Good day, everyone, and welcome to the Consumer Portfolio Services 2018 Third 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 will now turn the call over to Mr. Bradley..

Thank you, and welcome to our third quarter earnings call. So the numbers are out, and looking at them, they're probably about what we expected. The industry is still exceedingly competitive. People are still pushing very hard for both growth and earnings. The good news is we don't have to do that.

So we're not chasing them all off a cliff, but nonetheless, the market's tough. Some highlights for the quarter is our credit performance continues to improve. We did another successful securitization in July. So the good news is there's lots of liquidity in the market.

So the bonds are very attractive to investors, and we have little to no problem having good executions on our securitizations. We also renewed our $100 million Citi warehouse facility. So that was another good thing we did.

Like I said - and actually, one other thing, towards the end of the quarter, it looks like things are beginning to loosen up just a little, which I'll comment on later. But overall, it's the quarter we expected. All the things we expected to do, the credit line, the securitization, all were as good or better than we would have hoped.

And like I said, credit performance is improving, and it looks like maybe eventually, or sooner than later, the market will sort of improve a little bit. With that, I'll turn it over to Jeff to cover the financials, and then I'll go back to some more comments..

Thanks, Brad. Welcome, everyone. We'll begin with the revenues. Revenues for our third quarter were $95.6 million. That's down 13% from the third quarter of last year and down 4% from the previous quarter, from the second quarter this year.

The year-to-date revenues were - the nine month revenue was $298.6 million, and that's down 9% compared to the first nine months of last year.

So we talked about this, and I think it bears repeating that the revenue numbers for this year are significantly reflected by our adoption in January of 2018 for fair - of fair value accounting for the receivables that we've originated since that time.

And as we've discussed, and hopefully everybody remembers that the revenues on the fair value receivables are essentially haircut, or adjusted, for the net losses, which are baked into those numbers. And that's even though the portfolio has remained relatively flat, that's the biggest reason for the reduction in the year-over-year revenues.

Now moving to the expenses, $90.9 million for our third quarter. That's down 10% compared to $101.4 million last year, down 4% compared to the second quarter this year. Year-to-date, $284.6 million of expenses for the nine months. That's down 6% compared to last year.

So while year-over-year, we had some increases in a few core categories, those have been significantly offset by decreases in the provisions for credit losses.

And as we just mentioned, since the losses are baked into the revenue recognition on the fair value portfolio, all of the provisions for credit losses are applied only to the legacy portfolio, the portfolio on the balance sheet at the previous year end. And as a result of that, that portfolio is declining and the provisions are declining ratably.

Moving to those provisions, $31.9 million for the quarter. That's down 33% from $47.3 million in the third quarter last year, and down 10% from the June quarter of this year, the second quarter. For the nine months, $108.0 million. That's down 25% compared to the nine months ended September of 2017.

So you can see that, that really shows how the provision expenses decreased, due primarily to the change in the accounting for the receivables. Pretax earnings for the quarter, $4.7 million. That's down 42% from $8.1 million in the third quarter last year, roughly flat compared to our second quarter this year.

Year-to-date nine month pretax earnings, $13.9 million. That's up just slightly, 11%, from the nine months last year and up slightly compared to the $9.2 million for the second quarter this year. Net income for the quarter, $3.2 million.

That's down 32% from $4.7 million for the third quarter last year and roughly flat with the second quarter this year. nine month net income, $9.5 million. That's down 31% compared to the nine months of the previous year.

Diluted earnings per share of $0.13 is down 24% compared to $0.17 in the third quarter last year and roughly flat with the second quarter. Moving on to the balance sheet, really no changes in the balance sheet compared to our second quarter this year. Looking at the year-over-year balance sheet, there's some interesting or some notable differences.

As we discussed in the last quarter, in the second quarter this year we raised $40 million in the residual interest financing, new financing, the sort of which we haven't had on the balance sheet for a couple of years. And then you also see the way we present the balance sheet, the notable decrease in the finance receivables line item.

Those receivables represent what we refer to as the legacy portfolio, the portfolio on the traditional accounting, which we'll just continue to run off as long as we continue to use fair value accounting for the new receivables. And you can see the fair value line now is up to $615 million at the end of the third quarter.

Looking at some of the performance metrics. The net interest margin for the quarter was $69.8 million. That's down 19% from $86.2 million in the third quarter last year, and down 6% compared to our second quarter this year. That's almost entirely comprised of our securitization and warehouse financing costs.

The blended cost of our ABS debt for the quarter was 4.19% compared to 3.78% in the third quarter last year.

