Consumer Portfolio Services Inc (CPSS) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2012 first 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 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; and Mr. Robert Reidl, Chief Investment Officer of Consumer Portfolio Services. I will turn the call over to Mr. Bradley.

Thank you, and welcome, everyone, to the call this morning. Being as it is so soon after the year end, there's not a whole lot different, other than the quarter went very well, and we now have two profitable quarters in a row. I think, in looking at the quarter, we have had a very good start to the year. Originations are a bit stronger than we expected, which is very nice. We also did a securitization in March, which gets us back on our quarterly schedule.

If you recall, we did three securitizations last year, and then this year we hope to do four, back on our normal quarterly schedule of doing securitizations. The pricing was very strong during that securitization, as well. I think, overall, we are really looking to get back to growing the Business. Car sales continue to be strong, and everybody seems to believe that the economy is getting better, and there's more consumer confidence. All those elements should lead to a good year, and the first quarter is fairly representative that we are off to a good start.

With that, we will go to financial results from Jeff.

Thanks Brad. Good morning, everybody.

Looking at the revenue numbers for the quarter, first quarter revenues were $44.5 million. That is down just slightly, about 3%, from the December 2011 quarter, but up significantly, 37%, from the first quarter of 2011. Our managed portfolio grew about -- well, our organic portfolio grew about 4% during the first quarter, compared to the fourth quarter of 2011, but the consolidated portfolio did shrink somewhat over the course of the first quarter.

Expenses for the first quarter were $44 million. That is down about 3% from $45.5 million in the fourth quarter of 2011, and up about 20% from $36.6 million in the first quarter of 2011. Most of the expense categories were flat or little change for the consecutive quarters, except interest expense was down $3.4 million, or 13%, in the first quarter of 2012, compared to the fourth quarter of 2011. Interest expense was up about 17%, though, compared to the first quarter of the prior year, most of that interest expense attributable to the fact that our portfolio is larger compared to last year, and that there is more financing debt associated with it.

Loss provision for the first quarter, $4.8 million. That is up compared to $3.5 million in the fourth quarter 2011, and up about 30% from $3.7 million a year ago. We are going to be reversing the trend over the last couple years of sort of decreasing provision expense, as our portfolio now seems to be at a steady growth path. We can expect provisions for losses to increase somewhat ratably with the size of the portfolio.

Pre-tax earnings for the quarter were $500,000, $0.5 million, compared to $200,000 pre-tax profit in the fourth quarter of 2011. That is a 150% increase, and that is a significant improvement over the $4.2 million pre-tax loss from the first quarter of 2011. We did not book a tax provision on this nominal pre-tax income, as we are carrying this significant valuation allowance against deferred tax assets/ So, for the time being, we will just be offsetting any what would have been booked tax expense with an equal reversal of the valuation allowance against our deferred tax assets.

On a per-share basis, earnings were $0.02, compared to $0.01 in the fourth quarter of last year, and a $0.23 per-share loss in the first quarter of 2011.

Moving to the balance sheet, unrestricted cash was $10.6 million at March 31, 2012. That is up just a little bit from $10.1 million at December, and up a little bit more from $9.2 million a year ago. Our restricted cash balance is $131.5 million at March 31. That is down significantly from $159.2 million in December.

One of the events that took place during the quarter, a significant event for us, was in the quarter, we did clean up and wrap up five ABS deals going back to 2006 and 2007. In the process of doing that, we freed up about $39.7 million of restricted cash, most of which went to pay down the related outstanding bonds of those five deals.

Our portfolio finance receivables on the balance sheet net of the allowance was $543.7 million at March 31. That is up about 7% from $506 million at the end of the year 2011, and also up about 7% from a year ago. We did originate $119.9 million in the first quarter, a strong quarter of originations, and that contributed to that portfolio growth, and contributed, obviously to our revenues and earnings for the quarter. The Fireside portfolio, which we carry a fair value on the balance sheet, had a contractual balance of $133 million at March, and that is down from $172 million at December, and of course, that portfolio just came on board in September of last year.

