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 16 and its quarterly report filed May 5 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'll now turn the call over to Mr. Bradley.

Thank you, and welcome everyone to the second quarter earnings call. I must note I wanted to have people on the conference call set up business get their jobs 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 that - 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 stood up very well.

We went from starting on 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 is worried about the volumes. Our volumes are off a bit, however 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 is sort of trying to maintain liquidity and being cautious, and as our 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 check 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 where good, 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 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. It'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 $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 for the quarter, really think about 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 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 - I mean 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, $67.7 million, 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 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 interesting to note, the sequential quarter, we did have some decreases in some of our core operating costs, like for example, our sales expenses, a number of expense categories that are tied to originations volumes and we had significantly lower originations volumes inn 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 of $6.7 million is an 85% decrease compared to the first six months of 2019.

And so you'll 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 and that portfolio will exceed what our January estimates were. And so we put $3.1 million in to 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 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 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 pretax earnings in spite of these COVID-related adjustments and it's the first time really since we have 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 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.

Our year-to-date net income $13.8 million is 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 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 The CARES Act got put into place. So that's kind of rippling through those net income numbers. If we look at earnings per share of $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 six months, and that's up significantly from $0.15 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 $0.37 per share.

Moving on to the balance sheet and not much going on there, but to talk about, you see the continued reduction in amortization run-off of the legacy portfolio, and you may notice too that on the warehouse lines, you know, 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 million in the first quarter and down 30% compared to the second quarter of 2019.

This 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 components of the NIM being the cost of funds, the actual blended cost of all 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 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 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 million and 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 origination 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% of 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 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 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 grants 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 over granting what you know today, and the month of June is really just a normal number of extension. 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 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 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 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 shutdown. And so we just bided our time we kept in touch with our partners, our Wall Street partners and investment banks. And we saw that window begin to open up in late May.

We let a couple of our - we 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 - again pleasantly surprised at 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 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 of 3.08%, but nevertheless, invested still a very acceptable cost of funds financing for us. With that, I think I'll turn it back over 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 is less new cars out there because of the COVID problem.

A lot of the new car 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 a result of those things, we've also been able to raise our APR a little bit. We raised our fees significantly, have also improved the credit quality.

Our LTVs are down, our 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 were getting and I think we can get back to those volumes.

I think volumes across the industry will be slightly depressed a little bit, mostly because I would think most people are proceeding with caution like we are. But again, it's a little hard to tell the industries’ seems to have plenty of liquidity. It seems like everything is functioning the normal, other than car sales are down.

People though, do get cars when they when their cars breakdown 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 average 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. And 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 had before.

We've got lots of new technologies that have improved collections. And so 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, as you pointed out, the auctions are just about flat year-over-year.

We would expect them as long as there's, until a 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 - snapback rather well. So we think the liquidity on Wall Street is very good.

So in many ways, everything's 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're 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 up for questions..

[Operator Instructions] Thank you. Our first question is coming from the line of Kyle Joseph from Jefferies. Your line is open..

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 or 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, we 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 show that. In general, we make good extension decisions.

And so I mean, 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 one month extension, and then they recognize that they've got to be on track after that..

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 are baking into those credit forecasts, and how those have changed since March 31?.

So in the fair value mark, there is two 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 forecast and like each of these, the whole fair value portfolios 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 six-month window coming up. And we predict - just judgmentally predict that the losses over that six-month window will be something like maybe 10% higher. And so, we've baked that in, and then that has an effect on the mark.

And then the other mark is a little more subtle, as Brad mentioned, we're getting a juicer yield or richer yield and 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..

And one last one from 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 as its summer and summer is generally given everything's going on, they're 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’ll react with the market. And like I said, I guess the important thing is, we're doing very well at 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 is caution. We don't want to get going real fast and have something go wrong - either with 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. We'll just keep managing it as we go. So it's a little hard to put a number on it. If we 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. Your line is open..

I just got a quick one on.

I was wondering what you guys just 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 as the market - the auction markets are going to remain strong. There is, a few states still that you cannot repossess cars right now I think there is five of them. And so, it's not having any dramatic impact in terms of repossessions.

We would expect I almost think as much as it maybe - I don’t know was the perfect thing 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 is 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 unless 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 it auctioned, they're probably going to be stronger until that new car demand catches up to the new car production, which again it may not happen this year.

So, we would be relatively optimistic for both repossessions the rest of the year and auction values the rest of the year..

[Operator Instructions] I don't have any further questions. Mr. Bradley, you may continue..

Thank you. So I guess I probably said we are caution about 10 times 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 as we can. And we said, I’ll add second quarter was great. I mean, it's amazing given the COVID and all these other problems going on, that we're able to have such a good quarter.

And so, our hope is that this continues, and we'll get through it. Hope everyone stays healthy and safe. And I will speak to you next quarter. Thank you for attending..

Thank you. This concludes today's teleconference. A replay will be available beginning two hours from now until the 29th of July by dialing 855-859-2056 or 404-537-3406. The conference identification number 9486817.

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..