Consumer Portfolio Services (NASDAQ:CPSS)
Q4 2012 Earnings Call
February 05, 2013 1:00 pm ET
Charles E. Bradley - Chairman, Chief Executive Officer and President
Jeffrey P. Fritz - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Robert E. Riedl - Chief Investment Officer and Senior Vice President
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.
Charles E. Bradley
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 was to do one every quarter. So in 2012, we managed to do that, having done 3 in 2011, we did 4 in 2012, and we would expect now to be in normal -- back to sort of our old ways of doing them quarterly.
The other big thing that we did in the fourth quarter and for the year was to reverse the tax asset, or the accrual for the deferred tax asset. That really does wonders for our balance sheet. We've been sort of waiting to get that done, and we just needed to get enough profitable quarters behind us. And so I think that certainly makes the balance sheet look a whole lot better going forward. And as we now continue to grow and the earnings continue to grow, the balance sheet should strengthen considerably, as we continue to work on, in the future, lowering our leverage -- or continuing to lower our leverage, paying off some more debt and increasing that retained earnings section.
Also, as I mentioned, the stock price. We were probably very hopeful the stock would kind of start paying attention or moving along with the results we put out. Careful what you wish for, now that the stock seems to be running a bit, but I'm sure that's not a bad thing. We're very happy with what that's -- what's going on in the market. And also, almost more importantly than the price itself, that we're actually starting to have a little bit of a following and we're getting in the volumes. The average daily volume is now in excess of 100,000 shares a day, which, for anyone following, used to be as low as 10,000 or 20,000 a day. So as that continues to improve, it's another strong step in terms of what we want to do going forward.
That's about, I think, the highlights of the quarter. As you said -- as I said, overall, just about exactly what we'd hope for, and I think that's always a good thing.
With that, I'm going to turn it over to Jeff Fritz to go through the financials, and then to Robert Riedl to go through capital markets and credit quality.
Jeffrey P. Fritz
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 2011. This is pretty obvious, the provision expense is tracking and is going to increase as long as the originations are increasing and the consolidated portfolio is increasing.
Pretax earnings, $4.6 million for the fourth quarter, that's up 70% from $2.7 million for the third quarter, and up, well, very significantly, from $200,000 in the fourth quarter of 2011. You may recall that the fourth quarter of 2011 was our first profitable quarter since the second quarter of 2008. The full year pretax earnings, $9.2 million, again up significantly from the $14.5 million full year loss in 2011.
The net income, the after-tax net income, $64.8 million compared to $2.7 million in the third quarter and the $200,000 income, net income, in the fourth quarter of 2011. For the full year, $69.4 million and, again, that's compared to the $14.5 million loss in 2011.
As Brad pointed out, and as the press release covered, we reversed, in the fourth quarter, a $60.2 million valuation allowance on our deferred tax assets. The reversal is the result of our conclusion that it's now more likely than not that those tax benefits, represented by the deferred tax assets, will be utilized in the future.
The diluted earnings per share was $2.20 for the fourth quarter. That's up significantly from $0.11 the third quarter and up very significantly from the $0.01 for the quarter last year. Year-to-date, diluted earnings per share, $2.72, compared to the loss of $0.76 a year ago. Remember, too, that the third quarter results and the full year 2011 results had no tax expense or benefit in any of those periods.
Moving to the balance sheet. Cash in the balance sheet, $13 million, that's up a little bit from $10.5 million in the third quarter, and also up a little bit from $10.1 million a year ago. Our restricted cash balances of about $104 million includes $45 million in pre-fund proceeds for our 12D securitization money that was released in -- after the end of the year in January, and was used primarily to pay down advances on our warehouse lines of credit. Looking at the finance receivables. The finance receivables, net of the allowance for loan losses, was $745 million at the end of the year. That's up 11% from $670 million in September of 2012, and up 47% from the $506 million a year ago.
Another asset-earning component, the Fireside portfolio, is about $60 million at year end, and that's amortized significantly from $77.5 million in September and $192.6 million a year ago. The Fireside portfolio is amortizing rapidly, but I think we'd -- we've seen that to be a very good acquisition for us in terms of its earnings, the acquisition we did back in September of 2011.
Looking at the debt. The warehouse lines at the end of these periods, the fourth quarter, the third quarter and also the fourth quarter last year, has been pretty steady at around $20 million. Our strategy of using prefunded structures in our ABS deals has helped us to minimize utilization of the warehouse lines and saved a little bit on interest expense for those facilities.
The residual interest financing has remained flat for the consecutive quarters, third and fourth quarters, although it's down a little bit from $22 million a year ago. The securitization balances are up significantly, reflecting our 4 ABS deals that we did in 2012. Although we did clean up 7 deals in 2012, older legacy deals, higher interest rate deals, and replaced much of that debt with the lower securitization debt of these 2012 financings.
