Consumer Portfolio Services, Inc. (CPSS) Q1 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Consumer Portfolio Services 2013 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 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'll now turn the call over to Mr. Bradley.

Thank you, and welcome to our first quarter earnings call. I think you can see from the press release, we had a very good quarter. We're very pleased with the results in terms of the earnings both -- almost throughout both top line, the expenses, the bottom line earnings, they've all been what we would have expected and are certainly in line with our expectations, and so for us, it's a very good start to the new year, just about in line with everything we talked about. I think originations were -- they went up substantially, in line with what we'd expect for the year. They probably didn't quite peak to where we thought they might, but I think part of that's just because of the sort of slow roll this year with the tax refunds, and so we grew substantially, but not quite as much as we might usually grow. But again, I think we'll touch on that a little bit later, but there's a little more competition and again you can't really chase the loans. In terms of collections, our collections continue to perform very well. Our portfolio is now growing, so we're in fact adding new collectors what with very strong results there as well. We did another securitization. It was the lowest cost of funds ever achieved in a securitization by our company. We keep saying the rates keep getting lower, and it's surprisingly that they continue to still go down. I guess, at some point, they've got to bottom out, but our margins have remained strong, and so we have plenty of room in terms of going-forward margin. We actually had a stronger discount in the first quarter than we would have expected, and our coupons have remained strong throughout. So in terms of our cost of funds, we've done very well. We did, in fact, renew one of our warehouse lines, the Goldman/Fortress line was renewed, as we announced during the quarter. And we continue to work on strengthening our balance sheet as we go forward. And we'll talk a little bit more about the sort of the industry results in a minute. I'll turn it over to Jeff Fritz to go through the financials.

Thanks, Brad. Welcome, everybody. Beginning with the revenues. Revenues for the quarter were $54.6 million, that's an 8% increase over the previous quarter, the fourth quarter of 2012, and a 23% increase over the first quarter of 2012 of $44.5 million. The revenues, of course, were tied to -- indirectly tied to our consolidated portfolio. It was aided by originations of $180 million here in this first quarter and the consolidated portfolio is up 9% for the quarter, quarter to quarter, and 31% compared to year ago. Moving to the expenses. $48.1 million for the quarter, that's an increase of 5% over the previous quarter and an increase of 9% over the year-ago quarter. We're really kind of falling into a pattern now on expenses over the recent quarters. We've had slight growth in the core operating expenses reflecting the growth in the business, but somewhat offset by realizing some economies of scale. And we've had, generally, decreases in interest expense over the last, I think, 5 quarters now as a result of the runoff of the higher cost ABS and those being replaced by newer -- lower cost ABS financings. And then the other pattern we've seen regularly is an increase in our provision expense for our credit losses, which have increased, but are in line with our expectations and based on originations and portfolio growth. Looking at the loss provision specifically, $15.1 million for the quarter, that's a 31% increase over the previous quarter and a whopping 200% increase over the first quarter of 2012. Again, those increases are very much in line with our expectations and forecast of budgets based on the growth in the originations volume and the growth in the consolidated portfolio. Pretax earnings for the quarter, $6.5 million, a 41% increase over $4.6 million…

Thanks, Jeff. First of all, going through some of the portfolio performance metrics. On the delinquency side, we finished the quarter at 4.16%, down from 5.55% at the end of December, and up slightly from March of last year at 3.51%. We're seeing, definitely seeing some impact from the first quarter tax refund season in the improvement, sequentially. We're up slightly year-over-year. And as folks have alluded to, tax refund delays I think definitely had an impact there. We would expect our delinquencies to improve through April, which is not typically the case. On the net loss side, annualized net losses for the first quarter were 4.23%, up slightly from the December quarter of 4%, and as well up slightly from a year-ago quarter of 3.9%. Year-over-year, we're up slightly, but compared to any of the first quarters in the last cycle, we're still at a much lower level. At the auction market, we saw a strong seasonal uptick in the first quarter. We were at 49% in the first quarter this year compared to 46.8% in the December quarter and 48% a year ago. That's tied to tax refund season as well. We'd expect, going forward in the year, to see a little bit of softening in that, but still we would expect a strong number given the industry dynamics of lower production in the last few years. Looking at the capital market side, Brad and Jeff have alluded that we did have a busy start of the year. We did our first securitization in March, the 13A, $185 million, lowest cost of funds ever for the company at $187 million. That deal was very similar to the last few deals where we had 5 tranches, a rate of [indiscernible] both S&P and Moody's and a pre-funding structure. And…

Thanks, Robert. In terms of looking at the industry, I think everyone -- we certainly hear a lot of comments throughout that the industry has become very competitive. I don't know that it's particularly getting more competitive than we've seen in the past. I think you sort of have a combination today of a few, what we'll call overly aggressive companies out there, buying somewhat irrationally because they either need the growth or for whatever reason, but we certainly see that often and it happens every -- certainly every cycle, and we see it on a relatively frequent basis. And for the most part, you let those people run on towards the cliff, whatever they're doing, and you don't worry about it. On the other side of the spectrum, we also are seeing, and have continued to see for the last almost 18 months, lots of new small start-ups. And to the extent they're well managed and well run, then they grow very slowly, so they're not particularly a factor in terms of what we're doing. To the extent they grow really quickly, then they join that first group where they're growing too fast and they cause their own problems. Within that environment, we've always -- it's somewhat repetitive. But in terms of our growth strategy, within that is we never affect our credit in terms of how we grow. We grow by expanding our geographic footprint and adding more marketing people. And as I've said many times in the past, you can put people in new markets and you're going to get some amount of business just because of your presence in that market as opposed to having to truly compete until you've really saturated the entire country. And even at this point, as much as we've grown quite…

[Operator Instructions] Our first question comes from Kirk Ludtke of CRT Capital Group.

