Consumer Portfolio Services, Inc. (CPSS) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Consumer Portfolio Services 2011 Fourth Quarter Operating Results Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference 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; and Mr. Robert Riedl, Chief Investment Officer of Consumer Portfolio Services. I would now turn the call over to Mr. Bradley.

Thank you very much, and thank you, all, for joining us today for the conference call. It's nice to be able to say that 2011 ended with a profitable fourth quarter. Overall, I think everything is going to plan. With the profitable fourth quarter, which really is the first since the second quarter of '08, we can sort of say we've completed our comeback of getting through the recession in one piece, and now we can look forward to, hopefully, the prosperity of the future. The company is very well positioned. The industry is doing very well. The company is very well positioned in that -- in our industry, and so we think a lot of things are all swinging around to where the following few years could be very good, assuming there's no big problems yet again. But having said that, I think everything is going very well. And I'll talk a little bit more about that after we go through the financial results and the performance results. So I'll turn it over to Jeff Fritz to go through the financial part.

Thanks, Brad. Welcome, everybody. We'll take a look at the numbers now. The revenues for the fourth quarter were $45.8 million. That's up about 36% from $33.8 million of the September 2011 quarter and up 30% from $35.3 million in the fourth quarter of 2010. Our revenues, of course, were driven significantly primarily by our consolidated portfolio of finance receivables. We had a couple of significant events on the portfolio in the fourth quarter. We acquired the spender [ph] Fireside portfolio right at the end of the third quarter, and it didn't really contribute anything significant in the third quarter but had a major contribution to revenues during the fourth quarter. Also during the fourth quarter, we originated $92.2 million of new receivables under our regular CPS programs. And for the first time, during the fourth quarter of 2011, since the fourth quarter of 2007, our organic portfolio actually grew. And that's a significant milestone for us. That portfolio has been shrinking now for many years. The year-to-date revenues were $143.1 million. That's an 8% increase over -- an 8% decrease over full year revenues of $155.2 million in 2010. On the expense side, the expenses for the quarter were $45.5 million. That's an increase of about 20% from the September quarter of $37.9 million and a similar 20% increase over the fourth quarter expenses of 2010. Most of our expense categories actually were flat or changed relatively little for both the consecutive and the year-over-year quarters, except for interest expense, which increased pretty significantly in this quarter due almost entirely to the financing of the Fireside portfolio. That, as I said, came onboard right at the end of the third quarter of this year. Full year expenses were $157.6 million. That's down about 8% from $171.4 million for the full year 2010. Again, most of those categories were relatively flat, except we did see somewhat higher marketing expenses during 2011, reflecting our substantially increased originations and a somewhat lower provision for loan losses during 2011. Looking at the provision for loan losses, there were $3.5 million for the fourth quarter. That's down about 13% from $4 million for the September quarter and down about 17% from $4.2 million for the fourth quarter of 2010. The full year provision expense was $15.5 million, and that's down significantly, 48%, from $29.9 million for the full year of 2010. Our provision expense decreased significantly during 2011, primarily due -- especially through the first 3 quarters, through the shrinkage and the seasoning of what we'll call primarily the older portfolio. At the end of 2011, our pre-2009 receivables were about 37% of our portfolio at the end of this year, 2011, compared to a year ago in December 2010, when our pre-2009 receivables represented 81% of our portfolio. Those pre-2009 receivables have experienced substantially higher losses throughout their life than one we anticipate on the portfolio of receivables that are -- have been originated subsequent to 2009. The results for the quarter, as Brad pointed out, were earnings, pretax earnings of about -- just over $200,000. That's a significant improvement from a $4 million loss in the September quarter and a $2.6 million loss in the fourth quarter last year. The year-to-date loss, again, was $14.5 million. That's an improvement, a reduction in loss of about 10% from $16.2 million for the full year last year. There is no tax benefit or expense. The full year tax benefit we would have realized on these pretax losses simply went into our -- was offset by a valuation allowance for our deferred tax assets. The results per share for the quarter were $0.01 in earnings per share, and that compares to a $0.20 loss per share for the September