Consumer Portfolio Services Inc (CPSS) 2009 Q4 法說會逐字稿

Good afternoon, my name is Beverly and I will be your conference operator today. At this time, I would like to welcome everyone to the year-end 2009 earnings conference call.

(Operator Instructions).

Thank you, Mr. Bradley, you may begin your conference.

Thank you. Welcome to our fourth quarter 2009 conference call. And really it's the 2009 year-end, and I think everyone certainly here and along with most folks, we are glad to see 2009 is now over. We certainly are, and I think the last two years, 2008, 2009 presented us with a whole list of problems and things to get through. As I think we have told everybody, conference call, the conference call, that we had a plan and we were going to get through it, and it is nice to say that from where we sit today I think we have done just that.

We had many things to surmount and problems to get over during that time, and what now people call the great recession of 2008 or 2009, being how that it was financial-related and Wall Street-related -- we somehow -- and sub-prime related, we would be somewhat near the cutting edge of the entire problem. And that problem caused lots of issues for multiple players in the industry. So for us to make it through, is we think sort of an important thing, a really good thing. And we probably beyond that though, in the time we got through it, we have been able to do a bunch of different things that have prepared us, so that 2010 has started out amazingly well in the terms of how quickly things seem to be recovering, and we are very well positioned to move along with our plan and hopefully over the next few quarters, a year, will forget about the problems of 2008 and 2009.

Looking at the marketing, we saw our -- at the end of 2007, we had reached $100 million a month in marketing volume. We had 120 reps. We were doing everything about as well as we could possibly do it, the credit performance was fine. And then, of course, we saw the Wall Street markets dry up over night. We dropped down to something like 10 marketing reps and less than $500,000 a month. Today we now are up to about [25] marketing reps and we're up to almost pacing $10 million a month now. So we have actually gotten things running again after having a virtually nonexistent 2009. Having to make those big changes in marketing, had a real effect in terms -- to do things to make us survive we had to make some severe cuts very quickly, which we did. It's nice that now, we can finally start rebuilding on what we had. And another nice part is a lot of those folks are around, and so we are able to rehire a lot of people that were caught in those layoffs, and they are experienced and ready to go, as we continue to grow.

In terms of looking at the market, the market looks pretty good. There are a few independent finance companies, the banks are a lot less aggressive, and the dealers look like -- one part people don't realize is that car dealers were hurt dramatically, probably worse than almost anyone in this recession. And you have the ones that survived, much like us, and rebounding rather strongly. And as a whole, they're all very eager to find sources of lending, and that obviously dovetails very well with us. And I think what we will see, and we are beginning to see is that customers who for the last two years have really sat on the sidelines, either trying to be able to just hang on to their cars, or didn't want to go out and make a new purchase, and are now beginning slowly to think the market is such that they can afford and the economy is such they can afford to go out and make a new car purchase.

So with the fact that the dealers are kind of roaring -- raring to go and you have a lot of customers beginning to come in the market and getting some good deals, it will fit in very nicely if we can be there to offer financing for all of those folks, and we think we will be. In terms of originations, during this time, as I think we have mentioned in previous calls, we have tightened credit, somewhat substantially. We have also increased pricing across the board. Now we have recently grown from $500,000 a month up to almost $10 million a month. It is good that the pricing is holding just fine. We are getting some of what we think will be some of the best credits we've ever had. So that's also really strong. We have already hired 40 new marketing -- 40 new origination folks, down from a low of less than 10. And as I said, we are pacing around $10 million a month now, and I think our near term goal is to get to something like $30 million a month. At that level the portfolio shrinkage really drops off to nothing. That's sort of a new goal for the short term for the Company.

One of the other things we did is automated a whole lot of things in origination, we used to try and hope to get our automatic decision processed into the low to mid-90s. It is now operating at close to 100%, and those efficiencies and automation allow us to really be able to leverage up our people, and make the whole process that much stronger, both in terms of efficiency of people, but also in terms of the controls we used in terms of how we buy paper. One of the questions that one might ask, as we start to ramp up, again, is are you going to buy too deeply to grow. What's different today than it might have even been a year or two ago, or six to ten years ago, is we now have a very controlled automated process that does all of the decisioning. There's always going to be a human element, but the more and more that you can take care of the upfront decisions without getting involved in the human element, or is this the deal we should help the dealer with, so and and so forth, the better off you are. And as I said, with our automated decision process running close to 100% it really alleviates any of those problems that makes sure those controls are holding in place. So we think that will be very helpful going forward.

