Good day, everyone. And welcome to the Consumer Portfolio Services 2018 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 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 would now turn the call over to Mr. Bradley..

Thank you. And welcome to our first quarter conference call, our earnings results call. Overall, we’re very pleased with the quarter. The numbers worked out the way we would expect them to, and so all that’s very good.

More importantly and important to talk about is effective with the first quarter 2018, we have adapted the fair value accounting for finance receivables acquired in the first quarter and thereafter.

But this was really all about is that in 2020, January 1, 2020, the CECL will come into effect and that’s the current expected loss standards will be adopted and we would have to adopt that on January 1, 2020. And what sort of the layman's terms of this, I’ll let Jeff talk about a little more in a minute.

But starting in January 1, 2020, you have to take a provision for the entire expected loss of the loan that they booked. Today, we take what will be 12 months and even take that over 12 months.

So in today’s accounting, we assume that during the first 12 months alone, we’ll build enough reserves against that loan to have 12 months of losses going forward. And that today, starting in 2020, you’re going to have to provide enough for the losses for the loan for the life for the loan on day one.

One can imagine that the earnings hit and then companies are going to take and its public companies in 2020, all companies in 2021. So the earnings that you would take in 2020 will be rather extreme, so much so they would wipe out the vast majority of our book value, something we do not want to do.

So to prevent that from happening, we’ve adapted fair value accounting for all loans purchased starting in January 2018. I’ll let Jeff explain the intricacies and the ins and the outs of that, but this is entirely to protect our book value in the event that CECL becomes law in 2020.

Ironically in 2020, we could switch back, because at that point you don’t have to take this large charge for the entire portfolio. So what we’re really doing is we’re protecting the portfolio we already have, and so that portfolio from 2018, 2019 will be fair value.

In that way most of the portfolio we already have will run off, but the 2018 and ’19 that will still be on the books won't be affected by the CECL hit nearly as much if at all. So anyway, that’s the big thing we had to change in starting with this quarter. Overall, we think the numbers are what we expected.

I think the other thing we’re going to talk about, I’ll talk about more in a little bit is how competitive the industry is today. All our folks out there are trying to get something done, whether it's going public or trying to get their PE fellows paid. Whatever it is, the competitiveness has risen to a level that is extreme.

We probably only seen it back in the good old days before everyone collapsed. So is something we’re not playing and it’s making very difficult I think for everyone in the industry, and again I’ll cover that more in a minute.

We did -- another point of importance is that our collection is really starting to show some improvement, it’s a shame that portfolio isn’t growing and if it was the collection numbers have been really strong.

But even with the shrinking portfolio and an aging portfolio, our collections are really beginning to show some of the results we’ve been hoping for literally last two years. We also did another securitization and that went out at 3.46%, it’s really settling in to where our securitization in the last three or four, have been in that 3.5% to 4% range.

That's really a good level for us and we could say there that’d be nice probably that will inch up over time. But again, the securitization is well received, did real on the marketplace, so again another positive.

Felt such more on what's going on in the industry and what we’re going to do about it after Jeff runs through both the intricacies of the fair value accounting and the financials..

Thanks Brad, welcome everybody. Let's talk about fair value accounting just briefly. So again this method of accounting, we estimate a net level yield for each quarterly pool of receivables as they require.

This estimated net level yield takes into consideration factors such as the interest rate of the underlying loans, the estimated timing and magnitude of charge-offs over the life of the loans and things like the estimated prepayments.

Then once this net level yield is estimated in that fashion, interest income on that portfolio those loans is recognized as revenue as interest income based on its estimated level yield. This method varies from traditional accounting method we’ve used for the loan portfolio.

And there is no provision for credit losses when you use the fair value method. There is no allowance for credit losses in the balance sheet when you use the fair value method, because this level yield that I just described is effectively reduced by the impact of the estimated credit losses.

So this accounting method that we've adopted is only a place for receivables originated in Q1, 2018 and thereafter.

The portfolio that was on the balance sheet at 12/31/2017, which we’ll refer to as the legacy portfolio, will continue to be accounted for in the traditional fashion, the interest income will be recognized on a gross basis based on the interest rates of those underlying receivables and we’ll continue to maintain an allowance for the loan losses on the balance sheet by establishing through the establishment of a provision for credit losses on the income statement.

