Consumer Portfolio Services Inc (CPSS) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2011 third-quarter opening 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 facts may be deemed to be forward-looking statements. Thus 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; Mr. Jeff Fritz, Chief Financial Officer; Mr. Robert Riedl, Chief Investment Officer of Consumer Portfolio Services. I would now like to turn the call over to Mr. Bradley.

Thank you, and thank you all for joining us today for our third quarter conference call.

I think, overall, we are very pleased with the quarter. We've accomplished a bunch of things. The easy way to explain it is we really are accomplishing what we set out to accomplish this year. And the third quarter continues that trend. We're continuing to grow our originations. We're continuing to have our performance work the right way in terms of credit. We actually managed to go out and do an acquisition of a significant-sized portfolio.

So we did a bunch of different things. Overall, I think the quarter is doing what we want to do. We're starting to grow again. We're still losing money. But that trend should get smaller and change over the next few quarters. We'll talk more about that in a minute, but first we'll run through the financials.

I'll turn it over to Jeff Fritz.

Thanks, Brad. Good morning, everybody.

Looking at the performance for the third quarter, the revenues for the quarter were $33.8 million. That's an 8% increase over the June quarter of $31.2 million. And that's a welcome reversal of a long trend of consecutive quarterly reductions in revenue, and so we are very pleased to report that. That's about an 8% decrease from the third quarter revenues of 2010. For the nine months, revenues were $97.4 million, compared to $120 million for the nine months ended September 2010. And that's about a 19% decrease in those nine-month revenues.

As we've said all along, our revenues are largely driven by our managed portfolio. And this third quarter marked another important milestone in terms of our managed portfolio, where we are continuing to increase new originations. So that's what we'll call our organic portfolio, shrunk by only 2% in the consecutive quarters. And so now we're looking at growing that organic portfolio. In addition, as Brad mentioned, we made an acquisition of a significant portfolio, about $210 million, right at the end of September. It didn't have a significant impact on this quarter's revenues, but it will have going forward.

For the expenses, $37.9 million for the quarter. That's about a 1% increase from the June quarter, and a 3% decrease from the year-ago September quarter. And for the nine months, expenses were $112.1 million, and that's a 16% decrease in expenses for the nine months ended September 2010. So, again, comparing the quarterly consecutive numbers and the year-to-date numbers, what we're seeing is sort of a leveling out of the consecutive numbers as the portfolio is leveled out and hopefully starting to increase. And, still, a significant decrease from the year-ago numbers where the portfolio was still quite a bit larger.

Loss provision for the quarter was $4.0 million. That's a 9% decrease from the June quarter, and a 43% decrease from $7 million for the September quarter of last year. On a year-to-date basis, the provision expense was $12 million. That's a 51% decrease over the nine-month provision expense a year ago. And our provisions are still significantly influenced by the relative age of our portfolio. Although, I think we're going to start seeing now, and expectations are that, as the portfolio begins to grow, the organic portfolio originations continue to grow. Our portfolio will stop aging and you know start reflecting the mix of the new originations. And we'll probably start seeing some slight increases in provision expense going forward.

The pretax loss for the quarter was $4 million. That's a 38% decrease over the $6.4 million loss in the June quarter, and a 67% greater loss than the $2.4 million in the third quarter last year. The year-to-date loss is $14.7 million, and that's about a 9% increase in the loss compared to the nine months of last year. The net loss numbers are the same. We booked no tax benefits from the book losses. We have no tax expense. We just increased our valuation allowance for our deferred tax assets by an amount that's roughly equal to what would've been the tax benefit.

The diluted loss per share was $0.20. That's about 43% increase over the second quarter, the June quarter diluted loss per share of $0.35. And it's about the same as the third quarter loss last year, also at about $0.20. The year-to-date diluted loss per share was $0.78. And that's a 25% improvement over the $1.04 diluted loss per share last year.

On the balance sheet, our unrestricted cash balance was $9.4 million, compared to $16.5 million in June, and $11.3 million at September 30 in 2010. Our restricted cash balances which reflect credit enhancements, spread account deposits, and other funds in process of being paid down to securitization debt, remain pretty steady at $128 million for both the September and the June 2011 periods. Our free cash balances are significantly influenced by the manner in which we use our credit facilities, the amount of originations that we are undertaking at any given time.

Looking at the rest of the balance sheet, the finance receivables, net of the allowance for loan losses, is $487.3 million at September 30. That's just slightly increased over the $486 million that we had in June 2011, and about a 20% decrease compared to the $600 million we had September of last year. Those numbers don't reflect the acquisition that we made of about $211 million. This acquisition portfolio, which we are carrying in the balance sheet, net of its purchase discount, and it shows on the balance sheet of about $192.6 million, again net of that discount.