The Fireside debt is winding down and the long-term debt changed only slightly, $73.4 million at year-end compared to $76 million at the end of the third quarter and $79 million a year ago. There's a couple of components to that debt that have paid down a little bit throughout 2012.
Our managed portfolio now is $897.6 million at the end of the year, that's up 6% from $845 million in the third quarter, and up 13% from $795 million a year ago. Again, we've got steady originations growth and, I already mentioned, $150 million for fourth quarter and $552 million for the year.
Looking at a couple of the performance metrics. The net interest margin for the fourth quarter, $32.9 million, that's up 16% from $28.4 million in the third quarter and up 64% from $20.1 million in the fourth quarter of 2011.
Year-to-date, net interest margin, $107.8 million, that's up 64% from $60.1 million for the full year 2011. Our net interest margin has really benefited from the low cost of funds associated with the 2012 securitizations, and also helped by the 7 cleanups of the older securitizations done in 2005, '06 and '07, throughout 2012 that were cleaned up.
The risk-adjusted net interest margin, $21.4 million for the fourth quarter, that's up 13% from $18.9 million for the previous quarter, the third quarter, and up 29% from $16.6 million for the fourth quarter of 2011. The full year net interest margin is $74.3 million, again up significantly 29% from $44.6 million for the full year 2011, a significantly improved risk-adjusted net interest margin, even though our provision expense has increased as a result of the growing portfolio.
Our core operating expenses, now these numbers are starting to reflect our leverage, our operating leverage. The core operating expenses, which exclude the interest in the loss provision, were $16.8 million for the fourth quarter, that's up only 4% from the third quarter and up only 2% from the fourth quarter of last year. The full year core operating expenses, $65.1 million, again up only 2% from $59 million for the full year 2011.
As a percentage to those core operating expenses, as a percentage of our average managed portfolio, 7.6% for the fourth quarter. It's actually down 3% from 7.8% in the previous quarter, the third quarter, down significantly, 7%, from 8.1% for the fourth quarter of 2011. The full year core operating expenses as a percent of the average managed portfolio, 7.9% in 2012, down again, significantly, from 8.3% for 2011.
And with that, I'll turn it over to Robert Riedl.
Robert E. Riedl
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.
Charles E. Bradley
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 terms of the overall economy, I think as much as everyone sort of maybe globally complains about the growth of the economy, the slow growth of the economy is very good for us. It really drives those low rates. And the continued low rates should last through the end of the year at least, and those low rates really do wonders in terms of our securitizations. So we're very happy about all that. Also, I think consumer confidence is finally starting to improve and that means people buying more cars. Everybody has certainly seen new cars or new car sales are continuing to grow. We're not quite back to the old levels, but we're getting there. And yet, the age of cars on the road still remains at almost an all-time high. So you got an awful lot of factors, both within the industry in terms of lighter and not much competition, to also the overall economy being very well situated for our company in this industry, our industry and this company, in particular. So we're sort of pretty of happy about all that.
In terms of our future and with this upcoming year, we're going to continue to expand our marketing footprint by adding more marketing people. We started doing that last year. We basically hired everyone necessary in the originations department and the marketing field, to do about $80 million a month. We're currently running at about $55 million to $60 million in monthly originations. I think we've said in many different calls that our overall goal isn't really that aggressive, it's to get back to where we were. And back in the day, we got to about $120 million a month. So even if we're running around $60 million, we're only about halfway to our established goal. And again, we've already staffed up enough to do about $80 million per month this year. So if things kind of go the way they're supposed to, we should in great shape in terms of accomplishing those goals.
In terms of the growing portfolio, we actually, as much as we've bought a lot of paper in the last 18 months or so, the overall portfolio hasn't grown that much, and only now, is beginning to see some significant growth. We've gone from about a $790 million portfolio to an $890 million portfolio. Again, we used to have a $2 billion portfolio. So we kind of think we're pretty well set up to handle it. But we will, this year, finally start seeing some growth in collection staff. Our facilities and our collection branches are all set to do that. So again, we don't see any real issues in terms of keeping the proper amount of people to sort of keep going, in terms of getting -- establishing the objectives we want to do and making it all work.
Other things we're going to try and do this year is we'll probably try and refinance some of our more expensive debt, maybe pay down some debt as we continue through. I think, again, the capital markets, being as strong as they are, and sort of a lot of money out there looking for a home, we can find some real opportunities in terms, to get some better deals our balance sheet.
Also, I think it's apparent that we'll continue to focus on our economies of scale. We've had a lot of time, developed a lot of systems and efficiencies, in terms of how we do things. And so as we really start to grow some more, those efficiencies and economies will really kick in. I think as Jeff pointed out in some of the numbers, we're going to put some real operating leverage on our growth. Ironically, we're going to try to put some real operating leverage on our growth, while we try and delever our balance sheet. So I think that -- those 2 things together could have some real good results.
With that, we'll open it up for questions.
[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?
Charles E. Bradley
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.
Charles E. Bradley
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.
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