Consumer Portfolio Services Inc (CPSS) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services third quarter 2005 earnings release 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that can cause actual results to differ materially from those projected. I refer you to the Company's SEC filings for further clarification. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

I will now turn the floor over to your host, Charles E. Bradley, Chief Executive Officer of Consumer Portfolio Services. Sir, you may begin.

Thank you and thank you all for joining us this morning on our conference call. First before we get into the numbers I thought I would make a couple of comments. Obviously we are very pleased with the quarter. The numbers came in really nicely for us. I think we have been pretty much sticking to a plan for all those people who've been with us and following the conference calls and the Company for the last few quarters if not several years.

We set out when we went off again on sales (ph) accounting about 18 months ago to do it the right way, to be conservative in how we projected the performance of the Company. And somewhat more importantly, to take the proper steps in growing the Company, building the proper foundation, doing the things and putting the controls in place in other areas of the Company to firm them up so that when we are able to grow, we are able to grow correctly and build on a strong foundation.

Having said that it seemed like it took us a little bit of a while before we actually had some quarters where that happened. And I think as I mentioned several quarters ago, we have done a lot of things to put expenses in line, to put technology in place and we were ready to grow. And then the growth was coming a little slowly.

On the last two quarters, finally, that growth arrived and we were able to take advantage of it and as of course you can see it has come down to the bottom line. So we are sticking to our plan. The plan now is nicely showing some results. The quarter's worked very well. We think everything is in place and it's certainly something we are both proud and pleased with and I will look for the results to continue.

With that let's walk through some of the numbers. The quarterly revenue for September was 49.4 million. That compares to previous quarter of 47.8 and the year ago quarter of 34.9. So obviously the revenue numbers are up substantially from a year ago, slightly quarter to quarter.

The expenses for the quarter were 48 million versus 47.2 the previous quarter and 37 million a year ago. Again with the jump in the production and things like that you're going to see the expenses go up as we will point out a little bit later. We think we've really been able to manage them in the right direction.

The loan loss provision for the quarter was 15.8 million -- that's versus 15.2 million for the previous quarter and 7.6 million from the year ago quarter. As we now are starting to grow, the provision is going to grow along with it.

Really one of the sort of -- not tricks but the way to see how things work is you need to be able to grow and that provision is a big negative. Because as you grow quickly or as you grow more, the provision will always continue to increase.

Net income from the quarter was 1.4 million versus .5 million in the previous quarter and that $2.1 million loss the year ago quarter. So we had a nice little jump in earnings this quarter. As I said things are starting to work very well. We are very pleased with those numbers.

Earnings per share, $0.06 for the quarter versus $0.02 previous quarter and a loss of $0.10 in the year ago quarter.

Cash on the balance sheet at the quarter end was 164 million versus 155 million previous quarter and 124 million a year ago quarter. As we continue to grow and do more and more securitizations and the size of those securitizations continues to increase, you'll see that cash continue to build, much of it being in those securitizations.

In terms of the finance receivables, we currently at the end of this quarter have 872 million finance receivables versus 747 million previous quarter, and 524 the year ago quarter. Allowance was 56.1 million this quarter versus 53.3 million previous quarter and 39 million a year ago quarter. For a net finance receivables of 816 million this quarter versus 693 and 485 for the year ago quarter.

Again, we've had a nice jump in how that managed receivables volume has grown. The goal really is as time goes by for us to grow the managed receivables. In fact, that's really in most ways just a very large annuity. As you add more and more larger securitizations to that portfolio, you will reap the benefits of the interest income as it comes off.

In terms of debt, the overall debt was 950 million versus 824 the previous quarter and 596 the year ago quarter. The largest piece of that debt is now -- and this will continue as we go forward -- will be the debt associated with the securitized portfolio. That debt in this quarter was 804 million versus 692 in the previous quarter and 477 a year ago.

