Consumer Portfolio Services Inc (CPSS) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2011 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 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 to everyone joining us this morning to go over our second-quarter results. It is probably one of the latest times we've announced the quarter, so we're deep into the third quarter.

But looking at second quarter, as much as the earnings don't particularly reflect a good result, the overall quarter worked very well for the Company. We're really beginning to get back on the road in terms of growth. We're getting rid of the last final results of the recession. All these things are beginning to sort of gel in the right way, leading us to where the third quarter, fourth quarter should all begin to improve. So, as much as, like I said, the bottom line numbers weren't particularly great in the second quarter, they were not unexpected. But that should represent, with any kind of luck, the bottom, as we begin to start really going in the right direction.

And again, looking at some of the highlights of the second quarter, we did in fact get a securitization done in April. That was a rather big deal in terms of getting back on track in the securitization market. The securitization was very well received on Wall Street. We sold it out very easily, and the pricing was extremely good. So, if that's anything of a bellwether of what's to come, then we have very good things coming down the road in terms of the securitization market. Everything we've seen since April shows that the market is still strong. Even with some of the wacky market moves up and down, the bond market and the need for securitization products still remains very strong.

In terms of what we are doing, I think the biggest thing we're doing now is we are trying to grow. As I think everyone knows and I've said numerous times on previous calls, a lot of the last few years was about surviving -- first, downsizing the Company so we could make it work, second, trying to keep enough cash around keep the thing running, but just trying to make it through the recession. As I said on the last call and I will say again on this call, those days are pretty much over. We are really beginning to see much better results coming down the road. The focus now is much more on growth and what to do with the Company going forward, rather than just making it through the recession.

In terms of marketing, 1 example of that is in the first quarter, we only had 26 marketing reps out in the field. As of the second quarter, we have 53. So, we more than -- just more than doubled that rep force. And it takes a little while for those guys to get their feet -- their footing in the market, but as those guys get settled into the market and grow, we should see some real results from having that much larger marketing force out there. And we will continue to grow that as we go forward in the next few quarters.

In terms of originations, even originations is beginning to grow. We had about $50 million in originations in the first quarter. We went to $60 million in the second quarter, which doesn't seem too much more, but then again, that's 20% growth, quarter to quarter. The third quarter will be even better.

So, we are beginning to show that trend line in terms of originations, as I've said before, and once we get that originations back to a sustainable level, then the portfolio will start to grow. And we are fast approaching that time. We think that is somewhere around the $30 million, maybe a little more or a little less, we're almost there now. So, again, putting the marketing people in the field and getting originations growing is really what's the focus of the Company today and what's going to drive us going forward.

On the other side, collections has done very well. We've really seen the results improve on the managed portfolio. The managed portfolio still is running off, but the overall results in terms of the collections are improving. And even during these summer months when things generally get a little bit worse, we're actually seeing some improvements. We'll talk about that a little bit more in a few minutes.

Overall, the quarter was very good, if not the best in terms of results, but in terms of what we accomplished during the quarter is much more important in terms of what we're going to do going forward. With that, I will have Jeff Fritz run through the financial numbers.

Thanks, Brad. Good morning, everybody.

Looking at the results for the quarter, the revenues for the quarter were $31.2 million. That's down 4% from the March quarter of $32.4 million and down from last year's second quarter about 19%. The year-to-date numbers, the first 2 quarters, $63.5 million in revenues. That compares to $83.1 million for the previous year, down about 24%. And this is a similar pattern as we've been working through the recession.

The revenues have been decreasing more or less in the same ratio as the managed portfolio, although what we are seeing is that the decrease in revenues is coming down somewhat as our originations have increased. As Brad pointed out, we originated significantly more receivables in the first 6 months of the year than we did last year. We originated $111 million through the first 6 months, and that's nearly as much as we originated in the entire year of 2010. And the revenue line is starting to reflect that growth.

