Consumer Portfolio Services Inc (CPSS) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2010 second-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 meanings of the Private Securities Litigation Reform Act of 1995. These 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 now is Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Fritz, Chief Financial Officer of Customer Portfolio Services. I would now turn the call over to Mr. Bradley.

Thank you and welcome to our second-quarter conference call.

Well, I think the second quarter is probably relatively representative of what 2010 is going to be for us, which is still another recovery year. 2007 was a great year, but then '08 and '09 obviously we are in the middle of the recession and spent those two years recovering and really fighting our way to survive all those problems. 2010 is more of those problems. Most of them are behind us, but it is going to take us some time during the rest of this year to get everything stabilized, and so in some ways 2010 is sort of our year of stabilization. 2011, we should get back to doing what we are doing, and then hopefully 2012 and beyond, things will be back to sort of normal or 2007 kind of levels.

So with that, it appears our industry is now stabilizing. I'm sure everyone noticed Americredit was purchased by GM. That's probably a good sign for the industry. It doesn't look like there's a lot of yet again fewer players in our industry. The ones that are left seem to be having rather rational goals and objectives in how they're running their companies, which is probably good for the industry. It certainly fits in with the way we are looking at things.

Wall Street finally looks like it's beginning to open up some. Credit is becoming more available. Americredit did a second securitization, a few other people have done securitizations, so that market appears to finally be falling to some good levels. So one would hope that, over time, that would also improve.

So I think overall in terms of the Company, the overall look at it is pretty good. We will talk a little bit more about that in a minute, but for now I'll have Jeff Fritz go through the financial numbers and then I'll have Robert Riedl run through some of the securitization and credit matrices.

Thanks Brad. We'll take a look at some of the results.

The revenues for the quarter were $38.5 million. That's down from the March quarter's revenue of $44.6 million, or 14%, and down from last year's second quarter of $58.3 million, a reduction of 34%.

For the six months, the revenues were $83.1 million. That's down 33% from last year's six-month results of $124.4 million. Revenues of course are driven primarily by the consolidated portfolio. These percentage reductions that I just stated match pretty closely and correspond pretty closely with the reduction in the managed portfolio, consolidated portfolio, of 11% for the consecutive quarter and 39% year-over-year.

Looking at the expenses, the expenses for the quarter were $43.9, million. That's down 13% from the previous quarter of $50.4 million and down 32% from last year's second quarter of $64.3 million. For the six months ended June 30, 2010, the expenses were $94.3 million. That's a 28% reduction from last year's six-month period of $130.8 million.

We pretty much have seen significant reductions in all categories of expenses. Our most significant expenses are of course our interest expense, our provision for loan losses. All those have come down more or less ratably with the portfolio.

Looking at the loss provision, loss provision expense for the quarter was $7 million. That's down 40% from the March quarter of $11.7 million and 62% from last year's second quarter of $18.5 million. For the six months, provision expense was $18.7 million. That's down 46% from last year's six-month number of $34.6 million. The provision expense has decreased somewhat more significantly than the portfolio reduction, in part because the portfolio is seasoning and becoming older as well as smaller with each quarter, and much of the higher loss periods of this particular portfolio are somewhat past us.

Pretax loss for the quarter was $5.4 million. That's down 7% from the first-quarter 2010 loss of $5.8 million and down 10% from last year's second-quarter loss of $6 million. For the six months, the pretax loss is $11.2 million. That's actually an increase of about 72% from last year's six-month loss of $6.5 million.

On a net basis, the only difference in the numbers is we added an additional $5.8 million to our allowance for our deferred tax asset, the valuation allowance for a deferred tax asset. The deferred tax asset is of course a significant asset on our balance sheet. We have a number of tax planning strategies that we have to evaluate, that we evaluate every quarter to determine whether or not a valuation allowance is necessary. We did put a valuation allowance at the end of the year of 2009 and added $5.8 million at the end of this quarter. The valuation allowance for the second quarter ended was $3.6 million additional valuation allowance to the tax (inaudible).

Moving on, looking at the diluted loss per share for the quarter was $0.51. That's an increase of 55% from $0.33 for the first quarter and an increase of 59% from $0.32 diluted loss per share for the second quarter of 2009. On a year-to-date basis, the diluted loss per share was $0.84. That's up from $0.34 for the first six months of last year.