You mentioned in the -- in your remarks that there are pockets where the market's becoming more competitive. And yet you're not -- your underwriting standards haven't changed. You may have mentioned this, but I missed it. Can you talk a little bit about pricing trends?

Sure. I think we're willing to compete on pricing not on credit. And so we've been a little surprised that this year we were able to maintain our growth strategy goals without really having to change the pricing. And that's probably much more because of the expansion of our marketing group. As I said, we added 30 or so people between spring and summer of last year until now. And so those people really gained their footing in the last 6 months of last year to where they were able to do lots of good things this quarter and, hopefully, in the quarters coming along. And so we really haven't had to compete, particularly, on pricing. We have kept their numbers about where we thought. I think we thought our discount could drip down to 3%. It's maintained closer to 4%. Our APR has sat around 20% the entire time, so we really haven't changed anything in pricing. And like I sort of mentioned, we've actually done a little bit better on the discounts, so we're very pleased with how that's happened. And again, I think in some certain places, there is more competition. Pick some place like Texas. We tend to see a lot more start-ups in Texas. There are a lot of bigger companies in Texas, so to pick a place where maybe they have been competitive, we've lost a little market share, it would be there, but based on the overall geographics, it wouldn't -- it doesn't really matter to us.

That's helpful. You mentioned that you're building more cash than you may actually need to run the business. Is there a level of cash above which you'd start using that cash to pay down debt, or do you have a target cash level?

For a minute, I thought you were going to say we're going to have a dividend. That's really not on the horizon. But yes, I think to the extent we build up more cash, that we continue on the trend line of building up, not excessive amounts of cash but more cash than expected, yes, we would continue to look for ways to pay down our debt. Our dividends are a little in the future.

Is there a level of cash that we should think about as a target level?

Well, I think sort of an easy way to think about it is, we have to have a minimum amount of cash on balance sheet, about $8.5 million. And for a long time, particularly during the lean years a few years ago, we would be skating right around that $9 million, $10 million range. Today, we probably carry something closer to $20 million to $25 million in cash, and so it's hard to say right off. One of the things you can do when you're sitting on cash is use it to supplement your warehouse lines. And so that's one area that we sort of get an advantage. In terms of how we're going to pay down debt, it's really when it comes due, the residual, the old residual, as we'll call it, is due in October. So there's a good chance we could pay that off if the cash continues to exceed what we expected. We have the remainder of our senior lender debt due next April. We would expect to pay that off as well.

Do you think you can pay that down with internally generated cash, or would that be -- would some portion of that need to be refinanced?

If trends continue, we'd probably do some portion of it refinancing. Certainly, to be safe, that's what we assume. If the cash continues to do what it's been doing, there'd be an interesting decision to make next April. We certainly could pay the debt this fall with cash. Next April, we have to see how we do the rest of this year.

Great. The share count moves around with the share price, and could you remind us the total number of shares and warrants and options that are in the money?

Well, I think at this point, if all the options and such were exercised, you could have something in the sort of 33 million to 34 million share range. It's a little complicated given there's a treasury stock method in terms of how the shares are accounted for. But the easy answer is as the stock continues to go up, those shares will become much easier to sort of see on the balance sheet.

Right, right. That's helpful. And the provision for credit losses was up, as you mentioned, a little bit. Is there a normalized provision that you can -- I know you don't give guidance, but is there a normalized level of provisioning that we should think about?

It's really the methodology of how we achieve a provision. You got us on what the normalized level would be?

Well, I mean, I think we'd be looking for it to settle in at around 7%.

Okay. So we're pretty close to that already. Okay, so it should level off. And then lastly, Robert, you mentioned the seasonality of delinquencies. Is this the new normal? Should we expect this cadence going forward?

I don't think so, Kirk. I mean, there's clearly some things that were going on in that with the politicians in Washington and the budget deficits, so they didn't start accepting tax returns until 2 weeks later than typical. So for the moment, we would say this is probably a one-off, but who knows.

[Operator Instructions] Our next question comes from John Hecht of Stephens.

Just a little bit more on the competitive environment. I'm just wondering, your key lending programs, where pricing and fees were, say, a year ago and where they are now. And is it across the board or is it only in a few select kind of cycle ranges that you're seeing the competition change?

