Good day, everyone, and welcome to the Consumer Portfolio Services 2019 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 as 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 Mr. Bradley..

Thank you, and thank you, everyone, for joining us on our first quarter conference call. The quarter was a little different than what we might have expected. I mean, overall, we're very satisfied. The earnings were not quite where we had hoped for. Good news is, probably that will correct itself.

First and foremost, I think tax season, as we've always known, it probably doesn't exist anymore. The tax season now tends to be much more drawn out, much smaller.

So, you don't have that big first quarter impact we've had for years, and over the last couple of years, it has diminished, and this year probably was the least existent or – the most non-existent tax season we've ever had.

And so, that coupled with the fact that we're not growing at some outstanding amount is going to – is what caused sort of the lower revenue, and therefore, the lower earnings in the first quarter. And there's another part in the accounting. We've switched to fair value.

I'll let Jeff walk through that but – so we're almost sort of at the low point in terms of where we would be as we switch. The fair value accounting tends to push the earnings out into the future. And right now the portfolio is in the process of switching to fair value. It's almost 50:50. And so, that again has had a negative effect on the earnings.

That would be the bad news about the first quarter. And again, most of that is one-time and shouldn't affect the future of the Company at all. The good news is the paper is really starting to perform. The 2017, 2018 and 2019 vintages are all doing great and they're beginning to make the 2015 and 2016 vintages pale in terms of their performance.

It's exactly what we've been hoping for and working on for the last few years and now we're finally beginning to see the results. So we still have to sort of go through the tag end of the 2015 and 2016 portfolios, which are now getting pretty old, but again, they're shrinking. Those are the portfolios that still have the provisioning.

So there is bunch of different effects that are causing that paper to have a little more effect on the earnings right now. But again, it's going to run off, and then, the 2017, 2018, 2019 paper will become a greater part of our portfolio, and that should produce even better results for us. So that's good and the losses are down.

Sort of the next level of losses are down, which is also good, but the DQ is up. One of the main reasons the DQ is up is we had a real focus on doing less extensions and just working on the DQ. So it's not so much that the portfolio has a high DQ, it's just that we've cut back on the use of our extension policies, try and turn those down a little bit.

So again nothing that we would be particularly alarmed about and then we would expect that to improve in the future as well. Another highlight or good news aspect of the quarter was that we renewed the Fortress credit facility. So, again, we have our three facilities in place, also working in the way we want them to.

Another thing we did is with the APR, one of our focus has been to raise the APR back to a sort of normal level. We raised it in the first quarter to 18.6, that's up from 18.1. Again you won't see that effect just yet, but in the future you will.

So like I said, as much as we're still at this point in the earnings for the quarter, almost everything else in the quarter is going very, very well. I'm going to comment a little more on the different departments after Jeff runs through the financials..

Thanks, Brad. Welcome, everybody. Let's begin with the revenues. Revenues for the quarter were $88.2 million. That's down 3% from the fourth quarter of 2018, and down 15% from $103.6 million in the first quarter of 2018. And right there, you can see really the impact of the transition to fair value accounting on the revenues side of the business.

Anyway, remember that, the traditional portfolio, the legacy portfolio, as we call it, accrues interest at the gross amount that's on the coupon of the receivables approximately 18% to 19% for those receivables.

But the fair value portfolio, which is everything since we've originated since January of 2018, is sort of a net revenue, where the losses are baked into the revenue number.

And so that portfolio which represents 43% of the business now, the whole portfolio is merrily accruing along at about 9.5%, while the big portfolio continues to amortize off rapidly at the bigger number.

The offset to that I'm going to skip to the provisions for credit losses, provisions for credit losses were $24 million for the quarter, that's down 4% from the December quarter, but down 41% from the year ago quarter. Now, the provisions you'll remember for credit losses only apply to the legacy portfolio.

And you can see the drastic year-over-year reduction, but in spite of that significant reduction, the credit performance of the 2015 and 2016 vintages has dragged down and increased the provisions for credit losses somewhat.

And so we're a little bit in this kind of crosshairs, where we're in the transition to fair value accounting, we start provisions for credit losses, they will continue to decrease, but we didn't get maybe quite as much of a decrease as we'd hoped for this quarter.

The broader expenses, $85.6 million for the quarter, that's down 1% from the December quarter and down 14% from $99 million in the first quarter of 2018. Most of our core operating expenses are really flat. There's a couple of decreased categories.

We did have slight increases in interest expense, which I'll talk about in a minute as we move down the list here. Pretax earnings for the quarter, $2.7 million, that's a 44% decrease compared to the December quarter and a 41% increase compared to $4.6 million in the first quarter of 2018.

Net income for the quarter $1.7 million, that's a decrease of 69% on $5.4 million in the December quarter, the fourth quarter of last year. However, you may recall, we had a $2.1 million tax benefit in the fourth quarter of last year that was kind of a one off event.

The $1.7 million is a 45% decrease from $3.1 million in the first quarter of last year. Diluted earnings per share is $0.07, that's 42% decrease from $0.12 in the first quarter of last year. And moving onto the balance sheet, very little change really in the composition of the balance sheet.

You can see in the finance receivables that the portfolio is decreasing from $1.3 billion this year, compared to almost $2 billion last year. That's a 35% decrease in the legacy portfolio year-over-year. And as I said, that portfolio now represents 57% of the total.

Just below that in the balance sheet you can see the fair value portfolio approaching a $1 billion – $997.6 million compared to $209.8 million last year when we had just begun the fair value accounting. No significant changes on the debt side of the balance sheet. As Brad said, we've renewed the Fortress credit line in the first quarter.

