Consumer Portfolio Services, Inc. (CPSS) Q2 2012 Earnings Report, Transcript and Summary

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 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; Mr. Jeff Fritz, Chief Financial Officer; Mr. Robert Riedl, 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're very pleased with the results. They're probably a little bit stronger than we might have expected, but that's the result of a bunch of different factors all sort of going the right direction. It's a trend we would hope to continue. In terms of the quarter, as I've said, it was a good quarter. We had nice, sort of even growth. The second quarter, generally, in terms of growth originations tends to slow down. We're 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 start, it tends to sort of enter the summer months, tends to not do as well. I think, we've done very well this year. Also, with the securitization and the results in that were probably significantly better than expected. The Wall Street market securitization remains very strong. We thought it was strong before, it seems like it's even stronger now. And that's 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 -- with Citigroup, and that adds to our other $100 million line. So we have lots of warehousing to grow the business, also puts us in a stronger position there. The overall industry appears to be behaving very well. There's no wild competition. There's plenty of business in the market for everyone. There are some new startups, but they're a little smaller than we are, so we're not really either particularly challenged by them or concerned by them. And the big guys seemed to have moved a little bit upscale, and so we've developed a rather nice niche in the middle. One of the big drivers now, as we've mentioned over the last few quarters, as the portfolio is finally starting to grow overall, the economies of scale that we've had all along in terms of the large servicing centers all ready to go have -- is really starting to kick in. And so that's also one of the reasons results are better. Overall, like I said, we're very pleased with the way it's working. We'll talk a little bit more about that, but first, I'll have Jeff go through the financials.

