Consumer Portfolio Services Inc (CPSS) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2017 Second Quarter Earnings 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 statement. 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.

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

Thank you, and good morning, everyone joining us on our second quarter conference call. I guess, the easy way to describe the quarter is sort of business as usual. As everyone knows, over the last couple of years, we decided to slow down and just sort of wait out the problems within our own industry, and meanwhile, focusing on, internally, just improving every part of our business.

To that end, in the second quarter, we had a few highlights. As I said, it's continued focus on modest growth, with an emphasis on credit quality and collections, and that all seems to be working pretty well, and I'll run through that more specifically a little later.

Other highlights were we renewed our credit line with Fortress, and we -- actually, we've announced in April, but it's part of the second quarter. And so again, that keeps us with 3 active warehouse lines, which is what we need, and it's about exactly what we want right now, so that's all going quite well.

Also we did another securitization through our per usual 4 securitizations per year. This one was probably as successful as any we've had in the last few years. It was the tightest -- I think, we've put this in the press release. It was the tightest spreads in 3 years on securitization. And what that really means is that the demands for these bonds in the marketplace is only increasing.

And I'm sure everyone's heard that there's lot of money out there, and so auto bonds become more and more popular, so even though the Fed is raising the rates as we go, our cost of funds is basically staying flat. And that just is because of the tightening in the spreads. So that's sort of a positive we might not have expected 2 or 3 quarters ago.

We also increased our allowance to 5.56%, up from 5.02%, that's a fairly substantial increase. Again, with our focus on credit quality and watching the portfolio, we might expect that to continue in the future. But again, another good spot in terms of what we're trying to do.

Also, we continue our stock repurchase program and purchased 540,000 shares in this quarter. And that's about, give-or-take, 500,000 shares is what we're sort of aiming to purchase per quarter. That has continued and is obviously a good part of what we're trying to do.

I'll get into more specifics in some of the operational areas after Jeff runs through the financials.

Thanks, Brad. Welcome, everybody. We'll begin with the revenues. Revenues for second quarter were $110.1 million, that's a 2% increase over the March quarter of this year, the first quarter of this year, and a 5% increase over the second quarter of 2016.

For the 6 months ended June of 2017, $217.7 million, that's a 6% increase over $205.6 million for the first 6 months of 2016. So you can see that the revenues are increasing as the portfolio continues to grow, even with the somewhat slowdown in the originations over the last nearly 6 months or almost 1 year now. We did have $234 million of new originations in the quarter, and that's $464 million for the year. So the portfolio continued to grow modestly, up 1% for the quarter and 4% year-over-year.

To the expenses, $102.1 million. That's a 2% increase over the first quarter of this year, which was $99.8 million. That's a 10% increase over last year's $92.6 million in the second quarter. For the 6 months, $201.9 million of expenses, that's a 12% increase over $181 million last year.

Sequentially, the growth for the second quarter compared to the first, the growth in expenses is almost entirely from interest expense and provision for credit losses. We'll talk a little bit about both those categories in a little more detail. And we did have just nominal year-over-year growth in the operating expense categories as the portfolio did grow, as I said, about 4% year-over-year.

Provisions for credit losses, $48.5 million for the quarter, that's a 3% increase over the previous quarter, the March quarter of this year, and a 9% increase over the $44.4 million for the second quarter of last year. 6 months provisions for credit losses, $95.7 million, an 8% increase over the 6 months last year.

And so for the Q2 provision, reasonably stable credit performance. Actually, some seasonal improvement in the credit performance was seen. And then, also, keep in mind, as we look at, Brad mentioned the allowance, the increase in the allowance, we have had some increases in the allowance for credit losses. One thing that's happening in the portfolio now is that with the growth levels, the way they are in the originations line, the way they are, the portfolio is seasoning somewhat quarter after quarter. For instance, where we stand right now, June 30, the portfolio's weighted average age is about 19 months, and that compares to 16 months a year ago at June 30, 2016. So portfolio is aging and that's going to impact some of these metrics in terms of credit performance and the amounts of allowance and provisions for credit losses.

