Consumer Portfolio Services Inc (CPSS) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services' 2009 third 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 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.

The 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 thank you, all, for joining us this morning. In looking at the quarter, I think as the quarter stands on its own, I think it was a fine quarter and we did okay. I think more importantly, it being the third quarter of this year, it really is more important where we sit in the sort of time line of getting through this problem and I think the third quarter in that sense is far more important that finally, after everyone has patiently waited for the last two years for things to get better, it's nice to be able to say that things are finally getting better. Literally, as recently as the last few weeks, but let's call it the end of September and October, the market has changed dramatically which we can talk about a little bit, in a little bit.

One of the highlights of the quarter was we did in fact sign up a purchase commitment for a warehouse facility with fortress. We announced a little while ago, and that is for $50 million. We've literally gone from having difficulty having anyone return our calls six months ago to having an influx of many calls and many opportunities coming our way in the last few weeks. Like I said, I think that's probably the easiest way to look at the fundamental change in what's happened this quarter versus the last few, or even the last couple of years. Along with that, the ABS pricing spreads have come in dramatically in the last 60 days or so, far more than we would have ever expected.

At some point I think in sort of a conservative format a year ago we thought, well, number one, we need to get through the recession and sort of weather this storm and number two, you need to anticipate that the spreads will never get back to where they were and that the price of doing this business will be more expensive, so on and so forth. And again, we are happy to report and very pleasantly surprised that the spreads have come in just amazingly in the last 60 days to where they're nearly what they were two years ago. If we used just for historical purposes, we did a deal in September 2007, and that was probably the last what we might call normal deal. Even though we did do a deal in 2008, the pricing on that was much different. But in 2007, in the September deal, what we call 2007-three, the pricing was up a little bit. It wasn't terrible. And the pricing now is almost back to those levels. And we really didn't expect that to happen, if at all, but certainly not this soon. So two major big news points today are that the capital markets finally seem to be opening up and actually a very measured way and secondarily the pricing on the ABS market, the ABS spreads has come in way more than we ever thought. So that as much as this is new enough to what it hasn't had an effect on what's going on in the quarter, it may not even affect the fourth quarter all that much, it certainly bodes very well for the future.

So we think that's probably the most important thing to talk about today. The quarter itself, we really just tried to maintain what we're doing with really that focus being to get through this recession and the problems and keep everything going, tightening as much as we could in the operating level, but really maintain the infrastructure, get through the recession and then sort of look to the other side and looks like we finally gotten there. We'll talk a little bit more in a minute but now let's go over the financials.

Thanks Brad. Good morning, everybody. The revenues for the third quarter were $52.8 million, that's a decrease of about 9% from the second quarter of $58 million, and a decrease of about 42% from the 2008 third quarter. On a year-to-date basis, the revenues were $178 million, that's about a 40% reduction through the nine months ended September of 2008.

These reductions are pretty much in line with the shrinkage of the service portfolio, the managed portfolio shrunk by about 11% from the second quarter to the third quarter this year, and shrunk about 36% from the third quarter last year to the quarter just ended. Operating expenses for the quarter were $57 million. That's about an 11% decrease from the second quarter of $64 million and about a 45% decrease from the $104 million in the third quarter last year. For the nine months this year, the operating expenses were $188 million. That's a decrease of 37% from $300 million through nine months ended September 30, 2008. Again, we continue to see significant decreases in operating expenses, really across all the categories, commensurate with the shrinkage in the managed portfolio.

One of those big categories experiencing a decrease was the provision for losses. For the third quarter, $15.3 million, a decrease of about 17% from the second quarter this year, and a decrease of 41% from $26 million in the third quarter of 2008. On a year-to-date basis, the provision expense has been about $50 million, which is a 46% decrease over the $92 million for the nine months ended in the third quarter last year. Our pretax loss for the quarter was $4.3 million. That's a 28% change from last year's loss of $6 million in the third quarter. And about a 66% decrease from -- or excuse me, about a 28% decrease from the second quarter loss and a 66% change from the third quarter loss last year.

When we're comparing these results from 2008 to 2009, you may recall that in the third quarter last year we entered into a securitization structure which resulted in a loss on sale of about $14 million. And so that rippled through the third quarter and the nine months results of 2008 and we comparable to that in this current quarter and due 2009. Let's see. Moving on.

Diluted earnings loss per share, $0.23 for the quarter. That compares to $0.32 for the second quarter. And $0.32 for the third quarter of last year, and on a year-to-date basis the loss was $0.57 and that's significantly more than $0.14 for the year-to-date period ended with the third quarter of last year.

