Consumer Portfolio Services Inc (CPSS) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to today's first quarter 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Charles Bradley, President and Chief Executive Officer. Sir, you may begin your conference.

Thank you and thank you all for joining us this morning. I'm going to do things a little bit differently during this call and going forward. I'm going to do the opening remarks and then Jeff Fritz is going to do the financials and Robert Riedl, our Chief Investment Officer, is going to talk about portfolio performance in the capital markets. Given that we had a call a month ago, not a whole lot's changed. We did the first quarter, seen results. We were generally pleased with results, other than we still have an operating loss. We expect that to improve as time goes by. Probably most importantly, I think it's apparent at this point that we've made -- we've turned the corner in terms of getting the Company back in the right direction. We've gone through what people are loosely calling the great recession. We've certainly crossed out of survival mode. We're back in growth mode.

We are focused very heavily, as I think I mentioned last month, on marketing originations. We're targeting $10 million or so in originations this month, which compared to the million or less we were doing monthly last year, it's certainly moving in the right direction. Our goal is to get close to $25 million or $30 a million a month by the end of the year, so that's the focus. We are really back in growth mode. We have been able to keep the infrastructure in place during this last two years of problems. We did have to shrink the Company substantially, now we're actually starting to grow it a little bit. But again, we're trying to do it wisely with managing costs and being as efficient as we possibly can.

In terms of collections, this is probably one of the best times ever. The year-over-year delinquencies are the lowest they've been. They've declined for the first time in at least four years. And so you really are probably seeing both a combination of -- we are doing a very strong job of collections, but also with the economy improving, it's beginning to have a real significant effect on the portfolio performance. And we would expect that to continue, as well.

As to recovery, the auctions continue to improve the pricing, which also has an added effect, which is also beneficial to the collections. So literally, almost everything we would hope for is going the right way. The cost of capital's down, the market has less participants than it did before. So we find that very helpful. We've been able to keep higher margins. There are companies out there doing deals and so everything is getting -- the cost of funds is going down. So we hope that the first quarter will be the first of, with any kind of luck, 8, 12, 16 quarters of what we would look for, continued growth and prosperity as the remnants of the recession end. I'll talk about that a little bit later. So now let's switch over and talk about the financials with Jeff Fritz.

Thanks, Brad. Good morning, everybody. Revenues for the first quarter of 2010 were $44.6 million, that's down about 4% from the fourth quarter of '09 and 33% from the first quarter of 2009, a year ago. These reductions pretty much track closely with reductions in our consolidated portfolio. Those numbers we're going to look at a little bit later. Expenses for the first quarter of 2010, $50.4 million, that's down about 41% from the fourth quarter of '09 and 24% of $66.6 million from the first quarter of '09 a year ago. Those reductions pretty much across the board. Interest expense, a significant reduction in the consecutive quarters from provision for loan losses, which I'll talk about in a minute. And really across almost all the operating categories, expenses are shrinking. Not quite at pace with the reduction of the portfolio, but a similar trend.

The loss provision for the first quarter, $11.7 million. That's down significantly, 72% from $42.2 million in the December, '09 quarter and down 27% from the year ago first quarter. The provision is significantly influenced by the continued aging of the on-balance sheet portfolio and also the shrinkage, the continued decline of the on-balance sheet portfolio. Although we're originating more receivables than we have had in recent quarters, our portfolio on a net basis still shrinking pretty significantly every quarter. And then of course also influencing the provision expense is what Brad alluded to, which is substantially better credit performance in the first quarter, returns at the auctions, and those kinds of things, all influenced the provision expense. Pretax loss for the quarter was $5.8 million. That's down 85% from the $38.6 million loss in the fourth quarter of last year. It's a greater loss from the $0.5 million loss we incurred a year ago.

There was no income tax provision or benefit as a result of that loss as we increased our valuation for the allowance on our deferred tax assets in about the same amount as the benefit that we would have realized from the book loss of $5.8 million. The diluted loss per share was $0.33 compared to $2.55 from the fourth quarter of '09 and $0.03 a year ago. Moving to the balance sheet, unrestricted cash at March 31, 2010 was $22.8 million. That's a significant increase from $12.4 million at year-end of '09 and a slight increase from $20 million a year ago. The increase in cash is the result of greater utilization of our $50 million credit facility and also for the first time in the first quarter, we utilized our new $50 million note purchase facility. And both of those things bolstered our cash balances, even in light of increased finance receivables originations.

