Consumer Portfolio Services Inc (CPSS) 2008 Q4 法說會逐字稿

Good day and welcome to the Consumer Portfolio Services 2008 fourth quarter and full year 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 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 could cause actual results to differ materially from those projected. I refer you to the Company's SEC filings for further clarification. This Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future 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 to our year-end conference call. First, I probably want to point out, the reason it's late this year, I think as most people know we changed auditors at the beginning of the year so our annual audit got started a little bit late, and given the timing and all, it just pushed the call back to today. Thought it does seem like it's been awhile since our last call, but the audit went very smoothly and worked out very well so I think all in all it's been a very good transition in that respect. But that is the reason the call is a little bit late this year in terms of when it would have been last year.

Overall, everyone knows with this economy and all it's been a very difficult year, '08 was, but given that, given the economy, given the industry, probably the fact that the finance industry or financial services industry and specifically subprime, forgetting about subprime mortgage, is probably the hardest hit area of the entire economy. On that sort of landscape, I think things have done pretty well. I think the Company has done a very good job of getting through what was a very difficult year, and I think the results show that.

I think the portfolio performance has really hung in there, certainly better than most. We've done really taken the appropriate steps all through the year to maintain the infrastructure and the model and everything else. We've reduced overhead significantly. We've gone from 1,000 employees down to 600. It's a painful process but something that needed to be done in order to keep the franchise where it needs to be. We also changed offices, so we saved some money there. I think the point is we've done many, many different things to conserve our capital, to cut costs, do everything we can to sort of weather this economic storm which, I think a lot of people hoped would have sort of settled out by the middle of this year or this year, and I think it's probably going to be the end of this year if not early next. So I think our planning is more in a 12-month cycle as opposed to thinking things are going to get rosier in three to six months but if it does, that would work out very well for us.

I think we've done a good job of conserving cash. We cut our originations rather drastically in very early '08. I think that was really, in hindsight, the appropriate thing to do and something that's really done well for us in terms of cutting our costs, preserving our capital, and maintaining what we need to have going forward. We've also focused on collections with not a big emphasis on growth and as much as we've now been able to do this twice, and we did this 10 years, this gives you time to really figure out what you need and sharpen up in all the different areas of the Company which we've done for all of '08. I think the results will be very good. The portfolio is doing very well. We've become much more efficient. We've scaled back originations, but we've automated all these different things so that I think when we come out of this in six months or early next year, that we're going to be in really a very strong position going forward. And that's really the nature of what's been '08 and might be most of '09, which is to get through this economic crisis, problem, whatever you'd like to call it, recession, and be ready so that when things come back to normal we're in a position to really be the leader in the industry again.

And looking at the industry, I think on top of everything else, the Detroit car dealers have had a significant problem in the year, probably have very significant problems coming along in the next year. But that -- at the car dealer level two things are interesting. One, the car dealers are having the same kind of weeding out process that a lot of the lenders are. Two, we've found that the car dealers that are there, in many ways are just like us. They're very eager to get back in the business, they're very eager to start selling cars again, they're very eager to have financing available. And I think having that dealer base and having those dealers ready, willing, and able to start financing cars through us when they get the opportunity to start selling cars, is, again what everybody wants. So at the front end of the business, I think that bodes well for the future. And therefore, bodies well for us as well.

In terms of the customers, I think our customers are hanging in there rather well. We've always focused on customers that have significant residence, significant jobs. As much as unemployment has gone up and that has effected the performance somewhat a lot of our customers can move around and find other jobs. I think as the stimulus package helps out a little bit I'm not sure all that many people see the stimulus checks but a whole bunch of our customers do and so that's one of the things we're looking forward to. I think those checks are starting to go out this month. That could be a little bump in the performance as well. In all those different things, as the economy begins to move a little bit, our customers should be able to hang in there and keep doing what they need to do to keep employed and stay in their cars.

It's also important to realize, one of the things that's different to us than, say, the mortgage industry, is our customers at some point are going to replace those cars. They are going to need to get new cars, and that's going to be a stimulus to the industry as well, regardless of the fact that new car sales are down so much in the last year.

