Q3 2019 Earnings Call

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Well, that's here isn't Mr., Charles Bradley, Chief Executive Officer, Mr., Jeff Fritz Chief Financial Officer, with some are Foleo services.

I'll now turn the call over to Mr. Bradley.

Thank you and welcome everyone to our third quarter carbon scores.

I think overall, we're happy with the results are not the results, we would kind of on the long term, but it is because most people know we've been talking about for several calls now you know we're sort of laboring through 2019 with much better prospects next year.

Still suffering through the accounting change, that's significant and having a material effect on some of the numbers.

We're also still going through the problems of the legacy portfolio. The good news there is the legacy portfolio is anything from 17 before so.

Radically 14, 15, 16 and 17.

Those years 14, 15, and 16 were not particularly good 17 was and the good news is 17 better than 16, 18, rather than 17, and 18, rather than 18, and I said that before not everyone. In the industry can say that but you know so we need to get through having the rest is portfolio run off currently the.

You know underperforming assets in the portfolio were about 25% portfolio that number should continue to decrease in even more rapidly as time goes by so you know as much as it doesn't work, particularly perfect today, it's got to get better.

Well, so we're starting to feel very competitive marketplace is people out there, but your real hard there's lots of PE firm backed companies that are you know again looking for growth and try to find an exit so we have that pressure as well, but having said that we're still probably projecting to grow you know 10 or 11%. This year. So it's pretty good well going away more detail in all those.

Our is after Jefferson through the financials.

Thanks, Brad a welcome everybody I will begin with revenues, which were 85.5 million for our third quarter, that's down to about a percentage point from our second quarter of this year of 86.3 million and down 11% from 95.6 million in the third quarter last year. The nine month revenues 260.

Point 1 million down about 13% from the nine months ended September of 2018, So as Brad mentioned and as we said we've been saying for sometime now were seven quarters into this transition to fair value accounting and slowly the revenue comps are beginning to normalize somewhat.

As the fair value portfolio is now overtaken the legacy portfolios, so where we are today.

Fair value portfolio represents 56% of the total portfolio and so we're gonna start seeing you know in the coming quarters, a little more normalization and be able to compare these periods a little more.

Normally are somewhat favorably.

On the expense side $82.7 million for that or third quarter, that's down <unk> percentage point from the June quarter of 83 point, Sixmillion and down 9% from 90.9 million in the third quarter last year. The nine month expense figures 251.8 million is down about 12%.

From the nine months of 2018 first nine months of 2018.

Most of that reduction most of the operating it.

Expenses and core expenses are reasonably flat.

But the big decreases in the the provision for credit losses in this quarter those losses those provisions for credit losses were 19.9 million that's down 3% in the from 20.5 million in the June quarter, this year and down 38% from 31.9 million in the third call.

Order of last year, a the nine month provisions for credit loss number 64.3 million this year compared to 108 million in the first nine months of last year. So the provisions remember only apply to the legacy portfolio.

As Brad alluded to we're still taking our medicine somewhat on those 15, and 16 vintages, but the 17 vintages show significant improvement compared to the earlier ones.

Pre tax earnings for the quarter $2.8 billion is flat with our June quarter, and down 40% compared to 4.7 million in the third quarter last year.

The nine month numbers 8.3 million compared to 13.9 million, a 40% reduction compared to the nine months first nine months of 2018.

Net income was 1.8 million again flat with our June quarter, this year and down about 44% compared to 3.2 million last year and the nine month or net income numbers 5.4 million as a 43 per day percent reduction from 9.5 million in the first nine months of last year.

The diluted.

Earnings per share was eight cents flat from the second quarter, this year and down about 38% compared to 13 cents for the third quarter last year and the year to date diluted earnings per share is 22 cents.

Compared to 38 cents, a 42% reduction compared to that first nine months last year.

So much really happening on the balance sheet, the numbers are pretty flat quarter to quarter. Our portfolio of did grow just slightly during the quarter. We did originate 262 million of new receivables, bringing the year to date numbers up to 755 million for the first nine months.

You can see when you look at the balance sheet, how the finance receivables is shrinking and the fair value mine is increasing as we go along here no changes in the warehouse financings.