Probably one of the more fundamental changes by going off of gain on sales is putting all the loans on balance sheet so you see that debt number. And it will continue to grow as the portfolio continues to expand.

Long-term debt was 76.8 million versus 74.8 million in the previous quarter and 74 million, same number a year ago quarter.

The securitized and warehouse debt for the quarter was 873 million versus 737 the previous quarter and 494 the year ago quarter. Long-term debt is down somewhat at 76.8 million versus 86.8 million the previous quarter and 102 million the year ago quarter.

On to the portfolio performance. The portfolio continues to perform very well for us. We think it's both the combination of paper we originate and also the strong collection performance. The overall economy does have some effect on it and that continues to be favorable as well.

The delinquency in the September quarter was 4.72% versus 3.87% in the previous quarter and 5.23% in the year ago quarter. So even though the delinquency percentage was up a bit from 3.87 to 4.72 quarter to quarter it is down somewhat from the 5.23 in the year ago quarter.

As we coast into the fall, the summer months being the third quarter and the fall months being last quarter, the delinquency seasonally will go up. But if you compare again year-to-year it's better off than we were before.

The annualized losses for the quarter were 4.1% versus 2.89 in June and 6.03 the year ago quarter in September. Again if you -- probably the more relevant comparison looking at the losses is year-to-year so it's 4.41 versus 6. Again the quality of the portfolio is probably either at least marginally if not significantly improved than the quality of the portfolio a year ago.

The consolidated portfolio or total portfolio at this point -- the consolidated portfolio was 900 million for the quarter versus 772 the previous quarter and 553 the year ago quarter. For reference, two years ago the consolidated portfolio was 275 million.

The total portfolio, and it is kind of a nice benchmark for the Company, crossed over $1 billion for the first time in a long time at $1,055,000,000. That is up from 966 million in the previous quarter and 899 in the year ago quarter and 750 two years ago quarter.

So having that $1 billion portfolio market is significant for us. It is one of the goals we set out. I think one of the -- probably two of the goals we talked about a lot was, getting back to where we were before -- back in 1997-98, which was $1 billion managed portfolio and 100 million or so in monthly originations.

Today we have now crossed that billion dollar portfolio threshold, and that will continue to grow. We are getting a little closer as we go with the originations. Originations for the -- our monthly originations have eased up to around 70 million which, for those who are following along, is significantly higher than it was a few months ago when it was in the 40s to low 50s. We think that number will continue to grow. Probably we wouldn't expect it to grow too much during the rest of the year. We would look for the normal seasonal growth in the first and second quarters next year.

Probably some other numbers to look at that are, we think, exceedingly relevant would be the net interest margin. Net interest margin for the quarter was 31.8 million versus 28.6 million for the previous quarter and 19.6 for the year ago quarter.

The net interest margin represents for all intents and purposes the money you make on the held portfolio which is the interest rate you earn on the portfolio or on the loans minus your losses. That spread going up is what will eventually be the core earnings mark and is the number to watch.

Then, the quarterly loss provision which another way to look at it would be to take the net interest margin minus the loss provision. For the quarter that number was 16 million versus 13.4 million the quarter before and 12 million the year ago quarter.

When that really shows, that is where the growth in the revenue is going to come because you have to take the provision out, and as probably I mentioned a little bit earlier, as we grow you are going to continue to provide for that provision and if you buy a loan today and a better example -- and especially today, since it is near the end of the month. If you buy the loan today the day you buy that loan, you have to book the full provision or a significant provision for 12 months.

By the same token, though, you only get to book the earnings on that loan for the few days you have remaining in the month. The significant growth or any growth and certainly from a 45 to 50 million a month, the 70 million a month growth, you're going to have higher provision with not a lot of income behind it. So you have to keep that in mind and certainly looking at the net interest margin minus the provision is probably a more accurate way to look at how the Company is performing.