So it's important for folks following the financial reporting to think of us now us having two portfolios, the legacy portfolio, the traditional accounting and the Q1 2018 and thereafter portfolio, which will use the fair value accounting method.

There is going to be a fair amount of disclosure we’re drafting the 10-Q now, so there would be a few more details in the 10-Q about how we come up with these estimates and what some of the key inputs are to these estimates for fair value portfolio, that’s fair value 101. So we’ll move on to the results.

Revenues for the quarter of $103.6 million, that’s down 3% from the December quarter of $107.2 million and down 4% just from the third quarter of last year. And the portfolio is at level or maybe down slightly on a sequential basis that certainly impacted the revenues.

And what I just described in the fair value methodology is going to have an impact on the revenues too, because the revenues that we recognized in the fair value portfolio are net of the expected losses. So that is baked into the revenue numbers as opposed to having a gross revenue interest income number offset by a provision for credit losses.

Moving on to expenses, $99 million for the quarter is really flat compared to the December quarter, and down just slightly from the first quarter of last year.

We have some increases in some core expense categories, but those were largely offset by decreases in provisions for credit losses again impacted by the fact that there is no provision for credit losses on the fair value portfolio.

In addition, one other fairly settled nuance of the fair value accounting is that we no longer defer direct originations costs associated with new receivables. So in the old accounting and traditional accounting, we would make an estimate of what the cost per loan for acquiring new receivables was.

That amount was deferred, that expense amount was deferred and then recognized over the life of the portfolios. In the fair value world, you don’t do that.

And so in fact during this quarter, we had about $1.4 million in expenses that under the traditional accounting method would have been differed most of those flowing through the employee expense line.

So we didn’t really have a significant increase in these core expense category -- employee expense for example in the sequential quarter, it was really just that the accounting change, the adoption of the new method doesn’t allow us to defer certain employee cost that we did in the past.

Looking at the provisions for credit losses; $40.5 million down 7% from the December quarter down 14% from a year ago, I think you can expect to see provisions shrinking somewhat in the future as the legacy portfolio declines.

The legacy portfolio is now seasoned at 23.5 month, and so that's going to, as I said, continue to decline the absolute dollars and provisions likely continue to decline somewhat in future as well.

Pretax earnings; $4.6 million that’s down 44% from $8.2 million in the fourth quarter last year, and down 41% from $7.8 million for the first quarter a year ago. Net income was $3.1 million in this quarter that compares to $10 million net loss in the fourth quarter of last year.

But remember too in the fourth quarter last year, we had $15.1 million income tax charge as a result of the change in the corporate tax rate, which resulted in a write-down of our deferred tax assets.

Diluted earnings per share was $0.12 for the quarter, that's up from $0.40 loss in the fourth quarter due to the tax charge and then down compared to $0.16 in the first quarter of last year. Not much changing on the balance sheet.

You'll see that we have now broken out on the balance sheet and we’ll continue to breakout finance receivables in the legacy portfolio, which is offset by allowance for loan losses. And then we have a new line item on the balance sheet, finance receivables at fair value.

We originated about $211 million in contracts in the first quarter, and those are all represented in the line for finance receivables at fair value. Not much changes in the debt section of the balance sheet. We continue to operate with the three warehouse lines.

Brad alluded to the securitization, which was normal course for us during the first quarter.

Looking at some of the other performance metrics; net interest margin was $79.5 million for the quarter, that's down 5% from the fourth quarter and down 7% from the first quarter of last year; the actual blended cost of all of our ABS debt for the quarter was 4%, which is up compared to 3.7% a year ago; and so the general trend of our new ABS cost has been down since 2016, but we still have some of that higher ABS costs from before that time factoring into these figures.

The risk adjusted NIM was $39 million for the quarter, that's down 2% from the sequential quarter, the December quarter, but it’s up 2% from a year ago. And of course the risk adjusted NIMI is influenced by provision for credit losses, which as we said is down slightly.

The core operating expenses of $34.4 million, that's up 9% from this fourth quarter, and up 13% from a year ago. Again, some of that increase is due to the change in accounting method for the new receivables, which I alluded to earlier.

That ratio of core operating expenses as a percent of the managed portfolio 5.9% for the quarter compared to 5.4% in December and the fourth quarter of last year and 5.3% a year ago. It’s difficult to get improvement in this metric with the portfolio flat or shrinking. So I think these are the levels that we can expect to see.