quarter and an $0.87 loss per share for the fourth quarter of last year. Full year results on a per-share basis, $0.76 loss per share for 2011, and that's a significant improvement over a $1.90 loss per share for the full year 2010. Moving to the balance sheet. Unrestricted cash in the balance sheet was about $10 million at the end of December 2011. That's not very much changed from the September balance of about $9.5 million and a slight reduction from the $16.2 million at the end of 2010. Our restricted cash balances, if you're comparing these balance sheets, you'll see that we had a -- what looks like a significant increase in restricted cash, $159 million at December 2011, compared to $128 million in September and $124 million a year ago. We just would point out that we had about $36 million in restricted cash on the balance sheet at December 31, 2011, which reflects proceeds from our 2011 fee or December securitization that were held in the restricted cash accounts until we delivered the balance of the pre-funding collateral in January 2012. Our finance receivables balance, net of the allowance for loan losses, is $506.2 million at the end of the year, December 2011, and that's an increase of about 4% from the September balance and a slight decrease, a decrease of about 8% from $552 million a year ago. Looking at the debt side of the balance sheet. The warehouse lines of credit were $25.4 million. That's up a little bit from the third quarter of $17.5 million. Residual interest financing continues to decline a little bit as we continued to make principal payments on that residual interest financing facility. Our securitization trust debt continues to increase, I think, with every quarter this year, as we've added and completed 3 securitizations during 2011, the last of which we completed right at the end of the year. And we have a new caption of debt on the balance sheet if you were -- well, I guess, we had this since September, the third quarter, but again in December and continuing on with the Fireside acquisition, we have a separate line item for the Fireside-related debt that we -- this is called debt secured by the fair value receivables due to the accounting methodology we elected for the Fireside portfolio. And long-term debt went up by $5 million from the previous quarter to $79.1 million, reflecting an additional $5 million in long-term debt that we took on during the quarter. Looking at a couple of the performance metrics. The net interest margin was $15.5 million for the fourth quarter. That's a significant improvement, about 38% over the third quarter, the September quarter, of $11.2 million, and again, a significant improvement over the fourth quarter of last year. And as I alluded to earlier, the Fireside portfolio, together with the new and now growing organic portfolio, contributed significantly to the net interest margin. Year-to-date NIM, $44.8 million. That's a slight decrease over $55.5 million for the full year 2010, reflecting the fact that the average balance of the portfolio during 2010 was certainly higher than our average balance during 2011. The risk-adjusted NIM for the quarter, this is the net interest margin without effect or less the provision for loan losses, $12.1 million for the fourth quarter. That's up, again, significantly, 68% from $7.2 million for the third quarter and also up from $6.5 million a year ago. The full year risk-adjusted NIM was $29.3 million. And again, that's an improvement over the full year 2011 of about 14% with $25.6 million for the full year 2010. The NIM has benefited significantly, not only from the growth in the revenues, particularly here in the fourth quarter, but also from a lower provision for credit losses throughout 2011 and compared to the prior year. Core operating expenses for the quarter were $16.4 million. That's up slightly from about $15 million, 10% or so from the third quarter of 2011, and up about 14% from $14.5 million a year ago. The full year operating -- core operating expenses were $59 million, and that's just down slightly from $60 million for 2010. Our dollars of core operating expenses are starting to reflect the increases, especially throughout the fourth quarter, in the managed portfolio and somewhat greater increases in our originations costs. I think I alluded in the marketing cost and some of the employee costs are starting to plateau and taper off, and we're going to see some slight increases in those costs. The core operating expenses as a percent of the managed portfolio, average managed portfolio, were 8.1% for the quarter. That's down a little bit from the third quarter of 8.6%, although up a little bit, 10% or so, from last year. And the full year core operating expenses as a percent of the average managed portfolio, 8.3% for the year. That's up about 29% from 6.5% for last year. But now with our portfolio growing again, we hope to see some improvement in this metric as we'd expect to realize some economies of scale to be restored as the portfolio continues to grow and our costs hopefully stay in line. I'll turn it back over to Brad.

Now I'll let Robert run through the performance metrics.

