Consumer Portfolio Services, Inc. (CPSS) Q2 2013 Earnings Report, Transcript and Summary

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

Thank you, and welcome, everyone, to our second quarter earnings call. As you can see from the press release, in the number, we had a very good quarter. It's probably actually a little bit better than we expected. Our overall plan continues to run exactly the way we would like it to in almost all regards and so we're very pleased with the results. Originations are continuing to grow almost exactly as we had sort of planned for the year. It might be a little bit better, but it's at the -- a good pace and the pace we kind of want, so that's working out well for us. Credit performance remains in line with our expectations. We had initially, in sort of 2010, 2011, operated a little bit tighter as we got started again, and so now we've gotten to sort of exactly the range of lending we were supposed to always be in, and so we're very happy with where we sit in the credit spectrum today. And also, the capital markets, as much as they've gone a little bit tighter in terms of investors looking for a little bit more yield, overall, they remain wonderfully strong for us and still represent, historically -- almost historic lows in terms of our cost of funds. So all those things combined have produced a very good quarter and continuing a run of good quarters, and we would also expect that to continue in the future. With that, let me turn it over to Jeff to run to the financials. Jeff?

Thanks, Brad. Good afternoon, everybody. Beginning with the revenues for the quarter, $70.5 million, that's up 29% from $54.6 million in our first quarter this year, and up 60% from $44.2 million in the second quarter last year. The 6-month revenue is $125.1 million, that's up 41% from $88.7 million for the 6 months ended June of 2012. We had an unusual item this quarter of a $10.9 million gain on cancellation of debt, Brad can talk a little bit more about that later. But without that, we had sort of the same kind of the revenue improvement in growth we've been seeing over the last few quarters aided by new originations in the quarter of $204 million, and also saw growth in the consolidated portfolio, up 11% for the quarter and 35% over the prior year's period. Looking at the expenses. $61.9 million for the quarter, that's up 29% from $48.1 million for the first quarter and up 45% compared to $42.8 million last year. The 6 months' expense is $110 million, and that's up 27% from $86.8 million for the prior year's 6-month period. Also on the expense side, one unusual item, $9.7 million in contingent liability accruals. Again, Brad is going to expand on that a little bit. Otherwise, we have seen pretty much what we've seen over the last few quarters. Some increases, nominal increases in the operating expenses such as employee costs and G&A and decreases in interest expense over the last few quarters due to improve ABS cost of funds in the more recent deals compared to the deals that are running off. Moving on to the provision for credit losses, $17.4 million, a 15% increase over $15 million in the first quarter and a significant 126% increase over $7.7 million in the second…

Thanks, Jeff. Starting with the asset performance metrics. Delinquencies at the end of June were 5.16%, that's up from 4.16% at March and up from 3.81% a year ago. In the losses. Annualized quarterly losses were about 4% in the second quarter, down from 4.2% in the first quarter and up year-over-year versus about 3.2%. On an annualized basis, the net losses for the first 6 months were about 4.12%, up from 3.53% a year ago. And as Brad mentioned earlier, the metrics are up a little bit year-over-year, but we expected that as kind of the newer and larger origination years of 2012 and 2013. Credit performance is tracking a little bit higher than the earlier 2010 and '11 vintages, so that's in line with our expectations. In terms of how we did at the auction market, for the June quarter, we were at 48.6%, down slightly from the first quarter of 49% and compared to a year ago, at about 49% also. Turning to the capital markets. Jeff mentioned we completed our second deal of the year in June, a 13B, $205 million, and it had a blended cost of 2.34%. Structure-wise, really almost identical to the 13A transaction. We had 5 trenches, AA at the most senior, down to a B and rated by both S&P and Moody's. We also had another -- had a pre-funding component of $64 million in there and we also included $7 million of coal receivables from our kind of our last legacy deal from the 2008-A transaction. The blended cost was up a bit. The last of our March deal was about 1.89%, so about 45 basis points increase. That was -- we came to market just as the Fed was talking about reducing some of their quantitative easing measures and…