In terms of the lenders, more and more lenders have exited this business this year. It's some very interesting, somewhat frightening ways, so similar to 10 years ago when most of the lenders, or 85% of the lenders exited our industry and we've seen many many lenders exit this industry in the last year and probably a few more still will. And again, that just sets up the next year or the next whenever this recession ends and people start lending and moving again to put us in a very strong and healthy position to take advantage of that. One of the things we are going to be able to done and we have done is we've increased our margins, we've tightened our credit, so we are actually going to be buying, and we're buying today, a much stronger credit at a much stronger margin and I think that will have significant effects when we get to start growing the business again. And so as much as we've lost a bunch of lenders, it's truly, I think a testament to the strength of this Company that we're not planning on going anywhere. I think the opportunity on this side can be extensive.

In terms of the capital markets, it's a very short conversation, since they really don't exist right now. They have not really unfrozen much, as much as people have said they are going to. Today they're still just locked up as much as they were six months ago. There have been one or two deals in the last month or so that may be showing a glimmer that things are beginning to move a little bit. But I think the way to look at it, it's going to take some time. We were kind of hopeful that maybe this would move faster, and it might really open up in three months or in six months. We're going to take the long view that it could be six to 12 months and plan accordingly, then if we have a nice surprise we'll be in a very strong position to take advantage of it.

But right now with the TALF program and some other things, I think the government is trying to create some avenues for those banks to start to lend again. There's a few glimmers that that could happen, but right now it's still pretty tight and I think it's going to take another three to six months at a minimum, but we'll see. There are some glimmers of hope but right now those markets are still pretty closed up. At this point I will turn it over to Jeff to walk through the financials.

Thanks, Brad. Good morning, everybody. Let's start with the revenues. The revenues for the fourth quarter were $74.6 million, down about 20%. 19% from the September quarter and about 32% from the 2007 fourth quarter. The full year revenues were $368.4 million. That's down about 7% from the full year revenues in 2007.

Of course, the revenues are almost exclusively influenced by the size of our outstanding financed receivables portfolio. The portfolio, due to the reduced originations, is shrinking, and shrunk about 9% from the third to the fourth quarter and about 22% over the -- or about $460 million over 2008 compared to the end of 2007. And you can see how that has influenced the revenue picture.

Moving to the total expenses for the quarter, $111.9 million, that's up about 7% from the third quarter of 2008, and up about 8% from the previous year's fourth quarter, full year expenses, $412 million, that's up about 11% from the full year 2007. We're going to talk about the provision for losses in a minute, which is one of our significant components of expenses. Many of our categories of operating expenses are decreasing. They were either maybe flat or slightly decreased during the year. Certainly in the fourth quarter compared to the third quarter and the fourth quarter of the previous year, most of our major expense categories, such as employee costs and interest expense, marketing, have decreased as the originations, volume, and the portfolio itself have decreased in those periods.

The provision for losses, however, did not decrease in the fourth quarter. It was $56.6 million, compared to $26 million in the third quarter of '08. That's up about 118%, and it's up 46% from the fourth quarter of last year. The full year provision, $148.4 million compared to $137 million for the full year 2007, and that's about an 8% increase.

Obviously, the recession, the difficult economic climate has had an impact on the performance of our portfolio, so we looked at the portfolio metrics very carefully in consideration for the deterioration of the economic climate, the option values and all the components that impact the performance of the portfolio, and we feel we've made an adequate provision to make sure that the allowance for losses is sufficient.

Moving on now to the pretax results pretax loss for the quarter, $37.3 million compared to about $12.6 million for the third quarter, the previous third quarter, and a $6 million pretax gain in the fourth quarter of 2007. The year to date pretax results, $43.5 million loss, compared to a $24 million pretax income in 2007. Obviously, the pretax results are significantly influenced by the higher provision for losses during 2008. In addition to, we talked about this actually at the end of the third quarter, we recognized about a $14 million loss on the sale of certain receivables in the third quarter of 2008 that obviously contributed to the loss for 2008, and is unusual for us in that there was no comparable lost item or component in 2007.

The net loss numbers for 2008, fourth quarter, $23.4 million, compared to a net quarterly income of $3.5 million in the fourth quarter 2007, and the year to date loss, $26.1 million for 2008, compared to year to date income of $13.9 million, or the full year 2007. The diluted loss per share for the quarter, $1.22, and for the full year, $1.36. Again, those are significantly worse than the fourth quarter 2007 of $0.17 and the full year 2007 net earnings per share diluted earnings per share of $0.61.

