Consumer Portfolio Services Inc (CPSS) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2010 fourth-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 Charles Bradley, Chief Executive Officer; Mr. Jeff Fritz, Chief Financial Officer; and Mr. Robert Riedl, Chief Investment Officer of Consumer Portfolio Services. I will now like to turn the call over to Mr. Bradley.

Thank you and thank you all for joining us on our year-end conference call for 2010. I think overall -- I will I guess focus mostly on the quarter since we do quarterly calls. We were pleased with the quarter I think there is a couple of things of note.

One, we finally put our warehouse back in place by getting $100 million warehouse line with Goldman Sachs. We also raised some more capital. We have raised $20 million of new capital from our primary senior lender, Levine Leichtman Capital Partners. Both of those were important because -- the capital obviously was important because we needed to raise some more money and keep things rolling. The credit line, or the warehouse line, is even more important.

If you -- for everyone who certainly has been hanging around following the story, we lost both our credit lines in 2008. Without those lines and the shutdown of the securitization market that put us in a tough spot. We then spent 2009 or the rest of 2008, 2009, and 2010 fighting our way through that.

By getting that credit line or that warehouse line in December and then an additional credit line or a warehouse line in February with UBS we now have $200 million of warehouse funding. And that is effectively what we need to really get things rolling again. So it was a very somewhat monumental step in our road back.

We have already mentioned that the securitization markets and Wall Street have been back for probably over a year at this point, so we are really kind of where we need to go. Getting that done was very important. We also were able to start ramping up originations in the fourth quarter. That will fill -- that will begin to really push us towards what we need to do which is get back in the securitization market, which we should hopefully do rather soon.

But putting all of that together, if you sort of look at all this -- how this has all happened, obviously everybody knows about the Great Recession, as people like to call it these days. We have had to struggle through it. The historical comparison to this last go-round is eerily similar in that last time around in '98, '99, and 2000 was really the recession and it took us 2001, 2002, and 2003 to kind of fight our way through it.

This time around the recession is going to be 2008, 2009, and 2010, and then we are really working our way through it in 2010, 2011, and 2012. Part of the thing we are going to have to do now is grow and that will soften up our earnings as we do it, but the end result should be very good.

Before we get too much into all that I am going to turn it over to Jeff Fritz to run through the numbers for the fourth quarter.

Thanks, Brad. Good morning, everybody. Looking at the financial results, the revenues for the fourth quarter of 2010 were $35.3 million. That is a little less than $36.8 million for the third quarter of 2010 and a 24% decrease over the fourth quarter of 2009.

Year to date the revenues were $155.2 million. That is a decrease of about 31% from $223.9 million in the year 2009. The revenues are pretty much tracking with our consolidated portfolio, which shrunk by about 9% in the fourth quarter and about 35% compared to the prior year.

Expenses for the fourth quarter of $37.4 million. That is down about 7% from $40.3 million for the third quarter of 2010 and down about 56% from $85 million at the year-ago quarter. On a year-to-date basis the expenses were $172 million, a decrease of about 37% from $273 million in 2009. We experienced significant decreases in most of the expense categories, most significantly interest expense and provision for losses, both in the fourth quarter and for the full year.

Looking at the provision expense for the fourth quarter it was $4.2 million. That is down from $7 million in the previous quarter, the third quarter, and down significantly from $42.2 million in the 2009 fourth quarter.

On a year-to-date basis the provision expense was $29.9 million for 2010 compared to $92 million in 2009. You may recall that in the fourth quarter of 2009 we took a significant provision expense of about $42 million that was not matched by this year's fourth quarter.

The pretax loss for the fourth quarter was $2.2 million. That is slightly less than the 3.5 million loss in the third quarter of 2010 and down significantly from the $39 million loss in the fourth quarter of 2010. On a year-to-date basis the pretax loss was $16.8 million. That is a 66% change from the $49.4 million pretax loss for 2009.

