Q2 2020 Consumer Portfolio Services Inc Earnings 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 states any statements made during this call are not the statements of historical facts may be deemed forward looking statements.
The mens regarding current or historical valuation of receivables.
[music] because.
I think it's dependent on estimates of future events also are forward looking statements.
Such forward looking statements are subject to risks.
Could cause actual results to differ materially from those protected.
I refer you to the Companys annual report filed March 16th.
And its quarterly report filed me fit for further clarification. The company assumes no obligation to the 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, Mr., Jeff Fritz Chief Financial Officer of consumer portfolio services.
I'll now turn the call overcomes the 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 getting jobs.
Yes.
Oh My God.
It's been an interesting quarter certainly this is the real cobot quarter, because our first quarter ended in March and not in March really showed no signs. This quarter's been no rollercoaster not knowing what's going to happen whether thing good or bad are going to happen. The good news is cornerstone up very well we went from starting on April.
With wondering whether we can do anymore Securitizations, we had a postpone securitization.
The market recovered exceedingly quickly and were able to get off the screws age 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, you know, 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 the dog in Alaska, whether it is gonna be liquidity issue and everybody sort of trying to maintain liquidity and being cautious and adds or away.
Collections with another Big Challenge I.
We know our motto always illusions, we've been new car you can't drive your house, but it really shows with the the government shacks in the unemployment benefits you know our customers are using that money and they're paying us people wonder what how that would all work, but our collection efforts. Our results have been really good this quarter, even though we're in the midst of always problem.
So that's another huge highlight or what's going on.
You know the earnings were gives the best earnings since fourth quarter 2018.
We're hoping that trend will continue.
So you know any other today is we don't really know whats going to happen. We're so we're going to move cautiously preserve liquidity, we're buying little tighter we're getting good quality paper.
So we're doing a bunch of things right and the results are there back it out you know we went from having.
Enormous surge and extensions in April.
Almost back to normal very much just why in June so for all intents purposes. Our collection efforts are backed or whether it's supposed to be performance is obviously, where they're supposed to be so we've been very pleased with all those results.
Again still lots of I know, but we'll sort of talking about 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, earning revenues were $130.1 million, that's a 21%.
Decrease compared to the first six months of 2019.
So I think the way to look at the revenues for the quarter really think about in terms of three components or 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 its fair value.
So its yielding about 10.2% remember that that yield is net credit losses. So those two components, which you know we're gonna be with us for a while and then the unusual component is a markdown.
Negative revenue component of nine and a half a million dollars on the fair value portfolio.
Mark down that we took a result at the cobot.
In the uncertainties surrounding that and it's basically <unk>.
A combination of a couple of things, but really.
Essentially a covert related.
Markdown of nine and half million dollars you may recall, we had a $10 million cobot related markdown on the portfolio in the first quarter this year.
Moving on to expenses $62.6 million for the quarter, that's down 8% from the first quarter. 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 for the first six compared to the first six months of 29 team. So the biggest died.
Difference in expenses.
Year over year, it's really the provision for credit losses, which has not completely gone away, but a nearly gone away as a result or adoption of Cecil on the on the older portfolio legacy portfolio, but 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 to the cobot event.
Provisions for credit losses $3.1 million for this quarter, that's down 14% from three point Sixmillion from the first quarter, this year and down 85% compared to $20.5 million in the second quarter last year, a year to date, a provision for credit loss of $6.7 million is up.
An 85% decrease compared to the first six months of 29, <unk> and so you recall, we adopted Cecil which is a lifetime allowance standard for the legacy portfolio. We did that back in January 2020.
And the intent an expectation at that time was that there would be no further provisions for credit losses on that portfolio. However, the covered a bad.
Caused us to consider that Oh losses on that portfolio will exceed what our January estimates were and so we put 3.1 billion and to 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 for the first two in the first quarter this year and 64% increase.
Compared to the second quarter of last year, a year to date pre tax earnings $7.8 million is a 44% increase compared to the first six months of 29 team and so this is you know a positive pattern for us for two consecutive quarters, we've had year over year improvement in our pretax earnings in spite of these.
These cobot 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 a year or two 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 just second and its 67% increase compared to 1.8 million and net income in the second quarter of last year, a year to date at net income $13.8 million. It's.
294% increase compared to 3.5 million to net income for the first six months of last year. So you recall that in the first quarter of this year.
We were closing the books right at the same time that the I'm.
The government was putting together the cares act a response to the Cobra Tibet and so we booked and 8.8 million dollar tax benefit in the first quarter of this year as a result of the way. This carriers are got put into place. So that's kind of rippling through those that income numbers.
We look at earnings per share 13 cents for the quarter, that's up from a eight cents per share for the second quarter of last year, a year to date, a 58 cents for the six month and that's up significantly from 15 cents of for the first six months of 2019 as I said that tax benefit is rippling through.