We'll move on and look at a couple of the balance sheet components. Our cash -- free cash on the balance sheet at 12/31/08, $22.1 million, that's down just slightly from $23 million in September of '08, and it's up a little bit compared to a year ago, December 2007. Brad mentioned that we've significantly scaled back the originations volume. That has had a significant impact, it helped us conserve our liquidity and maintain what we feel is an adequate and strong cash balance. Restricted cash balances are declining more or less in proportion with the managed portfolio. The managed portfolio consists of on balance sheet receivables at the end of the year of $1.3 million after the allowance for losses. That's down about 11% from the third quarter and down about 32% from the fourth quarter of 2007. The allowance, we might point out, as a result of the significant provision in the fourth quarter, has increased about 17% from the third quarter of 2008.

Looking at some of the components of debt, we have warehouse financing debt of about $10 million at year end. We have some receivables still pledged to a warehouse facility. The facility has since been amended, so that no further advances are really available to us, but the lender in that facility has been a good partner to the Company and has helped us amend that facility to be sort of an amortizing, almost a little bit like a securitization type facility. But that will mature during 2009.

The residual financing debt is down slightly throughout the year, to $67.3 million by the end of the year. Securitization debt is down to $1.4 billion at the end of the year, and that's been amortizing again in proportion with the outstanding securitized portfolio. And our long-term debt is about $46 million at year end, down just slightly through paydowns and redemptions and whatnot from the third quarter, and it's up from $28 million in December of '07. You may recall that we did some long-term financing during 2008, and both the -- I guess technically both the second and the third quarter we raised some long-term debt.

The portfolio, we already talked about the reduction in the portfolio. The total managed portfolio is about $1.7 billion at December 31, 2008. That's down from $1.8 billion in the previous quarter, or about 9% and down from $2.1 billion in December of 2007. We did originate significant receivables really in the first quarter of '07, although we really started scaling back those monthly volumes late in '07 and throughout '08.

Some of the other metrics that we look at, the net interest margin, $34.3 million for the fourth quarter, that's down from $46.7 million in the third quarter of '08, about 27%, and it's down from $63 million in the fourth quarter of 2007, on a year-to-date basis the NIM, net interest margin, was $195 million for the year and that's down about 15% from $231 million in the full year 2007. Again, the NIM is going to track and trend pretty much in line with the size of the outstanding portfolio, somewhat influenced during 2008 by higher cost of our securitization debt, the coupons and the cost of the securitization debt in late '07 and our 2008 any securitization were higher than a lot of stuff that was securitized in early '07 and in '06, for that matter.

The risk adjusted NIM, which is the NIM and also including the provision for losses, is actually a loss for the quarter, $22.3 million negative, compared to a positive $21 million in the third quarter of '08, and a positive $24.5 million for the fourth quarter of '07. The full year, $47 million compared to $94 million for the full year of 2007, or about a 50% decrease. And again this is influenced significantly by the higher provision for losses in the fourth quarter, and somewhat less so by the higher cost of funds associated with our financings that were put on in late '07 and 2008 transaction.

Our core operating expenses have decreased somewhat, of course, as the portfolio has amortized and shrunk against the smaller origination volumes for the quarter, $20 million, or 4.7% of the average managed portfolio. That compares to $37 million, or about 4.9% for the previous -- for third quarter of '08, and $25 million or about 4.8% for the fourth quarter of 2007. On a full-year basis, the core operating expenses, $93 million for the full year of '08. That's just slightly less than the full year of 2007 of $94 million, and the ratio of the core operating expenses against the average portfolio for the full year has gone down a little bit, 4.8% for the full year '08 compared to 4.9% for the full year of '07. So as Brad pointed out, we've been consciously and diligently as possible reducing operating expenses to correspond with the effort to size and the magnitude of the managed portfolio. We've reduced staff throughout 2008, and other operating expenses where we can do that. That summarizes the numbers. I will turn it back over to Brad.

Thanks, Jeff. Now looking at the portfolio performance, the delinquency in December '08 was 8.59%. That's up from September '08 which was 7.68, and year-over-year, December '07 was 6.31. The thing to point out with both the delinquency and loss numbers I gave to you are that the portfolio is shrinking so they are going to go up. The loss numbers were 9.97 for the quarter, December '08, 7.89 for the September quarter, and 6.34 for the December fourth quarter. The net losses year to date annualized were 7.74 for December '08, 7.2 for September '08, and 5.26 for December.