The residual financings of securitization market and those balances will talk about a little bit later here in the call, but otherwise there's really nothing happening on the balance sheet.

Look at some of the performance metrics. The net interest margin was $57.6 million for the quarter, that's down 2% from 50.6 million in the second quarter this year and down 17% from 69.8 million in the third quarter of last year the year to date.

Net interest margin is 177.1 million and thats down 21% compared to the first nine months of last year.

So the fair value receivables of course, whose whose interest yield is net of the.

Expected losses are contributing to this downward trend.

And then the.

The other side of that coins the actual blended cost.

All of our ABS deals for the quarter was 4.5%, which was up just slightly from 4.26% and the third quarter of last year.

The risk adjusted NIM, which takes into account the provision was $37.7 million that's down 1% from the June quarter. This year and also down about 1% from the third quarter of last year and the year to date near risk adjusted NIM 112.8 million is down 2% from the first nine months of last year.

And what's happening here.

As as we as a fair value portfolio overtakes, the legacy portfolio the risk adjusted NIM and the net interest margin will converge and be the same number because the provisions for credit losses will eventually go away.

Core operating expenses for the quarter 34.9 million is down 1% from 35.4 million in the second quarter, this year and up 5% compared to 33.2 million in the third quarter of last year.

Nine month core operating expenses are 104.6 million, which is up about 3% compared to the.

First nine months of 2018, and as I said earlier, although we have significant reductions in provisions for credit losses, the operating expenses are pretty level.

As a percentage of managed portfolio those operating expenses were 5.8% for the quarter.

Thats compared Thats up down just slightly from 5.9% in the second quarter this year and up about 2% from 5.7 in the first excuse me the third quarter of last year.

And the non your.

Core operating expenses as a percentage of the managed portfolio, our 5.8%, which is flat from the nine months compared to the nine months of 2018.

And lastly in this category the return on managed assets as 0.5% that's flat with our second quarter of this year and down a little bit compared to 0.8% for the third quarter of last year and the nine months numbers are similar 0.5% for this year compared to 0.8% for the first nine months of last year.

Yes.

Moving onto the credit performance metric metrics the delinquency at September Thirtyth of this year is 5.74% that's up a little bit from 14.8% in the June quarter, and up a little more compared to 11.58% in the third quarter of last year and we talk.

About this I think a little bit and in the last call of one thing we've done during the course of this year beginning late last year and through the course of this year is significantly fewer extensions on accounts that are past due and so we're really working with our branch collection branches to.

The press that customers to make payments instead of granting them extensions and we've traded off of a few points of delinquency.

That exchange extensions in September this quarter were down about 380 basis points compared to the third quarter of last year.

Although the delinquencies are up the losses are pretty flat the losses for the quarter, 8.07%, that's up a little bit from 7.82% in the June quarter, and just a little from 8.03% in the third quarter of last year.

The nine month losses, again pretty flat from a trend standpoint, 7.96% for the first nine months of this year compared to 7.92% for the first nine months of last year.

We've seen pretty normalized and level results in terms of the returns at the auctions for our collateral hovering right around 34%.

All year, and Thats only down a little bit from 34.8%.

For the third quarter of last year.

Talk little bit about the ABS market, which continues to be a consistent shining bright spot in our business.

Our third quarter transaction was 2019 C, which we concluded in July of this year and tighter benchmarks and generally tighter spreads compared to the.

April deal resulted in a blended coupon of 3.36% with significant demand throughout the cap structure, our fourth quarter deal just completed a couple of weeks ago 2019 D had a blended coupon of 2.95%. This is the lowest blended coupon we've had on one of these deals since the second quarter of 2000.

15, and it was also sold during one of the busiest ABS weeks the year when there was over $7 billion of bonds in the marketplace. So we're very pleased about those results.

With that I'll turn it back over to breadth.

Thanks, Jeff I'm, focusing on sort of operations for a minute.

On the front end in terms of sales and marketing our focus has been to reevaluate the states I mean, the whole game here is to find the niches, where you can buy paper and so we look at both states with a good dealers with a good programs within states and so a lot of 2019 has been the focus of trying to figure out what areas, where we can get a competitive advantage.

In our programs in different states and it's been relatively effective like I said with all the competition out there we still managed to grow at about 10 or 11% this year.