On the debt side, our warehouse line of credit debt was about $17.6 million at September 30. That's significantly less than $43.8 million in June. And that's primarily because we did do our 2011-B securitization near the end here of the third quarter and resulted in a significant pay down of that warehouse debt. Residual interest financing was $25.6 million. That continues to amortize compared to $30.5 million in June of 2011, and $44 million a year ago. Our securitization trust debt is now climbing. With the new securitizations having out paced the run off of the old ones, the securitization trust debt was $543.2 million, compared to $516 million in June. Although the September balance is less than it was a year ago, at $632 million.

We also have $196.7 million of specific acquisition facility that was established in conjunction with the purchase of the portfolio. That Brad will probably talk a little bit more about. And our long-term subordinated debt remained at about the same level, $74 million from both the June and September quarter. And that's up about $26 million from a year ago.

Moving on to some of the performance metrics. Just to comment first before that, the managed portfolio now, including all of the receivables that we own and service, is $827.8 million. And that's a significant increase, about a 30% increase, over the June portfolio of $635 million. And it's very close to what the portfolio size that we had a year ago at $843 million. Again, that $827.8 million at September 30 does reflect the acquisition of about $211 million. But it's also important to note that it is significantly influenced by the $82 million or so that we originated in the third quarter.

At the performance metrics, the net interest margin for the quarter was $11.2 million. That's a 30% increase over the previous quarter, the June quarter of $8.6 million; but a decrease of about 19% for the year ago quarter. And on a year-to-date basis the net interest margin was $29.3 million. And that's about a 35% decrease compared to nine months of September 2010 of $44.8 million. The risk-adjusted net interest margin, $7.2 million for the quarter. That's a 70% increase over $4.2 million for the June quarter, and even a small increase of 4% compared to the third quarter of 2010.

Year-to-date risk adjusted NIM, net interest margin, was $17.2 million. And that's about a 10% decrease from the $19.1 million for the 9 months ended September 2010. Our core operating expenses, which exclude interest in the provision for losses, were $14.9 million for the quarter. That's a 6% increase over the $14 million for the June quarter and a decrease of about 13% compared to $13.2 million for the third quarter of 2010. And on a year-to-date basis those core operating expenses are pretty steady, $42.6 million for the nine months ended September 2011, compared to $45.5 million for the 9 months ended September 2010.

And our core operating expenses as a percentage of our managed portfolio, leveling out a little bit, 8.6% for the September quarter, compared to 8.7% for the June quarter. And that's an increase of just a percentage or so, compared to 6% for the September quarter of last year; and on a nine-month basis, 8.5% compared to 6.2% for the nine months ended September 2010.

And with that, I'll turn it over to Robert Riedl.

Thanks, Jeff.

From a credit metrics perspective, another good quarter in September. We see the continuing trends of decreasing year-over-year of performance metrics with delinquency ending at 621 at the end of the third quarter this year and that compares with 864 last year from a net loss perspective. Similar trends, the annualized net losses for a quarter ended September were 413 this year. And that compares to about 7% last year. For the first nine months of the year, annualized net losses this year were right around 7% and that compares with 9.7% last year.

From the auction market, where we sell our repossessed vehicles, we saw another good trend this year versus last year. We had about 43% we were receiving on our repossessed vehicles on the CPS portfolio, and that compares with about 40% a year ago. You know, and the 43% is down a little bit from three or four months ago, but, you know, we saw at that time with the tsunami and earthquake in Japan had created perceived shortages and drove the auction market up. It's obviously tailed off a little bit, but, you know, we would expected it to. And you know, it's done as we thought. We would expect early next year to see firm numbers at the auction given the reduced supply out there.

Turning to the capital markets, Jeff mentioned we closed our second securitization of the year, the 11-B securitization. And that was very similar to the first deal we did in April, but we improved upon our advance rate a bit. The 11-A transaction was at 94% advance. With the 11-B we got closer to 97. So that provides important liquidity to the Company. The all-in blended yield to investors on this transaction was about 4.70%, up a little bit from the 11-A transaction, but really in line with comparable deals in the market and our competitors. You know, I think we're probably back on a quarterly track of doing securitizations, three- or four-year. And we're currently looking at potentially doing one more transaction this year.

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

Thanks, Robert.

So, looking at a few of the items a little more closely in terms of marketing, I think we've been taking a step backwards. We have been saying what we wanted to do over the last four or five conference calls. First, we needed to make it through the problem times. We've done that. Then we needed to rebuild the capital structure. We've done that. We needed to get back in the securitization market, and with our second securitization in September, I think it's safe to say we've done that. So, all that's going to plan, which now leads us to the next stage, which is, ironically, what we have done many times, which is grow.

The trick to growing is, how do we grow the Company effectively without sacrificing credit. And also trying to keep our margins strong. Given the current industry situation, I think we're in a very good spot in terms of the margins. Our margins are better today than they've probably been in 5 or 6 years. In terms of marketing, we now have around 53 reps. Our goal is to get to 60 by the end of the year. We had 40 last quarter and 20 a year ago. So we really have done a good job of adding good strong marketing people at the front end of how we're going to grow.

