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Edited Transcript of CPSS earnings conference call or presentation 19-Apr-19 4:00pm GMT

Q1 2019 Consumer Portfolio Services Inc Earnings Call

Irvine Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Consumer Portfolio Services Inc earnings conference call or presentation Friday, April 19, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles E. Bradley

Consumer Portfolio Services, Inc. - Chairman, President & CEO

* Jeffrey P. Fritz

Consumer Portfolio Services, Inc. - Executive VP & CFO

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Consumer Portfolio Services 2019 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 facts 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; and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services.

I will now turn the call over to Mr. Bradley.

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Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, President & CEO [2]

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Thank you, and thank you, everyone, for joining us on our first quarter conference call. The quarter was a little different than we might have expected. I mean, overall we're, very satisfied. The earnings were not quite what we had hoped for. Good news is probably that will correct itself.

First and foremost, I think, tax season as we've always known and probably doesn't exist anymore. The tax season tend -- now tends to be much more drawn out, much smaller. So you don't have a big first quarter impact we've had for years and over the last couple of years, it has diminished. And this year probably was the least existent or the most nonexistent tax season we've ever had. And so that coupled with the fact that we're not growing at some outstanding amount is going to -- is what caused sort of the lower revenue, and therefore, the lower earnings in the first quarter.

And there is another part in the accounting. We've switched to fair value. I'll let Jeff walk through that, but -- so we're almost sort of at the low point in terms of where we would be. As we switch, the fair value accounting tends to push the earnings out into the future. And right now, the portfolio is in the process of switching to fair value. It's almost 50-50. And so that again has had a negative effect in the earnings. That would be the bad news about the first quarter and again most of that is one time and shouldn't affect the future of the company at all.

The good news is the papers is really starting to perform. The '17, '18, and '19 vintages are all doing great. They are beginning to make the '15 and '16 vintages pale in terms of their performance. And it's exactly what we've been hoping for and working on for the last few years, and now we're finally beginning to see the results. And so we still have to sort of go through the tag end of the '15 and '16 portfolios, which are now getting pretty old, but again they're shrinking. Those are the portfolios that still have the provisioning. So there's a bunch of different effects that are causing that paper a little more effect on the earnings right now. But again, it's going to run off and then the '17, '18, '19 paper will become a greater part of our portfolio, and that should produce even better results for us. And so that's good and the losses are down.

So in the next level, the losses are down, which is also good, but the DQ is up. One of the main reasons the DQ is up is we had a real focus and doing less extensions and is working on the DQ. So it's not so much that the portfolio has a high DQ, it's just that we cut back and the use of our extension policies, trying to trim those down a little bit. So again, nothing that we would be particularly alarmed about, and then we would expect that to improve in the future as well.

Another highlight or good news aspect of the quarter was that we renewed the Fortress credit facility. So again, we have our 3 facilities in place also working the way we want them to. Another thing we did is with the APR, one of our focus has been to raise the APR back to a sort of a normal level. We raised it in the first quarter to 18.6%, that's up from 18.1%. Again, you won't see that affect just yet, but in the future you will. So like I said, as much as we're a little disappointed in the earnings for the quarter, almost everything else in the quarter is going very, very well.

And then I'll comment a little more in the different departments after Jeff runs through the financials.

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Jeffrey P. Fritz, Consumer Portfolio Services, Inc. - Executive VP & CFO [3]

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Thanks, Brad. Welcome, everybody. Let's begin with the revenues. Revenues for the quarter were $88.2 million. That's down 3% from the fourth quarter of '18 and down 15% from $103.6 million in the first quarter of 2018. And right there you can see really the impact of the transition to fair value accounting on the revenue side of the business. Anyway remember that the traditional portfolio, the legacy portfolio, as we call it, accrues interest at the gross amount that's on the coupon of the receivables approximately 18% to 19% for those receivables, but the fair value portfolio, which is everything since -- we've originated since January 2018 is sort of a net revenue where the losses are baked into the revenue number.

And so that portfolio, which represents 43% of the business now, the whole portfolio is merrily accruing along at about 9.5%, while the big portfolio continues to amortize off rapidly at the bigger number. The offset to that -- I'm going to skip to the provisions for credit losses. Provisions for credit losses were $24 million for the quarter. That's down 4% from the December quarter, but down 41% from the year-ago quarter. Now the provisions you remember for credit losses only apply to the legacy portfolio. And you can see the drastic year-over-year reduction, but in spite of that significant reduction, the credit performance of the '15 -- 2015 and 2016 vintages has dragged down the -- and increased the provisions for credit losses somewhat. And so we're a little bit in this kind of crosshairs, where we're in the transition to fair value accounting. We still have provisions for credit losses. They will continue to decrease, but we didn't get may be quite as much of a decrease as we'd hoped for this quarter.