As much as those numbers have gone up, looking at delinquency from really year-over-year from 6.3 to 8.5, again, most of that has contributed just because the portfolio is shrinking, and really that's not that big a jump. The DQ back in '99 was about the exact same thing when we were having a declining portfolio as well. It was 8.4%. So we're literally about the same kind of situation as we were in that sort of -- '99 is very comparable to this year, and so we're really about where we were. And looking at the loss numbers, as much as the loss numbers are 9.97 in the quarter and that's up significantly from the 6.34 a year ago. The annualized loss numbers in '99 were 14.9%. And so we're performing significantly if not a whole lot better than we did back then. So I think it's, again, we've learned a lot of things from what we done '99, and during that period of having the same kind of credit issues in our industry, and I think the performance this year, as much as we want the portfolio to perform better, I think the way we built the portfolio this time around, it really shows that it's going to be way more resilient than a lot of other portfolios, and certainly way better this time around in terms of how we did it last time.

I think to point out a little bit of that, the difference from '99 until this time around, our securitization structures are much stronger. Last time around there was a lot of trigger problems and a lot of people had cross-collateralization, and we don't have any of those things on securitizations. So we haven't had any triggers, as much as the portfolios haven't performed stupendously, we haven't had any triggers in terms of performance triggers. So I think that's a really important point to make in terms of the portfolio. You would think in a time like this, actually a lot of our competitors are all over the place and we haven't. And we don't plan to, either, for that matter.

Part of that is, after going through this before, we have a little bit, maybe even significantly more conservative lending model in terms of how we did things. We had lower LTVs, we had shorter terms, we really didn't buy into the extended term, we had lower debt ratios, we had a real strong focus on stability and our customers and I think that's really paid off.

I think the other thing to mention, which we sort of mentioned already is when we saw the change coming, we slowed down very quickly. We cut originations immediately and drastically, and because of that, we're able to preserve capital much better this time around. I think all these things are really going to pay off as this recession comes to an end and business rebuilds. I think going forward, the motto is going to be to continue to conserve capital and cut expenses. We are going to continue to work on improving the origination model and maintain the franchise. We are also going to collect the portfolio and maximize that performance as best we possibly can, and really just be prepared for when those capital markets open up that we can grow. There have been some deals done, as many as five top deals are out there now, and that's a real significant point going into the future. Some of our biggest competitors have exited this industry completely, which again, bodes very well for the future. With that, I will open it up for questions.

Thank you. The floor is now open for questions. (Operator Instructions) Thank you. Our first question is coming coming from John Hecht with JMP Securities.

Good afternoon, guys. Good to catch up, and thanks for taking the questions. My first questions are related to kind of current credit conditions, specifically are you seeing a normal seasonal recovery despite a more challenged economic environment? Are you seeing the type of change in your loss curves in January, February, March that you would expect to see? And second, interested in your comments on the Mannheim Index and have we seen the bottom? Do you think there's support or, particularly in the last couple months we've seen that edge upward so would be interested in your comments on those two subjects.

I like both your questions since we have good answers for both. One, yes, seasonally, this portfolio, I mean, if you just say -- November and December were two of the roughest months we've seen in a very long time. So January kind of tailed off. That wouldn't have been very good. But January improved significantly over December, and February improved significantly over January, so, yes, we're seeing seasonal improvement. We're looking that the DQ just is really the leader to it and the DQ is down significantly over the last couple of months. The losses are going to take a little bit longer to catch up, but the answer is yes, seasonally the portfolio has made some movement, and I think compared to the fourth quarter, which was very tough, it's something we really wanted to see and have seen.

In terms of the auctions, same thing. November, December were terrible months for the auction, getting down to about the bottom of where they were the last time around, in the low to mid-30s. Even in the last month or so, they've come back significantly to where we've almost picked up everything we lost in the fourth quarter in terms of auction values. Granted, still got a lot of time left, but we've seen significant improvement in the last couple months in terms of used car prices at the auctions. Again, that's a very important part of the performance. So you take both parts together, and we think things are going in the right direction. Remember, though, we're still fighting a tough economy and rising unemployment still. So used car sales are up year-over-year. There's all sorts of good signs, both in terms of performance, in terms of the auctions. All we would need is for unemployment to slow down a little bit, and we'd have a real good picture going forward.

Okay. Thanks very much. The second question is on TALF you guys did refer to it during your prepared remarks. We've seen some prime deals get done. There appears to be some interest. What's your kind of update or thoughts on a subprime auto deal getting done? Have you been talking to the rating agencies, or have you heard of others talking to the ratings agencies will it be accepted? Any update on that would be helpful as well.