Although we had the significant operating losses, we actually booked tax expense of $11.4 million for the fourth quarter and $12.4 million for the full year. The tax expense resulting from additions to our valuation allowance to our deferred tax assets. As a result, the net loss for the quarter was $14.5 million compared to $4.5 million in the third quarter and $46.4 million in the fourth quarter of 2009. And on a year-to-date basis the net loss after tax $33.8 million for 2010, a 41% change from $57.2 million for the year 2009.

The loss per share for the quarter -- diluted loss per share for the quarter was $0.84. That is compared to $0.26 in the third quarter of 2010 and a loss of $2.55 for the fourth quarter of 2009. The year-to-date diluted loss per share $1.94 per share compared to $3.07 per share for 2009.

Looking now to the balance sheet. We have unrestricted cash in the balance sheet at December 31, 2010, of about $16.2 million. That compares to $11.3 million in September of 2010 and $12.4 million at the end of 2009.

Our restricted cash balance has not changed very significantly, $124 million at the end of the year compared to $120 million in September of 2010 and $128.5 million a year ago. Our cash balances are significantly influenced by our originations. We did have significant originations in the fourth quarter and also what helped the cash balance at the end of the fourth quarter was the addition of $20 million in new senior secured debt, which we previously announced and Brad may refer to again later.

Our portfolio of financed receivables net of the allowance for losses was $552.4 million at the end of the year compared to $608 million at the end of the September quarter and $840 million a year ago. As I said previously, those changes reflect a 9% decrease on a quarter-to-quarter basis and a 34% decrease year over year.

Looking at the debt side of the balance sheet, almost all of our debt categories have decreased from quarter to quarter and year over year with the exception of our warehouse lines of credit. Our warehouse line of credit increased to $45.6 million at December 31, 2010. That is up a little bit from $39.7 million at the September quarter and only $4.9 million in the year-ago period.

Residual interest financing, securitization trust debt, and our long-term debt, with the exception of our senior secured debt, all decreased in the fourth quarter.

Thanks, Jeff. Now Robert is going to walk through some of the credit metrics.

Thanks, Brad. In terms of portfolio credit statistics, our delinquencies ticked up a little bit in the fourth quarter to 9.2% from 8.6% in the end of September quarter. And that is up slightly year over year from 8.8% at the end of 2009.

On the net charge-offs for the quarter were 6.7% for the fourth quarter versus 7% in the third quarter and down significantly from the fourth quarter of last year at around 13.2%. For an annual basis on the net losses 2010 was 9% compared to an annualized 9.7% in September and down significantly from 11% in 2009. So what you see on the charge-offs is these positive trends of losses coming down as we have seen our 2006 and 2007 vintages really get past their peak loss periods and those losses are definitely coming down.

In addition, we see our newer vintage originations from 2008, the second half of 2008 and on forward, tracking at significantly lower net losses. They are very similar to our 2003 and 2004 cumulative net losses, so that is very positive with the new paper that we have been writing.

In terms of the warehouse facilities Brad mentioned, we entered into two new lines since our last call -- $100 million with Goldman and Fortress that was at a 75% advance rate, LIBOR plus 5% with a LIBOR floor of 1.5%. And that is a two-year revolver so that we can use that as a warehouse line for the next couple of years.

In February we closed another $100 million line with UBS that has a 76.5% advance rate. That is rated A by S&P and at LIBOR plus 6%, there is no LIBOR floor on that. That is a one-year revolver and then it amortizes for another year.

In terms of the asset-backed market, as Brad mentioned earlier, it still continues to be very strong. Auto paper makes up over half of new issuance these days. With the lack of mortgage paper and reduced credit cards, clearly investors see the value in auto and its short-term nature, and it has performed very well through the Great Recession.

Another thing that is notable in the ABS market is investors' search for yield. We have seen over the course of the last six months much greater demand for subordinated bonds and that has resulted in much more issuance of BBB and BB bonds by some of our competitors.