Moving to the balance sheet, our cash levels have remained pretty steady throughout this year at $20 million or so. We've been conserving our liquidity by purchasing very few contracts through the end of the third quarter, although as Brad alluded to, we now have capacity, additional purchasing capacity with the $50 million warehouse facility and expect to increase originations going forward. The finance receivables balance, net balance after allowance was $976 million at the end of the third quarter, that's down about 11% from the June quarter of a little over $1 billion down 35% from the $1.5 billion a year ago.

Moving on to the debt component, the warehouse line balance was $5.2 million at the end of the quarter. That's changed very little, up just slightly from the June quarter. However, the warehouse providers are actually changed. The June quarter we were still paying down the UBS warehouse line which by the end of the third quarter had been completely repaid and we had taken our first advance under the new warehouse facility. The other components, residual interest financing, is down to $60 million. That's been compared to this $63 million at the end of the third quarter and $68 million a year ago. That's been subject to scheduled principal reductions that we continue to make as that facility moves on through its life, securitization debt is just over $1 billion compared to $1.1 billion, in the second quarter and $1.6 billion, a year ago. And our long-term debt which consists of some senior secured subordinated debt and also our renewable notes program is down to $42 million, from $43 million a quarter ago and $48 million a year ago.

I mentioned the managed portfolio is a gross amount, $1.2 billion now compared to $1.3 billion at the end of the June quarter and $1.8 billion a year ago. Those are reductions of about 10% from quarter-to-quarter and about 35% on a year-over-year basis. Looking at some of the other performance metrics, our net interest margin for the quarter is 23.1%. That's down about 11% from the previous quarter, the second quarter of 2009, and down 51% from a year ago when the net interest margin was 46.7. On a year-to-date basis, $78.2 million compared to $161 million a year ago, again, about a 51% reduction. All these changes are very much in line with the size of the outstanding managed portfolio.

The risk adjusted NIM, $7.9 million for the quarter. That's actually up a little bit from $7.5 million in the second quarter, but down significantly, 62% from $20.8 million in the third quarter last year. On a year-to-date basis, the risk adjusted NIM, $28.3 million for the nine months, that's down about 60% from a year ago not through three-quarters or $69.2 million. We've managed to continue to reduce our core operating expenses in conjunction with the shrinkage of the portfolio, the servicing portfolio. For the quarter, co-operating expenses were $15.7 million, that's down about 7% from the second quarter of 16.8 and down 33% from the third quarter a year ago, of $23.5 million. On a year-to-date basis this core operating expenses were about $51 million that's down 31% from the nine month period ended a year ago of $73 million.

On a percentage basis, those core operating expenses as a percentage of the managed portfolio were about 5% for the quarter, which compares almost the same to the year quarter and up just slightly from the June quarter this year. On an annualized basis they're virtually unchanged from just under 5% both for the nine months ended September of '09 and September of '08, the year-ago period. I'll turn it back over to Brad.

Thanks, Jeff. Looking at the portfolio performance, the delinquency for September was 8.83%. That's still up from June of 6.99. And that's up from a year ago, which was 7.68. On the net losses for the quarter were 8.82 for the quarter. That's actually down from June of '09, 10.59, and that's up a little bit from a year ago at 7.89. Annualized on the net losses year-to-date, September is 10.44 versus 7.2 a year ago. I think the thing to look at in terms of portfolio performance and we talked about it a lot in previous calls, we did a very good job of tightening and sort of making changes even in '06 and '07.

Then when the recession came along and the economy fell apart, no matter how well you can originate, which I think we did a very good job of, the economy did have an effect on that and that effect is continuing to be seen in the portfolio performance but I think we're really towards the end of it. The whole thing with the -- having to work through the system and this portfolio with no new originations to soften the numbers, the numbers might look slightly harsh. If you compare them to the competitors in the industry they're actually pretty good. More importantly, as we start to originate again they'll get even better. Really all you're seeing is the aging of the portfolio that was originated in '07 and early '08. The '07 which would be the bulk of the originations currently is now two years old so it's the height of its loss curve. You're going to see that number for a little bit longer, probably the roast the year and then I think as we start originating more it will again -- you'll begin to see the improvement going forward.

In looking at the industry, I think finally, without I think literally the theme of the last, somewhere in the neighborhood of the last four to six conference calls has been here's what we're going to do to get through this quarter. I think next quarter or at the end of the year it will probably be more but this is really the time where now we'll finally be able to say what are we going to do and what are we going to focus on to start growing the Company back to where it was and I think in looking at the industry, just like what happened nine years ago, a lot of the competitors have fallen out and either ceased doing business, I think some people might have noticed HSBC sold their platform and are no longer going to originate. That's going to be common, with a lot of the banks, a lot of the independents. The industry's going to have fewer competitors just like last time. We're going to certainly hope for some more rational competition. I think everyone at least should have learned a lesson. It's going to be more cautious. Most of the big players out there should follow that. Not everyone will but hopefully most. Certainly from where we sit, we've tightened credit substantially. We've done a bunch of tweaks as we mentioned in previous calls. We've also worked on streamlining the credit process so that it will work better as we grow again and also we've obviously spent a lot of time becoming more efficient. So all the work we put into the last two years while we're waiting to get through this, we're now in a position to see the results or to begin to do things that will see the results as we start to grow again.