Originations, we put in a new scoring model or an updated scoring model last year is performing wonderfully well as can be seen by the production as I said earlier 17 better than the 16 18 19 same thing. So we're very pleased and more importantly, as those portfolios season of the new production seasons, the results will improve even.

More.

One of things we've done this year, which was this a little bit of any trick is we were able to raise our APC orders that we charge by almost a full point from the low 18% over 19% and also lowered the fees, we pay for the deals, but still get better performing loans and that's probably the best indicator that were probably doing something relatively right.

There in that we're getting better paper, but we're going to charge more for it. So the whole process from the front end sales and marketing through originations and risk is really doing well and the problem is currently see that because of all those seven mentioned earlier once we get clear of the accounting change the the older portfolio performance.

Lots of good things has started to happen. So were more importantly, what we've done this year has been very very effective.

In terms of.

Collections.

As Jeff pointed out we lowered the extensions if you do the math and you put the extensions back in the delinquency hasn't gone up at all but.

There's a lot of focus on other folks doing too many extensions with regards to inch policy has always been very strong we didn't really have a big problem. We're trying to attack tack with a little different way and put back on the DQ and then pushed DQ down.

The other thing about what we're doing this year. This is also probably true for last year is we're not really growing we're only having modest growth of 10% or so and when you're not growing those numbers show could basically is ugly as they can possibly be and so when we can start growing again, our numbers will really look a whole lot better.

Other folks are going hand over fist and their numbers still on look very good. So there's some telling things going on in the industry, but for US you know with slow growth and still having pretty good performance, we think that the future looks good in terms of what we're doing once the market opens up little bit and we can grow.

Moving on to the industry like I said, it's still very competitive.

Having the lower interest rates out there creates better liquidity you give a lot of people, who maybe not have originated as well as they should a little more breathing room because of lower cost of funds.

We appreciate your request funds I'm not so sure it's in the not hurting us a little bit the industry, because I think with higher cost of funds you might push a few folks out beginning again to see a few small folks pull out.

Get out of the market, we would expect at some point that to continue with some bigger folks maybe next year.

As I said, what amount of liquidity in Wall Street, there's lots of money chasing all sorts of deals that shows in the securitization market. It also shows and lots of other fundraising activities, where you're getting probably some of the best deals. We can see in the last five or 10 years. So again that helps us it out sort of else, but we're doing what we.

Can take advantage of those opportunities and we'll continue to going forward now the real trick is of course to see if we could find some opportunities opportunistic acquisitions or do you get some more servicing if we can do that and again that would help out the time, but really 2018 going to end up being the trends in transition year in terms of most of the accounting.

But also getting rid of the drag of sort of lesser performing portfolios from 14, 15, and 16 and predominantly probably 16.

Katami, so it's sort of goods certainly from a consumer point of view.

They all seem to be doing well the unemployment again is the most important thing for us unemployment is fine.

So we have big Valvoline economies, good not particularly worried about next year, maybe the year. After he gets more interesting, but overall, we think the health of the economy helps our obviously our industry as we said before our consumers kind of the tip of the spear in terms of what's going wrong with the economy and they seem to be performing quite well still so we think that's another good sign in it.

Again, we would expect it to continue.

So again 2019, most get through 2020, hopefully be brighter things with that we'll open it up for questions.

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Thank you.

Our first question comes from John Rowan of Janney. Your line is open.

Morning, guys.

Good morning line.

Just one housekeeping item. So you had $40 million that targets in the quarter correct gets AIE back into that number.

That sounds about right.

Okay.

And what if I were to just look at the net charge off rate on the legacy portfolio, what number would that be extinct. The eight 8.07, that's inclusive of both legacy and the fair value portfolio correct, because that's an aggregate number right.

Right so what.

I'm trying to run out the the legacy portfolio, we need to different charge off figure for the legacy portfolio, which I'm I'm calculating is somewhere in the fourteenish percent range that sounds right.

We'll have to.

They dropped to circle back with you and I am trying to picture the disclosures in the 10-Q, if we break it out either in the fair value footnote or somewhere else.

But we don't get into that detail in the press release I can see that.