In terms of collections, our collection force has been through a very difficult two years. One of the things we used to say, is that the unemployment rate didn't really affect the Company or the performance, and it probably doesn't within about 100 basis points swing. If the unemployment rate is 4% or 5% and it goes down 100 or up 100, it is not that big of a deal. But when it doubles, or rises very quickly, it does have a very dramatic effect on the performance. So that, and obviously, it is important to everyone. But having unemployment rate go from 4% up to 10%, it really hurts our customer base when even our guys who have what should be easy jobs to find, cannot find work, plus they're being laid off, plus all of the opportunities to work overtime all go away, it really has an effect. And I think that's one of the things you see in the numbers, and the provisioning we had to take to figure out or to finish 2009.

I think we needed to do that. In 2007 and 2006 originations, as much as they were sort of well-planned and the numbers and the guidelines all work, when you have that kind of unemployment and this kind of a severe recession, it is going to affect everybody. And everybody obviously knows that, as you can see what happened across the board, in many other industries and companies. So as much as our portfolio management certainly didn't break, the losses were more than we expected. But again, losses would have been more than most anyone would have expected. Having said that, all of our pools performed well within the balance of what they were supposed to. Unfortunately we've had the luxury of having to do this once before in 1999 and in 2000.

And in 1999 and 2000, when the performance didn't go very well it busted through all of the triggers, all of the level two triggers, and all sorts of cash trapping and issues like that, problems with insurers really rose quickly. In some ways, you can blame that on the industry, our Company and everyone else's for growing too quickly and too aggressively and not having the controls. We didn't really want to test out the new theory, but in fact we did. And this time around, with the controls, we originated the right paper, even though the economy was terrible, we haven't hit a level two trigger in any pool, nor do we ever expect to. As much as that's interesting, it's more interesting that some of our friendly competitors hit lots of level two triggers, and sort of blew the ceiling off a lot of their pools.

We didn't have any of those problems. Having said that, the pools did not perform as well as we would have originally expected. And we did not provide enough provisioning along the way until we knew at the end how poorly they might of performed relative to their initial expectations, remembering that overall, they performed just fine, in terms of the investors and the people that bought those pools. As a result, we did take a large provision in December this year to shore up that position. And we now feel comfortable with it, particularly given that, it is again ironic sort of looking at how things work, because we were one of the first Company's and the first industries caught in the recession in late 2007 but in the last three or four months, the performance and results of both our portfolio and how customers are doing is dramatically better. So with any kind of luck, we are also one of the leading indicators that things are truly getting better.

It would appear, at the very least, that -- it would be nice if the unemployment rate went down, as long as it does go up severely, even if it stayed in the 9% to 10% range, again our customers can move from job to job. It is when there's no jobs whatsoever available, and they are losing jobs, that it would have a severe effect. So we would like for the unemployment to go down, but it is not necessary for our paper to perform very well going forward. And again, the collection results have been very, very strong lately, and so I think that bodes well both for the remaining performance on those 2006, 2007 pools. But also more particularly the 2008 and 2009 originations, which we have tighter standards plus stronger margins, and we can get some really great performance, maybe the best in 10 or 15 years, out of those new pools.

So, again collections had a tough go of it, but things have really turned around in the last few months, and I think our collection folks have done an awesome job in making that pool perform, as well as it possibly could given the last two years' circumstances. One other thing we did is we took on a servicing of a pool, of a [distinct] pool recently and the results in that have been rocky in the start like one might expect, but today that pool is also performing very, very well today. So those are all really good things in terms of how the collections in the Company are working.

Looking at the overall market, as I said I think the dealers are now getting stronger, with the utter lack of car sales over the last couple of years, but dealers are really -- there's a real need to have cars replaced. And as I said, I think the customer base, and the consumers out there are beginning to go out and do it. They go out and find and replace those cars, and I think the dealers are more than willing to cut very good deals. As a result, we are getting a lot of business, and there is a lot of business out there. We have been operating with about 2500 dealers to date, we just added 1500 more, out of a potential of about 8000. So we still haven't even really cut into our dealership pool, and yet we are beginning to grow quickly which is really good.

In terms of the economy, as I said I think people are, you know, getting back into their jobs or finding jobs. Customers are finding jobs, everybody can tell with GE, unemployment is not going down, but it is a going down a little bit. But what really is happening and this is what was important to us before, is if our customer happens to lose a job today for whatever reason, they can go out and get another job. Even though unemployment is 10%, you can still move job to job. If unemployment is rising, that it really takes away any opportunity for our customers to stay gainfully employed. One of the other things we have noticed, is that the recovery rates have come up significantly. They hit a low of 31% a year or so ago, they are up to 42%. Two years ago, they thought their peak was about 46%, and we would expect them to continue to rise from that 42%, which is again another strong thing in terms of the overall performance of the portfolio.