Thanks, Robert. And in terms of looking at the operating parts of the company, these days, we're very focused on marketing. As people may recall, when we scaled back, we kept virtually all of our collection, a lot of our collection personnel, and we also sort of moved some origination people around, so we have the core folks as we started to grow again. On marketing, we had to lay off a lot more people, so our real focus in sort of growing and getting back into the market was in marketing. Today, we now have 93 marketing reps, up from 75. We've grown that from -- we started at 20 a couple of years ago, so we've done a very good job of expanding our marketing force. I think our goal is to get to 130, 140 over the next year. By having more marketing people in the field, that's the way to grow as opposed to sort of competing in given markets. As we've said all along, our goal is at geographic expansion and expanding our footprint and there's an awful lot of deals out there and lots of places for us yet to go. So we think that's the way to do it, it's worked out very well for us and we will continue to push in that direction. In terms of originations, we've done a very good job of increasing our staffing to accommodate the growth and, probably, as best as we've ever done it in the past when we've grown, and it's probably true with many companies. As you got a big growth surge, it's very hard for the originations folks to keep up. In this new sort of growth time or this cycle, we've done an excellent job of having almost no hiccups whatsoever…

[Operator Instructions] And our first question comes from the line of David Scharf from JMP Securities.

Obviously, you covered a lot, but maybe just following up on a few items, Brad. First, with the FTC matter, and it sounded like it's pretty much in the late innings towards getting resolved. Is there anything in revised collection patterns or anything within the proposed settlement that we should think about as factoring in how we look at delinquencies and recoveries near-term? I mean, are these material changes that impact collection costs or is it just sort of minor changes around the edges?

Well, it's an excellent question. I think it's almost the sort of -- it's really -- a little bit sort of revisit the culture of how you collect loans. I mean, I think, over time, there's a lot of -- you call at people -- we always used to say we collect like a squeaky wheel, we call a lot. And I think sometimes they may get into a stream you sort of call too often and things like that. And so all we've really done -- and it's not so much -- it's more, to be honest, it's sort of the staff. The staff has this tendency to -- they really want to improve their numbers and what good collectors they are. And eventually, the important thing from our point of view, in the management point of view is to have the controls in place that we properly monitor that. And as much as 10 years ago, 15 years ago, the technology didn't exist to really do that. And today, it does. And so we put in a lot of technologies where we can train the collectors to be more effective as opposed to being more aggressive. And I think that's probably maybe the key to how we describe what's going on. Overall, I don't really -- we don't foresee it having any effect on performance. I think it's much more just sort of making sure that we're operating within the lines and doing everything the way we should be doing. And we put in a lot of education and proper training for our collectors, so they're making the right, most effective calls. It's almost like saying, we're training to do it better, not more often. So overall, we don't expect the results to change remarkably at all. I mean, maybe the DQ would be just a little bit higher on a going-forward basis but, again, we've been running at dramatically low DQs. And in the end, certainly, what we tell everyone, and it is the most important, is we care about losses, not about delinquencies. And so we might see a slight rise in that, but we've already done a lot to make all those changes.

Got it, got it. And along -- just kind of -- just so I understand jurisdiction. I mean I know the FTC has purview over the fair debt collection practices act. I know a lot of collection agencies and debt buyers have also run into issues at the local level from state AGs lately. Is the FTC, at the federal level, kind of the only issue that's propped up on the collection front?

Yes, it is. We haven't seen anything else. I mean, certainly, all we hear is about the CFPB as well. We haven't seen them or anything. So it's just -- this is sort of all we got. And like I said, it was almost, in some ways, part of the education and part of the reinforcing of what we're supposed to be doing. So overall, it was -- it worked out fine -- working out fine, I should say.

Switching to just competition, you, obviously, you addressed it in a lot of detail. I'm just curious, given the kind of average discount right now. As we kind of move in to the back half of the year, did you have a sense that in order to maintain the kind of volumes that we're going to see, perhaps, some price cuts coming up imminently or do you think that 3% discount is still a good figure to hone in on?