I think in looking forward a little bit, car sales are still down significantly. The dealers have probably had almost a worse time than most. And so I think there is a chance that if the economy recovers slowly and car sales are down 15% or more, it may take a little bit in terms of growing originations back, but then again, if things really -- if the third quarter and the beginning of the fourth quarter is any indication of how the markets are going to recover, I may be taking back that last statement at the next call if in fact all this money comes in and the economy does start to turn a little faster than everybody expected. We can only hope but it's certainly a possibility given what we've seen lately.

I think in used car prices with Cash for Clunkers, that had a very significant and positive effect on the used car market. It allowed us to increase our recovery rates and the story behind the scenes helped us out a little bit in terms of when we're liquidating cars and such and I think also it helped for the dealer level, it cleaned out a lot of their inventory and so now they're going to have more cars to sell, they're going to go back to the markets, buy more used cars. Again, I think new cars could suffer a bit. Since we finance 80% used I don't think it will affect us that much.

I still think we're probably more at the bottom of the market than actually coming up but I think that the timing of this call and the timing of the market coincide, that we're probably at the bottom, we're hoping we're at the bottom. But certainly there's lots of indications that we are and we should now hope that things moving forward are going to be very much upward as opposed to continuing to go down.

Like last time, I think this is a time where we can look for acquisitions. Just recently we announced that we participated in and with a loan and received a servicing portfolio from CompuCredit. CompuCredit owned a small Company called ACC. That added $140 million of servicing portfolio to our managed portfolio. It's very much like last time where last time we bought three companies in '02, '03 and '04. I think we're now entering the phase this time where you're almost in the same kind of opportunistic situation where there will be some companies that either haven't weathered the problems as well and probably more likely, just people decided this isn't a business they want to be in which would provide opportunities for us to buy their either platforms or portfolios.

Obviously having portfolios to add to the managed portfolio supplements any continuing runoff of our portfolio and sort of bridge the time between now and when we get originations to the level where our portfolio is growing again. So that acquisition is very positive. Even carrying those two events, the Fortress facility that we set up and the portfolio servicing we did, six months ago you wouldn't even be looking at those sorts of deals and today we think there's probably potential for more of those deals and like I said, certainly more financing facilities as well.

I think as we go forward, one of our goals is going to be to -- we think we can, between -- a few things. One, we think between the credit tightening, the efficiencies we now built in and the increased pricing that we're going to have, remembering that we increased pricing with the anticipation that the funding costs would stay up, the funding costs have come down dramatically. We will probably at some point lower pricing somewhat but still maintain a significant benefit to where maybe we won't have to grow to the levels we were before to make just as much money. So that could be a good benefit of all this. Ironically, if you look back, in 1998 everything was business as usual. 1999 was terrible. 2000 was terrible. And we started doing securitizations again in 2001.

So basically it was a two year period before the Company began to recover and originate and 2001 was a little bit slow but 2002, 2003, 2004, we began a very good growth program and I think the comparison's going to be very similar in that '07 was pretty much a year where everything was fine and then '08 and '09, have been two bad years and '10 is going to be similar to '01 in that we're going to begin to originate again, we're going to get back in the program and you can see the next few years being the same good growth and moving along kind of years. So it's interesting that it's going to work that way. I think probably sort of summing it up, for us the good news is we now think we've weathered this storm completely. We think the opportunities are probably even better than we thought a year ago and we're certainly well positioned to take advantage of them. So finally we can say the future is looking a bit brighter. With that I'll open it up for questions.

Thank you. The floor is now opened for questions. (Operator Instructions) There are no questions at this time.

Okay. We got used to that during these last couple years. As things go, we think that might change and people will get a little -- one of the goals as we go forward is to get more interest in the stock. In terms of looking at the stock people are more concerned about whether we're going to survive. We can clearly say that we said all along we're going to survive. Certainly we're now putting out the evidence of that. People wouldn't transfer service into this facility if they thought we weren't going to be here to do it. We have, as I said, as we sign up some more of these facilities to originate into, we're going to really start to focus on growth and get that growth back to a very substantial level and we think there's tremendous opportunities in terms of acquisitions and other things we can do.

So we're very positive here. We appreciate everybody hanging in. And again, we'll look forward to the next call and I think 2010's really looking like a positive year many thank you very much.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until Tuesday, November 24, by dialing 800-642-1687, or 706-645-9291, with conference identification number 42140253. A broadcast of this 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 streetevents at www.streetevents.com. Please disconnect your lines at this time and have a wonderful day.