just showed there was a lot of demand for those bonds once those markets opened up. Spreads did widen. We did have a blended weighted cost of 4% -- 4.09%, which is higher than our January deal of 3.08%, but nevertheless, that's still a very acceptable cost of funds financing for us.

With that, I think I'll turn it back over to Brad.

Thanks, Jeff. And sort of running through where we sit today, from the marketing originations point of view, I think our sort of our watchword is caution. We're going to try and grow back to our levels or normal levels slowly and cautiously. There's less new cars out there because of the COVID problem. A lot of the new car manufacturers haven't made cards. And so the mix is beginning to change. We've dropped almost 8% in the percentage of new cars we buy. But sort of as a result of those things, we've also been able to raise our APR a little bit. We've raised our fees significantly, have also improved credit quality. Our LTVs are down, our payment-to-income ratios are down. So we're really getting a better piece of paper. As mentioned, we're not getting the volumes we were getting. And I think we can get back to those volumes. I think volumes across the industry will be slightly depressed for a little bit. Mostly because I would think most people are proceeding with cash unlike we are. But again, it's a little hard to tell. The industry seems to have plenty of liquidity. It seems like everything is functioning to normal other than car sales are down. People though do get cars when their cars break down and they need new cars. And so that's going to drive our industry almost regardless of the economic conditions. So we've been able to take advantage of that. As we pointed out, the numbers have been very good. The collection efforts are doing great. The fact that we've been able to get the extensions back down to what we'll call a normalized level and the DQ is doing really well. Granted, we might be getting a little benefit from the government stuff. But for the most part, I think, by and large, we're just doing it better than we have before. We've got lots of new technologies that have improved collections. And it's the performance, we've been sort of waiting for it to get that kind of good for a long time, and now it has. Everybody asked about the auctions that you pointed out, the auction was just about flat year-over-year. We would expect them, as long as there's -- until the new car starts building, the new car production starts rebuilding. The auction values are going to be great. So we don't have that problem. As we mentioned, the ABS markets have come snap back rather well. So we think the liquidity on Wall Street is very good. So in many ways, everything is kind of going in all the right direction other than we're still in the midst of this COVID thing, which God knows when that's going to end. But considering the circumstances, we're very pleased with how it's all going. I think, overall, we'll going to really just take the wait-and-see approach, and I'll make the rest of the comments after the questions. So we'll open it up for questions.

(Operator Instructions) Our first question is coming from the line of Kyle Joseph from Jefferies.

In terms of the deferrals or the extensions that you talked about, the volumes were high in April and they gradually fell down through the quarter. Can you give us a sense for the performance of the extensions that you granted in April? Are they performing kind of consistently with your expectations? And how more recent deferrals have been performing?

Well, we do a fair amount of sort of long-term analysis of extension effectiveness. And so I don't have really any data on those most recent extensions but we monitor that on a regular basis and put some tables in our 10-Q document that showed that, in general, we made good extension decisions. And so -- and I think we're confident that those results. And one thing, I guess, indirectly, I do know, for example, Kyle, that the cash collections have been very consistent. So the dollar amounts of cash payments that the customers have made have been steady. They were actually up slightly in May compared to April and the June numbers were level with May. And so I mean, I think that we're satisfied that the customers are getting that 1-month extension and then they recognize that they've got to be on track after that.

Got it. And then in terms of the fair value mark and the incremental provision in the quarter, can you give us a sense for what sort of economic assumptions you're baking into those credit forecasts? And how those have changed since March 31?