AmeriCredit continues to be very active in the space. They launched a deal this morning selling down to BBB. And we have seen some smaller issuers access the market over the course of the last couple of months as well. As Brad mentioned, we would expect to get back into the term securitization market in the next couple months.

With that let me turn it back to you, Brad.

Thank you. In looking at the marketplace today, I think because of the recession and people are generally getting the confidence that the recession is over and job loss is down, all of the sudden you are seeing a lot more activity at the dealerships. And so the car sales are going up a lot, the dealers are looking for financing.

We are in a somewhat good position in that there isn't a lot of competition out there, and so we are able to keep our margins strong but also keep our credit metrics very strong as well. That is only really happened in the last couple of months that I think the general populace is becoming more comfortable or more in need of replacing their old cars, and as a result it's really flowing through the dealer side of things.

We have only just begun over the last month or two to really try and expand our footprint again. The good news is we had a very large footprint before so we are able to very easily and even somewhat selectively expand into the best markets. We have actually recently hired 10 new marketing reps. They were all rehires from previous people we have had across so they hit the ground running. They are very experienced; they know what they are doing. And that is very much an advantage as we go forward.

So we like sort of the general market. As Robert pointed out, the Wall Street market is just as good. Without all the mortgage paper there is a very high demand, particularly for auto since auto performed so well through the recession, and so I think trying to access that market and get back in the securitization business is one of our prominent goals in the near future.

I think, overall, looking at houses [worked]. As I said, it eerily follows the last recession in that for the last two years if not almost, counting 2010 all years, our job was to survive. We cut our workforce in half. We had to layoff well over 500 people. We did everything we could to save money at every angle. We also had to get through the portfolio performance.

At this point our portfolio now is very seasoned from the old paper. With the increased economic performance in our economy I think the performance will be better. We have gone through the high loss part of the portfolio, so we think going forward the results and the performance of what we will call the old portfolio should be quite good.

In terms of the new portfolio, we have been able to originate very high quality paper with strong margins in this marketplace and we think the results of that will be very good as well. So we are kind of really at that turning point. If I was going to sort of handicap it, I would look at the last three years -- 2008, 2009, and 2010 -- as getting through the recession. Now is the time to start building the Company back up.

What is good in comparing it to last time around is the Company is about twice as big as it was after the last recession. We also have a much bigger infrastructure. We really have the -- we never got to $100 million the last go around, so getting up to $100 million in originations. We have the infrastructure we want.

Our credit model works very well. As much as we couldn't have predicted the severity of the recession and the effect it would have on the portfolio, ironically the model works and we know now the paper is going to perform. So we were able to tighten it, make some changes, so we are very confident in the model going forward.

As I said, we have been able to rehire a lot of folks. And having that experienced group come in and sort of hit the ground running has been very effective, not only in the marketing side but also in the origination side, even in the collection side.

We still are kind of battling with the last phase of getting through this, which is our portfolio is still declining. And so as much as we are growing we need to reach that tipping point where we begin growing the overall portfolio. We expect hopefully to do that in the next six months or so. Once we do that that really pushes us going the right way.

The one thing we seem to be missing a little bit from the last go around is last time right around now we began the process of buying three of our competitors and they really helped our bottom line to sort of soften the effect of growing quickly as we came out of the recession. Unfortunately this time around we have not been able to find any acquisition targets. I think a lot of them, unfortunately, went away in the recession and there just aren't any weak folks out there to pick up or to purchase.

So I think as a result of that, unless we can find one or two, we are going to have to kind of suffer through having to grow and remembering that as we grow kind of quickly here -- again, it's not quickly in the sense that we are growing from doing very little originations to doing $20 million or $30 million. It's not like we are growing up to $100 million. But even so it has a significant drag on our earnings which we are going to have to sort of work our way through this year.

But overall I think we have gone through the problems we are now in that phase where we really are starting to grow again and really taking advantage of everything we are able to preserve through the recession. As a result of that I think, given the market both at the purchaser level, the dealership level, and also at the Wall Street level, we have got an awful lot of things going our way. The fact that everything we have done worked, including in terms of the performance and our scorecards and such, we are very well positioned as we go forward from here.

