Good day, everyone and welcome to the Consumer Portfolio Services 2017 Second Quarter Earnings 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, and Mr. Jeff Fritz, Chief Financial Officer. I will now turn the call over to Mr. Bradley..

Thank you and good morning, everyone joining us on our second quarter conference call. I guess easy way to describe the quarter is business as usual.

As everyone knows over the last couple of years, we’ve decided to slowdown and just weighed out the problems within our industry and meanwhile focusing on internally just improving every part of our business. To that end in the second quarter, a few highlights.

As I said, it’s continued focus on modest growth with an emphasis on credit quality and collections. And that all seems to be working pretty well, and I’ll run through that more specifically a little later. Other highlights were we renewed our credit line with Fortress, and I think actually we’ve announced in April but it's part of the second quarter.

And so again they keeps us with three active warehouse lines, which is what we need. And it's about exactly what we want right now. So that’s all going quite well. Also, we did another securitization through our usual four securitizations per year.

This one was probably as successful as any that we’ve had in the last few years, it was the tightest I think we put this in the release. That it was the tightest spreads in three years on securitization. And what that really means is that the demand for these bonds in marketplace is only increasing.

And I’m sure everyone aware that there’s lot of money out there and so auto bonds become more and more popular. Even though that the Fed is raising the rates as we go, our cost of funds is basically staying flat. And that just is because of the tightening in the spreads, so that’s sort of a positive we may not have expected two or three quarters ago.

We also increased our allowance to 5.5%, 6% up from 5.02% that’s a fairly substantial increase. Again, with our focus on credit quality and launching the portfolio, we might expect that to continue in the future. But again, another good spot in terms of what we’re trying to do.

Also, we continue the stock repurchase program and purchased 540,000 shares in this quarter, and that’s about give or take 500,000 shares is what we’re aiming to purchase per quarter. That is continued and is obviously a good part of what we’re trying to do.

I’ll get into more specifics and some of the operational areas after Jeff runs through the financials..

Thanks Brad. Welcome everybody. We’ll begin with the revenues. Revenues for our second quarter were $110.1 million, it’s a 2% increase over the March quarter of this year, the first quarter of this year and a 5% increase over the second quarter of 2016.

For the six months ended June of 2017, $217.7 million that’s 6% increase over $205.6 million for the first six months of 2016. So you can see that the revenues are increasing as the portfolio continues to grow, even with somewhat slowdown in originations over the last nearly six months or almost a year now.

We did have $234 million of new originations in the quarter, and that’s $464 million for the year. So the portfolio continues to grow modestly, up 1% for the quarter and 4% year-over-year.

To the expenses, $102.1 million that’s 2% increase over the first quarter of this year, which was $99.8 million and that’s 10% increase over last year’s $92.6 million in the second quarter. For the six months, $201.9 million of expenses that’s 12% increase over $181 million last year.

Sequentially, the growth for the second quarter compared to the first, the growth in expenses is almost entirely from interest expense and provision for credit losses. We’ll talk a little bit about both of those categories in little more detail.

And we did add just nominal year-over-year growth in the operating expense categories as the portfolio did grow, as I said, about 4% year-over-year.

Provisions for credit losses, $48.5 million for the quarter, that’s a 3% over the previous quarter, the March quarter of this year and 9% increase over the $44.4 million for the second quarter of last year. Six months provision for credit losses $95.7 million, an 8% increase over the six months last year.

And so for the Q2 provision reasonably stable credit performance, actually some seasonal improvement in the credit performance was seen. And then also keep in mind as we look at, Brad mentioned the allowance, the increase in the allowance. We have got some increases in the allowance for credit losses.

And one thing that’s happening in the portfolio now is that with the growth levels where they are, the originations going so where they are, the portfolio is seasoning somewhat quarter-after-quarter.

For instance, where we stand right now at June 30th, the portfolio’s weighted average age is about 19 months and that compares to 16 months a year ago at June 30, 2016. So portfolio is aging and that’s going to impact some of these metrics in terms of credit performance and the amounts of the allowance and provisions for credit losses.