The broader expenses $85.6 million for the quarter. That's down 1% from the December quarter and down 14% from $99 million in the first quarter of 2018. Most of our core operating expenses are really flat. There is a couple of decreased categories. We did have slight increases in the interest expense, which I'll talk about in a minute as we move down on the list here.

Pretax earnings for the quarter were $2.7 million. That's a 44% decrease compared to the December quarter and a 41% increase (sic) [decrease] compared to $4.6 million in the first quarter of 2018. Net income for the quarter $1.7 million. That's a decrease of 69% or $5.4 million in the December quarter -- fourth quarter of last year. However, you may recall, we had a $2.1 million tax benefit in the fourth quarter of last year that was kind of a one-off event. The $1.7 million is a 45% decrease from $3.1 million in the first quarter of last year.

Diluted earnings per share is $0.07. It's a 42% decrease from $0.12 in the first quarter of last year.

And moving on to the balance sheet, very little change really in the composition of the balance sheet. You can see in the finance receivables that the portfolio is decreasing from $1.3 million this year -- $1.3 billion rather this year compared to almost $2 billion last year. That's a 35% decrease in the legacy portfolio year-over-year.

And as I said, that portfolio now represents 57% of the total. Just below that in the balance sheet, you can see the fair value portfolio approaching a $1 billion, $997.6 million compared to $209.8 million last year when we had just begun the fair value accounting. No significant changes on the debt side of the balance sheet. As Brad said, we renewed the Fortress credit line in the first quarter.

Moving on to some of the other operating metrics. The net interest margin for the quarter was $60.9 million. That's a 6% reduction compared to $64.8 million in the December quarter and a 23% reduction compared to $79.5 million last year.

From a cost of funds standpoint, the all-in securitization blended cost for the quarter was about 4.2% compared to 4.0% in the first quarter of 2018. And we'll talk about the new securitization cost of funds as we move down the line here in a minute. The risk-adjusted margin was $37 million. That's a 7% decrease from the December quarter of $39.7 million and a 5% decrease from $39 million in the first quarter of last year. That's significantly influenced by the reduction in provision expense and then somewhat also influenced by the slightly higher blended cost of funds.

Core operating expenses were $34.3 million. That's down 2% from the December quarter of 34.9% and it's about flat year-over-year from a core operating expense standpoint compared to the first quarter of last year. As a percentage, those operating -- core operating expenses were 5.7% of the managed portfolio and that's down about 3% from the December quarter and also down about 3% from the first quarter of last year.

So, with relatively flat operating expenses and a slightly increasing managed portfolio, we've seen just a slight improvement in that metric. The all-in return on the managed portfolio 0.4% for the quarter, that's down about 50% from 0.8% in the December quarter and also down about 50% to 0.8% in the first quarter of 2018.

The credit performance metrics, as Brad said, the delinquency was 12% for the first quarter. That's up significantly from 8.7% for the first quarter of last year. We didn't get sort of the focused and recognizable tax refund season that we've seen in the past that significantly benefits the delinquency. And we also have, as I said in the past, an aging portfolio. So the portfolio is in the aggregate is about 23 months at March 2019, and that's 1 month, maybe 1.5 month older compared to last year. And we know that vintage portfolio -- static portfolio will have ever-increasing delinquency numbers.

However, the annualized net losses for the quarter of 8% were down slightly from 8.2% in the first quarter of last year. And so we haven't seen -- and we've noticed this in the past too, even as delinquencies have risen, we haven't seen a proportional increase in the credit losses.

At the auctions, really stable although not exciting returns at the auctions about 34% of our net balances being achieved at the auctions when we liquidate the vehicles.

Just moving back to the ABS market. So our first quarter ABS transaction we completed -- 2019-A, we completed in January this year. The market frankly was a little soft getting out of the blocks in the first week of January when we launched that transaction. Nevertheless, we achieved a blended coupon in that deal of about 4.22%, which was a few basis points less than we had priced in the previous deal of October 2018, and that was largely a result of compressed -- or drops in the benchmarks, really offsetting what were slightly higher spreads on almost all the classes of bonds.

And this is really a second quarter event, but you might have seen that earlier this week, we closed our second quarter securitization, or 2019 deal -- 2019-B deal. And in that transaction, we enjoyed a significantly tighter spreads and also relatively low benchmarks to achieve a blended cost of funds of 3.95%. So that's a significant improvement in cost of funds quarter-to-quarter, and also this transaction marks the first time in about 2 years that we were able to include a Class F single B-rated bond. And so that improves our leverage execution on that deal significantly compared to other recent deals.

And with that, I'll turn it back over to Brad.

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Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, President & CEO [4]

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Thanks, Jeff. And walking through some of the departments. Marketing, we really tried to turn up our focus on capture. We don't -- lots of dealers can press buttons and send you lots and lots of applications. It's an expensive process. We really want to get the applications we're going to be able to fund loans on. And so we've had a focus in the market environment on getting the capture up in terms of the deals we capture from the dealers rather than just getting them sort of in the system and sending us apps -- applications.

