Good day, everyone, and welcome to the Consumer Portfolio Services 2018 Fourth Quarter and Full-Year 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 of Consumer Portfolio Services. I will now turn the call over to you Mr. Bradley..

Thank you, and welcome to our year-end conference call. I think -- and looking at the numbers, they are a little bit garbled because in both December of this year in 2018, and December of 2017 we had some tax recurring that affected the overall numbers.

Going forward hopefully the numbers would be a little cleaner, although the year is yet to figure out. But looking to those we actually have a pretty good quarter.

I think importantly the fourth quarter was probably better than we expected and if you notice originations actually grew for the year, we actually thought we might have it down year in terms of portfolio size and in originations and of course that wasn't true. For the year, we actually originated 900 million versus 860 million last year.

So and that's really important, because what we don't want to as a portfolio or the managed portfolio to shrink. Once it starts shrinking it kind of takes big effort to get back going again.

So one of the things to take away from 2018 is that in fact the core portfolio didn’t shrink at all, it grew little bit and somewhat even as important is that the overall originations grew. And so in the year we thought it would be flat or slightly down, we actually made some progress going up.

On the other side the delinquencies are up in the fourth quarter. It's probably worst than it look s like a bit because the fourth quarter is always a toughest one for collections in DQ. Also, our portfolio hasn't been growing, it’s now been really flat for almost three years, with that you're going to start to see the worst of the worst.

This is when companies have bad delinquency numbers and they are growing like crazy, that should be a real red flag. But for us it was fairly flat portfolio, you are seeing delinquencies up little bit. But really we were growing even a little bit, you wouldn’t even notice them.

So as much as we’re certainly concerned with delinquency and we keep working on that, it's not something we’re only concerned about the fourth quarter number. On the other side the losses are down. So again the losses hopefully will continue to trend down.

But I think when I get overly excited of the losses being down until I stay down for long time, but again it's certainly good news that they are down in the fourth quarter which in some ways is a little more important than delinquencies.

In terms of the full year, we started 2018 and as I think I had mentioned in the past, we still think the competition is quite frisky out there, we were still very aggressive in trying to do things and so we really wanted to sort of spend the time managing our portfolio, making things better, so that when we have an opportunity to grow we're going to be well set up to do it.

We’ve put in the new scorecard and sort of midyear that really price took effect in August. The results from that new scorecard looked very promising and that was a big project in 2018. The second half of 2018 originations were probably some of the best originations we've had and so we think the results there could be promising.

I think we've been talking for probably a couple of years, about getting things ready and sort of being ready to grow again and I think 2018 was better than we expected. However, we’re very good and happy that it's over. We are looking forward to 2019 and much better things, which I'll get into more after Jeff runs through the financials..

Thanks, Brad. Welcome, everybody. We will begin with the revenues. Q4 revenues were $91.2 million, that's a 5% decrease from the third quarter this year at $95.6 million and a 15% decrease from the fourth quarter of 2017. The full-year revenues of $389.8 million is a 10% decrease from the full-year revenues of 2017.

And of course, as we've discussed, this year the story on the revenues, there’s really two things, primarily the adoption of the fair value methodology of accounting for the 2018 originations, as we've said the losses are baked into the revenue recognition methodology for fair value.

And so, we've seen a significant decrease in revenues, as result of that. And then also as Brad alluded to just the overall portfolio has been fairly flat for the year, which has had a significant contribution to impact on the revenue recognition.

Moving to the expenses, $86.4 million for the fourth quarter, that’s a 5% decrease from the third quarter of this year and a 13% decrease from the fourth quarter of 2017. Full year basis, $371.1 million of expenses this year is an 8% decrease from $402.3 million last year.

And really on the expenses, you've get some increases in core categories which are largely offset by on -- entirely offset by decreases in the provisions for credit losses because there are no provisions for credit losses on the 2018 portfolio, which is being accounted for in the fair value method.

Looking at the provisions for credit losses, $25.1 million for the quarter, that’s a 21% decrease from $32 million in the third quarter of this year and a 43% decrease from the fourth quarter of 2017. On a full-year basis, $133.1 million of provisions for credit losses in 2018, a 29% decrease from 2017.

Again, all being driven by the legacy -- the shrinking of the legacy portfolio what we call the legacy portfolio, which was on the books at 12/31 of 2017. And so really that portfolio now is 31.5 months old. And so you get kind of the feel for the aging of that portfolio, as we go forward here.

Pretax earnings $4.8 million for the quarter a 2% increase compared to the third quarter this year and a 41% decrease compared to $8.2 million in the fourth quarter of 2017. Full year pretax earnings $18.7 million and that's a 42% decrease compared with $32.1 million in pretax earnings we have in 2017.