Just like you said, the prime TALF fields are starting to get done now. I think us and everyone else is talking about doing a subprime deal. I think given the leverage characteristics and enhancement levels it's going to be a little more difficult to be able to do but everybody is working on it. I think one will get done. Wether it's us first again or not I don't know. What we have seen the last few months is a lot of people, a lot of the funds and a lot of institutions interested in participating in those deals at all levels up and down the cap structure. So I think an easy way to look at it, the pieces are there and a deal will get done. It's a little hard to say when. But again, it's a positive, positive trend.

And what, if you can, tell me what do you think subordinate levels will be? Are there Americredit deals, the Deutsche Bank deals that got done late last year a good benchmark for what we'd see in terms of subordination at this point?

I think we're at exactly those levels. I think those levels could be 5% either way or something. But certainly that's the starting point for all those deals.

Okay. I have more questions, but I'll get back in the queue to make sure that I don't monopolize the whole time.

Okay, thanks.

Operator Instructions) You have a follow-up question from the line of John Hecht with JMP Securities.

All right, go ahead and monopolize it. No problem.

That was quick. This is a formal monopoly. Can you guys -- just trying to use the time to catch up on the industry and your Company as well. What are you guys seeing in terms of prepayment and amortization patterns? Are they changing? Are those indicative of stress in the customer base?

They have come down significantly. Before, they weren't very good, but now they've improved a bunch. So I think people are certainly staying in their cars, and doing the best they can, which is sort of better than walking away from them. So we would expect that to level out about where it is now.

What's the kind of CPR on a quarterly base right now? And this is more of a modeling the runoff versus the run-out of the portfolio.

Let us put some numbers together for you. You can give us a call back and we'll come up with those numbers.

Okay. Then the last question is, you mentioned your margins are way up. I've also heard that now, to the extent you are originating, I know everybody is tightened up a lot, but you are getting fees from dealers. Can you give us a little color on where incremental margins are and what the fee structure has done?

The margins have certainly changed significantly. Back 18 months ago, our average discount was 1 to 2%. The average discount now is north of 12%. And the coupons a bit higher as well. So I think the margins -- an interesting way to look at the margins, even though the cost of funds going forward could be up significantly, we think our margins might grow. So one concern going forward would be that with sort of the wrapping -- the insurance wraps being gone, that the overall cost of funds would be a lot higher. But the margins, the increase in margins is significantly exceeded what we would anticipate to be the cost of funds.

So as much as this has been no fun, and certainly we wish you hadn't run into the last 18 or 24 months, I think coming out of it we could be in a far better position, forgetting about the lack of competition, just the overall -- the pricing is going to be significantly better and the quality of the paper. We've been able to tighten credit dramatically in the last six to nine months or 12 months. I think you are going to be able to go forward with that. You are going to have a stronger loan package, you're going to have a higher margin, and I think it will all work out very well going forward. One of the other things we've done is, during the time when we have been really low in originations, is we've focused on a lot of dealer activities, like direct mail and training and lead sales and things like that. So we really found a way to generate business with the dealers during sort of the soft times, and that's proved to be very good in sort of maintaining the income to support what would be sort of a very ramped down origination structure right now.

All right, thank you very much.

Thank you.

And there are no further questions. I will turn the floor back over to Mr. Charles Bradley for any additional or closing comments.

So I think everybody gets a sense for what this. And this is really we're going to maintain where we are and just try and coast through this year. Maybe, coast, isn't the right word, but we're really in position where we think everything is going very well, given the conditions we think things are going extremely well. When these markets open up we're going to be in very good position to really take advantage of them. I think the comments on the margin expansion, the quality of the paper we're buying and the way we've been able to collect the portfolio in difficult times, I think all are real strong indicators in terms of how we can perform. As I mentioned, the interest we've had in people willing to lend money or participate in the TALF programs with us, and most all those people say this is a Company that's done it the right way. So for us, all it's a matter of time, is waiting for the time when we can access those capital markets and get into the business, growing our business again. So hopefully that time will come sooner than later, but I think we're both in a position to wait, the time that it takes, and also to capitalize when it gets there.

So that's what we're going to do. Ironically enough, our next conference call will be a whole lot sooner than the four or five months it's been. It should be next month, or late next month, so we'll talk to everybody then. Thank you for listening, and continuing to hang with the Company.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until Wednesday, April 15, by dialing 800-642-1687, or 706-645-9291, with pin number 93246086. 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.