Thank you, Brad. Beginning with the revenues. The revenues for the quarter were $44.2 million. That's 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 6 months of 2012, $88.7 million. That's up 40% from $63.5 million for the first 6 months of 2011. Our second quarter revenues were down slightly, primarily to seasonal upticks and 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 of Fireside portfolio in the first 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's 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's 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's up about 14% from the second quarter last year. Year-to-date, operating expenses, $86.8 million. That's up about 17% from the first 6 months of last year. Our managed portfolio is larger than it was last year, and that's contributing to the year-over-year comparisons. For consecutive quarters, most of the expense categories were actually flat or slightly lower. Most significantly, our interest expense in the June quarter compared to the March quarter was down, about $2.5 million or 11%. And that's 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's up about 60% from the March quarter or $4.8 million and up 75% from $4.4 million for the second quarter of last year. Year-to-date, loss provision expense, $12.5 million. That's up about 54% from $8.1 million on the first 6 months of last year. Provision 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. Pre-tax earnings for the quarter, $1.3 million. That's 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, net -- year-to-date pre-tax earnings, $1.9 million. Again, a significant improvement over the $10.7 million loss through the first 6 months of last year. The net income numbers are exactly the same. There's no net tax provision, as a result of the tax expense that we would've booked is offset dollar-for-dollar by a reversal of the valuation allowance that we're carrying against our significant deferred tax assets. The diluted earnings per share were at $0.05 for the quarter. That's up from $0.02 from last quarter, and up significantly from the $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 6 months of last year, where we lost $0.58 per diluted share. Moving to the balance sheet. Unrestricted cash balance has 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's up 11% from the previous quarter from the first quarter of $543 million, up significantly from $486 million of last year. Again, we did $138 million in new originations here in the second quarter. Separate from that caption in the balance sheet is our fair value portfolio, the Fireside acquisition from September of last year. That's down to $102 million at the end of this quarter compared to $127 million in the previous quarter or 19%. This, you may recall, is a fairly seasoned portfolio -- was fairly seasoned when we acquired it last fall. And it's 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. Brad mentioned we have a new warehouse line with Citigroup, bringing total capacity to $200 million. We're using both lines regularly. The residual interest financing, at $15 million, continues to pay down in accordance with its terms. It's down from $18 million in the previous quarter and $30 million a year ago. Our securitization trust debt now increases fairly regularly. We've issued a securitization in each of the first 2 quarters and both of the last 2 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 maintain. Our consolidated portfolio, at $806.1 million, this is the first quarter with growth in the managed portfolio of -- since 2008. So that's 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's up 9% from the March quarter this year, and up significantly from $11.9 million a year ago. The NIM for the first 6 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 active 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's down a little bit from $17.4 million from the March quarter but up significantly from $7.6 million a year ago. And the 6-month NIM -- risk-adjusted NIM, $34 million. That's a double of what it was in the first 6 months of last year. Our core operating expenses are now beginning to sort of be impacted and see the benefit to release the efficiencies of the portfolio growing. The core operating expenses were $15.3 million for the quarter. That's 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's down from the previous quarter of 8.6% and also down from about 8.7% a year ago. We're starting to see with the portfolio growing and our cost 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 delinquency side, at the end of June, we were at 3.81%. That's 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's down from 3.90% in the March quarter but down significantly year-over-year at around 6% last year. For the first 6 months, the losses annualized this year were 3.5%, once again, down significantly from a year ago at 7.74%. And what we're seeing there, obviously, is our portfolio is growing. That's helping the numbers. But 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's up slightly from the March quarter of 48.1% and up fairly significant year-over-year at 46.3%. Going forward through the rest of the year, we probably expect those numbers to tail off a little bit. It's fairly common, seasonal decline. But even with June, we were at 47.5%, and that's a -- 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's a significant improvement versus the other line that we have in place. We got an advance rate in the high 80s there, LIBOR plus 6. And that with the improved advance rate, that will help us with our liquidity as we continue to grow moving forward. We also closed our 12b transaction in June. It's very similar to our 12a deal. It's about $140 million transaction. We had 4 classes of securities similar to the last several deals, kind of Single A tranches down to Single B tranches. They're 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've got very strong reception in the market. This improved -- improves upon our 3.5%, with total blended cost in 12a. Each of the tranches of bonds was well oversubscribed by investors. So that helped us bring that cost down. We had initial credit enhancement in the deal of about 1%, so we've got an effective advance at 99%, which is a slight improvement over the 12a deal. And 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 haven't really seen any real change in the competition. They had a bunch of startups in the last year or 2, and they seem to be kind of moving along but not doing anything crazy. 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've been able to sit where we sit, maintain our margins. I mean, we could probably grow faster, but we'd probably give up some of our pricing. And right now, we're certainly growing in a nice clip. There's no real reason to sacrifice the margins or grow too much faster. And because we're not growing superfast, we're able to really focus on keeping our metrics, our credit quality and keeping performance where it should be. I think when the real benefits, as everybody now mentioned, is the strong asset-backed market. Because of that, I think it would be nice if everybody realized that a couple of years ago that 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's a very strong thing for the future. What we're really doing now is we're 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've already begun hiring a few more people -- a significant amount of people, so that we would be prepared for next year when sort of 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 the asset market, and actually the auto market and I think, business portfolios in this market, the competition for those portfolio is rather extreme. So we're not -- we're certainly not going to stretch or anything, but if we find one, we would jump on it, as we have in the past. With that, I think the quarter's going well. We expect the third quarter and the fourth quarter to sort of follow suit, and again, look for next year to probably be even better. With that, we'll open it up for questions.

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

Can you guys just help us -- these numbers continued -- these earnings continue to improve. Can you help us look out a year and see what the earnings cost this company has, as you continue to build the balance sheet and control expenses? Is it going to be like your $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. And I'll ask around before the recession, we were building the company in a very steady way, much like we're doing right now. And you could look at that growth cycle and think, if things work well, we could kind of follow that track. A little hard to say given -- if the market's there, we might grow a little bit faster, if it's not, we might grow a little bit slower. But certainly, we've gotten back profitability. We expect the profitability to increase and continue, as long as the markets keep hanging in there, so -- but if you really want to sort of see what the company can do, which I think is your question, it's easy enough to go back to our last cycle and look at '04, '05, '06, '07 and go from there. Those years we grew much like we would hope to grow again, and then you can sort of derive what you want from that.

[Operator Instructions] I'm showing no further questions at this time. I'd like to hand the conference over to Mr. Charles Bradley.

Thank you. Thank you, all, for attending. We've been doing this for a long time. I think it's nice to see that we've suffered through 2 recessions now. At the very least, we've certainly learned how to deal with it. And I think all that sort of preparation and planning we've done to get through this one is beginning to pay off. And so we would expect to do what we've done before, grow the company, get back to where we were. And keep our fingers crossed to 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 2 hours from now until July 25, 2012, at 11:59 p.m. By dialing 1 (800) 585-8367 or (404) 537-3406 with conference identification number 11952079. The broadcast of the conference call will also be available live after 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.