Net income $5.4 million for the fourth quarter, that's a 69% increase compared to the third quarter of this year, and a 154% increase compared to the $10 million net loss last year, we're going to talk about that here in a minute.

The year-to-date full-year net income $14.9 million for 2017, and that compares to $3.8 million for the full year of 2017. So to clarify that a little bit.

So this year in the fourth quarter, we had a $2.1 million net tax benefit that impacted the net income, the bulk of this one-time net tax benefit had to do with our adoption for fair value accounting for the tax books effective one year earlier than we adopted it for the GAAP books.

And so, without getting too much into weeds, we basically as I just said, we just retroactively adopted fair value for tax one year earlier and that triggered a little tax benefit that we booked during the fourth quarter.

And then, as Brad alluded to, last year in the fourth quarter, as a result of the change in the corporate tax rate we wrote down the deferred tax asset on the balance sheet with a big non-cash tax adjustments and that flow-through is a tax expense in the fourth quarter last year.

So it’s a little tricky comparing those numbers, but we talked about most of that before. Diluted earnings per share for the quarter $0.22, that's a 69% increase compared to $0.13 in the fourth quarter this year, and a big change compared to $0.46 loss in the fourth quarter of last year.

On a year-to-date basis, $0.59 diluted earnings per share, compared to $0.14 for the full year of 2017, again greatly influenced by those tax numbers last year.

Moving on to the balance sheet, no significant changes in the balance sheet, the financing structures, but you can see now since we breakout what we call the legacy portfolio, the finance receivables portfolio net of the allowance, it continues to shrink, it shrunk 10% in the sequential quarter and it's shrunk by 34% compared to last year at this time, and we have a separate line on the balance sheet for the fair value portfolio, $821.1 million at December 31st, and that's kind of what's left of the $900 million that we originated in 2018.

No significant changes on the debt side of the balance sheet. We continue to do our securitization transactions for the quarter, which I'll talk a little bit more about in a minute. Just take a look at some of these operating metrics.

The net interest margin for the quarter was 64.8 million, that's a 7% decrease compared to the third quarter this year, and a 22% decrease compared to the fourth quarter of 2017. For the full year net interest margin of $288.3 million is a 16% decrease compared to the full year of 2017.

ABS costs have trended up generally throughout the year, although very slowly, but have trended up and the total blended cost of the ABS debt on the balance sheet in the fourth quarter was 4.25% compared to 3.82% for the fourth quarter of 2017. So you can see that over the full year there’s been significant increase in the ABS cost of funds.

The risk adjusted net interest margin $39.7 million for Q4, that’s up slightly from about 5% from Q3 of this year and it's down just 1% from the fourth quarter of 2017. The full year risk adjusted NIM 155.2 million is almost flat with the full year risk-adjusted NIM from 2017.

Looking at the core operating expenses $34.9 million for Q4 this year, that’s up 5% from the September quarter and up about 10% from $31.6 million in the fourth quarter of 2017. The full year core operating expenses 136.5 million is up about 11% from the full year of 2017.

And so again you got a couple of things going down -- going on here in the expenses. So there are some increases in core operating expenses, such as employee costs, and occupancy.

But another big thing happening here as we talked about is the fair value accounting doesn't allow us or preclude us from deferring certain costs associated with originating contracts which we’ve incorporated in the prior years.

And so I estimate there was probably about $5 million of expenses that we recognized this year that had we not switched to fair value accounting. Most of that would've been deferred to be recognized in future periods. Looking at those numbers as ratios.

The core operating expenses as a percentage of the managed portfolio 5.9% is down a little bit from -- excuse me up a little bit from 5.7% from the September quarter this year and also up a little bit from 5.4% for the fourth quarter of last year and the full-year ratio -- operating expense ratio of 5.8% is up from 5.3% for the full year 2017.

Looking at the credit metrics, the delinquency as Brad alluded to 13.88% for at the end of the year, that's up from 11.6% in September and 11.3% from a year ago.

Seasonally the fourth quarter is always our most challenging quarter and as Brad said with the growth in the portfolio being very nominal we don't -- those numbers don't benefit from any growth dilution in that denominator.

The annualized total losses were down a little bit in sequential quarter 7.2% compared to 8% in Q3 of this year and just down slightly from 7.24% last fourth quarter -- last year's fourth quarter. And the unrealized losses for the full year 7.74% compared to 7.68% in all of 2017. One thing to monitor of course is what we are getting at the options.