Pre-tax earnings of $8 million for the quarter, that’s 3% increase over the first quarter this year. However, a 35% decrease compared to $12.3 million in the second quarter of last year. And the six months pre-tax earnings $15.7 million or 36% decrease compared to $24.6 million for the first six months of 2016.

Net income for the quarter $4.6 million, a slight increase of 2% compared to the first quarter of this year and a decrease of 37% compared to the second quarter of last year. Also, on a six months basis, $9.1 million of net income, a 37% decrease compared to $14.5 million for the first six months of 2016.

Diluted earnings per share was $0.17, that’s a penny more or 6% compared to the first quarter of this year and 32% decrease compared to the $0.25 for the second quarter last year. And on a year-to-date basis, we are at $0.32 and that’s a 35% decrease compared to $0.49 for the first six months of 2016.

Moving on to balance sheet, not very much changes in terms of the overall liquidity of the Company. We continue to get good execution leverage on the asset back securitizations, helps us to maintain a strong liquidity position.

You can see that the managed portfolio did increase finance receivables rather did increase by about 1% sequentially and 4% year-over-year. And the debt side of the balance sheet, again, pretty much as Brad said, business as usual. And we did our normal -- have done our normal first two securitizations in the quarter.

And really there is no significant changes really in any other categories of the debt. We renewed the warehouse line but the terms were not materially changed.

Looking on to a couple of these other performance metrics, the net interest margin was $86.8 million for the quarter, that's 2% increase compared to the first quarter of this year, also a 2% increase compared to $85.2 million for the first quarter -- second quarter rather of 2016.

On a year-to-date basis, the net interest margin was $172.4 million that's 3% increase compared to the first six months of last year. So this is mostly in no inspirer asset, the cost of our securitization trust debt.

So the actual blended cost of all of our ABS debt for the quarter was 3.8% compared to 3.7% in the first quarter of this year, and 3.3% in the second quarter of 2016. So all of those trends are up slightly, the general trend of our new ABS cost of funds has been down, generally down since about the second quarter of 2016.

So to really help these numbers and we’re definitely getting a spread alluded to really good response to our securitizations in the asset back market.

The risk adjusted NIM, which takes into account the provisions for credit losses $38.3 million, that's roughly flat compared to the first quarter and down 6% from the second quarter of last year; on a six month basis, $76.6 million down about 4% from the first six months of 2016.

Core operating expenses, again, we've done pretty well in this category and portfolio is growing only normally. The originations have been roughly flat, but our core operating expenses were $30.3 million for the quarter that's basically flat compared to the first quarter and up about 7% compared to the second quarter of last year.

On a year-to-date basis, $60.9 million and that's up about 11% compared to the first six months of 2016.

The metric that measures those core operating expenses, as a percent of the managed portfolio, 5.2% for this quarter that's down just a tick compared to 5.3% in the first quarter of this year and up a tick compared to 5.1% for the second quarter of last year.

So pretty much flat measurement as we’ve been able to control our operating expenses and the portfolio really as growing only nominally. Return on managed assets pre-tax managed asset return for the quarter of 1.4%, that's up compared, slightly compared to 1.3% for the first quarter of this year and down a little bit compared to 2.2% last year.

Again, this is mostly been influenced in the last year, so by generally high interest costs and higher provisions for credit losses during that time period. Moving on to delinquency and loss metrics, the delinquency for the quarter was 9.6%, down slightly compared to 9.7% for the first quarter of this year and up slightly compared to 8.6% a year ago.

The quarter annualized net loss is 7.6%, down slightly from 7.9% in the first quarter and again up slightly compared to the second quarter of last year where they were 6.9%. The six-month annualized net losses were 7.8%, and that’s up slightly from 7.2% last year. So again, we’ve seen some seasonable improvement here in the second quarter.

And then also referring just quickly to the auction values as the -- rather than the recovery values at the auctions, they’re actually up slightly at 35.6% for the second quarter compared to 35.2% in the first quarter, but down compared to last year at 38.9%. So we have that slight uptick in the second quarter.