It's another good question because the discount, when we started the cycle, it's like 9% and it's down to 3%, so it's easy to see that where we're giving is on the discount. And I think also, there has been some government talking about all these different fees associated with our car dealers, so loans and all. And so, it seems that that discounted fee is one of their interest spots. So we don't really mind giving it away. Having said all that, we're giving away incrementally as we really have an effect in different markets. For instance, in the last quarter or so, we picked a few states and lowered our discount and had dramatic increases in the capture of volume. And so that sort of tells you that, to the extent you're willing to cut some price, you can really go in and get territory. If we wanted to, we could do a bunch of things and grow probably too fast but, of course, that's not the plan. And -- but yes, over time, I would expect the discount to dwindle down some more. Being now, it's 3%, there's not a lot more to dwindle, but you could probably expect that over time.

Got it, got it. And lastly, for now, I think in the recent past kind of talk about maybe $750 million, $850 million of originations this year, is it still a good range to focus on for us?

Yes, that should be right about there.

Our next question comes from the line of Kirk Ludtke from CRT Capital.

What actually triggered the reserve? Was it the $9.7 million reserve? Are you -- would it -- have you essentially reached agreement on the number or...

No, we're still talking to them about that. But remember, that was over a variety of different issues that -- or different things that we thought. There's a few -- we're always subject to some class action suits and things like that, but there's a variety of different little legal things we decided to put some money away for. So -- but we haven't reached agreement on the FTC thing, though we are talking to them about it currently.

That's helpful. So the $9.7 million, is that -- would you think that that's inclusive of all the litigation or is there other...

Yes. And we'll be fully reserved across-the-board.

Great. And the timing of the payment, or any sense for when it you might have to come out of pocket?

Not at this point.

Okay. But it could be something that could be spread out or how does it typically work?

Yes. There's a bunch of factors to how that would happen, which probably aren't worth getting into on this call. But there's return of some money, there's a variety of things. But we'll sort of have to see how that plays out.

But, keep in mind, Kirk, remember that our liquidity right now, as Brad had mentioned, is about as good as it's ever been. So we wouldn't anticipate there being kind of a material change in that based on -- or the final payouts on this.

Right. That was my -- actually, it's a nice segue into my next question, which is -- have you, do you have a target level for cash and your corporate debt?

Well, yes. A lot of cash and no corporate debt. Certainly, as everybody knows, our goal -- we got caught a little bit over-leveraged in the last recession, where our major goals in life is to make sure that doesn't happen again. And so as much as we are sitting on a lot of cash, our goal going forward is to retire corporate debt as it comes due and get in a position within the next year where we have no corporate debt. And so -- some of the cash we used for that. I think having a liquidity is a strong position to be in. One of the things I did mention earlier in the call was that we're always looking for acquisitions. Acquisitions appear to be sort of far and few between. There's a lot of competition out there on Wall Street for people look for places to put money. And so we haven't really had any opportunities along those lines, but to the extent we did, that would be handy to have the cash. But predominantly, our positioning on the cash is to, a, use the cash, reduce our corporate debt, as it comes due; and b, to have lots of cash to the extent we might need it for a rainy day or a corporate opportunity or any such event.

Okay, that's helpful. And I -- every quarter, you buy some shares. And I am just most curious, what are the circumstances that lead to those share repurchases?

In this instance, we didn't actually purchase though that's a disclosure, obviously, in the 10-Q. We didn't actually purchase those shares in the open market. We had a lender who exercised a warrant and they net exercised, and so those shares were canceled. So it's treated like a buyback but it wasn't actually buy back in the market.

Okay, great. So it's -- and then with respect to your -- I know you had mentioned, you're still able to grow by finding, I guess, under-covered geographic regions. You probably -- what is the -- how many lenders typically service the typical dealer that you're targeting?