We have seen continuously a little soft in those markets 33% for this option activity, in fourth quarter this year is down a little bit from 34.8% in the third quarter and 34.7% for all of 2017. A quick look at the asset-backed market. So our fourth quarter securitization 2018-D we completed in October of 2018, that was a $245 million transaction.

The markets were very strong and very receptive to our bond offerings at that time. In fact we achieved the lowest weighted-average spread since at least 2011 from any of our securitizations. We have 24 unique investors and achieved a 4.25% blended coupon on that transaction.

And then more recently, you've seen in the release, I think last week for the 2019-A transaction, our first quarter of '19 transaction, actually had slightly wider spreads in a little softer market, but the benchmarks actually sunk a little bit during that period of time.

So even with the slightly softer demand for the bonds we achieved a lower blended coupon of 4.22% for that securitization. So I guess the message there is that overall those bond markets continue to be very receptive to our offerings and it continues to be a relative bright spot of the company's business. With that, I'll turn it back over to Brad..

Thank you, Jeff. Again, so looking at sort of where we said, Jeff mentioned the fair value.

So 2018 was a year where we were making some changes, we’re really focused on upgrading our marketing, getting more reps back in the field, connecting with dealers as much as everybody thinks automation goes beyond all, getting into the dealerships, stocking them is still very important. So we sort of changed our strategy slightly there.

Originations, with the new scorecard, our originations quality has improved substantially. We've actually gave up a little bit on the APR and the discount which we’re going to try and get back as we move forward in 2019, we’re fairly confident we can do that, and that will add substantially to the bottom line if we accomplish that.

With the new scorecard, we think we have sort of a shift mix where we are actually buying more higher tier and so as much as the losses there are good and it will contribute to the bottom line. We still like to have a blend a little more sort of the normal blend we've had, which is more profitable by having some of the more profitable deeper paper.

So that's the project for 2019. But more importantly it sort of shows that what we were doing in terms of the scorecard and originations in 2018 has worked very well.

As far as collection goes, collections is always going to be challenge but we have five branches, all five are operating quite well, at occasions that isn’t always true but it is right now. And so we are in really good shape there as we continue to expand there is a little bit of room for expansion on all of the branches.

So our collections sit very well. As Jeff mentioned, the recovery in the options was down just a little bit, would be nice if we can see that come back some and I don't know that that will happen anytime soon.

I think a lot of customers and folks out there would rather buy used cars just because new cars have become so expensive, used cars have good quality, they are certified new or whatever they call it. And so they get almost more quality buying a used car rather than buying a new car.

And as a result of that, that's going to have some effect on the auctions. But nonetheless we think that's all good as I said in terms of growing the portfolio in the fourth quarter. Originations wise we would expect that trend to continue in 2019.

So the net of all this is we've had sort of a down cycle in '15, '16, '17 and '18 or in '16, '17 and '18, I would to think 2018 is going to be the low point and from here we move forward and up both in terms of originations, originations quality, collections performance, the only sort of downside being probably the cost of funds in the marketplace goes up a little bit as the rates continue to rise.

But if we get some growth and get the sort of better performance that will usually offset there. As Jeff and I alluded to fair value accounting that was a significant change to avoid the CECL hit in January 2020, it’s possible that lots of other folks will adopt fair value. If that happens we will be ahead of that game as well.

So 2018 is much as we have worked up better than we expected. If nothing is right all about, we want better results, better everything. But we did accomplish a bunch of different things in 2018 that will help us in the future.

In terms of looking at the industry everybody is still hanging around when is going the consolidation to happen, there is a lots of talk out there about what's going to happen. People are all waiting around to see these big companies make decisions. All the private equity backed companies are still.

There has been a few smaller companies or portfolios in the sort of 100 million, less than 200 million range that are beginning to triple out but there are really big ones that are always waiting for good ones.

Once the big companies either the peak companies decide what they're going to do, whether they are going to establish market value or not that also has been the trigger for all other companies to make their decisions.

And so we think, I think in 2016, '17 a lot of people, including myself that said geez there’s going to be consolidation in the industry but in 2018 the companies involved started saying they were going to do something.

So to the extent that's true that they are talking about it than us and so the fact that some of these companies are saying they're making decisions and try and do something's hopefully will then start the ball rolling for everyone.

And our whole goal is to be sitting in the right spot at the right time to take advantage of that even when some of these large companies go away or maybe we can purchase one or any of those things. This is going to get some stunning valuation that tide will flow all boats including us so that would be okay as well.

But nonetheless hopefully 2019 sees finally the shake out of some of these folks in the industry and again with what we've done in the last couple years in a great spot for that.