This has been area that everybody has been looking at. There may be more pain to come in this category as more of these vehicles come through these auctions. But it seems though for the last few quarters that this may have stabilized little bit the rate of erosion seems to have slowed down somewhat.

So a quick look at the second quarter asset back securitization, 2017b represented $225.2 million of bonds, covering the same five classes, the same basic structure going from AAA down to BB that we’ve been using for some time.

All-in blended cost of funds of 3.45% reflected 51 basis point spread compression compared to our first quarter deal of this year, and 70 basis point spread compression compared to our 2016 deal. So it’s really a very well received transaction, and we’re very pleased with the kinds of reception we get in the asset back market.

And with that, I think I will turn it back over to Brad..

And looking through a few of the categories and marketing. We’re always working on our sales force. One thing that we started to do lately is refocus them on the sales aspect as opposed to just working the deals as they come in.

And what really happen is the lenders all receive in many ways these days, because the amount of automation, things like dealer track everyone is going to see a lot of the same applications. And so sometimes you get a little bit, not quite lazy. But we work with what we see rather than go out and try and get what we want.

And so we’ve had a little bit of a change in focus there, getting back into the dealerships and reaffirming our relationships with the car dealers so that we can get maybe a little bit better pick. So they understand that we know what’s going on and in some of them maybe we can do it better than others.

So as much as it’s subtle, it is something we’re working on today. In terms of originations, again, it’s still quality over quantity. We’re buying what we can get without trying to push it all and repeating what’s been going on lately. I mean the credit metrics have been improving steadily for the last two quarters.

And our LTV, just pick one, and I think it's most important is down to 112.74 this quarter, that’s the lowest that’s been in almost four years and more. Certainly, in the last three or four years that’s the lowest it’s been. And that’s a very good indicator of what’s really going on in terms of marketplace, in terms of what we’re buying as the LTVs.

Few quarters ago that reached I think its peak in the last three years around 115, maybe that was last year. I think so from 115 down to 113 or 112, those are significant improvements in that area. As I said, all the other metrics across the broader are improving. So again, origination is doing what they’re supposed to.

And just to pick highlights as somebody might ask, we do verify 100% income in every single deal, job verification or income verification that obviously was a hot topic in the news last few quarters, last quarter or so. It’s ironic that that isn’t more the norm in the industry, but for us it is.

We’ve always there verified 100% of the income of our borrowers before we buy a loan. So that’s -- it’s not bad when people ask questions and have a really good answer. Moving on to collections, it’s little hard to tell in numbers. But we think things are improving still.

It looks like the changes we made a few years back are starting to show up a little in the CNLs. And it’s little too early to really call it a huge success. But we’re cautiously optimistic that maybe things are beginning to go the right way a little bit.

Again, it’s hard to tell, as Jeff mentioned, because of the seasoning in the portfolio that’s going to cover up a lot of the improvements you might see. But overtime hopefully they’ll become more obvious. In terms of ARD or the recovery values the auctions, as Jeff mentioned, it looks like we’re leveling out, maybe down a little bit.

And if you recall during the recession, they went down into the 30% range. To the extent this thing could slow down in the 35%, 34% range that would be -- it almost makes sense. Obviously, the economy is not bad this is more of a card driven problem. And so we would like to see it to level off and it might be and may be down little bit more.

But it appears that we’ve maybe reached the bottom of that trend. So we’ll see. Now moving on to the industry, there’s not a lot to talk about the industry. I think things are moving slowly. One of the things we’ve thought would that a lot of folks that haven’t done things the right way might go on to market.

Certainly, some of the smaller companies have stopped funding or have pulled back some of the bigger companies have pulled back. But we really haven’t seen the transactions we might have thought, which show up. Having said that, make sure it appears soon or sometime soon.

And so we’re patiently waiting for maybe some opportunistic acquisitions or at least to take advantage of some of that market. One would think that people are in fact slowing down or few of the smaller companies have left, maybe the competition is easing. But that still does not appear to be the case.