Another thing to look at would be the core operating expenses which excludes interest, loss provision and impairments. For the quarter those expenses were 18.6 million versus the previous quarter of 20.1 million and the year ago quarter of 18.4. The thing to look at there and, obviously, it is very significant is that the core operating expenses are actually down quarter to quarter and are basically flat year-to-year. Yet we have added significant loan volume on a monthly basis and also on an overall managed portfolio basis.

So as I said earlier in the call this is just one of those areas where we really focus on keeping our expenses line, putting the controls and the technology in place to better leverage our current personnel and our current infrastructure. And that will continue to pay dividends as we go forward.

One last number to look at would be the core operating expense as a percentage of the managed portfolio. That number for the quarter was 7.1% versus 8.3% in the previous quarter and 8.2% a year ago.

That is also a good number to look at in terms of how we are operating on an expense basis, based on the portfolio. That number we would hope would continue to come down gradually as we continue to add more and more loans and grow the managed portfolio.

Overall, we are very pleased with those numbers. If we can keep things going the way they're going and the economy cooperates we would expect those numbers to continue.

Probably a couple of other things to talk about. One would be Katrina. Katrina, as everyone knows, has come through and caused an effect down on the portfolio in the New Orleans area. We think the overall piece of our portfolio affected by Katrina is around 2 to 3%.

It is a little too early for us to tell in terms of what the overall effect on our performance will be. At 2% or 2 to 3%, we are not hugely concerned. We have worked with our insurers and gotten a little room in terms of the extension policies for that area of the country. So we were a little bit more liberal with granting extensions to the people that we couldn't get a hold of or that were in that area.

We will have to see what the real results in the portfolio was -- portfolio is, over time. But again with strong collections and our ability to find and locate those people will tell -- give us a much better idea of what kind of effect it will have.

Overall we are not thinking it will be an enormous effect one way or another. Certainly the sale of these will have some effect. It is not going to be a no-brainer but it is not going to have probably a material effect in the overall performance.

In terms of the overall industry, the industry seems to be forming pretty much at status quo. Everybody I'm sure noticed that WFS was bought by Wachovia recently. So there continues to be acquisitions within the industry. There doesn't appear to be a lot of new players.

I think some of the competition is probably flattened out a little bit. The credit unions seem to have backed off a little bit in the ability of their financing in subprime. We might attribute some of the boost in our volume or monthly volume to that.

But, overall, the industry remains relatively sane and competitive but not so that it is hard for us to grow. So we are pretty happy with that, overall.

In terms of the overall economy, I think if the economy continues the way it is, it should have a fairly neutral effect. Another question we think that might be asked would be, what would be the effect of rising gas costs and the effect of higher heating costs for the winter? As much as we might think it might -- the overall economy, and if the overall economy doesn't do as well that might have an effect.

We think the overall economy not performing as well or maybe softening would have more of an effect on our ability to grow than on the overall portfolio performance. We think a growing economy certainly at least an even economy would contribute at least to continuing car sales the way they are. That obviously means we can (technical difficulty) bunch of them.

If the economy were to get flat people and weren't going to buy cars, either because of the economy, the higher cost of oil, or any of those things, that might have an effect on our ability to grow and increase origination.

In terms of the effect on the portfolio, however, we are still of the mind that people need their cars to go to work. If higher heating oil costs have an effect they are certainly going to want to keep going to work so they can afford to heat their homes. We will wait and see but we are not really looking at higher oil costs as having a huge effect on the portfolio performance.

We would key the portfolio performance and more importantly the growth in originations to the overall economic performance of the country. And see how that affects what we do.

Other than that, marketing origination continues to be strong. The technology we put in place is working very well. We continue to increase our presence across the country, opening new markets, expanding the rep force nationally. That has proved to be very much what we thought it would be.