Pretax earnings is $8 million for the quarter, that's a 3% increase over the first quarter this year, however, a 35% decrease compared to $12.3 million in the second quarter of last year. And the 6 months pretax earnings, $15.7 million, a 36% decrease compared to $24.6 million for the first 6 months of 2016.

Net income for the quarter, $4.6 million, slight increase of 2% compared to the first quarter of this year, and a decrease of 37% compared to the second quarter of last year. Also on a 6-month basis, $9.1 million of net income, a 37% decrease compared to $14.5 million for the first 6 months of 2016. Diluted earnings per share was $0.17. That's $0.01 more or 6% compared to the first quarter of this year, and a 32% decrease compared to the $0.25 for the second quarter last year. And on a year-to-date basis, we were at $0.32, and that's a 35% decrease compared to $0.49 for the first 6 months of 2016.

Moving on to the balance sheet. Not very much changes in terms of the overall liquidity of the company. We continue to get good execution leverage on the asset-backed securitizations, helps us maintain a strong liquidity position. You can see that the managed portfolio did increase -- finance receivables rather, did increase by about 1% sequentially and 4% year-over-year.

On the debt side of the balance sheet, again, pretty much as Brad said, business as usual. We did our normal -- have done our normal first 2 securitizations of the quarter, and really, there's no significant changes, really, in any other categories of the debt. We renewed the warehouse line, however, the terms were not materially changed.

Looking on to a couple of these other performance metrics. The net interest margin was $86.8 million for the quarter, that's a 2% increase compared to the first quarter of this year, also a 2% increase compared to $85.2 million for the first quarter -- second quarter, rather, of 2016.

On a year-to-date basis, the net interest margin was $172.4 million, that's a 3% increase compared to the first 6 months of last year. So this is mostly influenced by our asset -- the cost of our securitization trust debt, so the actual blended cost of all of our ABS debt for the quarter was 3.8% compared to 3.7% in the first quarter of this year, and 3.3% in the second quarter of 2016.

So all of those trends are up slightly, the general trend of our new ABS cost of funds has been down, generally down since about the second quarter of 2016, so it's really helped these numbers, and we're definitely getting, as Brad alluded to, a really good response to our securitizations in the asset-backed market.

The risk adjusted NIM, which takes into account the provisions for credit losses, $38.3 million is roughly flat compared to the first quarter, and down 6% from the second quarter of last year. On a 6-month basis, $76.6 million, down about 4% from the first 6 months of 2016.

Core operating expenses, again, we've done pretty well in this category. The portfolio is growing only nominally, originations have been roughly flat, but our core operating expenses were $30.3 million for the quarter, that's basically flat compared to the first quarter, and up about 7% for the second -- compared to the second quarter of last year. On a year-to-date basis, $60.9 million, and that's up about 11% compared to the first 6 months of 2016.

The metric that measures those core operating expenses as a percent of the managed portfolio, 5.2% for this quarter. That's down just a tick compared to 5.3% in the first quarter this year, and up a tick compared to 5.1% for the second quarter of last year. So pretty much kind of a flat measurement as we've been able to control our operating expenses and the portfolio really has grown only nominally.

Return on managed assets, pretax managed asset return for the quarter, 1.4%, that's up compared -- slightly compared to 1.3% for the first quarter this year, and down a little bit compared to 2.2% last year. Again, this has mostly been influenced in the last year, so by generally higher interest cost and higher provisions for credit losses during that time period.

Moving on to the delinquency and loss metrics. The delinquency for the quarter was 9.6%, down slightly compared to 9.7% for the first quarter of this year and up slightly compared to 8.6% a year ago.

The quarter annualized net loss is 7.6%, down slightly from 7.9% in the first quarter, and again, up slightly compared to the second quarter of last year, where they were 6.9%.

The 6-month annualized net losses were 7.8%, and that's up slightly from 7.2% last year. So again, we've seen some seasonable improvement here in the second quarter. And then, also, referring just quickly to the auction values at the -- or rather the recovery values at the auctions, they're up, actually, up slightly at 35.6% for the second quarter compared to 35.2% in the first quarter, but down compared to last year at 38.9%. So we had that slight uptick in the second quarter. This has been an area that everybody has been looking at, there may be more pain to come in this category as more of these vehicles come through these auctions. But it seems though, for the last few quarters, that this may have stabilized a little bit, or the rate of erosion seems to have slowed down somewhat.