Whoever is left for whatever reason, whether they should be going fast or not going fast are enough folks out there still pushing for business that the markets still competitive. And whether they’re pushing for business, because they’re desperate for earnings or whether they just think they’ve got everything fixed, we’ll wait and see.

But none of that is that the competition is still out there. The other thing in terms of looking at the competition is the credit unions. Credit unions have done a big job of moving into the spaces in the bottom of the spectrum, and been relatively competitive in growing in this sector in the last year or two.

And so, if you take those two things that probably gives you a good view of what’s going on in the industry. Some of the companies are pulling back, some of the companies are slowing down and a lot of that gap is being filled by some of these credit unions.

The other thing that’s probably helping the industry slog along before having changes is in fact the low cost of funds. And so as much as we appreciate the low cost of funds on our securitization is probably providing some amount of staying power with some of the weaker competitors that may in a different environment have cashed in already.

So those are the factors moving around. Other than that, it really looks like a slow summer for the most part. There is not a lot going on and there is not a lot of movement, coming fall we might see some changes. In terms of overall economies, probably exactly the same thing.

Unemployment seems to be going down and certainly has been going up, so that’s a very strong indicator of our industry is doing well. I think our customers is that Middle America part that’s still struggling for higher wages, but they also now understand how this works, they all want their cards to drive the work.

They understand -- the interesting thing is our customers are now probably got even better at having a priority of payments in terms of how they spend their money. And it used to be they pay their cards pretty quickly because we might pick them up. Today, they know they have some lead time given the new regulations about people collect.

And so it's more than managing the resources little differently. And teams have settled in to where this will be for the new norm and if that's the case that's just fine. They send a guest to appoint on delinquent loan where we might think about repossessing the car, and many of the customers pay up.

And that's not the case when it used to be when they get serious and delinquent in the past. So we mentioned this in previous calls that it just seems our customers are becoming more used to be on move their payments round for they need to pay, but not forgetting any of that CAR. So that part is all okay.

Again, we don't think there is much going on that affects our industry. We've mentioned the recovery at auction, so that's really the only other highlight I can think of off the top of my head. So with that, we'll open it up for questions..

Thank you. The floor is now open for questions [Operator Instructions]. Our first question comes from John Rowan with Janney..

You're saying that credit quality is getting better.

I'm just curious, what are you looking at? I mean, are we looking sequentially or because the year-over-year numbers don't look like they're improving?.

And that comes more to the portfolio aging, so even though I would like to see the year-over-year numbers improving as well. But I think what we're talking more about is let's say that our 2017 pull is just a big one might have been the worse pulls we think we've originated in this area.

So we think 2014 is little better, 2015 is little better, and 2016 little better. But to the extend you're not going to see that improvement in the large suites are growing again and make the portfolio younger again, which in fact is probably what will happen at some point.

So the improvement in older pools is being matched by the aging of the overall portfolio. So yes, in fact the numbers year-over-year don't look that great but if you go deeper into the numbers, you could see some better numbers. And at some point, you will see those results come through..

Thank you. Our next question comes from David Scharf with JMP Securities..

I know you seem to cover most of the industry topic spread. Just wondering, I know you don't want to go down the road giving explicit guidance. But I'm wondering, just based on your comments on the state of the industry, I think you even mentioned current origination volumes are indicative of weighting out the issues.

Is the '17 to '18 sense of quarterly earnings power the way we ought to be thinking about the next several quarters in the absence of anything that materially changes in the industry in terms of competition or end market demand?.

I think you’ve hit the nail on the head. We're not -- this is not a market where you can push to grow and so as much as we have our guidelines out there, and our market for us working as hard as they can. The problem is the people are buying more loosely or maybe they're trying to grow and so they're lowering the prices.

This is in the market where we want to compete in that area. So we buy what fits our criteria and that's it. What you'll probably see, depending on when this changes, is this steady flow. It’s not a terrible thing. I mean we think the collections numbers will improve.

You’re originating $75 million to $85 million whatever it is, it's a pretty profitable company that way. And when things improve, we’ll improve right with it. But yes, for the moment, forgetting opportunistic things coming on our way, you could realistically predict that the next two, three, four quarters could be like the once we’re looking at.