We've always said that you could add people in many places in the country and get growth from just expansion of your marketing base, rather than having to change products or cutting price. And in fact, that has been very effective for us. So we would hope that would continue. Overall, our collections remain very strong. We have a very significant infrastructure for collection so we are very easily able to add bodies as necessary. So that hasn't been a factor either. And overall collections have remained very strong.

I think Katrina probably might hide the effect of our continued success in collections a little bit. Maybe the two will offset each other and so Katrina won't be such an effect or have little or no effect on portfolio performance.

With that, we will open it up for questions.

(OPERATOR INSTRUCTIONS) John Hyatt (ph) from JMP Securities.

I'm new to the story here so I have a couple. Can you tell me, were there any renewable notes at the end of the quarter on the balance sheet?

Currently the renewable notes are about 3.5 million. To make a comment on the renewable notes program we've probably had significantly higher hopes for the success of that program. It is still early on and doing okay. It is not nearly the impact we thought it would be. So we'll continue to do it, but we probably wouldn't count on it for a significant contribution to our debt limits.

You talked about this during the conference call but the G&A costs were definitely -- they were down sequentially in year versus year. Is this a new base that we should look at or was there something seasonally maybe associated with bonus accruals or something that impacted this favorably?

I think, overall, I think you could probably use it. What we have -- if anything, what we really have is maybe an easy way to answer this – as we carry it as I've said in previous conference calls fairly significant infrastructure costs, because we want to be able to grow and not have to rebuild what we already had to do it.

So in fact, as we've been able to add a lot of growth or add to the portfolio we haven't had to add significantly to the number of employees. We haven't had to add any infrastructure, whatsoever, in terms of finding new buildings, new places to put people, things like that.

With respect to expansion plans, I understand hiring new marketing reps and geographic expansion will lend to growth. But can you comment on maybe more specific what regions of the country, or is there any new consumer base either in the higher or lower end you might be going after?

I think we've actually had a lot of success in the Midwest so we are expanding our position there. Before, previously and certainly maybe ever we had very little success in the Northeast. Recently we have been able to put reps on the ground in the Northeast with some success.

So it is hard to pick a real area. We have had -- if I was going to pick two, I would pick those. If I was going to somewhat jump around the country a little bit we -- we are doing better in almost any area you pick. We're doing better in the Mountain states. We're doing a little better in the Southwest. We're certainly doing significantly better in the Northeast because you're going from basically zero to something. And we're probably doing better in pockets in the Midwest.

I think one of the things we have been doing is made a concerted effort to sort of fill in the gaps in our overall umbrella of marketing reps across the country and I think the way we positioned the new ones has worked out rather well for us. So in terms of geographically that is really the growth strategy is to continue to fill in.

And even having said everything I just said, there is still lots of ground out there we could put more people in. So that is very -- it is good news both ways. It's good in that we are doing it, and it's also good that it still looks like there are plenty of other opportunities out there.

Secondarily, we continue to probably look to maybe move up the credit scale. We are looking for those higher borrowers, higher end borrowers. We haven't had a real lot of success getting them. But we'll probably continue to do that. On the lower side if we buy the deeper credits, we buy it at a significant discount and so with the actual lower end business is more profitable in some ways though the credits are a little riskier.

So we are looking at that. We haven't really moved much from our spot in the credit spectrum lately. I think a year ago it would be easy to say we moved significantly up the credit spectrum. Since then we probably haven't moved much at all.

Last question is related to, do you -- does your mix of your loan portfolio or your originations, does it from what you understand about or know about it, does it mirror recently what you -- excuse me, reasonably well the Manheim Index? On the same topic can you discuss the trend of recovery rates during the quarter?

The trend of recovery rate for the quarter is about the same as it's been. We've had slight to no real improvement in it. But, remembering that it has improved significantly in the last couple of quarters versus the year ago quarter. So we've had a pretty good jump year-over-year in terms of how we perform at the auctions. It hasn't moved up too much, if at all, in the last two quarters.