Term originations, both Jeff and Robert have pointed out, that the portfolio is starting to grow. We're up to $30 million a month, which, given that we used to do over $100 million, $30 million doesn't seem like such a big number; but we did grow substantially in that we only originated $80 million in this third quarter versus $60 million in the last quarter, which is significant growth in and of itself. And third quarter last year, we originated $35 million. So we have grown quite a bit, when we're on pace to $90 million versus something like $35 million a year ago. So again, we're growing rapidly, but compared to what we used to be able to do, it seems a little bit light. But again that is because we're trying to manage the growth accordingly, and get the most bang for our buck in terms of credit quality and margin.

If you look at the overall portfolio, in terms of what we originated -- last year, we originated $113 million for the year. This year, we're going to probably top $280 million for the year. So we have grown. We're really pushing it a little bit. But the good part is, we're pushing it with tremendously good metrics performance-wise, and also having strong margins. If you look at the collection trends in terms of performance, all the trends are good. They're all downward in terms of delinquency and losses. If you look at our risk scenarios, those are also very good. So we are actually doing what we want to do.

We could probably grow even quicker than we are. And our goal is to get to $50 million in the short term. However, we want to do it maintaining all the metrics. And we have grown from whatever it was, $8 million or $10 million a month or so last year, to $30 million a month. And we have actually achieved our goals of maintaining very strong metrics in both credit and in terms of margin. So, it's really kind of good even though in the big picture, we're still not quite there in terms of the earnings and such.

In terms of collections, as I said, everything is going really well. Since we are able to maintain our collections facilities during the downturn, we have been able to grow somewhat flawlessly in terms of adding people in our branches, and being able to add them very easily without get crowded up in terms of the growth. So the trick after we grow, is to make sure we have enough qualified people to collect it. We have been able to do that.

Which leads us to the next thing -- we were actually able to find an acquisition, finally. And we acquired the portfolio from Fireside. As both Jeff and Robert have mentioned, that was around $240 million. We were able to do that rather easily, given again that we have such strong branches and we're able to add collection people so easily. And that portfolio is doing quite well. With that sort of done and on the books, we're looking to do some more. We have said many times in the past calls, our job is to grow. And again, as we've pointed out, the portfolio reached that point in the third quarter. That's a bit of a milestone, because instead of fighting a shrinking portfolio and cutbacks, we're now in a position where, again, we're looking forward and we're growing rather than worrying about shrinking things.

So as much as the third quarter from a strict dollars-and-cents point of view, it hasn't gotten quite where we want to go. In terms of the things we're doing, it's probably one of the more successful quarters we've had in years. The work we're doing in the third quarter is what is going to lead to real success next year. In looking at the industry -- generally, the way we look at the industry today, other than, as I said, the margins are very good. People can see in the papers, the auto market is truly coming back. People are starting to buy cars. Overall, the demand is very good. The dealers are looking for financing sources and we fit right in very well with that.

In terms of our competition, we still have the big banks kind of coming in and out of the market when they want to. Something that is of interest in terms of the value of the Company is, in the last six to nine or 12 months, we have seen a lot of start-ups, which is hard to believe that people would want to be getting into sub-prime. But, in fact, if you look back at what's happened during the downturn, the sub-prime auto financing industry has performed very well. All securitizations perform great. The active class did terrific. All the pools and the securitizations did real well. And I think Wall Street is taking notice of that and trying to get into investing in small companies.

The good news is we're getting back to a size where the small companies, with any sort of luck, will never catch us in terms of size. And so, therefore, they shouldn't be much of a detriment in terms of competition. We're just going to be a lot bigger than they are by the time they really get going. So we kind of like our spot in the industry. We like the way the industry sets up in terms of the financing; and again, as long as Wall Street hangs in there and there aren't too many global problems, we think the securitization market should remain strong, which is something we obviously depend on.

So, overall, I think the results are there. The earnings results aren't there yet, but in terms of the performance and what we're doing, we literally have done about as good as we could this quarter. And I think that will bode well. Fourth quarter generally things turn down a little bit. But again, I think we're going to be well positioned to really hit the ground running next year, and have another big growth year.

With that, we'll open it up for questions.

Thank you. The floor is now open for questions. (Operator Instructions) I'm showing no questions at this time.

Okay. Again, we appreciate everybody listening in. We also appreciate all of our shareholders hanging in, in terms of as we rebuild the Company. I think, you know, we have good things coming, a good view in front of us. I think we have managed to do a lot of good things this year, and we will continue to, and look forward to speaking with you at the end of the year call probably in the February time frame. Thank you.

Thank you. This does conclude today's teleconference. A replay will be available two hours from now until November 21, 11.59 PM Eastern Standard Time by dialing 800 642 1687, or 706 645 9291 with conference number 27738583. 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.