Moving to the balance sheet, free cash on the balance sheet at December or June 30, 2010 is $13.4 million. That compares to $22.8 million last quarter and $21.5 million in June of 2009. Restricted cash is $120.7 million, compared to $126.9 million the previous quarter and $139.6 million a year ago.

Our cash balances are influenced significantly by our loan acquisition activity. We have increased our portfolio -- or loan acquisitions somewhat significantly during the course of this year. Brad will probably touch on that a little bit later.

The finance receivables portfolio, net of the allowance for loan losses, was $667.6 million at June 30, 2010. That's about a 10% decrease from the previous quarter's $738.8 million and about a 39% decrease from just over $1 billion a year ago.

On the debt side of the balance sheet, our warehouse lines were $29.4 million at June 30. That's up from $17.6 million at the end of the first quarter and $5 million a year ago.

You will recall we are using a warehouse line of credit that we just put in place in September of 2009. A year ago, we had an amortizing non-advancing warehouse line that was -- except that $5 million we had on the balance sheet at year ago.

Our residual interest financing is down to $48.8 million compared to $52.9 million the previous quarter and $62.6 million a year ago. This facility continues to amortize down based on the pay downs of the correlated portfolios.

Securitization debt was $702 billion at June 30, 2010. That's down from $796 billion -- excuse me -- at the end of March first quarter and $1.1 billion a year ago.

The long-term debt on the balance sheet -- $48.8 million, about the same as the first quarter and up about $5 million from the year-ago period.

Looking at the consolidated portfolio, or the managed portfolio, which is our on balance sheet portfolio plus the two off-balance sheet portfolios that we service -- $931.6 million at June 30. That's down from just over $1 billion at March 2010 and down from $1.3 billion a year ago.

A couple of the operating metrics that we monitor -- the net interest margin for the second quarter was 14.2%. That's compared -- that is down 14% from $16.6 million in the previous quarter and $26 million in the June quarter of last year.

On a year-to-date basis, the net interest margin was $30.8 million. That's down 44% from $55 million for the six-month period ended June of 2009. The risk-adjusted net interest margin for the quarter was $7.2 million. That's down -- that's up about 47% from $4.9 million in the March quarter, and it's about the same as the $7.5 million in the second quarter last year.

On a year-to-date basis, the risk-adjusted NIM was $12.1 million. That's down about 41% from the six months ended June of 2009 of $20.5 million.

Our core operating expenses were $15.9 million for the quarter. That's just slightly down 2% from the $16.3 million in the first quarter and down about 5% from the June quarter of last year. On a year-to-date basis, the core expenses are $32.3 million and that's an 8% reduction from the six months ended June of 2009. The core operating expenses as a percent of the average portfolio -- about 6.6% for the quarter. That's up from about 6% from the March quarter and up about 5% for the June quarter of last year. On an annualized basis, almost the same ratio, 6.3% for the six-month period ended June of 2010. That's up about 31% from 4.8% for the six months ended June of 2009.

I'll turn it back over to Brad.

I'll have Robert comment on the securitizations.

First, let's look at the asset performance metrics. Total portfolio delinquencies for the end of June were 6.8%. That's up slightly from the March quarter of 5.9%, but improved over the 7% from a year ago. We would expect, from a seasonal aspect of delinquencies, to see the March quarter be the best quarter in the year and a slight uptick for the June quarter, which we experienced. But we did have a reduction year-over-year, which on the delinquency side is going to -- the second time we've seen that since our portfolio started shrinking.

Our net losses for the quarter were 9.3%. That's down from 12.2% in the March quarter and down from 10.6% a year ago, which on the net loss side, that's the first time we've seen an improvement year-over-year in the last three or four years. So, that's positive. On the net losses on an annualized basis for the first six months, we saw 10.9% for this year versus 11.1% last year, which is, once again, an improvement.

In terms of vintage performance, we continue to see our newer originations from late 2008 and 2009 track at much lower loss levels than we saw '06 and '07. So that's positive for the new paper that we are writing. They are tracking in line with our '03 and '04 vintages.

On the capital markets front, Brad mentioned that Americredit has done a few more securitizations. I think Americredit has done several. Santander Drive has done several transactions, and there have been a few deals from smaller issuers. The market continues to be strong. Both the pricing on those deals as well as the amount of financing raised on those deals has improved versus last year. So, I think securitization markets continue to be strong for us when we eventually get back there.