So a quick look at the second quarter, asset-backed securitization, 2017-B, represented $225.2 million of bonds covering the same 5 classes, the same basic structure, going from AAA down to BB, that we've been using for some time. All-in blended cost of funds of 3.45% reflected a 51-basis-point spread compression compared to our first quarter deal of this year, and a 70-basis-point spread compression compared to our 2016 deal. So it's really a very well-received transaction and we're very pleased with the kinds of reception we get in the asset-backed market.

And with that, I think, I'll turn it back over to Brad.

Okay. Thank you. And looking through a few of the categories, in marketing, we're always working on our sales force. One of the things we started to do lately is sort of refocus them on the sales aspect as opposed to just working the deals as they come in. And what really happens is the lenders all receive, in many ways, these days, because of the amount of automation, things like dealer track, everyone's going to see a lot of the same applications. And so, sometimes, you get a little bit, not quite lazy, but we sort of work with what we see rather than go out and try and get what we want.

And so we had a little bit of a sort of change in focus there, getting back into the dealerships and sort of reaffirming our relationships with the car dealers, so that we can get maybe a little bit better pick so they understand that we know what's going on and in some level, maybe we can do it better than others. So as much as it's subtle, it is something we're working on today.

In terms of originations, again, it's still quality over quantity. We're buying what we can get without trying to push it all, sort of -- and sort of repeating what's been going on lately. I mean, the credit metrics have been improving steadily for the last few quarters. Our LTV, just to pick one that, I think, is most important, is down to 112.74 this quarter. That's the lowest it's been in almost 4 years or more. So certainly, in the last 3 or 4 years, that's the lowest it's been. And that's a very good indicator of what's really going on in terms of market place, in terms of what we're buying is the LTVs.

A few quarters ago, that was -- it reached -- I think it's peaked in the last 3 years at around 115, maybe that was last year. Anyways, so from 115, down to 113, to 112, those are significant improvements in that area. As I said, all the other credit metrics across the board are improving. So again, originations is doing what they're supposed to.

And just to pick a highlight, because somebody might ask, we do verify 100% income in every single deal, job verification -- or income verification that obviously was a hot topic in the news last few quarters, last quarter or so. It's ironic that, that isn't more the norm in the industry, but for us, it is. We've always verified 100% of the income of our borrowers before we buy a loan. So that's sort of, it's not bad when people ask questions and we have sort of a really good answer.

Moving on to collections. It's a little hard to tell in the numbers, but we think things are improving still. It looks like the changes we've made a few years back are starting to show up a little in the CNLs. It's a little too early to call it a huge success, but we're cautiously optimistic. It may be things are beginning to go the right way a little bit. Again, it's hard to tell, as Jeff mentioned, because of the seasoning in the portfolio, that's going to cover up a lot of the improvements you might see, but over time, hopefully, that will become more obvious.

In terms of ARD or the recovery value of the auction, as Jeff mentioned, it looks like we're sort of leveling out. That may go down a little bit. And if you recall, during the recession, they went down into the 30% range. To the extent this thing could slowdown in the 35%, 34% range, that would be -- it almost makes sense. Obviously, the economy is not bad, this is more of a car-driven problem. And so we would like to see it sort of level off. And it might be. It may go down a little bit more but it appears that we sort of maybe reached the bottom of that trend. So we'll see.

Moving on to the industry. There's not a lot of talk about in the industry. I think, things are moving slowly. One of the things we thought would be that a lot of the folks that haven't done things the right way might get on -- go on the market. Certainly, some of the smaller companies that have stopped funding, or have pulled back, some of the bigger companies have pulled back, we really haven't seen the transactions we might have thought would show up. Having said that, they should appear soon or sometime soon. And so we're patiently waiting for maybe some opportunistic acquisitions, or at least to take advantage of some of that market.