So we've had a general trend upward in those securitization cost of funds, primarily the result of increasing the benchmark rates, but we've also, as we've alluded to in other calls and in our press releases, we've had significant compression in the spreads over the benchmarks, which have helped reduce somewhat the overall impact of the increase in the benchmarks.

The risk-adjusted NIM, which takes into account the provision, $37.9 million for the quarter. That's down 2% from the third quarter last year and also about 2% decrease from the second quarter of this year. So what's sort of helping that impact to the risk-adjusted NIM is the decrease in the provision expense.

Core operating expenses for the quarter, $33.2 million. That's up 8% from the third quarter of last year, but down slightly from the second quarter of this year. As I referred to, operating costs year-over-year are somewhat higher.

Part of that is the change in the accounting for the fair value, which doesn't allow us to defer certain costs as we've done in the past, but we did have a slight decrease in some core operating expenses in the sequential quarter, going from second to third quarter this year.

Those percentages of core operating expenses as a percent of the average managed portfolio of 5.7% for the quarter, that's an increase compared to 5.2% in the third quarter last year, and a slight decrease compared to 5.8% in the second quarter this year.

And the return on - pretax return on managed assets, 0.8% for the quarter, and that's down from 1.4% for the third quarter of 2017. Brad alluded to the credit performance metrics. We had somewhat higher delinquencies year-over-year and even in sequential quarters.

Part of that, we contribute to sort of the seasonal pattern of delinquencies that we see every year where the third and the fourth quarters are typically a little more challenging from a servicing and collections standpoint. The loss numbers though are relatively in line on a year-over-year basis.

And generally speaking, I think we're pleased with the credit performance of the portfolio as it stands right now, particularly given that the portfolio is flat, so there's no growth dilution in the denominator. And the weighted average age of the portfolio right now is about 22.5 months.

You can see too that the percentage of recoveries at the auctions has really stabilized, hovering around 34% to 35%. And those numbers, after really taking a hit for about an 18-month period, going back a year or so ago, have really begun to stabilize during '17 and now 2018.

In the ABS market for the quarter, we closed our third quarter transaction in July. That was a $230 million transaction. Our blended coupon of 4.18% represented a weighted average spread of 137 basis points over the benchmarks.

And that was one of the best executions of a spread over benchmarks that we've achieved during this current era of securitization since the last cycle. And with that, I'll turn it back over to Brad..

Thanks, Jeff, and running through some of the different areas of the company. Marketing, it's kind of interesting when everyone else is trying so hard to grow real fast and increase earnings and market share and all that, it's very tough for us to play when we want to grow in a normal way and buy good credits.

So we've tried and come up with some different ways to do that. As we've mentioned in past calls, we've had a continued expansion of our marketing force, the marketing rep force, across country. That's proceeding really well.

Something new we're doing is we've sort of hooked up with a couple of people, a couple of banks and we're doing some flow programs, where we get a look at all of their turndowns, and that has real good prospects for the future in terms of getting additional growth without us having to reach too hard and play too much for the other folks that are trying too hard.

So both the expansion of our marketing force and the flow programs really are shaping up to be quite good. So we have some good expectations for the rest of this year and next year with those programs. In originations, about a quarter ago, or actually just about around a quarter ago, we rolled out a new scorecard.

Generally, that can always be an interesting time to see if it really works. And in this case, it's working rather well. And so because of that, we've been able to find some new areas where we can be a little more aggressive because of the scores and tighten a little other areas.

But overall, the scorecard is operating wonderfully well and should produce, again, lots of good results. The fourth quarter is always tough, but having the scorecard sort of all dialed in when next year starts should be very good for next year. We've also tightened our credit, as we've mentioned in the past calls.

We're doing a little bit more of a higher-end mix, more the franchise dealers versus independents. Again, we'll revisit that the beginning of the year, but that's probably produced a much better credit for us over the last quarter or so. And again, the results should pan out next year and the year after.

In collections, as Jeff mentioned, the DQ level is up just a little bit. But you probably can't emphasize enough that when your portfolio is not growing, and ours certainly isn't, it is very difficult to maintain those numbers. And more importantly, it's much harder to hide those performance numbers.

If a portfolio is growing a lot, like lots of other folks in our industry, then you would really expect DQ numbers, loss numbers, to come down just because you have all that growth to sort of not mass number, but just have a larger denominator. When you don't have those effects, it is a much tougher game to have really good performance.

And so those numbers, for us, are quite good. And if you compare it with other folks, it's very tough to do. We're doing it. When we start to grow, those numbers will get exceptionally good.