Thanks, Brad. Now we saw again in December improvements in both the delinquency and net loss. Performance metrics, typically in the fourth quarter, you see a little bit of weakness as much of our customer base will look towards the holidays and holiday spending versus making their car payment, but we saw some good decreases. On the delinquency side, for the -- ending in the December quarter, we had 5.95%. That's down from about 6.2% in September and over 9% at the end of last year. On the net loss side of things. On the quarter, annualized losses were 2.12%. That's down from 4.13% in the September quarter and 6.65% a year ago in the December quarter. For the full year, annualized losses were about 5.25% for 2011, down from 9% last year. One thing that Jeff and Brad have both mentioned is that our organic portfolio is starting to grow again, so that definitely helps these numbers. The Fireside acquisition also gave them a boost. So I think we -- we expect to see continued improvements there as we moved into the first quarter. That's the tax refund season. We've seen delinquencies come down so far to date this year, and we'd expect to see continued improvements this year. On the funding side of things, both Brad and Jeff mentioned that we completed the 11-C securitization in December. That was a $120 million deal. Very similar to the other 2 deals we completed last year, 4 classes of bonds, single A down to single B. The one improvement we had in the transaction was we added the pre-funding mechanism, where we had $36 million of incremental bonds that we issued for receivables we bought and put into the deal this year. That allows us to hedge a little bit on the interest rates and lock in long-term funding. The blended coupon on the deal was 4.93%, and the blended cost all-in was a little over 5%. That's up a little bit from our September transaction, but still, compared to the funding costs we've had over the last couple of years, it's still quite an improvement. In terms of the current market, so far this year, there's been quite a bit of issuance in the AVS market, and specifically in the auto market, and we've seen probably close to 12 auto deals on the prime space, sub-prime space, large issuers and even smaller first-time issuers. So we expect to be back on a quarterly track this year and, given the strength of the market, that should bode well. With that, let me turn it back to Brad.

Thank you, Robert. In terms of the company, as has been mentioned a couple of times, we did do another securitization in the fourth quarter. It went very well. That was the third one in the year. We will get back on track of doing one quarterly going forward. In terms of looking at originations, we did $92 million in the fourth quarter. That's versus $33 million in the fourth quarter last year. We did $284 million for 2011 versus $113 million in '10. You can look at those numbers and you can see that obviously the company is growing again. It's really, in most instances, following the plan we've set out to do. Sort of another nice part of all this is collections are also doing very well. And I think our decision to maintain the branch structure throughout the recession, when others may have closed down some branches to try and save some money, has really set us up in a good way, both in terms of having the people and the space available to handle this kind of growth rather seamlessly and, if anything, actually have better performance than we might have expected. It also allowed us to somewhat flawlessly pick up the Fireside acquisition. We added that portfolio, and it's performing significantly better than we would have expected. I mean we expected it to perform well; it's performed even better than that. So that is going awfully well as well. Another thing that I think has been touched on is we were able to create stronger margins during 2011, and that matches up with a lower cost of funds. That has continued into this year and in some ways has gotten even better. So what's really going to become interesting is as we sort of start hitting our growth numbers, we now are going to have an even stronger margin, lower cost of funds. As a result of the lower cost of funds, we'll have an even stronger margin. And now as we start laying on the paper, it's going to produce some real results. And again, a fundamental reason is we've now started to grow again. The portfolio was shrinking. No matter what you did, it really hurt the overall performance of the pool and then for the company. Now the pool of portfolio is growing again, with these stronger margins and this growth, you should have some sort of really nice result as it continues to go. Turning to the industry. The industry is very stable. The capital markets, as Robert touched on, are about as strong as we've seen them. It's truly 2007 all over again. It's as if the recession never happened. Unfortunately, we had to live through it, but the capital markets certainly are acting like it hasn't -- it was never there. There's tremendous appetite for product. There's lots of available capital. It's all those kind of things you look for. I think you throw in the fact that car sales are all of a sudden taking off in the -- across the country. Some people have read that the average age of cars on the road is now the oldest it's ever been at 10.8 years. What we're seeing today are a lot of folks -- it's a bunch different things and it's hard to put your finger on which, whether it's the tax refunds at the end of the year, or whether it's the age of the cars on the road, or the new car sales being up, the fact that maybe consumer confidence has finally picked up a little bit, or that the economy is in fact recovering somewhat, you could really pick your flavor, but it all is pointing out to we're having far stronger results in the first quarter than we would have even thought we could. So it's really started off in a good way. I think putting -- as much as the fourth quarter of '11 was good, it's nice to put '11 behind us, along with '09 and '10, those 3 tough years. We really think that everything we planned and sort of worked on during the recession is now in a position to bear fruit in 2012 and beyond. So we're very happy with both the company performance, we're very happy with originations, we're very happy with how the collections have performed, and I mean, overall, things are looking very good. With that, we'll open it up to questions.

[Operator Instructions] Our first question is coming from John Hecht of JMP Securities.