We are there a without the tax benefit in the first quarter year to date as would be around 37 cents.
Per share.
Moving on to the balance sheet and how much going on there.
To talk about you see the continued reduction amortization run off of the legacy portfolio.
And you may notice to that on the warehouse lines. You know, we're only using 56.7 million of our $300 million and warehouse capacity.
Because the volumes are still somewhat depressed as a result of here are the economy, just kind of getting back on its Pete a little bit.
Moving onto some of the other metrics net interest margin for the quarter $40.8 million, that's a 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 significant portion of the of the portfolio and the brand, but they're 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.
Actual blended cost of already be asked for the quarter was 4.5%, which is almost the same I think as soon as it was a year ago HM.
Got it those deals baby as deals have come we're going to talk about ABS here in a second 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 the first quarter this year and almost flat compared to the second quarter of 2000, and and 19 a year ago.
Core operating expenses $33.1 million, that's an 11% decrease from or first quarter. This year and a 6% decrease from the second quarter of 2018.
For the six month $70.1 billion is pretty close to flat just a little bit more than the 69.7 and core operating expenses that we had in that first six months of 29 team.
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 by 0.6% that's down from 6.1% in the first quarter. 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.
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 29.
19, and so again, we're seeing yeah.
Hi, good year over year improvement in that important metric.
[noise] moving on to credit performance you know in spite of all this this cobot concerns and everything that's happened in the uncertainty we were very pleased with the credit performance for the quarter a the delinquency a 9.6% at the end of June is significantly lower than the March number of 12.4 per se.
Right 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 and so you know it. So it was a pleasant surprise.
Obviously, we know that well two things of sort of cobot related a first many of our customers certainly benefited from the government assistance and to the extent they've lost if they've lost their jobs are getting you know the unemployment benefits and the bonus unemployment benefits you know 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 as Brad mentioned extensions.
We did grants significantly more extensions in the month of April to give you an idea just trying to some some hard numbers. We granted 14000 extensions on our portfolio in the month of April up in the month of May went down to 9000 and in the month of June this year. The month just added we did 4900 extensions well.
That compares to 4500 extensions in June of last year, So even though we had an extension spike in a right at the beginning of the of the crisis.
It seems to have normalized or granting what you know today and the month of June is really just normal number of extension. So we're very pleased with that no losses for the quarter also down from the previous years, 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 about with many of our business partners and constituents about auction liquidation numbers, Oh, we did 34% and in June in the second quarter in terms of recoveries on our balance at the auctions, that's actually an improvement from the first quarter and a and about flat from a year ago. So.
In spite of all this turmoil things have happened a the the values of the auctions have have held up pretty well.
So were again very pleased to see that.
Hi, Brad mentioned, our ABS transaction, we normally would've done our second quarter ABS transaction in April well in April those markets, we're completely shut down and so we just bide our time, we kept in touch with our partners our Wall Street partners in the investment bags 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 appears in subprime auto went out and did their securitizations and that we took advantage in June early June and we.
Did our securitization and we had.
Again pleasantly surprised that the resiliency of these markets.
We did five classes of bonds the lowest subscription level was four times oversubscribed and we had a one tranche that was a 11 times oversubscribed and so to show 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, a 3.08%, but nevertheless, and that's it still a very acceptable cost of funds financing for us.
With that I think I'll turn it back over to Brian.
Thanks, Jeff and sort of running through where we sit today you know them from the marketing originations point of view I think are sort of our watchword as caution we're going to try and you know grow back to our levels are normal levels slowly and cautiously there's less new cars out there because of the cobot problem a lot of the new.
Our manufacturers' haven't made cars 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 result of those things. We've also been able to raise or if you are a little bit we raised or a few significantly I've also improved equip credit quality or L.R. ltvs are down.
Payment to income ratios are down so we're really getting a better piece of paper as much as we're not getting the volumes. We worry getting 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 I would think most people are proceeding with caution like we are but you know again its little hard to tell the industrys seems to.
We have plenty of liquidity it seems like everything's functioning the normal other than you know car sales are down people, though do good cars when they 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 collection efforts are doing great.
Back that we've been able to get extensions back down to what we call the normalized level and the DQ is doing really well and granted we might be getting a little benefit from the government stuff, but for the most part I think by large we're just doing a better than we had before we've got lots of new technologies have improved collections and it's the performance. We know we've been sort of waiting for to get that kind of good for long.
Time and now it has.
He asked about the auctions as you pointed out the opportunity just about flat year over year, we would expect them as long as or you know until the new cars starts building the new car production starts rebuilding the auction values are going to be great. So we don't have that problem as weve mentioned, the ABS markets have come snapped back rather well. So we think the liquidity on wall Street very good submit.