With that we will open it up for questions.

(Operator Instructions) John Hecht, JMP Securities.

Morning, guys. Thanks for taking my questions. First one is you talked about $100 million per quarter origination target. What was the -- can you tell me what the gross originations were last quarter and what is the kind of level payment activity of your amortization in the portfolio at this point?

John, this is Robert. We originated $33 million in the fourth quarter of last year and I think we will see definite gains in the first quarter this year. I think the run off of the old stuff was probably in the 11%, 12%-ish range, something like that.

Robert, you mentioned that you are certainly past the peak charge-off period of the 2006 and 2007 vintages. Can you remind me when you guys slowed down in 2008 and how much of the 2008 vintages of the $550 million portfolio, how much of that is going to be 2008 vintage?

Well, really into 2008, John, if you remember, what we did, we did a securitization in kind of the April timeframe but that really only had one month's worth of 2008 originations. The rest of it we really sold on a servicing retained basis to Citigroup in September of 2009.

So we have got probably $50 million from that January first quarter and then probably another $25 million-ish to $30 million from the fourth quarter that we retained. So this is a ballpark and I can get you a better number, but I think it's somewhere between $60 million and $75 million-ish.

Okay. But they are certainly a minority of the overall portfolio?

Right.

Okay. And then can you talk about what is going on in the competitive marketplace? Obviously we know AmeriCredit is pretty active. But what are you seeing in -- are there new entrants coming to market or is it pretty much just that the incumbents that are operating? And what is going on with pricing and things of that nature?

Sure. Actually what we have seen, which is somewhat novel given everything, is there is a lot of new entrants. A lot of folks that are actually starting to put in start-ups. I would guess there is probably somewhere in the neighborhood of anywhere from three to six literally bare ground start-ups with people that have experience in the industry. Which on the one hand isn't particularly bothersome to us because it's going to take them a long time to get anywhere near the size that we would be, but on the other hand it's very interesting that the market is so strong to actually have people be thinking about doing that.

In terms of the current environment, I think there are just really the incumbents as you say. AmeriCredit is there. I think AmeriCredit is still in the subprime business. I think that probably their focus is more on the prime; I don't know how much they are going to try and grow subprime in sort of the middle range.

In terms of the banks it still looks like the banks are being very conservative, which is fine with us, and so they have pulled back a little bit. There are no real big players in the middle market. There are a few people sort of in the credit tier below us that have grown and I think they will continue to prosper as well.

So the market conditions, in terms of an independent finance company like ourselves, are very good. I think over the next few years you are going to have some of the new start-ups come in. And they may try and grow real fast, which might enable us to have some acquisition targets down the road, but given either way I think, unless the banks get aggressive again which we don't really see -- Santander is out there. They recently seemed to have slowed down a bit. But Capital One would be out there. Those would be the main players at this point.

And what is going on with pricing? And duration of loans been impacted at all over, say, the last couple of quarters?

No, I think the pricing has actually been stronger than we expected. We thought as we grew a few -- three or four or five months ago we were doing very little in originations and we were able to have a very high margin. One would think as you grow you might give up some of that margin.

And for us credit is all important so that is our focus, but interestingly enough we have been able to grow somewhat substantially, at least from that low, little, or nothing numbers, and hang on to the full margin. And actually it has gone up a little bit so that is interesting to say the least. But it does give you a good clue.

I think it's not so much from sort of the competitor's point of view. I think the fact that there are a certain amount of competitors, but as I mentioned earlier now that the people are back in the dealerships and the dealerships are beginning to really try and start originating more loans there is just a lot of production out there. And so they are looking for consistent players and players of size or that can grow to the size like ourselves.

And so I think having a CPS around where they can know we will buy a lot of paper gives them -- even though they might potentially have a slightly better pricing somewhere else, they want to keep us in as the new lender or as a growing lender for their store. So we were able to hang on to our margins, we were very pleased with that, and still maintain the strong credit.