First question is just with respect to the Fireside acquisition, the contribution during the quarter. Do you have the numbers of the contribution to revs? Maybe the easiest way to look at it would be the contribution to net interest margin during the quarter.

Yes, we have that. It's about -- it was about $3 million.

And that how -- that runs off over how many years should we think about it?

It's a pretty seasoned portfolio.

Yes, most of that, John, will run off over the course of the next 12 to 18 months. And there'll be a tail to it, but it's running off pretty quickly.

Okay. Second question is -- listened to your comments about the seizing in the portfolio and move it through the 2009 or pre-2009 credit stuff, and your losses and your delinquencies and charge-offs appear to be stabilizing at pretty low levels. I mean, at this point in the cycle of the business, should we think that your provision now might just grow with portfolio growth? Or is there any kind of guidance you could give us in terms of modeling that out for 2012 if the credit conditions stay similar to where they are?

Yes, I mean, I think we'd expect that the provision expense and the allowance would grow ratably with the organic portfolio. I guess, maybe one thing you're asking is do we see like a big blip in credit performance on the horizon, and the answer to that is no. And so we would expect, as you point out and as we discussed, with that older vintage portfolio really running off and being at the very tail end of its loss cycle, and the new stuff performing better and new originations coming in at the same sort of expected credit quality as the stuff we've originated over the last 12 to 18 months, I think we'd expect just for that growth in provision expense and allowance to be in line with the portfolio.

Okay. And Brad, what's your take on the competitive markets now? I mean, yields of the portfolio, I think 1 year or 2 ago were extremely attractive, and I think you were getting some net fees on origination. What's happened the last few months? And where do you see things panning out the next few quarters?

I think sort of in an overall positive way, you've seen a lot of new competitors coming in. Unfortunately, for those who've been around forever, it's sort of like 1995 all over again in that, back then, this is a very new industry and so you had lots of startups and lots of new competitors coming in and capital was rather inexpensive, as it is today. And then you had a shakeout in the industry, the banks took over. You had another shakeout in the industry and the banks all left. So you're sort of back where you started, where the banks are not a predominant player. Some banks are still there, and some pseudo-banks are still there. But for the most part, what you have is a large market with the opportunity for new companies to come in. What's good is most of the new companies are going to start pretty small and, hopefully, not try and grow too quickly because they'll have problems with that. But what we've seen to date is, in some ways, a lot of the new companies are being set up by people that are sort of veterans in the industry, so we would hope to see fairly rational building of those companies, rather than just going for the moon. And so far to date, that's what we've seen. Ironically, as this year started out, we've seen our margins somewhat stabilized as opposed to -- we gave up some margin as we started to grow initially, but now, we're still hanging onto significant margins over and above what we used to have, and yet we're really starting to see some growth. So I think you probably will continue to see some new guys come in and start up. I think because of sort of our size and where we sit, it's not going to be much of an encumbrance to us but -- and I also don't think any of them are going to be big enough soon enough to cause sort of irrational buying or irrational price competition. So we're not particularly concerned about that. The weird part is, what you really have is you have all this dramatic, pent-up demand for cars. People replacing old cars, people wanting to buy new cars, people finally believing in the economy, whatever you want to call it people not losing their jobs on a regular basis, any of that. So there's plenty of demand, yet again, for everybody, including ourselves and a bunch of new start-ups. So we think the competition probably should be fine in the short term and certainly, probably for the rest of 2012.

In terms of yields, John, I mean, I think we're still pretty close to where we've been for the last 12, 18 months. I mean, our APRs are still right around 20%, and we're still having a pretty healthy discount when we buy from the dealers, 93, 94-ish. And I think a lot of that is, as Brad mentioned, relates to that pent-up demand and people replacing their cars.

Okay. That's great color. The final question, I guess slightly tied to that discussion, is related to one of the powerful or positive things for the industry has been the high value of the used car and that helps the recovery rates. Do you guys look forward in terms of off-lease cycles or anything? I mean you're talking about buying power and more consumers coming back into the market. Any thoughts you have on the sustainability of recovery rates in used car prices for the next few quarters?

It should be fine because, again, the demands got to wait the cars coming off even leases. So I think -- it's not like the used car market -- I mean, it's very strong, but it's not stupidly strong. It's still within 5% of sort of where it might average out in the end. So even if it fell back to that level, we probably wouldn't care too much. And ironically, the very high demand of the cars at the auction, as much as that's good for our recoveries, sort of creates a little bit of a problem for the dealers trying to sell you used cars because they don't have the margins. So we would probably look -- I think we're averaging about 45%, and I think it might drift down into sort of just above 40%, but I don't really see it changing too much beyond that.