On the debt side the warehouse line balance was $28.9 million at the end of the quarter. That is up a little bit from $25 million at December, 2011. A year ago, we were carrying more receivables in the Warehouse line, because I think we did our first securitization last year in April, after the end of the first quarter, so we had more receivables pledged to the Warehouse line in the first quarter of 2011 than we did just recently.

Our residual interest financing continues to pay down. It was $18 million at the end of the quarter, compared to $22 million in December, and $34.8 million a year ago. Our securitization trust debt is back up close to $600 million at the end of the quarter, compared to $583 million at December, and $489 million a year ago. The debt that is securing the Fireside portfolio has a fair value of $133 million at March, compared to $167 million at year end, and during the quarter we paid down $5 million of our long-term debt, bringing that balanced to $74 million from $79 million at the end of the year.

Looking for a moment at the aggregate portfolio, the managed portfolio at the end of the quarter, $781.8 million. That is down just 2% from $794.6 million at December, but up significantly 15% from $679 million a year ago.

Some of the performance metrics, the net interest margin was $18.3 million for the first quarter. That is up significantly 18% from $15.5 million for the fourth quarter of 2011, and up substantially, 93%, from $9.5 million in the first quarter of 2011. We've got a couple things happening. First of all, the Fireside portfolio contributes significantly to the improvement in the year-over-year numbers, and the other thing that is happening with our portfolio, a positive event is that the older ABS financings are running off, and being replaced with lower-cost financings, such as we put on the books with our 2012-A transaction, which I'm sure Robert will go into more detail about in a minute.

The risk-adjusted net interest margin was $13.5 million for the first quarter. That is up 12%, from $12.1 million in the fourth quarter of 2011, and up a whopping 133% from $5.8 million in the first quarter of 2011. Our core operating expenses were $17 million for the first quarter of 2012, up from $16.4 million in the fourth quarter, and up 22% from $13.8 million a year ago.

We have not much of an increase in the consecutive quarters. Year-over-year we have more people, and we have significantly higher origination volumes than we did a year ago. The last metric we will take a look at, here, is our core operating expenses as a percent of our average managed portfolio. 8.6% for this quarter, compared to 8.1% in December, and 7.8% a year ago. And again, this is an area that we think we will see some improvement, as our economies of scale start to kick in, and the portfolio continues to grow a little bit more with our increasing originations.

With that, I will turn it over to Robert.

Thanks Jeff. Walking through some of the asset performance metrics, we have seen those numbers continue to improve. For delinquency, at the end of March we were at 3.5%. That is down from about 6% at the end of December. More importantly, it is down from 5.8% a year ago. On the loss of side of things, our annualized losses for the quarter were 3.9%, compared to 2.12% in the December quarter, and 9.3% a year ago. So year-over-year, both on the delinquency, as well as on the net loss, we have seen significant improvement.

The growth in our organic portfolio has helped that a little bit, as well as the Fireside portfolio. So the numbers are good, but the growing portfolio definitely helps. At the auction market, we have seen very strong recoveries. In the March quarter, our CPS portfolio recoveries were at 48.2%.

That compares to 44.1% in the December quarter, and about 43% a year ago. As we continue into 2012, we have seen very strong numbers. Our March level was over 50%. With the shortage of used cars we see at the auctions, we would expect strong numbers throughout the remainder of 2012.

Looking at the capital markets, Brad mentioned, and Jeff mentioned, we did our first securitization in March. That was $155 million deal, four classes, like we have done on our other recent deals, and we had a blended cost of about 3.5%. That is down from 5% on our 11-C December transaction. We had very strong investor demand. Each of the four tranches that we offered were at least two times over-subscribed by the investors, and the spreads on each of the tranches were at least 100 basis points lower on each of them. So, we were very pleased with the execution.

A couple of structural features we had there, we had a pre-funding in it, like we had on our last deal of 2011, where we added $46 million of paper after the initial closing, so that we were able to finance our March production. We also were able to finance the cleaned up loans that Jeff mentioned earlier. Through the cleanups that we did in February, we had about $37 million that we refinanced in 12-A.