On the expenses, the expenses for the quarter were $37.6 million. That's up 3% from $36.6 million in the first quarter of this year, and that's down 10% from $41.7 million in the second quarter of last year. For the 6 months, expenses were $74.2 million. That's down 21% from $94.2 million for the first 6 months of 2010. Many of our expense lines categories have decreased along with the reduction in the outstanding portfolio. A couple of categories are starting to level out, our like our employee expenses are starting to level out as we've added employees to accommodate the originations growth; marketing employees, as Brad referred to.

During the second quarter, although we did the securitization in April which greatly reduced our cost of funds on $104 million of our receivables, the quarter was influenced somewhat by high non-utilization fee on our oldest warehouse credit facility. And so that credit facility was mostly paid down with the securitization, but we paid sort of a high penalty, non-utilization fee on that throughout the quarter. On the plus side, that facility expires September 30. And so the impact of sort of carrying this kind of high non-utilization fee will diminish somewhat and go away entirely in September at the end of the third quarter. And we'll see somewhat better improvement on our interest expense.

Looking at the provision for loan losses, it was $4.4 million for the second quarter. That's up 19% from $3.7 million in the first quarter and down 37% from $7 million in the second quarter of last year. The year-to-date loss provision is $8.1 million. That's down 57% from $18.7 million last year. There's a couple of things going on with the provision and the allowance for loan losses. You have -- the bulk of our portfolio is highly seasoned and running off and generally incurring fewer and fewer losses with that seasoning. But we have put on a lot of new receivables, and we establish our allowance for loan losses through the provision for the new receivables, and so you have it being influenced by both of those factors.

The pre-tax loss was $6.4 million. That's up 52% from $4 million in the first quarter and down 6% from $6.8 million in the second quarter last year. The year-to-date loss is $10.7 million. That's down 4% from $11.1 million loss for the first 6 months last year. Again, the second quarter loss was significantly influenced by the interest expense on the warehouse credit facilities, as I alluded to, and somewhat also by a slight increase in the provision for loan losses.

The net loss was the same, the $6.4 million. We didn't record any tax expense or tax benefits for the quarter. We essentially added to our valuation allowance for deferred tax assets by the amount of what would have been the tax benefits from the loss for the quarter and the period. The diluted loss per share was $0.35. That's up 52% from the $0.23 in the first quarter and down 10% from the $0.39 loss for the second quarter of last year. And the year-to-date diluted loss was $0.58, and that's down 30% from $0.83 for the first 6 months last year.

Looking at the balance sheet, unrestricted cash on the balance sheet was $16.5 million at June 30. That compares to $9.2 million at March of 2011 and $13 million a year ago. The significant influencing factor for the quarter really was the execution of our securitization in April. And as Brad indicated, the market was very receptive to our offering, and we had really outstanding execution in the securitization, both from a pricing and cost of funds standpoint and from a structural standpoint, in terms of the cash that it generated for us.

The financed receivables net of the allowance for loan losses are $486.7 million. That's down 4% from the previous quarter of $507 million and down 27% from June 30 of 2010, where it was $667 million. And again, as I think you can see and we have been seeing, as we increased originations, that runoff is narrowing somewhat from quarter to quarter. And I think we can see, in the not-too-distant future, where the portfolio that we originate is going to level off with the originations volumes increasing somewhat.

On the debt side of the balance sheet, the warehouse lines at the end of the quarter were $43.8 million. That compares to $81 million at the end of the first quarter and $29 million last year. As we mentioned, the securitization significantly paid down the warehouse lines, and now we are building them up again towards what will be a late third-quarter securitization. Our residual interest facility continues to pay down. It's $30.5 million at the end of the quarter compared to $35 million at the end of the first quarter and $49 million last year. And our securitization debt for the first time in many, many quarters increased to $516 million this quarter, compared to $489 million in the previous quarter and $700 million a year ago. As we mentioned, we issued about $100 million of new securitization trust debt with the issuance of 2011-A securitization. And long-term debt went up slightly, about $3 million, with the issuance of a small piece of subordinated debt during the quarter and slight increases in our renewable notes program.