In terms of the big picture there has been a little bit of the news about delinquencies being up across the industry about subprime debt or auto debt being up, I don't think that it's somewhat interesting, I guess being the result of people growing and being aggressive, I think the bottom line for us and what we certainly care about, and probably even the industry is unemployment.

Unemployment is really the answer to everything in terms of performance, if we have recession unemployment goes up that affects our production, our performance, everything. But today unemployment doesn't seem to be factor at all. So we're not overly worried about that.

We think our delinquencies are fine and the delinquency trends across the industry, might it be interesting for some other folks but not for us. So I think 2018 is done behind us, 2019 started. We have high hopes for 2019 and again we will be talking to you soon after see how that works out. So we will open up for questions..

[Operator Instructions] Our first question is coming from David Scharf with JMP Securities. Your line is now open..

Brad, I'm wondering how we ought to interpret the very strong volumes to close out the year, as we think about the 2019 outlook? Because your commentary on the competitive backdrop doesn't seem to have changed and the macro environment hasn't changed.

What was the big spike in volume particular -- which was particularly surprising for which usually the seasonally slowest quarter? Was it somewhat related to buying a lot of higher tiered credits as you were testing your new scorecards or is there something else going on that reflects maybe a shift in either demand or competition?.

Good question. I think we look to other sources.

We've done some sort of -- not quite joint ventures but some flow programs with some other vendors and so we’re getting some looks and other sources just above and above beyond our normal dealer flow and so there’s still sort of in the beginning of seeing how they go but that could provide some additional volume during 2019 and certainly probably did in the fourth quarter.

We are not really quite sure how it’s all going to work out, but it's an interesting avenue of getting some looks at some turndown from some banks and other various companies. But that would probably be the answer to the volume in the fourth quarter. If that continues to work, that would be great for 2019.

And I agree with you that the industry has been -- moreover we said but the industry is still quite competitive, people are still out there, they want to put the best possible picture on their company in the hopes of getting something to happen. So still that changes is going to be that competitive background.

But even having said that we've been in a lot time and so we've been able to set-up some alliances and stuff that should hopefully provide generally good paper regardless of what's happening in the industry..

And normally, we would be thinking about the first half of the year both Q1 and Q2 being strong origination quarters than the fourth.

Were these slow programs, extra looks, I mean should we interpret the fourth quarter as a bit of an outlier or is that a good jumping off point for modeling the typical seasonality?.

Well, I guess. In terms of typical seasonality I would look at it as an outlier because I wouldn’t expect this fourth quarter of 2019 to have a better volume and the first three quarters.

So what we would hope is that the first three quarters of 2019 do jump off than the fourth quarter 2018 we will then maybe get the seasonality back for the fourth quarter 2019. But there is a little bit -- with the government shutdown, tax turns and other stuff, that first quarter maybe pushed a little further out.

But generally speaking we would expect first quarter, second quarter, third quarter particularly first and second to be the growth quarters. And then soften a little bit in the third quarter and then slow down in the fourth.

So the good news is we kind of hope the fourth quarter is the jumping off point for the next couple of quarters but I wouldn’t bank on that being a change in the seasonality of the fourth quarter..

And maybe a question for Jeff. Obviously a 31.5 months that legacy portfolio is becoming quite aged, I know there’s a lot of forecast going to answering this question, but can you give us some sort of ballpark of how we are to think about maybe quarterly provision expense exiting this year.

It seems like some time in 2020 it should go away, would it be below $10 million do you think in the fourth quarter of 2019?.

I don’t know if I can predict that, but I can tell you in 2020 it will go away because what will happen, if we adopt CECL for the legacy portfolio which we turns out that may have an option there that we haven't talked about yet, but if we adopt CECL for the legacy portfolio in 2020, we will take a provision, a one-time provision to establish the remaining lifetime allowance on that portfolio, right? And so there won't be any provision expense in the legacy portfolio.

In fact, I can tell you really after January 2020 there won't be any provision in terms of the legacy portfolio one way or the other.

For this year, I mean I think what you can do maybe a little bit is look at the progression, the sequential decrease in provision expense during 2018 and probably extrapolate off that a little bit and it gets you kind of in the right ballpark..

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

Jeff, just a quick modeling one.

Any outlook on the tax rate going forward here, any changes there?.

Yes, I think it might be a little higher than we've used last year, I would do around 35% on the tax rate..

Okay. And then just change the swing back to cost of funds. It sounds like the first quarter deal actually had a stable cost of funds with the fourth quarter where we're seeing the cost of funds up year-over-year given we’re getting a little bit of a pause from the Fed.

Can you give us the sense for your expectations for your cost of funds going forward?.