The net finance receivables on the balance sheet at March 31, 2010, $738.8 million. It is about a 12% decrease from the previous quarter, fourth quarter of '09, and a 39% increase from the year-ago quarter. The debt on the balance sheet generally reflects things we've been talking about. We have slightly increased balances for our house line of credit, $17.6 million at the end of March, 2010, compared to $5 million at the end of the fourth quarter of December, '09 and $7.5 million a year ago. I've mentioned we're using the revolving $50 million facility greater than we have been in the previous quarter. Our residual interest financing is down to $53 million compared to $57 million at year-end and $65 million a year ago. And that's amortizing down with a sort of a scheduled principle reduction that's been taking place for the last year or so.

Securitization debt is down to less than $800 million compared to $900 million at December of '09 and $1.3 billion a year ago. Again, that's tracking with the securitized portfolio. And long-term debt is about the same as it was, $49 million at the end of March compared to $48 million at year-end and $45 million a year ago.

Our consolidated portfolio, which includes our on-balance sheet portfolio plus another approximately $250 million of off-balance sheet portfolios, was $1.044 billion at the end of March, 2010. That's down about 13% from $1.2 billion at year-end '09 and down 30% from $1.5 billion a year ago. Again, even though we are originating greater receivables, as Brad alluded to, than we have recently, there's still significant run-off in all these components of our portfolio.

The net interest margin for the first quarter of 2010 was $16.6 million. That's down about 9% from the fourth quarter of '09 and down about 43% from the first quarter of '09 a year ago. And our risk-adjusted net interest margin was $5 million for this just-ended first quarter compared to a loss of $24 million in the fourth quarter of last year and a positive $13 million a year ago. You recall, we posted a pretty significant provision for loan losses in the fourth quarter of 2009 and the significantly smaller provision was posted here in the first quarter. Our core operating expenses for the first quarter was $16.3 million. That's down about 13% from the previous quarter, fourth quarter of '09 of $18.7 million. And it's down just slightly, about 11%, from a year ago. And although I think as Brad mentioned this maybe in the previous call, we have reduced our operating expenses significantly as the business has shrunk.

But we're also maintaining our infrastructure and key aspects of the business so that we can take advantage of the opportunities that we think are in the marketplace for originating new receivables as we go forward. As a result, these core operating expenses as a percentage of the managed portfolio have remained pretty flat, about 6% here at the end of the first quarter of 2010. That's down just slightly from the fourth quarter at 6.25% and up just a little from the 4.75% from the year ago first-quarter period. I'll turn it over to Robert for some additional comments.

Thanks, Jeff. In terms of portfolio performance, Brad mentioned at the beginning of the call that we're seeing some very positive trends. The delinquencies for the portfolio at the end of March were 5.94%, that's down from 8.76% at year-end. And also down from 6.73% a year ago. And I think that's an important point to highlight. That's the first year-over-year improvement in delinquencies we've seen since the portfolio started shrinking a couple of years ago. And I think even since probably 2006. On the net losses for the quarter, annualized net losses were 12.2%. That's down from 13.2% at the December quarter and 11.6% a year ago, a slight increase. As we continue in seeing positive trends on the delinquencies, we expect that these net losses on the year-over-year basis should start comparing favorably versus '09, which once again is another sign that we're through the worst of the recession.

In terms of vintage performance, how our pools from different years are performing, as Brad has alluded to in the past, we see the vintages from the late '08 after we made a series of credit-tightened changes, continue to perform significantly better than the '06 and '07 vintages and more in line with '04 and '05. And we continue to see those trends. And that leads to our positive thoughts on credit losses going forward.

In terms of the capital markets and the credit markets and the asset-backed market, things continue to be very strong. We've seen multiple issuers in the auto space and in the subprime auto space; so multiple deals have gotten done this year. We've seen several senior subordinated deals from subprime issuers, in addition to the first insured subprime auto finance transaction that closed about a month ago. The total cost of funds on those deals for the issuers has continued to decrease versus last year.