Brad?

All right. Thanks, Jeff.

Looking at some of the performance metrics, which I mentioned, we really are beginning to see some nice improvement there. Delinquency for the quarter was 5.92%, and that's up a little bit from 5.82% in the previous quarter and down significantly from 6.83% in the last year's quarter. What's kind of good about that, as I mentioned, normally it's a little bit softer in the summer, and so going from 5.82% in March to 5.92% really isn't too bad at all. And I think if you compare it to last summer, when it was 6.83%, it's significantly better. Net losses for the quarter were 6.04%, down from 9.32% in March and down from 9.33% last year's quarter in June. Again, you can see the same kind of significant improvement year-over-year. Net losses year-to-date, 7.74%, down from last year at 10.85%.

And the consolidated portfolio, the portfolio at the end of June was $522 million, down a little bit from $546 million in March and down from $719 million the previous year. And again, if you focus on the March to June, $546 million shrinking to $522 million, we were very much getting there in terms of turning that number to where it starts to grow, and we would expect it to grow soon. Overall portfolio counting the service was $635 million, down from $679 million, and that's down from $931 million the previous year.

Just looking back at some of the other operating metrics that we review, the net interest margin for the quarter was $8.6 million. That's down 9% from the previous quarter of $9.5 million and down 48% from last year's net interest margin of $16.4 million. On a year-to-date basis, the NIM was $18 million for the quarter -- for the first 6 months, and that's down 42% from $30.9 million for the first 6 months of 2010. The risk-adjusted NIM, which takes into account the provision for loan losses, was $4.2 million for the quarter. That's down 28% from $5.8 million in the first quarter and 55% from $9.4 million in the second quarter last year. The 6-month risk-adjusted NIM was $10 million, and that's down 18% from $12.2 million for the first 2 quarters of 2010.

The core operating expenses, which is all of our expenses except for interest and the provision for losses, was $14 million for the quarter. That's up 1% from $13.8 million for the first quarter and down 12% from $16 million in the second quarter of 2010. And on a year-to-date basis, the core operating expenses decreased by 14% to $27.8 million from $32.3 million for the 6 months of last year. And the core operating expenses as a percentage of our average managed portfolio were about 9% for the quarter. That compares about 8% for the first quarter of 2011 and about 6.5% for the second quarter of 2010. And the year-to-date operating expenses as a percentage of the average managed portfolio, 8.2%, and that's up about 31% from 6.3% for the first 6 months of last year.

Thanks, Jeff.

So, looking at the second quarter, some more things to think about. I mean, we are really -- you could almost look at 2011 as a transition year for us. We've gone from sort of trying to keep the Company going in 2010, 2009, to where we're really starting to look forward to 2012. We still have some things to clean up, as Jeff pointed out. We still have this credit line which we got back in September of '09, which at the time was a very good deal to have, but today, it's significantly more expensive than the current credit lines and it is sort of weighing on our earnings abilities. And again, it goes away in September. But there's a few things like that that need to get cleaned out during these quarters before we really start hopefully hitting our stride in 2012.

In terms of the economy and sort of the industry, the dealers are still struggling because all of the customers out there -- as much as people are buying cars, everybody is still probably listening to the news too much and wondering what the economy is going to do. And so consumer spending isn't quite what we might hope. But even so, the market is not as competitive as it used to be, and just getting enough marketing reps out there should be enough for us to grow as much as we would like. But even so, the fact that the used car prices are also very high at the auctions and this is mostly a result because there haven't been in an influx of new cars over the last couple of years. Also, the problems in Japan have slowed down some of the production over there.

So, without a bunch of new cars coming into the market, the price of used cars goes up in the auction. And since we are looking to finance those cars, it's a little bit harder for the dealers to come up with the inventory that would fit into the financing sort of buckets as much as we would like. All those things should work out, and as I said, even if it stays just the way it is, the fact that we are spreading our footprint again should make up for it in fine style in terms of getting the growth we want. If all those things start going the right way, then you would have even more growth coming in.