One would think that if people are in fact slowing down or few of the smaller companies have left, that maybe the competition is easing, but that still does not appear to be the case. Whoever has left, for whatever reason, whether they should be going fast or not going fast, there are enough folks out there still pushing for business that the market is still competitive. Whether they're pushing for business because they're desperate for earnings, or whether they just think they've got everything fixed, we'll wait and see. But the net of that is that the competition is still out there.

The other thing in terms of looking at the competition is the credit unions. Credit unions have done a big job of moving into the spaces in the bottom of the spectrum and been relatively competitive and growing in the sector in the last year or 2. And so if you take those 2 sort of things, that probably gives you a good view of what's going on in the industry. Some of the companies are pulling back, some of the companies are slowing down, but a lot of that gap is being filled by some of these credit unions. The other thing that's probably helping the industry sort of slog along before having changes is in fact the low cost of funds. And so as much as we appreciate the low cost of funds on our securitization, it's probably providing some amount of staying power to some of the weaker competitors that may in a different environment have sort of cashed in already.

So those are sort of the factors moving around. Other than that, this really looks like a slow summer for the most part. There's not a lot going on, there's not a lot of movement, but come fall, we might see some changes.

In terms of overall economy, it's probably exactly the same thing. Unemployment seems to be going down and certainly isn't going up. So that's a very strong indicator that our industry is doing well. I think, our customers, that middle America part that's still struggling for higher wages, but they also now understand how this works, they all want their cars to drive to work, they understand the priority -- the interesting thing is, our customers have now sort of probably gotten even better at having a priority of payments in terms of how they spend their money. It used to be they pay their cars pretty quickly because they were worried we might pick them up. Today, they know they have some lead time given the new regulations about how people collect. And so it's more of they're managing the resources a little differently. And it seems to have settled into where this will be sort of the new norm. And if that's the case, that's just fine. To the extent it gets to the point on a delinquent loans where we might think about repossessing the car, many of the customers pay up. And that's not the case when it used to be when they get seriously delinquent in the past.

So we've mentioned this in prior -- in previous calls that it just seems our customers are becoming more used to being able to move their payments around for what they need to pay, but not forgetting they need their car. So that part is all okay. Again, we don't think there's much going on that affects our industry. We've mentioned the recovery at auction, so that's really the only other highlight I can think about off the top of my head.

So with that, we'll open it up for questions.

(Operator Instructions) Our first question comes from John Rowan with Janney.

You're saying that credit quality is getting better. I'm just curious, how -- what are you looking at? I mean, were you looking sequentially? Because the year-over-year numbers don't look like they're improving.

Right. That comes more to the portfolio aging. So even though I would like to see the year-over-year numbers improving as well, but I think, what we're talking more about is, let's say that our 2013 pool is just to pick one, might have been the worst pools we think we've originated in this sort of area. So we think 2014 is a little better, 2015 is a little better, 2016 is a little better. But to the extent you're not going to see that improvement, unless we start growing again and sort of make the portfolio younger again, which, in fact, is probably what will happen at some point. So the improvement in older pools is being masked by the aging of the overall portfolio. So yes, in fact, the numbers year-over-year don't look that great, but if you go sort of deeper into the numbers, you can see some better numbers. And at some point, you will see those results come through.

Our next question comes from David Scharf with JMP Securities.

You seem to cover most of the industry topics, Brad. I'm just wondering, listen, I know you don't want to go down the road of giving kind of explicit guidance, but I'm wondering, just based on your comments on the state of the industry, I think, you even mentioned current origination volumes were indicative of sort of waiting out the issues, is sort of the $0.17 to $0.18 of quarterly earnings power the way we ought to be thinking about the next several quarters in the absence of anything that materially changes in the industry in terms of competition or end market demand?