Well, if you look back at sort of -- I think, from sort of the way we would look at it, the APR's basically been the same for the last couple of years. Our discount 3 years ago was nearly 10%, and so it's drifted from 10% down to 4%. And that's probably been distributed across all the programs in terms of what we've given up. And I think last year, our goal was to keep the discount around 5%, and we did just about that. Our goal this year was to keep the discount around 3%, and so we're expecting to give up some of that pricing, remembering that in sort of a fully normalized environment, our discount used to be 1.5 points. And so this year, we've done a little better than expected in that we're still running close to 4%, when we might have expected it to drift down into the low 3. And it may still do that. To the extent we look at our growth targets and such, we could give up 0.5 point whenever we want. But I would imagine -- again, if you're going to pick some numbers, we would expect the discount to stay around 3% this year, if not higher. But in terms of what we've given up since last year, what did the discount end last year at?

It was 4%.

Right. So we really haven't given up too much since last year, but the year before it ended at?

8% or 9%.

Yes, I mean I think within the last year, John, we have given up some. I mean, first quarter last year, we were around 7% on the discount, and we've strategically cut price to help volume growth.

Right. But I think what's interesting is that we went from 7% last year, ended the year at 4%, and we still have room to go, and we really haven't had to give up anything this year. That's a little surprising to us. But again, we have the room to go to 3% if we wanted to and still be within our targets.

But on the yield side, pricing, you mentioned, what -- anything there to talk about?

In terms of...

Other than -- I mean, you talked about discounts, but about pricing?

No, we're pretty firm in keeping our APR with a 20% handle on it, and it really -- it hasn't gotten close to 21%, but it certainly hasn't gone below 20% either. So we would expect to maintain that number.

And just to give us context, in, say, 2007, where the environment was fairly competitive, where were yields on that at that time?

5, 6 years ago, John, APRs were about 18%. So those were our coupons and our fees, as Brad mentioned, were between 1% and 2%.

Okay. So you still got -- it's still a much better pricing environment than it was then?

Absolutely.

Right. Both in terms of those 2 yield numbers and then when you have the overall Wall Street pricing, it's still way better so.

Okay. And then with respect to the securitizations, you mentioned the 5 tranches. Where are you selling down to with the 5 tranches?

Single B.

Single B. What's that? What's the kind of residual value that you guys hold after that in terms of the percentage of that to par?

We hold about 1%, John.

Okay. And do you -- Bob, where do you think spreads could go in the near term? You think they're stabilizing at the low end, or do you still think you might get some release?

Well, for us, remember, John, we still -- our senior tranche is a AA by S&P and an A1 by Moody's. So as we continue to show improved performance on financial statements and delever the balance sheet, we'll have -- I would say, within the next year or so, we should be able to get to kind of AAA levels. If we're able -- once we're able to do that, we should be able to bring our spreads in further. In terms of, kind of, with our current structure, we're probably -- we're close. I think deals that have continued to come out are still seeing very strong demand. So I think our blended spreads today for the next year are probably going to be in the same ballpark once we get to that AAA. On the senior tranche, though, we should be able to bring the whole thing in.

So it's probably a safe way to look at that would be, at some point, these numbers have to go up slightly. So if we do get to AAA, that will be a cushion against it going up, say, this year. So we might look at it as much as we might -- we have some little more conservative projections. It's probably not a bad guess to think our yields, at least for the next 6 to 9 months, stays the same in terms of our cost of funds.

Okay. In terms of the vintage analysis, how does -- I know it's young, but how does the '12 vintage look on a kind of static pool curve basis relative to other years?

It's still really strong, John. I mean, I would say you go back and you look at our 2010 vintage, it's running much, much lower than anything we've seen before in the history of the company, kind of mid- to high-single digits. 2011's a little bit higher. Maybe it gets to 10%. 2012 is a little bit higher than that, but still as good or better than anything we saw from kind of the first versus the last cycle, which '03 and '04 were 12%, 13%.

Okay, got you. That's good perspective. And finally, is there any other corporate debt that you guys can refi in the next few quarters? Or are we kind of -- in terms of your corporate interest expense, are we stabilized there?

Well, as I mentioned a little bit ago that we do have the other residual deal, which is around $14 million coming due in October. We could pay that off.

So what's that yield cost to financing?

About 13%. I think it's 12 7/8%. It's something like that. So we could take that piece out. But we really only have that piece, the new residual of $20 million, and then the $37 million of our senior debt that's due next April -- or not due next April, but we could pay it sometime next year. And so those would be the 3 pieces we look at. In terms of the retail notes, we probably aren't as concerned about paying those since what we can do is lower the rates as we continue to renew those.

I'm showing no further questions at this time. And I'd like to turn the conference back over to management for any closing remarks.

Well, thank you all for attending this call. I think as we sort of said and gone through it, we had a very nice first quarter. It's right in line with all we would expect. We also think it positions us for a very good year in 2013. We've ironically sort of been here before. And while it's nice to see that as we sort of get to repeat sort of what we've done in the past, we've been able to tweak things, improve things, so as much as this is sort of our third cycle through, we're at least starting out on the right foot to make it the best cycle we've ever had. So thank you all for attending, and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.