So as much as they're not perfect, and they don't look so perfect, the results are actually there for a really bright future in terms of our performance when we get to start growing again. ARG, Jeff mentioned, asset recovery, Jeff mentioned of the auctions, we've leveled off in that 35% range.

Remembering sort of the best of the best was 40%; the worst of the worst is 30%. So we're about in the middle. We thought maybe it might drift down some more. It doesn't look like it's going to. So having that stability in that 35% range is probably just fine and about what we would expect going forward.

We do continue to purchase shares, about another 300,000 or so this quarter. That brings our total to a little over 7 million over the last few years. We will continue that program. Obviously, we think the stock is significantly undervalued and we will continue to purchase it as we can.

Another thing to note is we did close our fourth quarter securitization yesterday. As Jeff pointed out, we did our third quarter one. The fourth quarter one was only up about 7 basis points. In some ways, it's actually better. We've done all our securitizations for the year, so we're kind of done until January.

So we're not really worried about any of the economic conditions that might happen towards the end of the year. And it was as successful, and even maybe a little more successful in the third quarter securitization.

So as we mentioned that the markets are exceedingly strong right now, there's lots of liquidity, that's proven good for both the credit lines and for doing our ABS deals, and we would probably expect that trend to continue the rest of this year and all of next.

In terms of the industry, as we've mentioned once or twice already, it is highly competitive. We've had to give up another 50 basis points in our coupon just to sort of get what we want to get. A lot of folks have - they have these private equity firms backing them, and those firms either need results or need to get out.

And so it's still a very competitive landscape with folks trying to drive their top line, drive the earnings line and grow so that they can look good and get out. And unfortunately, the market doesn't really support that. The market's not that busy. Car sales are off, so there's not as much financing. Shockingly, cars are lasting longer.

So there's lots of sort of headwinds to really growing, especially when lots of people are doing it. We're lucky we don't have to grow. We would love to grow, but right now, we've improved our credit metrics. We've improved our models. We're kind of ready to grow.

And as soon as this market breaks up, we will be in a very good spot to really take off, hopefully next year. And having said that, it does look in the last month or so that the market seems to be maybe loosening up just a touch.

There are companies that are beginning to sort of fold up shops, smaller ones now, hopefully bigger ones later, and that will again free up the marketplace for folks like us. So we've done everything we can to stay competitive in this market. Our portfolio hasn't shrunk, which is a very big goal for 2018, and we've achieved that goal.

So 2019 has all the earmarks of being a very good year in terms of the industry finally having some players go away, having some consolidation finally, and hopefully opening up the gates for us to grow and really start moving along again. So we think the quarter went really well. We'll see what the fourth quarter comes up with.

But really, at this point, the focus is almost predominantly on being ready for 2019 and what we can do there. With that, we'll open it up for questions..

[Operator Instructions]. And our first question comes from David Scharf with JMP Securities..

Brad, I was wondering, I just want to clarify, regarding the pricing, the yields of your latest originations, I thought I heard 2 different explanations. One may have been you're underwriting a little higher-quality credits versus references to just still very intense competition.

As we think about the yields coming down in the mid-18s, is it more a result of the product mix or just the environment?.

It's really both. It's maybe slightly confusing that way. Certainly, the product mix, you could look at that, because our product mix has shifted into higher tiers, which has a lot lower APR. But we've also cut a little here and there just to try and get some piece of the business we want. And so that probably exacerbates the problem slightly.

So it is both. If I were going to sort of ballpark it, I would say it's 75% product mix and 25% - or maybe 80-20 in terms of product mix versus us just cutting price. We've given up a little bit of the fee as well, but not - in comparison, not quite so much. I don't think we're going to cut much more.

Like I said, we're getting a little more business now, so we probably don't feel the need to try to do that much more. We really don't want to give up too much more margin. We're almost at the levels back when the banks were there in the early 2000s. And so you can see, just from that, that there's pushout there.

Like I said, sort of maybe as difficult as it is for us today, I'd rather be us than the other folks who really have to make those numbers..

Right. No, that's helpful. And on the credit side, looking at the last few years, sort of the seasonal increase in delinquencies, doesn't seem to be quite as dramatic as it was this quarter.

Is it just the growth math that's slowing the portfolio growth? Or - and I know you've talked for really years about ever since the SEC settlement, the collection practices have altered early stage payment patterns, but is there anything else behind this magnitude of increase?.

No, it's truly - I mean, I tried to emphasize as much as I could that the portfolio, when you're not growing, the delinquency shows as clear as day. And the fact that we're not growing and the portfolio is aging is sort of the double whammy you would expect.