With that, let me pass it back to Brad.

In terms of looking at the Company, I think people know we've been working hard during this time to both make the Company more efficient. We've spent a lot of (inaudible) rebuilding marketing to where we can become more efficient and [set] the costly aspect of when we originate loans, and that plan seems to be working. Origination itself, we've had to shrink from a high of around $100 million a month down to a low of around $500,000 a month. So now we have been able to build that back up to about $13 million a month. So as much as that is nowhere near the $100 million, it is certainly off the ground from the $500,000. So we are pleased with that, and we think, as time goes by, we can continue to expand the originations base.

The market out there appears to be moderately competitive, so we have been able to keep our margins and we expect to continue to. So that doesn't seem to be much of a problem. Again, I think most of the buyers are either becoming slightly more conservative or certainly are buying more conservative. In other words, some of our friendly competitors are moving upmarket, and they are buying more prime or non-prime. To the extent people are buying sub-prime, they're doing it in a conservative way, so that fits in pretty well with our market.

Again, I think, overall, we rise and fall with the economy. So as the economy continues to improve, it should have a positive effect on our business. A double-dip kind of thing would not be such a great deal, but overall we think, as the economy continues to expand and grow, by reading it at value you can see that the dealerships are doing better, the auto industry is doing better. All those things will eventually affect us and cause us to do better as well.

As Robert pointed out, collections are doing well. The portfolio is shrinking; that's a negative. Part of the problem is as it continues to shrink, it makes (inaudible) the portfolio is getting a little bit older, so the loans are aging and doing better, but on the other hand it's hard to keep the delinquency down on an aging portfolio. As we continue to grow originations, hopefully we can offset that affect. One of our immediate goals is to grow originations to the point where the portfolio becomes neutral and eventually begins to grow again.

Staffing, we are currently are at about 450. That's down from just under 1100 overall, so as we've mentioned in prior calls, we've had to cut staffing dramatically over the last couple of years. Staffing has now firmed up at that 450 mark we probably expect it to stay there, assuming we can get it to grow a bit.

As I said, we continue to look for efficiencies. We've been doing a pretty good job in streamlining anything and everything we could find over the last year and a half or so. I think that will have a positive effect once we start to grow again.

As Robert points out, Wall Street is improving. I think, again, with Wall Street getting better and deals getting done, those doors open to where we can go out and get a warehouse line, potentially raise some more capital, and get the things necessary to truly start growing.

But overall, 2010 is going to be another kind of rebuilding year. It's certainly going to be better than '08 and '09, but I think we still have a few things to clean up from getting through the recession, but we are trying to lay the foundation for better years to come.

I think part of the good news is we made it through this mess, and lots of folks didn't. So I think that is the strong positive to look on today, and the fact that, if you make it through, down the road, good things should or could happen. So we are optimistic that if the economy hangs in there and grows, we will grow with it.

With that, we will open it up for questions.

(Operator Instructions). [Kyle Joseph], JMP Securities.

Hey guys. Just looking -- going forward with the modeling and the balance sheet, I was looking for kind of a gauge or an annual payment rate. You guys were expecting an annualized payment rate. It looks like it's kind of climbed up, moving into 2010 as the portfolios decline. Can you give us any color there?

This is Robert. You are talking about the runoff rate?

Yes, exactly.

I know historically it's sort of been in the 10% to 11% on a quarterly basis and

Yes, low 40s% annualized.

And so I think take that's probably not a bad number. I think it was probably a little bit higher the last couple of quarters because of the ACC portfolio that we took over the servicing for about a year ago. So we would expect it to kind of normalize back in the 10% to 11% on a quarterly basis going forward.

(Operator Instructions). I am not showing any further questions in the queue at this time. I'd like to turn the program back to Mr. Bradley.

Thank you. So again, we think the second quarter went about the way we expected. We think the year is progressing well; we are beginning to get things rolling again. So, we are generally optimistic on how the whole thing goes. Again, as the economy moves, we should move with it. The capital markets are looking better. The portfolio is looking better. Origination is looking better. So we will continue to push along. Again, thank you for attending this call today.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until Tuesday, August 24 by dialing 800-642-1687 or 706-645-9291 with the conference identification number of 95075250. 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. Please disconnect your lines at this time, and have a wonderful day.