And as importantly, we've seen more appetite for subordinated bonds from the investor base as more investors have come back into the market. One of the most recent transactions, that on the senior subordinated side, had investors buying double B bonds. And if you recall, years back in our securitization days we would sell double-B rated bonds as well as unrated bonds. That's the first time the double-B rated bond has been sold in probably close to three years; so that all continues to improve, as well. I think Brad has mentioned in the past, as we continue to grow our originations, we will continue looking at new senior financing facilities and get back to potentially any warehouse facility later in the year with the goal of getting back into the term asset-backed market either late this year or early next year. Let me turn it back to Brad for final comments.

Thanks, Robert. I think in summary, we're probably going to be back to where we want to be in the world in the auto industry, in particular. When -- well, there are two ways to look at it. We've now, for better or for worse, done this twice. 10 years ago we had the auto industry had problems. We had to contract the Company and basically try and hang on and then grow and now we've done it again. So it's ironic that we sort of know what the future looks like because we've now done it twice. And having said that, after the first time around, a lot of the auto competitors went away, the independent companies, and they were replaced by the banks. Now most of the banks have backed off. So now, not only have you lost a lot of the big bank participants, but you've also lost a lot of the competitors again. So that leaves what should be a very open field in terms of us being able to grow and have higher margins and better expectations on the portfolio; coupled with our models are now more efficient, they're more predictive.

So we were really kind of well armed and well equipped to do very well as the next cycle goes through with the better margins, as well. I think that given that you can almost see the economy improving, all our customers are paying better. As much as unemployment still hovers around 10%, I think the problem we've seen is we can live with unemployment at 10%, we can live with unemployment at 6%, or 4%, but we don't do very well at or this business doesn't do very well at it when unemployment jumps. And so we don't necessarily have to have a lot of better employment for our product to do very well. We just need unemployment not to rise steeply and we obviously expect it won't.

The other really interesting thing, as Robert pointed out, is that the margins -- we were somewhat hesitant in rebuilding our model and looking into the future as to what the cost of funds would be and Wall Street has been very aggressive in having the pricing come down so our cost of funds have dropped significantly in the last, even the last six months. Deleverage is also improving. So all sorts of very close to everything we would want is going in the right direction. So it's nice that we've made it through the problems. Our first quarter was okay. We expect the next quarter to be even better as we continue down the road to making it back to where we were several years ago. With that we will open up for questions.

(Operator Instructions) You have a question from Ken Liddy of Wells Fargo.

Hi, Brad.

Hi, Ken, how are you?

Good. How are you? I just wanted to see what's holding you back from getting a warehouse line at this point?

I think we've been talking to some people about getting a warehouse lines. Actually the Fortress facility acts as a warehouse line. We may at some point get another line. We're sort of -- ironically the pricing is moving so quickly, given that we now have two facilities we're working on filling. It probably behooves us to wait a little bit to see if we can actually get the best appropriate pricing when we get that line. But we would fully expect to get one by the end of the year at the very latest.

And with the warehouse lines, how would that affect your business?

We would probably -- I think the major effect on the warehouse line would be the pricing. The two deals we've done as much as I think economically they're fine and they represented the best deals at the time. The pricing has moved so quickly that having a warehouse line to hold the paper and then take advantage of the improved pricing as it goes along would be the biggest effect of the line. I mean, it's very close to we'll be back to where we were before, so --

And as far as you're estimating around $10 million run rate right now going up to $25 million to $30 million by the end of the year. How often will you be doing new financing for that?

We'll probably expect to do one or two financings this year probably. Part of it is if we get a credit line we'll be able to keep a lot of the paper in the credit line. So it's almost three steps -- well, first we have to fill up the two facility that we have. Second, we have to get a new credit line. Third, we fill that up. And to the extent you do all that this year, then you do another deal.

And price (multiple speakers), what does that compare to the last three years?

Say that again, I'm sorry.

Pricing. Your pricing, what does that compare to over the last three years?

I would think the turn deal we would do out of the warehouse line later this year, assuming we get all that done this year, that pricing could very well compare very favorably to the '07, early '07 pricing.

Okay. Great. Congratulations on the start you guys have made.

Thank you very much. Thanks for hanging in there.

At this time, there are no further questions.

We didn't expect a lot of questions because it's so quickly after the last conference call. So we're glad everybody showed up and listened. And look forward to the next call down the road. Thank you all.

Thank you. This concludes your conference. You may now disconnect.