And having said that, as much as the numbers look a little bit up, they're actually quite good. And the long-term performance looks like they will improve a lot. And so we have - you almost picked 3 things. One, the portfolio is aging. The age of the portfolio now is probably as old as it's been for us in a long, long time. Two, we're not growing.

And three, we still have some of the paper that - some of the older paper really wasn't that good because of the new regulations in terms of how you collect, so a lot of that paper didn't perform as well as we wanted to. And so you still carry that burden even though it's beginning to run off.

So you literally could pick all three factors to kind of come up with what's going on. And in the end, we sort of understand perfectly all three. And when we start to grow again, the numbers should look really, really good. So we're in a good spot that way, but a little bit painful as it is to look at the numbers the way they are today..

Got it, got it. And then, last question, you mentioned this flow - well, not so much a flow deal, but a first look, if you will, with some banks on their turndowns. I mean, is this - number one, is it an exclusive or - and how many lenders does this include? Trying to get a sense for whether this is a material event..

Number one, it's not an exclusive. I think in sort of a very good way, lots of banks and big financial institutions don't want to buy the lower FICOs. And a lot of them are sort of wed to that FICO scale. And something in the area of 650, 660, they don't really want to go much below that, yet they see a lot of those applications.

And so having a partner like us, and others for that matter, is a very good setup for those folks because - and it's good for us, too. We get another avenue of getting loan volume. And it's helping them out and it's helping us out.

And so - and I think that's the trend you might see continuing into the future, with a lot of lenders like ourselves and other banks and institutions that don't want to play, but want to provide the service to their dealers. And it would work with capital just as well..

All right. Just for Jeff, a couple cleanup questions. One is, obviously, the legacy portfolio winding down, it's always a little challenging modeling the provision for there. We were very close this quarter.

But does the rate of decline accelerate? I mean, should - thinking about the fourth quarter expectations for provision expense, should it be a more pronounced sequential decrease than we saw from Q2 to Q3?.

I mean, it should gradually accelerate the decline in the portfolio, because as you think about it, as those receivables age, consumers' payments shift to be greater principal and less interest as that static portfolio moves along. So yes, we should see a gradual acceleration of the runoff of that principal balance of that portfolio..

Okay. And then, just lastly, thinking about fourth quarter as well on employee costs, it came in lower this quarter. It looks like there was less maybe deferred stock comp or incentive comp.

I mean, was that just a timing issue or...?.

Yes, that's a good point. So like deferred stock compensation, for example, that's tied to employee stock option awards. And you have a recognition period that takes place over like the vesting lives of those awards. And then when an older award sort of runs out of its amortization period, it drops off.

And it might be replaced by new awards, but the new awards might be worth less, not worthless, but worth less than the awards that dropped off. And so you have a shift from time to time as a result of the ongoing nature of that - the accounting for deferred stock compensation expense.

And then also in this quarter, we had sort of an unusual thing, a little bit of a windfall from a change in our employee benefits program where, literally, a health care vendor changed. And we had a windfall of like a couple of hundred thousand dollars, just due to the change in that vendor and the fact that the portion of it was sort of prepaid.

And so that was a little bit of a one-time thing. So I wouldn't expect necessarily to see a comparable fourth quarter decrease..

And our next question comes from John Rowan with Janney..

I want to just quickly run over charge-offs and provisions. I just want to make sure that within the provision expense line, the only thing that's in there is related to the legacy portfolio and that there's not anything in that provision line that would be an impairment of cash flow on the fair value portfolio..

That's correct..

Okay, so if I just take the provision expense and the allowance for the legacy portfolio, I can back into what the dollar value charge-offs were.

That will give me an accurate number, correct?.

It will. That's correct..

Okay. And then, just I brought this up on the last conference call, I just want to kind of reiterate it and just get your take on this and updated thoughts, I mean, obviously, earnings are down over 40%, or pretax income's down over 40%. I know you're waiting and biding time until the market turns around.

Is that still kind of the - your operating mode there, that you're going to continue to wait and hold on to all the staff and make sure you're in a position to lend into the market when it turns in your favor? Or are we anywhere closer to a cost-cutting initiative to improve pretax returns?.

I mean, a couple things there. We're not really waiting. I mean, we're as competitive as we can be without sacrificing the future of the company. We're not in a position, and this is good, we're not in a position where we have to put up all these numbers as much as we would like to.

But to do it, we would have to buy back credit, cut our margins, and it's just something that we're not - we don't want to do and are willing to do because it's not our long-term play in that.