Wall Street and its amazing ability to have the shortest memory of anyone possible, from nine months ago where we couldn't get anyone to talk to us, we literally are looking at more opportunities in terms of funding than we could possibly think of. They're all very strong, and I think the deals we do, will get stronger as we go. We announced with the earnings release, that we have closed our second funding commitment, and we are now looking at a third or fourth or fifth or sixth. So I think that market will continue to grow, and I think our goal would be to get back into using warehouse lines and securitizing later this year or early next. But, the fact that the markets are turning so quickly is another real strong indicator that I think we are -- certainly -- all the worst is behind us and there's lots of opportunities in front of us. It has been a painful two years to say the least, but I think we have done probably the best we possibly could, to make it through those two years in a good way and also positioned ourselves in a tremendously good way, that as 2010 unfolds, things should get a lot better. With that, we will open it up for questions. I'm sorry. I am going to have Jeff run through the financials.

Thank, Brad. We will look at some of these numbers from the financial statements. Fourth quarter revenues were $46.7 million. That's about a 12% decrease from the previous quarter, and a 37% decrease from the fourth quarter of 2008. As you have seen, as we have talked about before, over the last 18 months or so, our portfolio has been declining due to low originations, virtually no originations for much of 2009. The portfolio decreased by 12% in consecutive quarters, and about 38% year-over-year. And I think those revenue decreases are pretty much right in line with the shrinkage in the portfolio. The year to date revenues were $223.9 million, compared to revenues of $368.4 million, and again that is about a 39% increase, and that tracks pretty closely with the outstanding managed portfolio. Expenses for the quarter, fourth quarter of 2009 were $85.3 million, compared to $57.1 million in the September quarter, and a $112 million in the fourth quarter of 2008. Those are an increase in the consecutive quarters of about 49%, and a decrease year-over-year of 24%.

The total year expenses for 2009, $273 million, compared to $412 million, about a 34% decrease year-over-year. The biggest change in the consecutive quarters was an increase in the provision, which we will talk about it right now. Provision expense for the fourth quarter of 2009 was $42.2 million, and that's $15 million, or about 176 -- or excuse me, that's 176% more than the $15 million we posted in the third quarter, and it is about 25% less than the fourth quarter of last year. The full-year provision is $92 million, compared to $148.4 million, or a 38% decrease for the full-year of 2008. We saw in this, and Brad has talked about both in, earlier and probably later in the call, the softening in the credit performance late in the third quarter that carried on through the fourth quarter, and that had a significant influence on the amount of provision expense that we posted in the fourth quarter, the $42 million that I just referred to.

The pretax loss for the quarter was $38.6 million, compared to $4.3 million in the September quarter, and $37.3 million in the fourth quarter of 2008. The year-to-date pretax loss was $49.4 million. That's about a 14% increase in loss, compared to the $43.5 million for the full-year of 2008. The net loss that is only difference between the pretax loss and the net loss for the quarter was a $7.8 million allowance for our deferred tax assets. That brought the fourth quarter loss up to $46.4 million, and the full-year loss up to $57.2 million, compared to the fourth quarter of 2008 $23.4 million, and the full-year $26.1 million in 2008. We established an allowance against our deferred tax assets, that is following the more likely than not, standards that the accounting deferred tax assets calls for. The diluted loss per share for the quarter was $2.55, compared to $1.22 for the fourth quarter -- $1.22 loss for the fourth quarter of 2008. The full-year diluted loss of $3.07, compared to $1.36 fully diluted loss for 2008.

Looking at the balance sheet, our cash, our unrestricted cash balance at year-end of $12.4 million, as compared to $20.4 million at the end of the third quarter, and $22.1 million a year ago. Our cash balances are significantly influenced by our -- the amount of receivables we purchased, and the utilization of our credit facilities. Brad mentioned that we did secure another funding facility, $50 million funding facility, subsequent to year-end which we have been using since that facility was established. Our financial receivables balance has decreased to a net of $840.1 million at the year-end, compared to $976 million at the end of the third quarter, and $1.3 billion a year ago. Again we talked about the percentage decreases of about 14% for the consecutive quarters, and 37% for the year ago quarter, the year ago period.