Then, generally speaking it -- just trying to compare or forecast you in relation to say using the Manheim Index as it benchmarked, do you kind of vision that your overall portfolio is a reasonable comparison of the mix at the Manheim Index level?

It is probably not as good a comparison as you might like. The mix of the vehicles is different for them versus us. I don't know if I'd use that as a perfect indicator in terms of a comparison.

Okay and just to finish that off, was it -- would you be light in the SUVs or do you have a sense for where you might predominantly be different from the Manheim?

Very good. We would be prominently different from them in the SUV category. We think that would be significant enough to skew the scale somewhat.

Thank you very much.

Thank you for your questions.

Russ Salsbury from Woodcliff (ph) Comp.

Russ Salsbury (ph). Could you comment on your residual interest as of today?

The residual interest, the debt or -- ?

Well, the debt is paid off, is it not? So the balance sheet shows a significant decrease from the end of the year to now on the asset side?

Sure. We did. We retired all of the residual debt during the quarter. We are in the process of looking at doing a second residual deal. That probably would happen in the fourth quarter.

(OPERATOR INSTRUCTIONS) Sir, there appear to be no further questions at this time.

All right, well, again we're very pleased with the results. The things we've been talking about again I am kind of repeating myself. But maybe in some ways that is good. If you can put a plan together and stick to it, we think that is the way to do it and we have been very successful it seems in getting that done. We set out some goals 18 months or two years ago. We stuck to those goals. We built the right infrastructure. We put the technology in place. We built the proper base and, truthfully, hoping that this would work the right way and it has. We now are back to a growing company. We've been able to get the marketshare or the growth that we've been hoping to get. We've been able to apply that to the infrastructure and the technology and be able to save money doing it.

And as a result, we have been able to have a return to profitability and had success along the way. We will look for that to continue. We thank you all for attending today. It turns out there is one more question.

Clare Baum (ph) from Wachovia Securities.

Just a couple fast questions. No. 1, I'm wondering on the restricted cash are you able to manage that for a maximum return? Or what is happening on that restricted cash, which is of course quite a large amount?

I wish we could. No. That return to cash is in trust accounts. It does get a return. It's not enormously significant. It's in the area of 3%. If we could manage it better we would but that is not really what the cash is there for. So – but, you know, you're getting something on it.

I was just surprised you couldn't buy at least 90-day paper or something (inaudible)?

No, it's got a 30-day limit on it.

The only other thing I was wondering, are you talking insurance at all on Katrina cars from your standpoint? Or are you just relying on the owners of the cars?

Are we talking to insurance people? Was that the question?

Do you have insurance on your cars?

We'll find out. The way the insurance part works is all the cars are insured when the customer buys them and we finance them. Truth be told, one of the first things a customer is going to do when he can't pay for his car loan is stop paying on his insurance on the car. So we can use those dollars to pay us.

Historically, and maybe this is the easy way to answer it, around 65 to 70% of the portfolio is insured. So you could apply those numbers. If we were looking at Katrina and certainly are in terms of what the impact would be, we would think, 1, that the insurance is going to cover a lot of those cars. 2, a lot of those people if they were in their car and drove out of there still have their car so that would be fine. And, 3, if the government is in fact handing out the amount of money they are talking about handing out, some of our customers will in fact use that money to either to catch up on their loans or pay us or take care of their cars. So, overall, we think (technical difficulty).

Thanks a lot.

(technical difficulty)

So in closing, everything is going well. We're very pleased with the quarter. We look forward to talking to everybody next quarter. Thank you very much for attending the call.

Thank you. This does conclude today's teleconference. The replay will be available beginning an hour from now until Tuesday November 1, by dialing 1-877-519-4471 or 973-341-3080 with pin number 6598584. A broadcast of the conference call will also be available live and for 30 days after the call via the Company's website at www.ConsumerPortfolio.com. And at www.Streetevents.com. Please disconnect your lines at this time and have a wonderful day.