Consumer Portfolio Services, Inc. (CPSS) Q4 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Consumer Portfolio Services 2012 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 call may contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Any statements made during this call and are not statements of historical facts may deemed as 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, further 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 will now turn the call over to Mr. Bradley. Please go ahead.

Thank you. And thank you, everyone, for joining us today on our call. As I think, certainly you've been watching the stock, it was a very good quarter and we're very pleased with that sort of following what all I've said in getting in the stock market. In terms of the quarter, I think as much as it was a very good quarter, it pretty much went as expected. A couple of small things that were different. The volumes, in terms of our originations, were a little bit higher for the quarter than we might have expected. Generally, you see a seasonal drop or slight drop in the November, December originations. This year, we didn't really see that. We actually had a slight increase in originations for the quarter, going up to $150 million from $143 million. So that sort of bodes well for the future, that we're able to maintain the originations volume through the end of the year. Credit quality also remained good. We are very pleased with being able to grow as much as we have in the last 2 years and maintain a strong credit quality. We would expect that to continue as well. Fourth quarter securitization went off very well. The pricing on all our securitizations continues to improve quarter-to-quarter, which is also somewhat exciting, in that it's good that we're doing it and it's good that the price continues to come down, because virtually every single one is better than the last, and setting sort of new records in terms of our cost of funds. It's also nice to note that in the fourth quarter, we did our fourth securitization of the year. And it's the first time since 2006, we actually got 4 securitizations out in a year. Our normal trend back then…

Thanks, Brad. Welcome, everybody. We'll begin with the revenues. The revenues for the fourth quarter were $50.6 million, that's up 6% from our third quarter of $47.9 million and 10% -- up 10% from the fourth quarter of 2011, where the revenues were $45.8 million. The year -- revenues for the full year, $187.2 million, that's up 31% from the full year 2011. Revenues, of course, were driven by our consolidated portfolio, which, as we have announced, was aided by $151 million of new contract originations in the fourth quarter and $552 million for the full year of 2012. Our consolidated portfolio grew 8% for the quarter and 21% for the full year. Expenses for the quarter, $46 million, that's up only 2% from $45.2 million for the third quarter, the previous quarter, and up about 1% from $45.5 million for the fourth quarter of 2011. Full year expenses were $178 million, that's up 13% from $157.6 million for the full year 2011. Most of our expense categories remained stable or had modest increases in the quarter and throughout the year, reflecting our growth in originations and the growth in our consolidated managed portfolio. The notable exception is interest expense, which has now decreased for 4 consecutive quarters, primarily due to the lower cost of the new asset-backed securitizations we've done during 2012, the amortization and the cleanups of some of the older ABS deals and the rapid amortization of the Fireside debt. Provision for loan losses is $11.5 million for the fourth quarter, that's up 21% from $9.5 million for the third quarter of 2012, and up significantly from $3.5 million for the fourth quarter of 2011. Provision expense for the full year was $33.5 million, again up significantly, over 100%, from $15.5 million for the full year of…

Thanks, Jeff. I'll walk you through some of the asset performance metrics. Delinquencies ticked up a little bit in the December quarter to 5.55% versus 4.64% in September, but better than a year ago in December at 5.95%. Seeing the seasonal increase is something that we typically see during the fourth quarter, where delinquencies tend to be the weakest, given the holiday season. But as we're now in the tax refund season, I think we're starting to see a decline in delinquencies, which we would expect and should see throughout the quarter. Net losses for the quarter were 3.99%, up from 3.35% in September and 3.06% in a year ago quarter. Once again, it's the seasonal weakness that we would typically see. For the year, net losses were 3.61% versus 4.79% a year ago, and it reflects both the strong credit performance of our newer originations plus the growth in the portfolio. At the auction, auction levels for selling our repossessions, December quarter finished at 46.8%, down slightly from 47.2% in the September quarter, but up versus a year ago quarter at 44.1%. December results were close to 48%, so the numbers still looks strong there. In terms of the capital markets, Brad mentioned, we're back on our quarterly schedule of securitizations, and the ABS market continues to be robust. We did our fourth deal in December, that was $160 million transaction. We had 5 tranches. And similar to our September deal, we had a AA senior tranche and we sold all the way down to a single B tranche. That had a blended coupon of a little over 2%, 2.05%, that compares to 2.45% on our September transaction and 3.15% in June. As Jeff mentioned, we also had a pre-funding component in there, which allowed us to fund our December originations. So far in this year, the market has continued to be very strong. There's been at least a half a dozen auto securitizations that have come to market, including 2 or 3 sub-prime deals with a couple of the big benchmark sub-prime issuers. And so far, it looks like spreads are tightening in, even versus where our December transaction ultimately priced. So that bodes well for continuing improvement in our blended cost on the securitizations. With that, let me turn it back to Brad.

