Consumer Portfolio Services, Inc. (CPSS) Q1 2012 Earnings Report, Transcript and Summary

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 forward-looking statements are subject to risk -- certain risks and that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further -- for 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 like to turn the call over to Mr. Bradley.

Thank you, and welcome, everyone, to the call this morning. Being as it's so soon after the year end, there's not a whole lot different other than the quarter went very well. We now have 2 profitable quarters in a row. I think in looking at the quarter, we've had a very good start to the year. Originations were 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 3 securitizations last year. And then this year, we hope to do 4 back on a normal quarterly schedule of doing securitizations. And the pricing was very strong during that securitization as well. I think, overall, we're 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's fairly representative that we're off to a good start. With that, we'll have the financial results from Jeff.

Thanks, Brad. Good morning, everybody. Looking at the revenue numbers for the quarter, March -- first quarter revenues were $44.5 million. That's 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, or 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's down at 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 a 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 if there is more financing debt associated with it. Loss provision for the first quarter of $4.8 million, that's up compared to $3.5 million in the fourth quarter of 2011 and up about 30% from $3.7 million 1 year ago. We're going to be reversing the trend over the last couple of years of sort of decreasing provision expense as our portfolio now seems to be on a steady growth path. We can expect provisions for losses to increase somewhat ratably with the size of the portfolio. Pretax earnings for the quarter were $500,000, $500,000 compared to $200,000 pretax profit in the fourth quarter of 2011. That's a 150% increase. And that's a significant improvement over the $4.2 million pretax loss from the first quarter of 2011. We did not book a tax provision, this nominal pretax income, as we're carrying this significant valuation allowance against deferred tax assets. So for the time being, we'll just be offsetting any what would've been booked tax expense with the equal reversal of the valuation allowance against our deferred tax assets. On a per-share basis, the earnings were $0.02 compared to $0.01 in the fourth quarter 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 in March 31, 2012. That's up just a little bit from $10.1 million at December and up a little bit more from $9.2 million 1 year ago. Our restricted cash balance is $131.5 million at March 31. That's 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 wrapped up 5 AVS deals going back to 2006 and 2007. And 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 5 deals. Our portfolio finance receivables on the balance sheet was net of the allowance was $543.7 million at March 31, that's up about 7% from $506 million at the end of the year, 2011, and also up about 7% from 1 year ago. We did originate $119.9 million in the first quarter, a strong quarter of originations net 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's down from $172 million at December, and of course, that portfolio just came onboard in September of last year. On the debt side, the warehouse line balance was $28.9 million at the end of the quarter, that's up just a little bit from $25 million, December 2011. And 1 year ago, we were carrying more receivables than the last time, 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 than we did in the first quarter of 2011 than we did just recently. Our residual interest financing continues to pay down as $18 million at the end of the quarter compared to $22 million in December and $34.8 million 1 year ago. Our securitization trust debt is back up close to $600 million at the end of the quarter compared to $583 million in December and $489 million, 1 year ago. The debt that's 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 also paid down $5 million of our long-term debt, bringing that balance to $74 million from $79 million at the end of the year. Looking at some of the -- well, we're just looking at performing at the aggregate portfolio, the managed portfolio at the end of the quarter, $781.8 million, that's down just 2% from $794.6 million at December, but up significantly 15% from $679 million 1 year ago. Some of the performance metrics, the net interest margin was $18.3 million for the first quarter. That's 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 of things happening. First of all, the Fireside portfolio contributed significantly to the improvement in the year-over-year numbers. And the other thing that's happening in our portfolio, a positive event is the older AVS 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 details out in a minute. The risk-adjusted net interest margin was $13.5 million for the first quarter. That's 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. And our core operating expenses were $17 million for the first quarter of 2012, up from $16.4 million in the fourth quarter and up by 22% from $13.8 million 1 year ago. We have not much of an increase in the consecutive quarters. Year-over-year, we have more people, we have significantly higher origination volumes than 1 year ago. And the last metric we'll take a look at here is our core operating expenses as a percentage of average managed portfolio, 8.6% for this quarter compared to 8.1% in December and 7.8% 1 year ago. And again, this is an area that we think we'll start seeing some improvement as our economies of scale start to kick in -- I mean, and the portfolio continues to grow a little bit more with our increased originations. With that, I'll turn it over to Robert.