The return on managed assets, pretax was 0.8% for first quarter and that's down from 1.4% in the fourth quarter and 1.3% a year ago. The credit metrics, Brad alluded to. The delinquency was -- all in delinquency is 8.74% for the end of the first quarter and that's an improvement over 9.74% a year ago.

And so we’re really beginning to feel like the servicing platform has had some significant improvements and is coming along nicely. And so we’re relatively pleased with the servicing and credit performance. The loss is 8.2% for the quarter, up slightly we’re up a point from 7.24% in the fourth quarter and 7.9% year ago.

The auction level numbers, just down slightly in the first quarter at 33.8%. As we’ve talked about before, most of the pain of that it seems to been felt in 2015 and ’16 and the degradation has been significantly less lately. First quarter securitization, Brad indicated.

We completed in January, blended coupon of 3.46% was actually the best execution that has spread over the benchmarks that we've had since the financial crisis. And so that market continues to be the one consistent shining bright spot in our business for quite some time now so we're certainly pleased with that.

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

Thanks Jeff. So to talk about the CECL one more minute. I am not too sure when that was put together, it was really meant for companies like ourselves where you have subprime and you have significant losses as much as everyone in our industry and certainly we have proven that subprime works just fine.

Having to take that entire loss allowance upfront is certainly a large burden to bear. I think probably CECL is more into the banks where they could make that adjustment rather easily, because it's much smaller in terms of the percentage. Anyways, it’s why we're stuck with and that's why we’ve had to switch to fair value for the next couple of years.

Remembering that our book value is something close to $9 and someday when our industry settles down and everything comes back to hopefully normal and companies traded book value are multiple to book value, we'll still have ours. Anyway that's the rationale for all that.

Moving on the other interesting parts of the industry is the competitive nature of industry today.

And as everyone knows, we've talked about cycles and this is what we usually call the third cycle, and third cycle has been dominated by PE players putting money into companies, trying to grow them a lot, take them public have somebody buy them, any of those things. Obviously, that hasn't worked out very well for a whole lot of folks.

Over the last two years in 2016 and '17, everybody said there'll be some consolidation in the industry, there was none. So far this year, two companies have gone away. There's probably another one kind of gone away, at least three or four more on the rope.

So 2018 may finally be the year that consolidation happens in the industry, some of the PE guys give up the ghost and things start to move in the right direction. But of course, before that can happen, you have to have the Hail Mary pass where everybody goes nuts, and so here we are. Everyone is buying as aggressively as we've seen in 25 years.

They're doing crazy things in terms of both credit and pricing. And so it's a market we just can't plan. So we’ll get to what we're going to do about that in a minute. But I think I've mentioned in previous calls that our LTV, we had a goal of around 110%, 111%, we thought a 115% was high and we had that a few years ago.

And today, we do sit right around the 111% loan to value. I bring that up, because the new think on the street is something called guaranteed backend. And so while these going around is that all of these lenders are guaranteeing the dealers a guaranteed backend, which basically allows them to make some money in the loan off the customer.

As a result of that, that's just destroying the LTVs. We cannot play nor will we play in that game. It's a great idea if you want to get a whole lot of paper real quick, the paper is going to be horrible and eventually going to default like crazy.

And we're not even 100% sure if everyone is doing this, but there's enough folks out there that has become very interesting and we'll see how it all plays. But given, what I said earlier, this is the time where people got to get things done and this is what they're going to do.

So having said, we’re just assuming to watch and try some other things, and here are the other things. We think that things are going to change in the industry over the next year. We currently have -- we used to have back in the day, a 120 or so marketing reps, people out there roaming around looking for loans.

And then as things changed, we dropped that number to about 70. We're going to go back to a 120, we're going to put as people like to say, boots on the ground.

We're going to try to get into a lot of different markets where we can get our initiatives filled, remembering that if we get one or two loans from the dealer monthly that’s just fine, our average is just under two, two dealers per month per year.

We’ve said we can put guys in the field in different cities all over the country and they can get 25 dealers given in there two deals two sit per guy, we can get back to the levels we would like to have in terms of originations, while we wait out the storm. So as much as -- and the other part of that is the market is tough right now.