Now, hopefully, as even though that part might be true, which is stunningly exciting, it does mean that we will do way better when other people start falling apart. And secondarily, if the collection numbers do come around then those numbers will improve still.

In terms of originations and growth that’s probably this is kind of the norm we would expect going forward remembering that if the collections do improve and the results will be better, to extent there is opportunities then the results will be better.

To the extent some people fall over and the market gets back to normal then we would start growing again and then the results will be better..

And it seems like pretty steady stay here. And if we make that assumption, give or take, I mean the current origination levels. I’m wondering, from a seasoning standpoint, if you’re originating around this level per quarter, let’s say for the next year.

Where would the average age of the portfolio be 12 months from now relative to the 19 months that currently is? Just trying to get a sense for the impact of that reverse denominator or effect that you’re effectively talking about? Holding credit quality constant, but just a portfolio that’s further along the cumulative loss curve, how we ought to be thinking about the allowance rate?.

David, at this current portfolio size and volume levels origination volume levels, the portfolio seasoning almost a whole month every quarter, okay, not quite a whole month, but almost a whole month every quarter.

And I think what would happen is at these levels that rate of seasoning would probably accelerate somewhat and get closer to over the next four quarters, like closer to a month per quarter. So that gives you an idea of what the rate of seasoning would be..

And then just lastly once again it is steady state level of originations.

Should the efficiency ratio hold steadier? I’m just trying to think of the fixed cost component and how you’re thinking about overhead and in the context of weighting out the industry, as you say?.

I mean I think we probably, at this point, most of our costs are already in. I mean we could probably originate $100 million to $120 million tomorrow without doing much of anything. But the problem of course is at some point you might try to become more efficient given the industry. But certainly, we’re not going to do that now.

So the numbers are going to be what they are. I don’t see them growing in any real way, going forward. Now, how portfolio sits still, it’s probably I think a push. I think in the end, you probably keep about the same efficiency numbers now, going forward..

Just what -- last one on credit and then I’ll hope off. It relates to the first question you received on the call.

Jeff, is there any way to give us a sense for how the 2016 vintages that are performing at this point in time relative to the 2015 vintage after a similar number of months?.

It’s a little early. But I think what we’ve seen is the 2016 are pretty close to the ‘15s, they might have a monthly vintages a little over and then another monthly vintage just a little under.

But I think more importantly, we’ve seen improvement in the ‘15s versus the ‘14s for example and then that improvement is sustained so far in what we see in the ‘16. So that’s significant indicator of credit performance or improvement in credit performance.

And then of course that’s the thing that our portfolio of financing partners, the Wall Street folks, the rating agencies and the bankers and the bond investors look at too..

Thank you [Operator Instructions]. Our next question comes from Mike Del Grosso with Jefferies..

I know you mentioned your cost of funds has remained fairly stable, which is in part due to strong demand for auto ABS and spread tightening.

But could you remind us what your sensitivity is to rising rates?.

Well, I mean in a big picture our sensitivity is pretty good -- it isn’t very strong. I mean we have enough room in terms of the margins. Historically, over 25 years anything better than 5% cost of funds is probably pretty good, and we’re running at 3.5%.

So as much as it would take a little bit off of us to go out to 4.5 or whatever it was, if rates continue to rise. At some point, we might even goose APRs a little bit to keep up. But I don’t think we’re particularly sensitive to cost of funds, shorter than come to the moon.

And if Fed were in fact to raise rates at a quarter point four-more times, at some point, we would have to eat that point but we might be able to offset a little bit. So again I’m almost guessing a little in terms of how it would work. But the easy answer is in the big picture we’re not particularly sensitive.

In the short-term, particularly if we’re still not growing and we’re sitting around in idle then we might be a little more sensitive than normal, but in a huge way..

And then I guess the next question is on recoveries, but a little bit longer term. I know you mentioned in the short-term second half of this year we should see it level off hopefully in the 35% to 34%. But I think most industry commentary expects the majority of the pressure to set in over the next few years.