I think a dealer probably -- well, it's easy for a dealer to buy ones as many as he can. But my guess, roughly, from what we know, is a dealer can use anywhere between 5 and 12 or 5 and 15, depending on size and sometimes if it's a chain. And so it's really easy to go into a market, particularly -- not so much even smaller markets, but any dealer sitting there that has 3 or 4 lenders. When it comes to our sort of niche, we're one of the bigger ones. And so, as I've always said, whether it's GM Financial or Santander or whatever it is, everybody buys a little bit different. And so you can coexist just rather peacefully amongst a bunch of these guys. There's times where Capital One or whoever might want to really be aggressive and buy everything and -- because they're big and they can do it, then you might lose a little of that market for a moment. But generally, that doesn't appear to be the consistent play. And so, really, in terms of our geographic expansion, you're looking to be the fifth lender in or something. But again, of those 5 or 6 or even 10 lenders, you probably are only going to have 2 guys or 3 guys even really buying close to what you might have been buying. And yet, even then, that would be okay. Lots of times, we're still the only one.

That's helpful. And so, how do you -- do you have a visibility as to how big a pool of lender or of dealers there is out there that are still good opportunities for you?

You could certainly use a number of, probably, in excess of 15,000. Right.

Okay, so that's -- I guess, that's a little bit of runway bus.

Yes, there lots of runway.

[Operator Instructions] Our next question comes from the line of K.C. Ambrecht from Icecap.

Why -- just following up on that other -- last caller. How big do you think this subprime auto market is?

We usually generally go with $60 billion to $80 billion annually.

Okay. And you're doing right now, $75 million a month, and you want to be doing $100 million to $120 million a month next year?

That's the short-term goal, yes.

Right. So that's up 3% to 5%. Okay. And then the cash position, that's great to see it's at $60 million. I didn't realize that the -- where do you think it would be this time next year, if you didn't know other corporate actions? And how fast is that growing?

Well, not counting if we didn't retire debt with it? What do you think?

Yes.

We're probably building $2 million to $3 million a month, K.C., and potentially, a little bit more, if we do nothing because -- but remember, we had some residual debt that's coming up next month that we'll probably retire, that's $14 million. And then there's the Levine debt of $38 million in next year, and so...

Okay. And then like the Levine debt, like what's the interest rate on that? It's pretty high cost, right?

13%.

Okay. So if you were to take that out, would you want to refi that or take out the whole debt?

At this point, and that's sort of -- it may not the -- the different way to ask the question. But certainly, we have 2 pieces of corporate debt. The $20 million residual piece we just did will be paid out of cash flows to the deals -- the securitizations associated with that residual. So -- and sort of in terms of the way we look at the world, we have the $38 million for Levine due next June and then we have the $14 million of residual that's due in September. And so it's easy enough to say, we could use our cash to pay both of those without raising any other money. And generally speaking, that's probably what we'll do.

Okay. And my last question is, Drive Financial is scheduled to go public sometime later this year, early next year? Do you guys come out -- are they a good comp to CPSS?

It's a great question. I think we're all eagerly waiting to see how the market perceives that deal. I mean, they're a large, subprime financier, they probably have a wider range in terms of what they buy than us and, obviously, a whole lot bigger. But that's a -- it's a good way to -- it will be another good comp, for sure.

This does conclude the question-and-answer session of today's program. I'd like to turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you, all, for attending. I heard -- clearly those were really good questions. Like I said, it's pretty much steady as we go. We're very pleased with -- I think, in one hand, we're executing the plan we've set out to execute 2 years ago. I think we are probably somewhat being advantageous in terms of the capital markets and even the overall structure of our economy and everything else. And so, that's all aiding us. And as some people have said, at some level, we have the wind in our backs in terms of where we're going on this. So this is all good. We're happy with the quarter. We're expecting the year to continue, and we're hoping for a nice future. So thank you, all, again, and we will be talking to you next quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until August 16, 2013, by dialing (855) 859-2056 or (404) 537-3406 with a conference identification number, 30267175. A broadcast of the conference call will also be available live and up to -- 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.