On the debt side, our warehouse line balance was $4.9 million at the end of the year, compared to $5.2 million at the end of September, and $10 million a year ago. A year ago, our warehouse line was non-functioning or at least a non-advancing facility that was just running down. And the warehouse line we have on the balance sheet at the end of the year is a functioning, revolving $50 million facility. The other debt includes residual financing facility, which has had scheduled pay downs, bringing that balance to $56.9 million at the end of the year. And our long-term debt which increased slightly from $42.1 million at the end of the third quarter, to $48.1 million at the end of the year, influenced primarily by an additional $5 million in senior secured debt that we incurred in November, in conjunction with the third party servicing portfolio, that [Doug Brad] mentioned earlier.

The most significant reduction from the debt comes from a change in the securitization trust debt which reduced to $905 million at the end of the year, compared to a little over $1 billion at the end of the third quarter, and $1.4 billion a year ago. Securitizations, of course, are all static, fixed term debts running down as the portfolio runs down. So our total managed portfolio at the end of the year was $1.2 billion. And that's virtually flat from the end of the third quarter, and the result of that -- or the reason for that is, is the runoff on the managed portfolio was offset by the acquisition of about $137 million in third party servicing that we acquired in November. But overall for the year, the managed portfolio decreased about 28%, from $1.7 billion at the end of 2008.

Looking at some of the other performance metrics, the net interest margin for the quarter was $18.2 million. That is a decrease of about 21% from the third quarter and 47% from the fourth quarter in 2008. The year-to-date net interest margin was $96.4 million, and that's a decrease of about 50% from $195 million for the full-year of 2008. Our risk adjusted net interest margin which includes the -- without the loss provision, includes the loss provision, excuse me, for the quarter, was a loss of $23.9 million, compared to $7.9 million positive at the end of the third quarter, and a negative of $22.3 million for the fourth quarter of last year. For the year-to-date 2009, the risk-adjusted NIM was $4.4 million, compared to $46.9 million in the full-year of 2008.

Our core operating expense ratios -- our core operating expenses, excluding interest and loss provisions were $18.7 million for the quarter. That's just slightly higher than the third quarter of $15.7 million, and a decrease of about 7% from $20 million in fourth quarter 2008. Our year-to-date core operating expenses were $69.5 million, about a 25% decrease from the full-year of 2008. So our core operating expenses in general are decreasing, certainly significantly year-over-year with a significant reduction in the portfolio. They were just slightly up in the fourth quarter, compared to the third quarter, reflecting maybe a little slow down in some of the reductions due to the increase in origination productions that we are seeing with the new credit facility.

Our core operating expense ratio as a percentage of our average managed portfolio was 6.2% in the fourth quarter, compared to 5% in the third quarter of 2009, and 4.7% in the fourth quarter of 2008. For the full-year, 5.2% compared to 4.8%, or about a 7% increase, compared to the full-year of 2009 versus 2008. With that I will turn it back to over to Brad.

And just to add the delinquency numbers, the delinquency at the quarter was 8.76%, and that's up -- that's actually down slightly from the previous quarter in December of 8.83%, and that's up a little bit from the previous year, 8.59%. And for the delinquencies to really be getting where they are and staying where they are, given the declining portfolios shows you that the performance truly is beginning to change because -- in those numbers should be a little bit higher given the declining portfolio, much like the losses, and the losses were 13.23% for the quarter. And that's up from 8.82% for the previous quarter in September, and that's up from 9.97% a year ago December. And as I said, you can see the delinquency trend is doing very well, and the losses should track that shortly. It sort of always follows that way. So we would expect losses to continue to come down, even though we do have a shrinking portfolio which is causing most of that effect.

Overall, as I said, I think we are very happy to have made it through these last couple of years. They were awful tough on everybody, including us. But from where we sit in 2010, the capital markets seem to really have been moving, and we seem to be able to be adding growth with better credit and increased margins so that it's a very interesting time for the companies that have gotten to where we have gotten. So with that, we will open up for questions.

(Operator Instructions).

Your first question comes from the line of John Hecht of JMP Securities.

Good afternoon, guys, or I guess good morning. Thank you for taking my questions. First one is that you suggested that you are seeing the benefits of an improving economy and stabilizing unemployment, but separating that, where are you guys in term of your --- maybe the peak charge off period? Are you seeing some stabilization if not improvement in various vintages just because you are simply moving past the most stressful time of the vintages?

