Consumer Portfolio Services Inc (CPSS) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2012 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; Mr. Jeff Fritz, Chief Financial Officer; Mr. Robert Reidel, Chief Investment Officer of Consumer Portfolio Services.

I will now turn the call over to Mr. Bradley.

Thank you. Thank you all for joining us on our second-quarter conference call. I think you can see by the numbers we are very pleased with results. They were probably a little bit stronger than we might have expected, but that is the result of a bunch of different factors all sort of going in the right direction, a trend we would hope to continue.

In terms of the quarter, as I said, it was a good quarter. We had nice even growth. The second quarter generally in terms of growth and origination tends to slow down. We were able to keep it moving a little bit, but not too fast, and so that worked out very well.

The portfolio performance remains very good, particularly during the second quarter when it starts -- it tends to enter the summer months it tends to not do as well, and then we have done very well this year.

Also, we did securitization and the results on that were probably significantly better than expected. The Wall Street market for securitization remains very strong. We thought it was done before, it seems like it is even stronger now. And that has enabled us to get even better pricing on our second securitization. I don't know if that trend will continue, but we think it might at least stay in that area for the foreseeable future.

We also closed on a new $100 million warehouse line with Citibank -- or Citigroup, and that adds to our other $100 million line, so we have lots of warehousing to grow the business. It also puts us in a strong position there.

The overall industry appears to be behaving very well. There is no wild competition. There is plenty of business in the market for everyone. There is some new startups, but they are a little smaller than we are, so we're not really either particularly challenged by them or concerned by them. And the big guys seem to have moved a little bit upscale and so we have developed a rather nice niche in the middle.

One of the big drivers now, as we mentioned over the last few quarters, as the portfolio is finally starting to grow overall, the economies of scale that we have had all along in terms of the large servicing centers all ready to go is really starting to kick in. And so that is also one of the reasons the results are better.

Overall, like I said, we're very pleased with the way it is working. We will talk a little bit more about that, but first I will have Jeff go through financials.

Thank you, Brad. Beginning with the revenues, the revenues for the quarter were $44.2 million. That is flat or roughly down about 1% from the first-quarter revenues of $44.5 million, and up significantly, 42% from $31.2 million in revenues for the second quarter of 2011.

Year-to-date revenues through the first six months of 2012, $88.7 million. That is up 40% from $63.5 million for the first six months of 2011.

Our second-quarter revenues were down slightly primarily to seasonal upticks in other income categories in Q1 that didn't repeat in the second quarter. That includes products that we sell -- marketing products that we sell to dealers. And also we had a slight markup in the fair value Fireside portfolio in the fourth quarter that didn't reoccur in the second quarter.

Our interest revenue was up in the second quarter compared to the first quarter about 2.3%. And that is a result of our organic portfolio having grown about 10% in the quarter, aided by new originations of $138 million in the second quarter.

Expenses for the second quarter, $42.8 million. That is down about 3% from the previous -- from the June quarter -- or, excuse me, from the March quarter of this year, the previous quarter. And that is up about 14% from the second quarter last year.

Year-to-date operating expenses, $86.8 million. That is up about 17% from the first six months of last year. Our managed portfolio is larger than it was last year and that is contributing to the year-over-year comparisons. For consecutive quarters most of the expense categories were actually flat or slightly lower.

Most significantly, ouir interest expense in the June quarter compared to the March quarter was down about $2.5 million or 11%, and that is a result of our financing costs primarily in our securitizations -- new securitizations being significantly less than the cost of the older securitizations that are running off.

Loss provision expense for the quarter, $7.7 million. That is up about 60% from the March quarter of $4.8 million and up 75% from $4.4 million for the second quarter last year. Year-to-date loss provision expense, $12.5 million. That is up about 54% from $8.1 million in the first six months of last year.

Provisions expense is now tracking more or less in line with our organic, our CPS portfolio, if you will, and we expect those trends to stay more or less in line. Credit performance has been very good, as I think Mark or Robert and Brad will clarify a little bit later.

Pretax earnings for the quarter, $1.3 million. That is a significant improvement of 160% from $0.5 million in the first quarter, and a huge improvement over our $6.4 million loss for the second quarter last year. Year-to-date pretax earnings, $1.9 million. Again, a significant improvement over the $10.7 million loss through the first six months of last year.

The net income numbers are exactly the same. There is no net tax provision as a result of the tax expense that we would have booked is offset dollar for dollar by a reversal of the valuation allowance that we are carrying against our significant deferred tax assets.

The diluted earnings per share were at $0.05 for the quarter. That is up from $0.02 from last quarter, and up significantly from a $0.35 loss per share in the second quarter last year.