I think we feel pretty good about the cost of funds right so the Fed seems to have suggested they are going to take their foot of the gas pedal a little bit on rate increases, and even though -- and as I said they were maybe a little bit -- I don’t know if disappoint is the right word, but we observed a little bit less of kind of a demand of the feeding frenzy if you will for the January deal compared to the October deal.

But even with that slightly softer market with a little bit of a depression in the benchmarks we actually did better on the blended cost of funds. And so it continues as I said, it continues to be a part of the business that we’re really pretty satisfied with not too many things to complain about on the asset backed front..

Probably, it's worth noting that as much as we've had sort of the tax things in both December '17 and December of '18 the accounting world and also our fair value change the Wall Street world is working with risk retention and so you put in the US risk retention rules earlier this year and now they are trying to put in the European risk retention rules and so that affected our first quarter of '19 deal.

So assuming they sort that all out, one would assume that the demand should be just as robust as it's been with our interest rates not going up or at least a little bit, I think you probably have a fairly good outlook on what's going to happen. The good news overall of that is that the demand for these bonds has been great.

It wasn't perfect, as Jeff pointed out our first deal of 2019 and I think that has much more to do with the European risk retention rules than anything about the market. So one would think -- and it's because at the very beginning of the year I think people weren’t sure how it will work, now I think they have sorted it out.

It will probably go back to what we would expect going forward. As I said probably two things we care about most in the world is we care ton about unemployment, we care a ton about the ABS market being there and functioning well. And so the good news is both of those things are great.

No employment, problems and the ABS markets looked that as good as they are going to be even with adjustment to risk retention both US and Europe..

And then one last one from me just a modeling follow-up question.

Jeff on the $5 million of expenses you guys had to recognize upfront because the fair value accounting, which line items were those in specifically?.

It's almost all on employee expenses..

Thank you. [Operator Instructions] Our next question comes from Jim Henry with Automotive News. Your line is now open..

I have a question about affordability, there's a lot being written about especially on new cars, there's an affordability problem on new cars create more demand for you all or do people switch to a cheaper used car or is that not so much an issue to you.

The issue to you is more availability and availability is good?.

Yes, I think it's actually positive for us I mean at this point I wouldn’t want to be a new car manufacturer. I think they are having a very tough time. They had high margins before, I think their margins today after being minuscule.

And so there certainly was an overproduction of cars for the last couple of years so until that bubble or whatever they created goes through I think new cars are going to be a problem, and just to make that problem somewhat worse for them used car is better, used cars better made or cars are better made so the used cars last longer.

I just think -- I think it is an affordability thing. I think customers are saying why wouldn’t I buy a three year old car rather than a new one. Three year old car look pretty like a new. And so I think that's going to affect the auctions somewhat, and I think it's actually really good for us.

I mean if anything it's going to continue to trend the subprime vendors and neo prime vendors doing quite well.

So like I said I think it's very good for us, and rather be us so the new car guys and the dealerships are also -- one of the usual things the dealerships seeing to make money, they never made all that much money in the last 10 years or something with new car sales, they’d still be pretty good on used car and they do even better on subprime.

So I think the trend is very positive for our us, almost regardless of the auctions. At some point the auctions are going to actually get more competitive in terms of what they pay for the cars and our recovery rates should improve. So yes I think it is an affordability question..

Thank you. If there are no further questions the operator will turn the floor back over to the speaker Mr. Charles Bradley for any additional or closing remarks..

So I think you guys got the just of what we’re doing 2018 was a better year than we expected but nothing what we were looking for.

We think next couple of years, particularly 2019 the industry consolidation never happens it should happen soon and that would be a very good thing for all the players in the industry that aren’t looking to be consolidated like us. And I think in terms of all of the things we've done internally we’re in a great spot.

I think the lot of things we've been waiting to see in terms of collection performance, we’re excited to come together. Like I said the scorecard is great. We've done the accounting change back to fair -- over the fair value. So we are not going to see some problem next year.

We have done as much as I guess you would call it in housekeeping but we've done a tremendous amount of housekeeping in 2018 that should bode well for the future. And on top of that we've actually been able to grow some.

So as much as these bottom line numbers aren't quite there yet, and -- aren’t quite there at all yet, and the stock price isn’t quite there yet. We think we’ve built the right thing to be in a position to really succeed in 2019. And so I will see how it goes. I think the remark I said the ABS market is great, unemployment is great.

I think we’re in a position to continue to get growing again. So we’re looking forward to it. With that, we will look to talk to you probably in April. Thank you..

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until the February 22, 2019 04:00 PM Eastern time. By dialing 855-859-2056 or 404-537-3406, with conference identification number 2286988.

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