Thanks, Jeff. I'll walk you through some of the asset performance metrics. We've seen those numbers continue to improve. For delinquency, at the end of March, we were at 3.5%. That's down from about 6% at the end of December. More importantly, it's down from 5.8% 1 year ago. On the loss side of things, our annualized losses for the quarter were 3.9% compared to 2.12% in the December quarter and 9.3% 1 year ago. So year-over-year, both on the delinquency as well as on the net loss, we're seeing significant improvement. The growth in our organic portfolio has helped out 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've 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% 1 year ago. And as we continue into 2012, we've seen very strong numbers. Our March level was over 50% with kind of a shortage of used cars that 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, 4 classes like we've done in our other recent deals and we had a blended cost of about 3.5%. That's down from 5% on our 11-C December transaction. We had very strong investor demand. Each of the 4 tranches that we offered were at least 2x oversubscribed 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 that, 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 at in '12-A. So far in April, new insurance continues to be strong. I know in the last couple of weeks, there's been at least a half a dozen auto deals and at least 2 sub-prime deals. AmeriCredit, 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're back on a quarterly trend here and pricing remains strong. With that, Brad, let me turn it back to you.

Thanks, Robert. So in terms of the company, suits today, it seems we can finally sort of put the recession behind us and all the battles we had to fight to get through it and keep the company going. Now, as we turn the quarter in profitability, we can focus on growth. We've been adding marketing reps, trying to sort of reinvigorate our footprint nationally and adding more dealers and working with the dealers to increase the flow of contracts. We've been doing all these 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's doing very well. So it's really, overall, a very strong picture in terms of the company. In some ways, it's sort of similar to 2005 when we're beginning to get growing again after the last recession. So it's going to be a long, steady road, but we think we're on the right track. In terms of the industry, I think the rest of our competitors are probably doing normal competition. There's nobody being overly aggressive, nobody's buying stupidly. I think the smaller guys are trying to be a little more aggressive, some of the larger guys are probably trying to stay a little more conservative. So, yes, not a bad mix and we fit into that mix rather well. So we think we sit pretty good there and we have a good opportunity to maintain our margins in that environment. In terms of the economy, I think there's gradual recovery that probably seems to be wonderful for the country 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 tiny to get back up to speed, the better off we'll be in the future, because sooner or later, we'll have to cut the margins a little bit to compete as we get much larger. So certainly given the first quarter, we're 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'll open up for questions.

[Operator Instructions] Our first question comes from K.C. Ambrecht from Millennium.

Just 2 questions. Where does your competition only come from? We're hearing a lot about how the banks are kind of going into this space. I know you tend to be deeper in the credit markets than they are, but who's your typical competitor?

The banks -- the bigger banks, probably won't go as deep as we are. They're just staged at above us, where they've pretty much been for a while. We would look at Capital One. Well, we continue to call it AmeriCredit, it's sort of a general competitor along with Santander. And granted, Santander is a bank, but been an operator as much as a bank, since they're a foreign bank. But those are probably our 3 largest competitors. And then there's lots of little guys who are starting to try to get a foothold, that would be our competitor as well.

Yes. And then the second question was, now that you guys have 2 profitable quarters, when should we think about the DTA being written back in?

That's a wonderful question. I feel and think it should be switched yesterday, but that's just me. The general rule is...

But it doesn't impact your operations down put? It doesn't impact your operations but it'd be nice to...

No, but it would certainly make the balance sheet look better and might as well the good things. But normally speaking, you need at least 5 profitable quarters. And the other in the general rule in accounting is you need to have a 3-year cumulative profit. And so as long as we have a 3-year cumulative loss, that might be a little difficult to get that changed. But that's certainly one of our mid-term goals to get that flipped.

[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 a lot more questions once our stocks starts taking off. But for now, we're very happy with where we are and doing what we need to do to get our thing going in the right direction again. So we appreciate everyone's patience, we appreciate everyone hanging in the last few years, in difficult times. And hopefully next year, we'll be way much better. Thank you all for attending today.

Thank you. This does conclude today's conference. A replay will be available beginning 2 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.