Yes, there's two parts to that. One is that, we are, in fact, doing just what you said. The portfolios are finally getting -- or the pools are getting to the age, where you've seen the bulk of the charge offs. And unfortunately, we have had to suffer through a lot of that during 2008 and 2009, when the economy was at its worst, and so you didn't really get a lot of help in that. Now, we both are past a lot of the peak periods for those pools. And so what's more helpful is now you are having better recoveries; jobs are beginning to free up a little bit. So you might have, from getting our lowered expectations as result during that period, you may see even better results than we now -- anticipated six months ago.

Okay, where you are originating now, what program are you focused on, given I guess pricing and opportunity, and the competitive environment? Is it more in the alpha range or the standard range, where are you guys seeing the best types of opportunity?

Actually, across the board, it appears to be about like it was last time. The interesting part is that, we are able to, with increased pricing across the board, all the programs are doing well. I think the fact that our sort of lower tier, has even tighter credit metrics. I mean that's probably the most profitable end at this point, and it is making up about 25% to 30% of what we are doing. But what we are not really emphasizing any given program, in all honesty; what we are emphasizing is growing and getting to the size. What will be interesting as we grow, is to see whether there's any price pressure on certain programs or not, and which ones, is there an area where we can target. Given all the sort of, the measurement techniques we now have, we can sort of pick the parts. And if we can find areas where there's a product level that we really like, that seems to be under priced or undervalued, then we will go after that part, we don't have a real sort of specific target at the moment. We are really just expanding in all areas.

Okay. You guys historically have had pretty good success at buying third party, third party portfolios. You recently did one with CompuCredit. Do you see anymore opportunities out there, or is the market tight in that regard?

I think the market is tight, but it's been sort of much tighter this time through the recession than the last couple times. After going out of the last recession, we bought three different companies, and so far we have been able to pick up one. There's always a couple of opportunities out there, but certainly the market is tighter this time through. But having said that, there's always a chance we can pick up another one, or maybe even two. But what is nice about what we have done is, all of ours have done very well. And the three from the last time all performed very well, the one we just did seems to be performing really well. So again, that doesn't always happen to be the case with some of the other folks, but with us it has been very effective, and so we would continue to pursue that if we get the opportunity.

Great. And then the last question I have is, Brad you mentioned you are seeing positive movements in the credit markets. Can you characterize what -- the evolution is it more in terms of leverage, is it more in term of rates, or which is giving faster than the other component?

The first thing we saw was sort of well, the easy answer is step one is, we went from having nobody around to having lots of people interested in providing funding. The next thing that happened was the rates started to move, and now the leverage is starting to move. But I think, you can't get it all, I think at the end of the day, the fact that we have increased the margins a bit -- the current rates we are getting are almost close to where the middle of 2007 again. But, I think rates will come back first, and then leverage -- I think the rates will probably come all the way back. I think the leverage probably won't, but you never know. It has come back enough to where it is fine, and it may improve a little bit. But you know most of that is from sort of a, hedge funds and such. The next thing that is going to happen is you will probably get the warehouse lines back. And you will have a combination of hedge funds and warehouses, and then you will get back to securitizing out of the warehouses. And so, you will probably get your ultimate best pricing when that happens, you are back to securitizing. And the leverage, it will be interesting; you may end up getting a little leverage out of funds. But I think at the end of the day, this time next year, ironically a lot of people are going act a lot like this thing never happened. So in terms of pricing and leverage, so I think like I've said 2010 can be a very good year, in terms of the progress we make along that path.

And what would -- just your gut feel today at where does leverage get to this time around?

Well, it is a little bit hard to say yet. I think -- I think our old leverage might have been in the low 90s this time, could be the mid-80s. They can get all the way back, but I think they will probably get within five points of the leverage. I think it can get all the way back on the pricing, and close on the leverage. So, we are already kind of getting in the neighborhood early on.

Okay. Great. Thanks for the color.

Thank you for hanging in all of those years.

(Operator Instructions). There are no further questions at this time. I would like to turn the conference back over to Mr. Bradley for closing remarks.

Well, like I said I appreciate everybody for following along with us the last couple of years. We did very well up into 2007 and then everyone across the country got hurt. We did too. But it looks like we have survived that well. And so hopefully we can start doing things pretty good, and get back to where we are supposed to be. Our next goal for the Company is to get back to where we are originating enough to we are now a growing Company as opposed to just managing where we sit, once we get back to growth, I think the earnings will follow. So, we look forward to a positive 2010, and we will be talking to everyone in less than a month. So thanks for attending the call today.

Thank you, ladies and gentlemen, this now concludes today's conference call. You may now disconnect.