So again, I know it's maybe early but any thoughts on how we should think about 2018 if it’s more kind of a lower for longer type phenomenon or do you think that we can -- do you think recovery rates can move down from that 35% level?.

I certainly think they can move down in the 35% level. I think in terms of the long-term picture, what we would say is the lowest starts got to in the recession was around 30, give or take.

And so as much as 35 not the best in the world, if not 30, but either certainly a significant possibility given what’s going on that they could go lower before they go up, as well now whether they’ve slowed down for the moment.

They were steadily moving down for quarter after quarter after quarter, and in these last couple of quarters, they’ve leveled out. But if you were asking me to bet on that, I would say down rather than up. So the real take is there’s two ways to do it.

I think the odd certainly over the next year or so that the recovery rates drop further, but I would probably be pretty likely to take the over that they stay over 30, certainly. So are we in ballpark, maybe they go down to 32 given what we’ver seen and that’s before. But I pretty much be guessing at picking 32, but we’ll see..

Thank you. Our next question comes from Jordan Hymowitz with Philadelphia Financial..

I have a question, I mean AmeriCredit or GM Financial reported this morning recovery rates of 53-54. And you guys are at 34-35.

What accounts for the difference?.

Well, one might think that what would influence that number for GM would be that they probably have more prime. And so the cars are newer but not so new that they do having to drive off problem.

So to the extent that their average private finance is a little bit newer than ours and that they're more prime than we are, they probably aren't over-advancing on the car either.

So just for instance if their average cars closer to year and half older something instead of 2.5 years and they're only financing 100% of book, those two factors that probably give them a significant pick up.

The other thing would be to the extent they're doing more prime and they have maybe a stronger target to go after later then their other recoveries might be improved as well..

Are you guys doing anything different than auctions at this point? You're not doing any retail experiments or anything like that or….

Retail experiment, as you and I both know, tend to go poorly..

I don't disagree, I'm just wondering if there is any other disposition..

No, I think we’re trying to stay away from the problems where people go, so and so as doing this retail deal and there is more. So now we try and stick to anything in all of those areas..

And then my last question is you've mentioned there is a potential small acquisition.

Is there a point that you guys are one of those few remaining independent firms that you would obtain margin with the bigger firm at a certain price without mentioning the price to a dime?.

I think, we're open for phone calls. But at the moment, it would have to be a very interesting proposition for us to get involved in that..

And anything to continue to maintain the reserve level about what it is?.

I'm not doing everything that will please you..

That would please me a lot..

I think it should be where it is or higher, yes..

Thank you. I'm showing no further questions, at this time. I would now like to turn the call back over to Mr. Charles Bradley for any additional or closing remarks..

Thank you. So I think people probably, at this point, understand what we're trying to do. I mean people who know the Company and certainly know me know that we would rather be aggressive, we would rather be actively growing the Company and moving forward in the world. So this is a bit of a painful process for us right now.

But to the extent you go back to’07 when they had a huge problem, they’re tens of times and being a little more conservative might give you a huge home run later. And so what we don't want to do is stick our neck out with the rest of the folks and have our problem. So we've been pretty good at avoiding them.

We think we've done a lot of things right now. As we mentioned in the call, it may take a few minutes or little while to prove that out. But we have some time to do it. And in any luck, we’ll position ourselves very well for the next couple of years if we just staying in there patiently for the next few quarters.

And that's what we've been trying to do and certainly we are achieving that goal today. Painful hurt maybe for some of us who like to see the Company moving surging forward rather sitting in idle. But that’s the course we’ve chosen and we think it’s a life course and we’ll see what happens in the next few quarters.

Thank you all for attending our call and we’ll see you next quarter..

Thank you. This does conclude today’s teleconference. A replay will be available beginning two hours from now until August 01, 2017 by dialing 855-859-2056 or 404-537-3406 with the conference identification number of 54724137.

A broadcast of the conference will also be available live for 90 days after the call via the Company’s Web site at www.consumerportfolio.com. Please disconnect your lines at this time and have a wonderful day..