Year-to-date diluted earnings per share is $0.08, and again a significant improvement over the first six months of last year, where we lost $0.58 per diluted share.

Moving to the balance sheet. Unrestricted cash balances stayed pretty level at around $10 million. Our restricted cash balances of $127.8 million include $49.5 million in proceeds from the pre-funding of our 12b securitization that was concluded right at the end of the quarter. Most of those cash -- restricted cash deposits were used when we closed the second part of that 12b securitization early in July.

The finance receivables portfolio now net of the allowance for losses is $604 million -- $605 million. That is up 11% from the previous quarter, from the first quarter, of $543 million, up significantly from $486 million last year. Again, we did $138 million in new originations here in the second quarter.

Separate from that caption on the balance sheet is our fair value portfolio, the Fireside acquisition from September of last year. That is down to $102 million at the end of this quarter compared to $127 million in the previous quarter, or 19%.

This, as you may recall, is a fairly seasoned portfolio. It was fairly seasoned when we acquired it last fall and it is amortizing rapidly, but the performance has been very good, meeting or exceeding our expectations in terms of credit performance and contribution to earnings.

On the debt side of the balance sheet our warehouse utilization is pretty steady at about $28 million for the last couple of quarters. As Brad mentioned, we have a new warehouse line with Citigroup, bringing total capacity to $200 million. We are using both lines regularly.

The residual interest financing at $15 million continues to pay down in accordance with its terms. It is down from $18 million in the previous quarter and $30 million a year ago. Our securitization trust debt now increases fairly regularly. We issued a securitization in each of the first two quarters and both of the last two quarters of 2011.

The separate caption for the fair value debt, $104 million, continues to go down in conjunction with that portfolio. And the long-term debt stayed fairly level. No changes to long-term debt. Just some minor changes to the renewable notes balances that we maintained.

Our consolidated portfolio at $806.1 million, this is the first quarter with growth in the managed portfolio since 2008. So that is a significant milestone for us. The originations volume even offset the rapid amortization of the Fireside portfolio. So this is a first for us since 2008 with the managed portfolio increasing quarter-over-quarter.

Looking at a couple of the other operating metrics. The net interest margin for the quarter was $24.3 million. That is up 9% from the March quarter this year and up significantly from $11.9 million a year ago.

The NIM for the first six months, $46.5 million, again, up significantly from $25.2 million a year ago. I mentioned that our costs -- our financing costs have decreased significantly with the liquid and asset-backed market, and the new asset-backed structures coming in at significantly lower costs than the older deals that are running off.

The risk-adjusted NIM was $16.6 million for the quarter. That is down a little bit from $17.4 million for the March quarter, but up significantly from $7.6 million a year ago. And the six-month NIM -- risk-adjusted NIM, $34 million. That is double what it was in the first six months of last year.

Our core operating expenses are now beginning to be impacted and see the benefit, or at least, the efficiencies of the portfolio growing. The core operating expenses were $15.3 million for the quarter. That is up slightly from a year ago of $14 million, but down slightly from the previous quarter of $17 million.

The core operating expenses as a percentage of our managed portfolio were 7.7% for the quarter. That is down from the previous quarter of 8.6%, and also down from about 8.7% a year ago. Again, we are starting to see with the portfolio growing and our costs remaining fairly steady in the short term here, seeing some significant improvements or at least positive trends in those performance metrics.

With that I will turn it over to Robert.

Thanks, Jeff. Let's start with some of the performance metrics. I think Brad alluded early in the call that things still look very strong. And on the delinquencies side at the end of June we were at 3.81%. That is up a little bit versus March at 3.5%, but down significantly year-over-year from 5.9%.

On the net losses on the quarter we had 3.16% for the quarter of June annualized. That is down from 3.90% in the March quarter, but down significantly year-over-year at around 6% last year.

For the first six months the losses annualized this year were 3.5%, once again, down significantly from a year ago at 7.74%. And what we are seeing there obviously is our portfolio is growing. That is helping the numbers. But the credit performance on our newer vintages continue to do very, very well, as well as we saw in the last cycle.

So at the auction we saw very strong results in the second quarter. That was at -- we were at 49.1% for the quarter. That is up slightly from the March quarter of 48.1%, and up fairly significantly year-over-year at 46.3%.

Going forward through the rest of the year we would probably expect those numbers to tail off a little bit. It is a fairly common seasonal decline. But even with June we are at 47.5%, and that is historically a very high number for us.

Turning to the capital markets, I think both Brad and Jeff have both said we had a very active quarter. We put in place the new $100 million credit facility with Citigroup in May. That is a significant improvement versus the other line that we have in place. We have got an advance rate in the high 80s there, LIBOR plus 6. And with the improved advanced rate that will help us with our liquidity as we continue to grow moving forward.