Anyways, Everything's kind of gone and all the right direction other than we're still in the Mrs. Cobot thing, which God knows when that's going to end, but you know considering the circumstances were very pleased with how it's all going.
I think overall, where it's going to really just take the wait and see approach I don't make the rest of comments. After the question. So up another question.
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Thank you all our first question is coming from the line Kyle Joseph from Jefferies.
No one has it been.
Hey, good morning, guys. Thanks for taking my questions.
In terms of the deferrals or the extension that you talked about the volumes right in April and they gradually fell.
Down through the quarter can you give us a sense for.
The performance of the extension that you granted in April or Theyre, performing kind of consistently what's your expectations.
And how more recent deferrals had been performing.
Well, we do a fair amount of.
Sort of long term analysis of extension effectiveness and so we don't have a 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 you know in general we make good extension decisions and so.
I think we're confident that those results and one thing I guess indirectly I do know for example, Kyle that the cash collections.
I have been very consistent so the dollar amounts of cash payments that customers have made have been a steady they were actually up slightly in may compared to April and the June numbers were level with may and so you know I mean, I think that we're we're satisfied that the customers are getting that one.
The extension and then they recognize that they've got to be on track after that.
Got it and then you know in terms of the fair value Mark in the incremental provision in the quarter can you give us a sense or what sort of economic assumptions, you're you're baking into this credit for cats and how does it change since March 31st.
So there is so in the fair value Mark there's two pieces of it a one is kinda straightforward and the other one is a little bit more settle the domain one that goes into that nine and half million dollars. Mark is we're just looking at the forecasted like each of these the whole fair value portfolios to us on a granular basis is a bunch of monthly portfolios.
Starting from January 2018, and so we look at each monthly portfolio and each portfolio has a forecast of losses in the future and so we picked a window like a six month window of.
Coming up.
We predict just judgmentally predict that the losses over that six month window will be in or something like maybe 10% higher and so we bake that in and then that has an effect on the Mark and then the other markets a little more subtle as a as Brad mentioned, we're getting a juicy or yield a richer yield and the paper that were.
Buying today and so when we 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 a 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 market down the fair value portfolio I was too.
Right up the yield on the oldest cohorts.
Got it very helpful and one last one from me can you just give us the Centsper I know you talked about you know the goal is do you 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 there are obviously going up probably on a you know maybe a slightly slower scale than we would expect but again, we're actually doing really well with what we're buying so the the offsetting yield adjustments are probably worth the lower volumes. So.
I mean, the problem is that summer in somebody's generally given everything is going on I'm not going to be a real great time to try and push the growth and so probably unless things change so much 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 so.
Something like that but yeah, we would expect it to trend up 10% a month or something would be sort of the gas at the moment just were will react with the market, but like I said I guess important things, we're doing very well, 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 and all that as caution we don't we don't want to good going real fast and have something go wrong, we wouldn't covert or the economy or whatever it is that causes us to have a liquidity problems down the road. So you know we're doing fine what we're doing it we'll just keep managing it as we go so far to put a number on it but if you wanted to say we're gonna grow.
I would hope at a minimum 10% monthly, but we'll see.
Got it very helpful. Thanks, a lot for answering my questions. Thank you. Thanks.
Once again, if you have a question you me press Star one on your a touch.
The phone.
Next question, it's coming from the line of Jefferies Chen from JMP Securities. Your line is open.
Hey, guys. Thanks for taking my question I, just got a quick one on Oh I was wondering what do you guys. His thoughts are on recovery values in terms of repossession activity, even near term and on potential future regulatory action.
I mean, we sort of talked about is the.
The market Oh auction market is going to remain strong there is a few states deal that you cannot repossess cars right now I think this five of them and so it's not having a dramatic effect in terms of repossession, we would expect I almost think as much as baby.
Perfect and to say you know the new car manufacturers, we try to keep in the new car sales as high as it could go lives for years and you know that bubble was gonna burst and so kogut. It 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 gonna be all at the man get built back up as they ramp up production again, but in the meantime.
Hi, I'm you know, we're gonna benefit dramatically from used cars going to auction and having a much better values. So in terms of repossessions, yeah. We're missing a few stays where its not dramatic in terms of the values. We get it auction you know, they're probably going to be stronger until a 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 you know repossessions rest of year and auction values resi or.
Okay. That's helpful. Thank you.
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You don't have any further questions.
Mr. Brett Lee you me a continue.
Thank you. So I guess you I, probably said would caution about 10 times today, because that's really the operative word for where 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 propel improve or technology cut expenses and manage our way through as best we can having said all that.
Second quarter was great I mean, it's amazing given the coded and all these other problems going on that we're able to have such a good quarter and so you know our hope is that this continues yeah and we'll go through it hope everyone stays healthy unsafe and I will speak to next quarter. Thank you for attending.
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