Car sales just aren’t as strong as they were. I think as I mentioned before, car sales probably should have slowed down in ’15 or ’16. And instead of the manufacturers wanted to maintain the industry and did but also the tricks and leasing and such. And so now there is suffering.

So car sales are down, these car markets down, lot of bad weather in the first few months of the year, which also impacts car sales and financing as a result of all that. And so a lot of folks are staring to [indiscernible] in terms of having these big productive years through 2018 that they want, and it certainly reflects in our numbers as well.

But to the extent, we have to grow the company real fast, improve the earnings real a lot in this year, so we could exit and that would be a huge problem. We don’t have that problem, other folks are going to.

But if we can put our people out there, one or two things will happen; one, we’ll get amount there, they'll get a lot of deals, our business will improve; and two, when some of these big companies fall down, they’ll be standing there ready to take a lot of that business.

And so I think it's a slightly risky strategy by growing in that way in the face of the struggling industry. But we think it's going to be very opportunistic when things change. So anyway, that's the plan and that's just going on in the industry and it's going to be interesting if not a lot of funds to see how it all shakes out.

In terms of collections, as both Jeff and I pointed earlier, we think we’re really getting somewhere in collections. Like I said, I wish the portfolio was growing because it would really show, but the portfolio is aging and we're not growing to delinquency numbers, delinquency is looking great.

We had that opposite effect, delinquency would be the best it's ever been. Even so, it's about it's been 2.5 years. Same thing the losses the portfolio was actually growing and they would look even better. So as much as -- it's a little hard to tell looking just at the numbers.

Overall, we really think we finally found what we want in the way we collect loans. And again down the road, that's going to be important as everybody else, other folks start having real problems. We think we’ve really turned the corner inflections. We’re very proud of what we've done. And I think we’ll see the results.

Auctions, at least the auctions seem to have flattened out in that 33% to 36% range. Again, it might get a little softer, but it seems to have stabilized, that's good too. In terms of the industry, as people have been reading, the CFPB is changing quite a bit lately.

So I think the regulatory environment, one can say that's certainly improving and gotten to a place where everybody shouldn’t be worried about it, certainly we're probably not. In terms of the economy, we generally do think of our customers being the tip of the economic sphere, because they don’t have a lot of disposable income.

They seem to be doing pretty well. And they seem to be not having a lot of trouble keeping up with their loans. We would see it if the economy is starting to turn. So generally speaking, the new economy is probably good for us, good for our customers and again, it should be good going forward. So that’s probably the short and sweet part of it.

And we’ll open it up for questions..

[Operator Instructions] Thank you. Our first question comes from Mitchell Sacks of Grand Slam Asset Management. Your line is now open..

With respect to the first quarter and the move to the fair value accounting.

Does that impact the bottom line in terms of net income earnings per share?.

Well, yes it does a little bit, Mitch, because in the traditional accounting, the earnings tend to be a little frontloaded in the portfolio, because if you think about so you got a loan it’s got a 20% coupon and then we build and so the things start occurring at 20% right from day one.

And then we build, as Brad just mentioned, an allowance over a 12 months period. And so that provision for credit losses is recognized, begins to be recognized right away, but it’s a relatively low amount compared to the 20% coupon that the loan is occurring at.

In the fair value world, you’re immediately coming up with this level of yield that takes into account the losses from day one. So you’re booking a net lower number but it’s again a level number, so there's not the frontloading that comes from the traditional accounting, and it's not as lumpy.

And I think what’s most important I meant to say this before is the economics of these receivables is the same no matter what accounting will do.

So at the end of the day at the end of the years that these loans are on the books, the economic benefit to the company is exactly the same no matter what amount -- what method of accounting you use but to your -- answer to your question is yes, it does have somewhat of a negative impact on the earnings at least initially..

The other part of that is that under the old accounting, as we’ll call it, you defer the acquisition cost and today you recognize them immediately. And that probably is the most prominent effect at least in the beginning. Over time, we’ll catch up to that. But you go from deferring it all to taking it all.

So that has probably more negative effect initially then even the fair value though, they’re both negative..

Do you have an estimate of what earnings per share would have been if you had not made the change?.

No, we’re not going to do that, because we don’t want take -- there is two different numbers or two different earnings. But it's fair to say that particularly in this first quarter of adoption, it had a negative effect of the results..