Also, we have continued to work on our flow programs. They are going very well. We have a one that's working, primarily right now. We have a couple more in the works. And the flow program is basically working with banks or bank-type lenders, who don't want to lend to subprime. And you work out a deal where you get a look at their turndowns. And then for us, it's actually a slightly better grade of paper. And so the whole process has worked rather well and we're continuing to focus on that, given that the market is still very competitive out there and with -- amongst our friendly competitors.

Collections -- excuse me, originations. We have a new scoring model working, and it's working very well. Our focus now there is to sort of look for those nooks and crannies where we can get good performing paper at good prices. That's really been a process, and it's working very well as well. So we expect the results start to continue to improve. As I said, the paper from '17, '18, and '19 is all very good. The '19 paper, hopefully, will the best of all, and that trend will continue. And then as we get rid of the legacy portfolio and sort of stay on this fair value, then we should see some real improvement in what we see out of those numbers.

And collections. We finally reached a point where we think our collection culture in terms of collecting the money from the customers without being too forceful and things like that. So we're within the regulatory boundaries. But again, we think that culture's finally arrived and the results are really good. All the branches are functioning very well. So as much as and I pointed out, the losses are down and DQs up, but again, that doesn't really tell the picture of how well we're doing in terms of collections.

And as Jeff pointed out, the auctions remained kind of flat and probably this is about where we sit for a while. And so the glut of new cars and the off-lease cars goes through, but again we've been sort of living in that area for long time. So that's fine.

In terms of the industry, I think, as -- a little bit tells the tale, it's still a waiting game. Everyone's curious as to what happens with Fiat Chrysler and Santander. Obviously, that's the biggest combination in our industry. Everyone wants to know how that's going to break up or what happens there. There's a few companies out there trying to do an IPO or IPOs. Everybody's curious to see whether that's possible. In the midst of that, I think, we're just trying to stay somewhat to keep our heads down and wait for that to come out. We've been all been waiting for it for a few years for that consolidation. We saw a couple of companies go away last quarter or the quarter before. We haven't seen any lately, but we would expect some more as the year continues.

As Jeff pointed out, the securitization market is doing great. It's probably as strong as it has been in several years. Even with the rising rates, we've been able to get better execution and almost as importantly, the demand for bonds is very good. As Jeff mentioned, we sold an F bond or B-rated bond for the first time in a long time. That just gives you an idea of how strong the market is, very important for us. Again, that we get the better pricing, but also that the market just continues to remain strong because that's the backbone and supporting how we fund loans in our industry.

In terms of the economy, economy still seems really good. We don't have any problem. As I said, the one thing we care about is unemployment. Unemployment is not a problem these days. The overall car market's slowing down some, but people still need cars to get to work. So we would expect that the market at least stay this way, if not improve, over time.

And finally, and sort of in the summary of what we're doing as a company and then looking at the first quarter, there is probably no better test of how a company performs than to have a slow-growing portfolio to see what kind of performance your portfolio really has. And that's in fact what we're doing.

On top of that, we've had to switch accounting to get to the fair value accounting and so that's an extra sort of bogey we have to get through. But the fact that we have an aging portfolio, we're not growing real fast at all, very modest growth in this environment. Yet, our numbers are doing fine and the newer paper is doing much better. And so those are all the kinds of things if you're looking at the industry and you're looking at companies in the industry that are very telling and very important. We were fast-growing like some of the other folks, growing like crazy. We would have ridiculously good delinquency numbers, ridiculously good loss numbers. They should too. If they don't, that should be an enormous red flag in terms of their future performance. So it's very easy to show good numbers if you're growing hand over fists and 50% to 100% annually. Try doing it when you're not growing so much and you're doing modest growth and then show those same numbers.

If you can do that, that's a company that's going to be there for a long time. And in the end will prosper when those other companies growing real fast, can't just sustain their performance and eventually falls over. This happened in the past. We expect it to happen again, and then we will be able to take advantage of the industry and have the opportunities we want to really grow and succeed again. So as much as the first quarter is a bit of a mixed bag, we think in the end it's a good stepping-stone for the future of this year and how we're going to do in the industry going forward.

With that, we'll open up for questions.

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Operator [5]

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(Operator Instructions) And I'm not showing any questions from our phone lines. (Operator Instructions) Thank you. And I am showing no questions from our phone lines. I'd now like to turn the conference back over to Charles Bradley for any closing remarks.

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Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, President & CEO [6]

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Well, I will highlight -- it's a little unfortunate we've done the call on Good Friday, but nonetheless we appreciate the folks who did listen and it is recorded, so everyone else can hear it next week. Again, I think, the quarter went well, and we expect to build off this quarter as we look forward in 2019. Thank you, all, for attending our call and Happy Easter.

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Operator [7]

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Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until April 26, 2019, at 3:00 p.m. Eastern Standard Time by dialing 1 (855) 859-2056 or (404) 537-3406, with conference identification number 3479959. 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.