We also closed our 12b transaction in June. It was very similar to our 12a deal -- about $140 million transaction. We had four classes of securities, similar to the last several deals. Kind of single-A tranches down to single-B tranches rated by S&P and Moody's. And we had an all-in blended cost of about 3.15%, which -- once again as Brad mentioned, we got very strong reception in the market. This improves upon our 3.5% total blended cost in 12a. Each of the tranches of bonds was well oversubscribed by investors, so that helped us bring the cost down.

We had initial credit enhancement in the deal of about 1%, so we got an effective advance at 99%, which is a slight improvement over the 12a deal.

We also have a pre-funding component in there close to $50 million, which Jeff mentioned. And that allows us to lock in the long-term funding for our June production. So far in July in the third quarter issuance remains strong. So that should bode well for us as we continue to look to put these out on a quarterly basis.

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

Thank you, Robert. In terms of looking at the market, as I mentioned, we really haven't seen any real change in the competition. They had a bunch of startups in the last year or two, and they seem to be moving along but not doing anything crazy. And as I mentioned, the large players have probably pulled back a little bit in terms of where they are buying, and so we haven't seen particularly any real strong competition from them either.

And so with that we have been able to sit where we sit, maintain our margins. I mean, we could probably grow faster, but we would probably give up some more of our pricing. And right now we're certainly growing at a nice clip, and there is no real reason to sacrifice the margins to grow too much faster.

And because we are not growing super fast we are able to really focus on keeping our metrics, our credit quality, and keeping the performance where it should be.

I think one of the real benefits, as everybody has now mentioned, is a strong asset-backed market. Because of that I think it would be nice if everybody realized that a couple of years ago that be the auto paper really performs well. People certainly realize that today, and as a result the pricing continues to get better and better for us.

And I think as long as we can keep growing and taking advantage of that market, really the sky is the limit on how much better that can get. So that is a very strong thing for the future.

What we are really doing now is we are almost starting to plan for next year. One of the things we have realized is that it takes a little bit longer for our marketing folks to really get up to speed and get to the kind of production levels we would expect them to be at. And so we have already begun hiring a few more people -- a significant amount of people so that we will be prepared for next year when the growth phase kicks in in that February, March and April timeframe.

With that we continue to look for other acquisition potential candidates and things like that. Unfortunately, because of the strength of asset market, and actually the auto market and any business portfolios in this market, the competition for those portfolios is rather extreme. So we're not -- we are certainly not going to stretch for any, but if we find one we would jump on it as we have in the past.

With that I think the quarter is going well. We expect the third quarter and the fourth quarter to follow suit. And, again, look for next year to probably be even better. With that we'll open it up for questions.

(Operator Instructions). K.C. Ambrecht, Millennium.

Thanks very much for hosting the call. Can you guys just help us -- as these numbers continue -- these earnings continue to improve, could you help us look out a year and see what the earnings power of this Company is as you continue to build the balance sheet and control expenses? Is it going to be like the $0.15, $0.20 quarterly run rate by the end of next year?

I think probably the best way to look at that question is to say go back to where we were before. The last go round before the recession we were building the Company in a very steady way, much like we are doing right now. And you can look at that growth cycle and think, if things work well we could kind of follow that track.

It's a little hard to say, given -- you know, if the market is there, we might grow a little bit faster, if it is not, we might grow a little bit slower. But certainly we have gone back to profitability. We expect the profitability to increase and continue as long as the markets keep hanging in there.

But if you really want to see what the Company can do, which I think is your question, it is easy enough to go back to our last cycle and look at 2004, 2005, 2006, 2007 and go from there.

Okay, great.

In those years we grew much like we would hope to grow again, and then you can derive what you want from that.

Okay, it sounds good. Thanks very much. Good stuff.

(Operator Instructions). I am showing no further questions at this time, so I would like to hand the conference over to Mr. Charles Bradley.

Thank you. Thank you all for attending. We have been doing this for a long time. I think it is nice to see -- we have suffered through two recessions now, at the very least we have certainly learned how to deal with it. And I think all that preparation and planning we have done to get through this one is beginning to pay off.

And so we would expect to do what we have done before, grow the Company, get back to where we were. And keep our fingers crossed the capital markets, Europe and the rest of the world does all the right stuff too.

So with that we will talk to you in a quarter. Thanks very much for attending.

Thank you. This does conclude today's conference call. A replay will be available beginning two hours from now until July 25, 2012 at 11.59 PM by dialing 1-800-585-8367 or 404-537-3406 with conference identification number 11952079.

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.come. Please disconnect your lines at this time. And have a wonderful day.