And then in the competition, you mentioned the two companies went away and there is three or four, I guess are on the ropes. Can you just give us a little bit more detail on what's going on there? And then in terms of the loans, the guaranteed back end loans.

What is that effectively make their loan to values?.

In the first one, most of the PE money came in ’12 and ’13, so generally speaking five year windows, ’17 and ’18 becomes where you’re supposed to be out. So the problem is a lot of these guys came in back to these companies, made investments in these companies and they like to see a return.

But part of the other problem is to the extent the company rule a little bit more than should have, didn’t quite have the controls in place and the results haven’t been what they want, even to the extent we didn’t make any money, you got a problem.

So a lot of those folks out there today are facing that problem, whether its small companies, medium size companies or large companies. And seeing this at least from our point of view across the industry they all have the same problem.

In that they try to put together this plan, the plan probably wasn’t execute quite as well as it should have and now they’re standing there with not great results in terms of losses and not great results in terms of earnings, and they’re trying to figure out what to do.

And again, in past lives or cycles, we’ve been -- and we've seen how this works and it's difficult. I have huge amounts of pity for everybody who's facing that problem, because how you do, it is very difficult to get out of it, having your back or double down. So that's what's really going on with the companies.

In terms of the guaranteed backend, and again we're not 100% sure everyone's doing it, but it's certainly out there on the street a whole lot of folks are. Generally speaking, the best we can figure it pushes the loan to value in the 130 to 140 range, which is something that never in the history of our world have we ever seen.

Having said that probably everybody's not doing that and probably every loan is not like that, but when you're doing the fast math of claiming in -- if you think about it, if you're adding $2,000 or $3,000 in our world, our average amount finance is $16,000.

So if you want to add $2,000 to that or $3,000 to that, you're talking about 15% and 20% right on top instead of extending here at 110-115, you're in the 130s probably for sure..

And the final question, in terms of expenses with your portfolio running stable, I understand you're going to spend more on hiring more marketing people.

But do you get any efficiencies on the backend in terms of servicing, or as people get -- you don't need to hire new people you can hit other than for churn, you start to get better yields from people servicing the loans that are existing?.

You probably don't. If you think about it, let's just say you pick a flat number. If we originate whatever the number is every month and the portfolio is growing then you're going to continue to add people to service those exact loans.

Since our portfolio is shrinking, you probably get the benefit of not having to particularly add anybody just because you've got body standing there that are done servicing the loans running off and they can service the new loans coming as much as it doesn't work exactly like that. So we would expect that.

What you really can't do too much off is you can't leverage the guys. The collectors need to service a certain amount of accounts and/or you need a certain amount of collectors to service a certain number of accounts, regardless of the dollar value of those accounts.

And so as much as -- but the better way to do it is through technology where you were using more and more scoring, more and more credit scorecards to figure out which accounts we don't have to call at all, or call less and things like that, run better jobs for the collection crew.

So you get more benefit and efficiencies from the technology, and actually the bodies, because again you need certain amount of bodies to collect a certain amount of loans. It's very hard. We think our collector ratio to accounts is probably one of the best in the industry anyway. So we probably don't want to toy with that too much.

But again, to the extent we can find out ways to eliminate it or lower the amount of people we actually have to call then we get efficiencies that way, and/or to the extent we're using texting which we are and things like that, I think then you can find a way to how to compute, generate much of that stuff then that helps too..

Thank you [Operator Instructions]. And this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Charles Bradley for any additional remarks..

We think we must have answered much of the stuff upfront. So probably the last two, maybe a little bit to comprehend in terms of switching the fair value and maybe the industry comments. But it's going to be an interesting year.

I think the good news is we're still up in a good way, we have collections going the right way, we have a good marketing strategy that doesn’t affect how we're going to buy and credit. And then as it happens in industries, there is lots going on out there, lots of folks have to make some decisions and then lot of people have tough decisions to make.

Hopefully, we’ll get some opportunities out of all that. And more importantly, at the end of the day, we continue buying our stock. We think our stock is quite valuable. At the end of all this, we should hopefully see that show up and show some results. Thank you again. We’ll talk to you on next quarter..

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until April 26, 2018 at 11:00 PM Eastern Standard Time by dialing 855-859-2056 or 404-537-3406. The conference identification number 6382649.

A broadcast of the conference call will also be available live and 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..