Yes, and I would concur, Brad. I think --and our cars are a little bit different than the ones that are coming off lease, John. I mean, our cars at the auction are 5 or 6 years old versus kind of the 2- or 3-year-old vehicle. And while we saw about a year ago a pretty big run-up based on perceived shortages at the auction, so we got up into the high 40s, that number has kind of drifted back down. In the fourth quarter, we were probably averaging 44-ish. So far this year, we're down 1 point or 2 but I mean, we've never -- we don't expect it to move too much.

Our next question comes from Ken Liddy of Wells Fargo.

The Fireside Bank acquisition, obviously has been very fortunate in your -- about a decade ago, you had similar purchases of loan portfolios. Is there anything out there that you think that could help in the -- other portfolios out there that you could be purchasing or any other opportunities similar to the Fireside?

Sure. We're constantly looking at new ones, and we sort of have developed a bit of a track record. And in terms of those kinds of acquisitions, as I mentioned earlier, there's lots of capital in the market, and that capital's looking for things to do. And so to extend these portfolios are out there and you have a lot of capital, you need somebody who can look at the portfolio and then service it. And we've certainly got a name in that way. So we're sort of a popular partner for a lot of these acquisitions, which is good. Having said that, at the exact moment, we're not really looking at any. We have looked at several that we passed on or missed on over the last 6 months. We would probably -- based on sort of what we've seen in the last 12 months, we'd expect more to come along. At some level, we'll start sort of setting the bar a little higher in terms of what we would do. At some level rather soon, $100 million acquisition isn't going to be really big enough, but $500 million or higher certainly would be. So maybe as we really get going our own organic growth, we might be a little pickier in terms of what we do. But a lot of these deals can be rather profitable, so we're always looking. I think there's a very good chance there'll be more out there, though, as of right now, we haven't seen any.

Given the performance of the Fireside Bank acquisition and the relatively short-term runoff on that over the next 12 to 18 months, it sounds to me that you're -- it looked like you should have some leverage as far as on your profitability margin over the next 12 to 18 months.

We should. I think the real thing that's going to be the driver is just the growth we're experiencing organically. Like I said, the fact that the portfolio is now growing rather than shrinking, you couple that with the significant growth we're experiencing, and we definitely have some very strong margins going forward.

And how old is the existing portfolio, I mean, of the older paper? How much of that poorly performing paper is still left?

Well, the answer is all the poorly performing paper is charged off. So if you look at the pools -- or another way to look at it, we still have pools from '07 -- '06 -- really I think '05, '06, '07 and '08. And you can sort of figure out, just taking the -- what we'll call the newest of the old and say '07, anything originated in '07 is 4.5 years old. So most of that paper, as Jeff pointed out in some of the loss numbers, has experienced its loss. To the extent they're still there, they're all paying. So we're not particularly looking at that. All the paper we have at this point is so old that it's good or it's so new that it's very good, would be one way to look at it. As a percentage, maybe we have a number?

Well, It's about -- it's probably about 1/3 of the portfolio right now, Ken. Maybe $150 million to $200 million.

Okay. And as far as your free cash level, do you expect that to grow over the next 12 months?

We're going to use a lot of the cash as we grow. To the extent we reach the levels we're shooting for in '12 and slow down some, then the cash will start to build. But certainly, in the first couple of quarters, we'll probably use all of our cash just to help generate the growth.

[Operator Instructions] At this time, I'm not showing any further questions. I'd like to turn the call back to Mr. Charles Bradley for any additional remarks.

Well, as any of you can tell by the tone of the call, things are going well. 2011 is now behind us. We should -- we're just about finishing up, or will finish up our first quarter, so we'll be back rather shortly with our first quarter conference call. But again, I think 2012 looks good so far. And I think our goal today and going forward is to build back to where we were in 2007, and I think we're well equipped to do that. The company's well set up. The industry is well set up. And now the capital markets are well set up. So with that, thanks for attending the call, and we'll speak to you in a month or so.

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until March 12, 2012, by dialing (855) 859-2056 or (404) 537-3406, with conference identification number 59347514. A broadcast of the conference call will 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.