So far in April, new issuance continues to be strong. I know in the last couple weeks there has been at least a half a dozen auto deals, and at least to sub-prime deals.

Americacredit, I think, has priced a deal. DriveTime has priced a deal. All of these deals are coming at tighter spreads. So as Brad mentioned, we think we are back on a quarterly trend, here, and pricing remains strong.

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

Thanks, Robert. In terms of where the Company sits today, it seems we can finally put the recession behind us. All the battles we had to fight to get through it and keep the Company going, now, as we have turned the corner on profitability, we can focus on growth. We have been adding marketing reps, trying to reinvigorate our footprint nationally, and adding more dealers, and working with the dealers to increase the flow of contracts. We have been doing all this while maintaining very good credit margins, our credit performance, and strong margins.

Also, the Fireside acquisition has worked out, probably, well beyond anyone's expectations. It is doing very well. So it is really, overall, a very strong picture in terms of the Company. In some ways it is sort of similar to 2005, when we were beginning to get growing again after the last recession. So it's going to be a long, steady road, but we think we are on the right track.

In terms of the industry, the rest of the competitors are probably doing normal competition. There's nobody being overly aggressive, nobody buying stupidly. I think the smaller guys are trying to be a little more aggressive. Some of the larger guys are trying to stay a little more conservative. So you have not a bad mix, and we fit into that mix rather well. So we think we sit pretty good there, and we have good opportunity to maintain our margins in that environment.

In terms of the economy, I think there's gradual recovery that probably isn't particularly wonderful for the country. It is very good for us. It keeps the interest rates low, allows us to really keep strong margins as we grow, and the more paper we can put on the books with those margins as we try to get back up to speed, the better off we will be in the future, because sooner or later we will have to cut the margins a little bit to compete as we get much larger. Certainly, given the first quarter, we are very happy with where we are today, and the future looks fairly bright, as long as we continue to maintain all the things we're trying to do, and stay the course.

With that, I will open it up for questions.

Thank you. The floor is now open for questions.

(Operator Instructions)

Our first question comes from K.C. Ambrecht from Millennium.

Hi, gentlemen. Good afternoon. Thanks for hosting the call today.

Hi, K.C. How are you doing?

Good. Just two questions. Where does your competition normally come from? We are hearing a lot about how the banks are going into this space. I know you tend to be deeper in the credit markets than they are, but who would be your typical competitor?

The banks, the bigger banks, probably won't go as deep as we are. They are going to stay just above us, where they pretty much been for a while. We would look at Capital One, what we continue to call AmeriCredit, as sort of our general competitors, along with Santander. Granted, Santander is a bank, but they don't operate as much as a bank, since they're a foreign bank. Those would probably be our three largest competitors. There's lots of little guys who are starting -- trying to get a foothold that would be our competitors as well.

Yes. And then the second question was, now that you guys have two profitable quarters, when should we think about the DTA being written back in?

That's a wonderful question. I still think it should be switched yesterday, but that's just me.

It doesn't impact your operations now. It doesn't impact your operations, but it would be nice to have that --

No, but it would certainly make the balance sheet look better, and lots of other good things. But, normally speaking, you need at least five profitable quarters, and the other, and the general rule in accounting is, you need to have a three-year cumulative profit. So as long as we have a three-year cumulative loss, it might be a little difficult to get that changed. But that is certainly one of our midterm goals, to get that flipped.

Okay. Great. Thanks a lot.

Thank you.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Charles Bradley.

Thank you. I'm sure we'll get lots more questions when that stock starts taking off, but for now, we are very happy with where we are, and doing what we need to do to get this thing going in the right direction, again. So, we appreciate everyone's patience. We appreciate everyone hanging in there the last few years in difficult times, and hopefully the next few will be way much better. Thank you all for attending today.

Thank you. This does conclude today's conference. A replay will be available beginning two hours from now until April 25, 2012, by dialing 855-859-2056, or 404-437-3406, with conference identification number 73718135. 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.