Thanks, Robert. In taking a little bit of a look at the industry, I think all 3 of us have now pointed out the excellent capital markets environment we are currently in. I think everyone is taking advantage. Not all the competitors or all the players are in the market and it would appear that market really could continue. In terms of the competition, it seems most competitors seem to be pretty status quo. Nobody particular new. Nobody doing anything particularly aggressive, which is very good. So we don't really see anything happening there. In terms of credit quality, I think most of the company's credit quality is pretty good. I think, eventually, you'll be able point out a couple that might have gone a little too fast. I think everybody has high hopes for the industry and I think, in this particular go around, being probably our third try, you'll see most of the players doing very well. But as always, you'll see a couple that went too fast, bought too deep, and hopefully, it'll show up with some acquisition possibilities down the road. Currently, there really aren't any acquisitions around. We're always looking for new ones. I think as Jeff pointed out, the Fireside portfolio acquisition was a terrific deal for us. So we're always looking. But I think with the amount of money in the industry in -- or in Wall Street looking for deals, it's going to make doing a good acquisition sort of hard, probably at least for all of this year. But you never know. So we'll continue to look. But currently, not much in acquisitions, not much going on in terms of competition. It seems everybody is doing their own thing and it seems there's plenty of market for just about everyone. In…

[Operator Instructions] Our first question comes from the line of K.C. Ambrecht with Millennium.

I had 2 questions for you. The one I was going to ask you was on the monthly contract purchases, you addressed that. The second question was on -- going a bit deeper on the NIM. Can you just go through the current outstanding high cost debt you have? What's redeemable? What's the coupon? Do you plan on refi-ing this or paying it down?

Sure. We're sort of going from the bottom up. We have about $20 million-ish of what we call public notes, and those are the retail notes we have occasion to sell. And what we can do there is -- those notes we'd probably like to keep around for a while, but we can keep lowering the rates as they renew. And we've been doing that somewhat more aggressively in the last 6 to 12 months. And so we think, even though that paper has, or those notes had a sort of overall coupon in the 15% to 16% range in the beginning, we think we eventually will get that range down into the 10% to 11% range over the next year. So -- but again, that's probably the lowest piece of our balance sheet, so we probably won't focus on that just yet, other than, like I said, we can mechanically sort of lower the interest rate as we go. The next piece is our senior debt, with Levine Leichtman Capital Partners, that's about $52 million, it runs about 15% or 16%, and we're looking at some things to do there, in terms of refinancing it or redoing a deal with them. They've been a very good capital partner of ours for a long, long time, and so we're looking to a couple of different options on what to do there. But again, we'll probably, at the very least, get some lower rates there, and probably pay off a bunch of that this year, or some of that this year, at least. And then above that, there's room to do more residuals. We have 1 residual today at 14% -- excuse me, $14 million, at about 13%. And given the size of our portfolio today, there's probably room do to some more residual financing. And probably the residual financing rates run anywhere between 10% to 12%. And so, again, as we sort of transition into more residual, less senior debt, you'd see both a combination of us paying off some debt, but lowering our overall interest rates on debt from sort of the 15% to 16% range, down into the, probably, 10% to 12% range.

[Operator Instructions] Presenters, I'm showing no additional questioners on the queue. I'd like to turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

All right. I appreciate it. I guess we must have answered all of those questions or everybody's just happy the stocks are $8 today. As I said, the quarter was really good, the whole year was very good. We are looking for a nice 2013. Trying to think of something witty to say. So my new comment is, we're going to be -- the company should be moving forward by looking backwards. That's sort of a Yogi Berra kind of thing. But what I mean is, we really have the opportunity as we move forward, but to look backwards and look over our shoulders and learn from all the things we did and all the lessons we've learned in the past, to make sure we don't make any mistakes. So as much as everything is going super terrific today, the last thing we want to do is make any mistakes. But with our experience and everything we've done in the past, we should be in real good shape going forward. So there you go. Thanks a bunch. We'll talk to you next quarter.

Thank you gentlemen. This does conclude today's teleconference. A replay will be available, beginning 2 hours from now until February 12 2013, 11:59 p.m. by dialing (855) 859-2056 or (404) 537-3406, with the conference identification number 96024567. A broadcast of the conference call will also be available live and for 90 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.