I think we've mentioned in the call, Wall Street is in great shape in terms of the bond market, as much as there seems to be constant turmoil in the stock market, both in what the economy is doing and what the overseas economies are doing. I think, in terms of Wall Street looking for places to put money, the auto industry and the auto bond market has performed so well through the recession, it's now become a very safe place in still a very turbulent time for people to invest their money. So, that's a very strong point.

And the next part is looking at the overall. As much as everybody would like to see a very fast recovery and the normal kind of hockey stick recovery in a recession, normally in a hockey stick kind of recovery where there's a lot of growth after the recession, interest rates generally move very quickly to follow. Ironically, that doesn't help us. Today, with a very slow economic recovery -- and it may be even slower still -- that keeps interest rates very low. And that allows us to grow and grow in size and get big securitizations done. And once we do securitizations, we lock in those rates.

So it really, as much as it's not maybe the best thing in the world for the country, in terms of our little world and CPS during securitizations, keeping those interest rates low while we grow is a very, very beneficial thing. So to the extent we have a slow recovery, which it certainly seems we might, then that pricing could really maintain for a good long time as we grow and can rebuild our portfolio and lock in those rates. So like I said, as much as we'd like to see the consumers out there a little more and the dealerships getting more business, we think we can live with that if the swap is we get to keep the low cost of funds for a good long time.

So we think the industry sits very well. As I said, there isn't any unreasonable competition. As another interesting note, people think enough of this industry today that a lot of little startups are coming out, and we haven't seen startups in this industry in almost 8 or 9 years. So the fact that people actually like it enough to even begin to put some new money into it is a really very bright sign for the future of our industry. The fact that we are a lot larger than any of those startups really is a good thing as well. We're not particularly concerned about them competing in any large way with us.

Like I said, overall, I think the future is very good. We have to get through these next couple of quarters, but we are looking forward to doing a bunch of new things, getting the growth growing again, and really getting the Company back on track. I think it's worth mentioning, since everybody already knows and we've announced it, that we entered into an agreement to purchase a portfolio from Fireside Bank. That portfolio is about -- give or take $250 million. That's an enormous step in terms of adding a lot more portfolio for us to service. We've been talking on this entire call about trying to keep the growth -- excuse me, keep the portfolio from running off. Dropping in another $250 million of loans certainly has a huge effect like that.

So, we think things are going good. Third quarter, we're about halfway through it, so we've got a good handle on that as well. With that, we will open it up for questions.

The floor is now open for questions. (Operator Instructions).

Our first question comes from the line of Casey Ambrecht from Millennium. Your line is open.

Just a quick question. I am sorry if you went over it, but can you go through the metrics of that portfolio you bought and what you think the returns should be?

Well, we haven't closed on the deal yet, so we're probably not -- really want to talk too much about it. But it's not dissimilar from other deals we've done, where what we really bought was a servicing portfolio. And so, we have a pretty good servicing fee, the cost of funds is pretty good, but overall, we think really the way to look at that deal is just adding to our overall portfolio. But we would expect to make mezzanine level returns, give or take.

Okay, and when is it expected to close?

It should close in September.

Great. Thank you.

Thanks, Casey.

Thank you. (Operator Instructions).

I show no further questions. I would like to turn the floor back to Mr. Charles Bradley for any additional or closing remarks.

Okay. I think we've kind of said what we wanted to say today. We think the second quarter is over, we are on to the third. Everything is going in the right direction. We like both the -- as much as the world economy is imperfect, we think it is okay for us. We think our industry sits very well, and we think all the things we worked on over the last couple of years should begin to show some real fruits of our labors over the next few quarters. So, again, thank you all for attending, and we look forward to talking to you at the end of the third quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until August 16 by dialing 1-855-859-2056 or 1-404-537-3406 with conference identification number 917-133-14. A broadcast for the conference will also be made available live 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.