Extending real fast results, we could do it; six months, nine months later if it doesn't work out, you've got a real problem, and that may show for others soon. It's not what we're going to do. So on the one hand, we're not really waiting. We're doing everything we can. We're not that overstaffed.

I think we're certainly not going to cut - we're - one of the things you get to do, which is helpful in this kind of circumstance, is we can provide much better dealer service right now if we're slightly overstaffed. I don't know that we could do enough cost-cutting to make some significant difference.

Really, you can either play with the wolves and hope it works out. Or you can kind of wait until they chew each other up and then take what's left. And obviously, we've chosen to do the latter. So I think we'll finish out this year. What we wanted to do is make sure the portfolio didn't shrink, and it hasn't.

We want to make sure that we have everything put together in terms of the front end, being marketing and originations, so that we can start to grow. As I mentioned, the market seems to be loosening a little. So maybe some of the folks are finally saying this isn't going to work. Or they're finally trying to come back into the credit world that works.

And that will give us the opportunity. And already, it's beginning to show up just a little bit in the last month or so. So it's hard to say that - there's no timeline where we're literally like carrying all these people for nothing and then we're going to cut them all if we don't get somewhere. It's nothing like that.

I mean, I think that might have been the gist of what you're asking..

[Operator Instructions]. And our next question comes from Kyle Joseph with Jefferies..

Most have been asked and answered, but just following up on I think it was David's question on the provision. Jeff, if you could give us a reminder. It looks like the reserve was up a little bit year-over-year, but just remind us of the dynamics on the reserve as the legacy portfolio runs off..

Yes, so there's one thing particularly for you guys who have your own earnings models, remember how in the legacy portfolio, we would build the allowance. So if we had a quarter or a month's worth - take a month's worth of originations, our goal was to establish an allowance that was equal to 12 months of the future charge-offs.

But we didn't do that all at once. We actually built that 12-month allowance over the first 12 months of the life of that one monthly portfolio. And so what we have now is the last portion of the legacy portfolio, the last portion of the portfolio with an allowance was originated in December of 2017.

So that portfolio, and for that matter, with these numbers here, these Q3 numbers, neither the December, the November, nor the October portfolios of 2017 had yet been funded with their full 12-month allowance.

But by the time we do the fourth quarter earnings conference call, all of those portfolios will have gone through the cycle, the methodology that we go through to fund the 12-month allowance.

And so when we - in the future, when we look at the legacy portfolio, we look at the allowance, we should be able to say, okay, this approximates what the expectations are for the next 12 months' losses, which would never have been - you could never actually have said that in the past because the last 12 months of receivables were always building..

Got it. And then, Brad, on competition, you mentioned it was softening up a little bit recently.

Is that - are competitors running into credit issues? Is that the impact of rising rates? Or how would you classify that?.

I think it's all of the above. I think, to be out there right now and try to grow your company and make earnings with lots of other folks, I think the problem is you only have a certain amount of time. If you're buying very aggressively, you have about a year or 18 months before a lot of that paper sort of comes home to roost.

And probably, that's going on right now. And then on top of that, their margin are getting squeezed. Both - they were squeezed because the auctions went down. So now they've stabilized some, this might help.

But even though the rates are good, and for us, we're able to squeeze the margins, the overall rates are still going up, so it's putting more pressure on them. So in all fairness, I think it's a difficult time to try and grow a company in this marketplace.

And I think a few of the smaller ones have already started to exit the industry, and maybe the bigger ones are starting to try and figure out what to do next. And part of that might be slowing down on the aggressive credit. So we'll see. Again it's just 3, 4 weeks old, so it's a little hard to tell.

But - just like I said, it's a very tough market to be trying to do a lot in, unless you know you can get it done. So we're very curious to see what happens next..

This does conclude today's question-and-answer session. I would now like to turn the call back to Mr. Charles Bradley for any additional or closing remarks..

Again, we're very happy with how the third quarter went. We're very happy with where we sit in the marketplace and in the industry. The securitization market is great. It's the backbone of our existence basically, so that's real good. Having all that liquidity in the market, I think, will be very handy going forward.

Companies are beginning to go away, and there should be some consolidation. Everyone's been waiting for it for three years. So hopefully, whether it's in the fourth quarter or 2019, I just can't imagine 2019 won't be a very interesting time for our industry. And hopefully, we'll be right there to take advantage of it.

So thank you all for attending this call and we'll talk to you next year..

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until the 25th of October, 16:00, by dialing 855-859-2056 or 404-537-3406, with conference identification number 7899309.

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, everyone, have a wonderful day..