Great. Thank you guys very much for the color.

Thanks, John.

Gideon Bernstein, Leisure Capital Management.

Morning, guys. Thanks a lot for the call and for taking my question. The last few calls you mentioned what was going on with the managed portfolio and where you saw it heading in the short run. You just said that it's still declining and it's going to turn in the next six months or so.

Just wondering where you thought it -- what number you thought it would bottom out. And also wanted to find out on the sales people side with your workforce how many people you expect to have relative to where you had in the last peak of your cycle?

Sure. It's sort of, not complicated but almost a little bit of a guess, because on the one hand the portfolio is declining but on the other hand we are growing. So it's really where those two points are crossing and that is certainly one of our main focuses today. We want to get there faster than it comes down.

But the answer to your question, I think the portfolio dropped into the $500 million range. The last go around we dropped below $300 million as we came back. So as I said, we probably will start from at least a double from where we were but probably somewhere in the neighborhood of low $500 millions to high $500 millions is where the portfolio will eventually bottom out before it starts to grow again.

In terms of our marketing, when we were doing $100 million a month we had 120 marketing reps or marketing people. Today we have about 30; we just hired 10 new ones to make that 30. We will probably hire at least another 10 or 20 over the next couple of months.

I don't know, given the automation and sort of our efficiencies, that we will ever need to go back to 120. I would almost guarantee that won't happen. On the other hand, I am not so sure -- it will be a little while before we get to $100 million a month too. So at the moment we are looking at -- we probably have 30 current marketing reps, counting the 10 we just hired, with plans to hire another 10 or 20 over the next couple of months.

Are you --?

Did that answer all of them or did I miss one?

Yes, I think you got those ones. With respect to bank covenants and compliance, things like that, are you guys still working through all that?

No, we are pretty much getting there. I think we have -- having experienced and gone through this once before is we are able to try and limit our exposure to downturns and things like that. So we have still -- we have very good lenders that we have been working with all along and we fully expect to be able to work with them going forward.

It's kind of like they have hung with us all through the tough times and now they are having an opportunity to really sort of participate in the good times. And so I look favorably on those relationships and them working through any potential issues going forward.

Final question for you guys in terms of shareholder value and creating shareholder value and your guys' opportunities now. I know you guys have a stake in the Company, but do you have any windows of opportunity that you see the growth coming back that you can show some further vested interest in buying shares for yourselves or --?

I certainly would like to right about now, but we have given the windows. I think you might see some of that coming along in the next little bit.

Okay.

But I think it's a good opportunity.

Sounds like it. Thanks, guys.

Thanks very much.

(Operator Instructions) At this time I am showing no additional questioners in the queue. I would like to turn the program back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. Again, I think for everyone who was hung in there with us it has been a difficult couple years on the negative. On the bright side, we have been able to really sort of fight through in a very good way in maintaining our entire infrastructure and really being at a sort of -- as much as I hate to think that we have had to repeat this whole thing, it's pretty much in fact what we have done.

And if you look at it that way then I think looking forward you have some real opportunities in terms of a lot of this looks the same as the last go around coming out of the recession. You have a very good market at the dealership level, probably an even better market at the Wall Street level, and so it's just a matter of us to sort of execute our plan which is maintain our credit performance, keep our margins strong, and grow.

The good news is we have got a lot of experience this time going around growing. We have no real need to grow to $100 million a month anytime soon, but we are in a position where we can grow somewhat substantially relatively easily. And I think that is the key to us being able to take advantage of the future.

So again, thank you all for hanging in there, thank you for attending this call, and we will be speaking to you rather soon given the first quarter and all. Thanks very much.

Thank you. This does conclude today's teleconference.

A replay will be available beginning two hours from now until April 10 by dialing 1-800-642-1687 or 706-645-9291 with the conference identification number 56806276. A broadcast of this conference will be also 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.