Yes. I think, you've hit the nail on the head. We're not -- this is not a market where you can push to grow. And so as much as we have our guidelines out there and our marketing force is working as hard as they can, the problem is the people are buying more loosely or maybe they're trying to grow and so they're lowering their prices, this isn't the market where we want to compete in that sort of area. So we buy what fits our criteria and that's it. What you'll probably see, depending on when this change is, is this kind of steady flow. It's sort of not a terrible thing. I mean, we think the collections number will improve. You're originating $75 million to $80 million, whatever it is. It's a pretty profitable company that way. And when things improve, we'll improve right with it. But yes, for the moment, forgetting opportunistic things coming our way, you might -- you could realistically predict that the next 2, 3, 4 quarters could be sort of like the ones we're looking at. Now hopefully, even though that part might be true, which isn't stunningly exciting, it does mean that we will do way better when other people start falling apart. And secondarily, if the collection numbers do come around, then those numbers will improve still. In terms of originations and growth, that's probably -- this is kind of the norm we would expect going forward, remembering that if the collections do improve and the results will be better, to the extent there's opportunities, then the results will be better. To the extent some people fall over and the market gets a little back to normal, then we would start growing again and then the results will be better.

Got it. It seems pretty steady state here. And if we make that assumption, give or take, I mean, at current origination levels, I'm wondering, from a seasoning standpoint, if you're originating around this level per quarter, let's say, for the next year, where would the average age of the portfolio be 12 months from now, relative to sort of the 19 months it currently is? I'm just trying to get a sense for the impact of the debt reverse denominator effect that you're effectively talking about. Holding credit quality constant but just a portfolio that's further along the cumulative loss curve, how we ought to be thinking about the allowance rate?

Well, David, at this current sort of portfolio size and volume levels, origination volume levels, the portfolio is seasoning almost a whole month every quarter, okay? Not quite a whole month, but almost a whole month every quarter. And I think, what would happen is, at these levels, that rate of seasoning would probably accelerate somewhat and get closer to -- over the next 4 quarters. Probably get closer to a month per quarter. So that gives you an idea of kind of what the rate of seasoning would be.

Okay. Got it. And then, just lastly, once again, at this sort of steady state level of originations, should the efficiency ratio hold steady? And I'm just trying to think of the fixed cost component and how you're thinking about sort of overhead in the context of waiting out the industry, as you say?

I mean, I think, we probably, at this point, have most of our cost already in. I mean, we could probably originate $100 million, $120 million tomorrow without doing much of anything. So -- but the problem of course, at some point, you might try to become more efficient given the industry. But certainly, we're not going to do that now. So the numbers are going to be sort of what they are. We don't see them growing in any real way going forward. Now given how the portfolio sits still, it's probably, I think, a push. I think, in the end, you'd probably keep about the same efficiency numbers now going forward.

Just one last one on credit and then I'll hop off. It relates to the first question you received on the call. Jeff, is there any way to give us a sense for how the 2016 vintages are performing at this point in time relative to the 2015 vintage after a similar number of months?

It's a little early. But I think, what we've seen is the 2016 are pretty close to the '15, there might have a monthly vintage that's a little over and another monthly vintage that's a little under. But I think, more importantly, we've seen improvements in the '15 versus the '14 for example. And that improvement is sustained so far in what we've seen in the '16. So that's -- to us, that's significant indicator of credit performance or improvement in credit performance. And then, of course, that's the kind of thing that our portfolio financing partners, the Wall Street folks, the rating agencies and the bankers and the bond investors look at too.

(Operator Instructions) Our next question comes from Mike Del Grosso with Jefferies.

I know you mentioned your cost of funds has remained fairly stable, which is in part due to strong demand for auto ABS and spread tightening, but could you remind us what your sensitivity is to rising rates?

Well, I mean, the big picture, our sensitivity is pretty good -- isn't very strong. I mean, we have enough room in terms of the margins. Historically, over 25 years, anything better than a 5% cost of funds is probably pretty good, and we're running at 3.5%. So as much as it would take a little bit off of us to go up to 4.5% or whatever it was if rates continue to rise. At some point, we might even goose the APRs a little bit to keep up. But I don't think we're particularly sensitive to cost of funds shorter than going to the moon. If the Fed were in fact to raise rates at 0.25 a point 4 more times, at some point, we'd have to eat that point, but we might be able to offset a little bit. So again, I'm almost guessing a little in terms of how it would work, but the easy answer is, in the big picture, we're not particularly sensitive. In the short-term, particularly if we're still not growing and we're sort of sitting around in idle, then we might be a little more sensitive than normal but not in a huge way.