But I did that's a hard number there is no sense, we don't need to guess added I can get it for you John Okay, but you're going to continue releasing reserves right I mean windows I mean, there was a big reserve release in the quarter, obviously, just given the charge off relative to the provision I mean, when does that stop I mean at some point, you're actually not can have a reserve on the legacy portfolio and what where do you.

You see that can that cannot be in 2020, well what's going to happen is in January 2020, we'll have to make a decision on the legacy portfolio right. So we'll have.

These are the options one we could adopt fair value for the legacy portfolio, which I think weve ruled that out.

I would not do that option number two would be to take the.

The to defer adopting Cecil for one year, because the Fas be just in the last few months gave smaller reporting companies that option to defer adopting Cecil and the door number three would be to early adopt Cecil.

In January 2020, and put the remaining lifetime allowance established that allowance at that time, and so I think we're leaning towards door number three slightly but to haven't made that final decision, but at that point.

There would be no there would be a lifetime allowance in the legacy portfolio, assuming that allowances was adequate for the remaining life there would be no more provisions for credit losses on that portfolio.

Okay.

And then just lastly.

Brad I think you mentioned getting better rates on new loans right.

As we transition to the fair value portfolio.

Chad an important you know what the net rate is to the company right. So.

Can you give us idea what the yield is on what the implied credit costs are just in the fair value portfolio for new loans, we know what the net yield is to show on just that portfolio.

On the fair value on the new receivables on the fair value correct, yes, right. So yes, so when we take like in this quarter for example, we.

We originate receivables for the most part there coupons were around 19% for the most part in the aggregate we purchasing them at par and we look at the credit mix on those and make an estimated future losses and when we bake in the losses and do the the net present value and compute.

A flat internal rate of return, it's around 11% and its hovered around 11% for really every monthly and quarterly cohort. This year. Okay. So it's like 19% yield 8% last 11% net yield to CBS .

Okay, all right Thats it from me thank you.

Thank you. Our next question comes from Cowen Joseph with Jefferies. Your line is open.

Hey, good morning, guys. Thanks for taking my questions, Jeff just want to talk about rates in the impact on the business. Obviously, you guys gave us negative you've actually been able to increase pricing, but just seeing if you guys have seen any relief in the cost of funding side. I know you mentioned it was up on a year over year basis, but.

Sequentially did you get some relief.

Well in ABS deals, we do we put on is the lowest cost funds in four years and what's happening is.

Maybe if I look back over the last over the ABS deals over the last four years. We've had some some cycles are some ups and downs in that market and I think we did we did a few deals in 2000, though.

15, and 16, where the blended cost was about 4%. So what's happening is that some of the real cheap stuff going back to 15 is running off and we've got this kind of bulge in the middle with higher cost deals and that we're putting out some lower cost deals and so that the current blend is that for now.

Half or so we've got a really nice table in the 10-Q that takes all those all the interest expense components and shows kind of what the current quarter and the and the comparison over the previous year, but I mean, we certainly can.

We can start to.

Laments a little bit about credit performance at some of these deals going back to 15, and 16, we can limit to little bit about the competitive landscape and the difficult difficulty and growing the business. One thing we can't complain about as the ABS market.

Got it.

And then it looks like your recovery rate fell a little bit year over year can unique.

You are out your outlet for used car prices in your expectations there.

I think I think we feel good about that that space. It's really it's really normalized over the last two years in spite of lot of people sort of predicting more dire results there, but I don't think theres anything on the horizon that would suggest to us that those.

That market place is going to change grew significantly in the next 12 months or so.

Got it thanks very much for answering my questions.

Welcome again.

Thank you once again, if you have a question you mean press star one on your Touchtone telephone at this time.

Our next question comes from Jeff sang of JMP Securities. Your line is open.

Good morning player.

Okay.

Again, if you have a question. Please press Star then one.

One moment. Please you may disconnect it.

Again, if you have a question. Please press star one on your telephone.

I'm showing no further questions I'll turn the call back over to Mr. Bradley for any closing remarks.

Thank you. We appreciate everyone attending the call like I said good humor, most severe can't wait that those two month be over but this behind us, but a you know like I said there is our bright spots in terms of how we're running the company what we're doing to improve everything and Oh, all we need is sort of a clear field next year in Seattle shakes out so again, we pay.

For your time, and we will look forward to speaking with you next year.

Thank you.

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