So there's -- so in the fair value mark, there's 2 pieces of it. One is kind of straightforward. And the other one is a little bit more subtle. The main one that goes into that $9.5 million mark is we're just looking at the forecasted like each of these -- the whole fair value portfolio to us on a granular basis, is a bunch of monthly portfolios starting from January of 2018. And so we look at each monthly portfolio and each portfolio has a forecast of losses in the future. And so we've picked a window like a 6-month window of coming up, and we predict, just judgmentally predict that the losses over that 6-month window will be something like maybe 10% higher. And so we baked that in, and then that has an effect on the mark. And then the other mark, a little more subtle is, as Brad mentioned, we're getting a juicier yield, a richer yield on the paper that we're buying today. And so when we look at that, technically, this fair value accounting, you're supposed to look at your current purchases as sort of a proxy for the value of your existing book. And so what we've seen is because the yield is a little higher on the paper we're buying today, we actually went back to some of the oldest cohorts in the fair value portfolio and we marked their yield up just ever so slightly, so it was more comparable to the current yield. But in order to do that, you have to give something back, if you will. And so a part of the markdown of the fair value portfolio was to write up the yield on the oldest cohorts.

Got it. Very helpful. And one last one for me. Can you just give us a sense for -- I know you talked about the goal is to get volumes back to where they were gradually. Can you give us a sense for how volumes trended in April, May, June? And then ultimately, how they're trending in July?

Generally, they're obviously going up probably on a -- maybe a slightly slower scale than we would expect. But again, we're actually doing really well with what we're buying. So the offsetting yield adjustments are probably worth the lower volumes. So I mean, the other problem is that summer and summer is generally, given everything is going on, not going to be a real great time to try and push the growth. And so probably unless things change somewhat dramatically in the next month or so, we would probably expect slight increases month-to-month. It's not like we're going to go from 50 to 80 or something like that. But we would expect it to trend up 10% a month or something would be sort of the guess at the moment. It's just we will react with the market. But like I said, I guess, the important thing is we're doing very well with what we're buying. We want to get back to those levels, but we're going to let the market sort of dictate how fast that happens. Again, the watchword in all that is caution. We don't want to get going real fast and have something go wrong with either COVID or the economy or whatever it is. That causes us to have a liquidity problem down the road. So we're doing fine with what we're doing, and we'll just keep managing it as we go. So it's a little hard to put a number on it. But if you wanted to say we were going to grow, we would hope at a minimum 10% monthly, but we'll see.

(Operator Instructions) Next question is coming from the line of Jeff Zhang from JMP Securities.

I just got a quick one on -- I was wondering what you guys thoughts are on recovery values in terms of repossession activities in near-term and potential future regulatory action?

I mean, we sort of talked about it. The the market -- the auction markets are going to remain strong. There is a few states still that you can not reassess cars right now. I think there's 5 of them. And so it's not having a dramatic effect in terms of repossessions. We would expect I almost think as much as maybe, I don't know it was particular to say. The new car manufacturers were kind of keeping the new car sales as high as they could for the last few years. And that bubble was going to burst. And so COVID has certainly burst that bubble. And maybe in some ways, it's going to be the best thing for the new car market. Because now they're going to be able to let demand get built back up as they ramp up production again. But in the meantime, we're going to benefit dramatically from used cars going to auction and having a much better value. So in terms of repossessions, we're missing a few states, but it's not dramatic. In terms of the values we get at auction, they're probably going to be stronger until that new car demand catches up to the new car production, which, again, we -- may not happen this year. So we would be relatively optimistic for both repossessions the rest of the year and auction value the rest of the year.

(Operator Instructions) We don't have any further questions. Mr. Bradley, you may continue.

Thank you. So I guess, I probably said we're cautioned about 10x today, but that's really the operative word for what we're going to do. We're going to proceed that way. We're going to take advantage of the markets when we can. We're still looking, of course, as always, to improve our collections, improve our technology, cut expenses, and manage our way through this best we can. And we said all that, the second quarter was great. I mean it's amazing given the COVID and all these other problems going on. That we were able to have such a good quarter. And so our hope is that this continues. And we'll get through it. Hope everyone's stay is healthy and safe, and we'll speak to you next quarter. Thank you for attending.

Thank you. This concludes today's teleconference. A replay will be available beginning 2 hours from now until the 29th of July, by dialing (855) 859-2056 or (404) 537-3406 with conference identification number 946 -- 948817. A broadcast of the conference call will be available live and 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.