Got it. And then, I guess, the next question is on recoveries, but a little bit longer term. I know you mentioned in the short-term, the second half of this year, we should see it level off, hopefully, in the 35% to 34%. But I think, most industry commentary expects the majority of the pressure to set in over the next few years. So again, I know this may be early, but any thoughts on how we should think about 2018? Is it more of kind of a lower for longer type phenomenon? Or do you think that we can -- do you think recovery rates can move down from that 35% level?

I certainly think they can move down from the 35% level. I think, in terms of the long-term picture, what we would say is the lowest ours got to in the recession was around 30%, give or take. And so as much as 35% is not the best thing in the world, it's not 30%, but there's certainly a significant possibility given what's going on that they could go lower before they go up. It is a little novel that they've slowed down for the moment. They were steadily moving down for quarter after quarter after quarter, and these last couple of quarters, they sort of leveled out. But if you were asking me to bet on that, I would say down rather than up. But I guess, there's 2 ways to do it, I think that the odds, certainly over the next year or so, that the recovery rates drop further. But I would probably be pretty likely to take the over that they stay over 30%, certainly. So if I were going to ballpark it, maybe they go down to 32%, given what we've seen, and that's the floor. But I'd pretty much be guessing at picking 32%. But we'll see.

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

I have a question, I mean, AmeriCredit or GM Financial just reported this morning recovery rates of 53%, 54%, and you guys are at 34%, 35%. What accounts for the difference?

Well, one might think that what would influence that number for GM would be that they probably have more prime. And so the cars are newer but not so new that you're having a sort of a drive off problem. So the extent that their average car they finance is a little bit newer than ours and that they're more prime than we are, they probably aren't over advancing on the car either. So just for instance, if their average car is closer to 1.5 years old or something instead of 2.5 years and they're only financing 100% of book, that -- those 2 factors would probably give them a significant pick up. The other thing would be the extent they're doing more prime and they sort of have maybe a stronger target to go after later, then their other recoveries might be improved as well.

Are you guys doing anything different than auctions at this point? You're not doing any retail experiments or anything like that or something else?

Retail experiments, as you and I both know, tend to go poorly.

I don't disagree. I'm just wondering if there's any other disposition.

No I think, we're trying to stay away from the problems where people go, "Oh, so and so is doing this retail deal and it's horrible." So no, we try and stick to our knitting in all those little areas, like income verification.

My last question is you mentioned there's potential small acquisition, is there a point that you guys are one of those few remaining independent firms that you would entertain merging with a bigger firm at a certain price without mentioning the price of a dime?

I think we're open for phone calls. But at the moment, it would have to be a very interesting proposition for us to sort of get involved in that.

Okay. And are you going to continue to maintain the reserve level about where it is?

I'm hoping we'll grow it, which I know will please you.

That would please me a lot.

But I think it should be where it is or higher, yes.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. So I think, people probably, at this point, understand what we're trying to do. I mean, people who know the company and certainly know me know that we would rather be aggressive, we would rather be actively growing the company and moving forward in the world. So this is a bit of a painful process for us right now. But to the extent you go back to '07 when we had a huge problem, there tends a time when being a little more conservative might give you a huge home run later. And so what we don't want to do is stick our necks out with the rest of the folks and have a problem. So we've been pretty good at avoiding them. We think we've done a lot of things right, right now. As we mentioned in the call, it may take a few minutes or a little while to prove that out. But we have some time to do it. And with any kind of luck, we'll position ourselves very well for the next couple of years if we just hang in there patiently for the next few quarters. And that's what we've been trying to do. And certainly, we are achieving that goal today, painful though it may be for some of us who like to see the company moving, surging forward rather than sitting in idle. But that's the course we've chosen, we think it's the wise course. We'll see what happens in the next few quarters. Thank you, all, for attending our call, and we'll see you next quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until August 1, 2017 by dialing (855) 859-2056 or (404) 537-3406, with a conference identification number of 54724137. A broadcast of the conference will also be available live for 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.