Moving onto some of the other operating metrics, the net interest margin for the quarter was $60.9 million, that's a 6% reduction compared to $64.8 million in the December quarter, and a 23% reduction compared to $79.5 million last year.

From a cost of fund standpoint, the all-in securitization blended costs for the quarter was about 4.2% compared to 4.0% in the first quarter of 2018. And we'll talk about the new securitization cost of funds as we move down the line here in a minute.

The risk adjusted margin was $37 million, that's a 7% decrease from the December quarter of $39.7 million, and a 5% decrease from $39 million in the first quarter of last year. That's significantly influenced by the reduction in provision expense, and then, somewhat also influenced by the slightly higher blended cost of funds.

Core operating expenses were $34.3 million, that's down 2% from the December quarter of $34.9 million and stopped flat year-over-year from a core operating expense standpoint, compared to the first quarter of last year.

As a percentage, those core operating expenses were 5.7% of the managed portfolio, and that's down about 3% from the December quarter and also down about 3% from the first quarter of last year. So with the relatively flat operating expenses and the slightly increasing managed portfolio, we've seen just a slight improvement in that metric.

The all-in return on the managed portfolio, 0.4% for the quarter, that's down about 50% from 0.8% in the December quarter, and also down about 50% to 0.8% in the first quarter of 2018. The credit performance metrics, as Brad said, the delinquency was 12% for the first quarter. That's up significantly from 8.7% for the first quarter of last year.

We didn't get sort of the focused and recognizable tax refund season that we've seen in the past that significantly benefits the delinquency. And we also have, as I've said in the past, an aging portfolio. So, the portfolios in the aggregate, is about 23 months at March of 2019, and that's a month, maybe a month and a half older compared to last year.

And we know that vintage portfolio, static portfolio we have ever-increasing delinquency numbers. However, the annualized net losses for the quarter of 8% were down slightly from 8.2% in the first quarter of last year.

And so we haven't seen and we've noticed this in the past too, even as delinquencies have risen, we haven't seen a proportional increase in credit losses. At the auctions, really stable although not exciting returns at the auctions, about 34% of our net balance is being achieved at the auctions when we liquidate the vehicles.

Just moving back to the ABS markets, so our first quarter ABS transaction we completed 2019 A, we completed in January this year. The market frankly was a little soft getting out of the blocks in first week of January when we launched that transaction.

Nevertheless, we achieved a blended coupon in that deal of about 4.22%, which was a few basis points less than we had priced in the previous deal of October of 2018. And that was largely a result of compressed or drops in the benchmarks, really offsetting what were slightly higher spreads on almost all the classes of bonds.

And this is really a second quarter event, but you might have seen that earlier this week, we closed our second quarter securitization, our 2019 B deal. And in that transaction we enjoyed a significantly tighter spreads and also relatively low benchmarks to achieve a blended cost of funds of 3.95%.

So that's a significant improvement in cost of funds quarter-to-quarter. And also, this transaction marks the first time in about two years that we were able to include a Class F single B rated bond. And so that improves our leverage execution on that deal significantly compared to other recent deals. And with that, I'll turn it back over to Brad..

Thanks, Jeff. And walking through some of the departments, marketing, we've really tried to turn up our focus on capture. We don't – lots of dealers can press buttons and send you lots and lots of applications. It's an expensive process. We really want to get the applications we're going to be able to fund loans on.

And so we've had a focus in the marketing department on getting the capture up in terms of the deals we capture from the dealers rather than just getting them sort of in their system and sending us apps or applications. Also, we continue to work on our flow programs. They're going very well. We have one that's working primarily right now.

We have a couple more in the works. And that flow program is basically working with banks or bank type lenders who don't want to lend to sub-prime and you work out a deal where you get to look at their turn downs. And then for us that's actually a slightly better grade of paper and so the whole process has worked rather well.

And we're continuing to focus on that given that the market is still very competitive out there and with – amongst our friendly competitors. Collections, excuse me – in originations, we have a new scoring model working and it's working very well.

Our focus now there is to sort of look for those nooks and crannies where we can get good performing paper at good prices. That's really been a process and it's working very well as well. So we expect the results there to continue to improve. As I said, the paper from 2017, 2018, 2019, is all very good.

The 2019 paper, hopefully, will be the best of all and that trend will continue. And then as we get rid of the legacy portfolio and sort of stay in this fair value then we should see some real improvement in what we see out of those numbers.

In collections, we've finally reached a point where we think our collection culture in terms of collecting the money from the customers without being too forceful and things like that, so we are within the regulatory boundaries. But again, we think that culture has finally arrived and the results are really good.

All the branches are functioning very well. So as much as – and I pointed out, the losses are down and DQ is up, but again, that doesn't really tell the picture of how well we're doing in terms of collections. As Jeff pointed out, the auctions remain kind of flat. Probably this is about where we sit for a while.

And so that the glut of new cars and off lease cars goes through, but again, we've been sort of living in that area for a long time so that's fine. In terms of the industry, I think as – a little bit of tells the tale and it's still a waiting game. Everyone's curious to see what happens with Fiat Chrysler and Santander.

Obviously, that's the biggest combination in our industry. Everyone wants to know how that's going to break up or what happens there. There's a few companies out there trying to do an IPO or IPOs. Everybody is curious to see if that's possible.

In the midst of that, I think, we're just trying to stay somewhat to keep our heads down and wait for that to come out. We've all been waiting for it for a few years, for that consolidation. We saw a couple of companies go away last quarter or the quarter before. We haven't seen any lately, but we would expect some more as the year continues.

As Jeff pointed out, the securitization market is doing great. It's probably as strong as it's been in several years. Even with the rising rates, we've been able to get better execution. And almost as importantly, the demand for bonds is very good. As Jeff mentioned, we sold an F bond or a Single B rated bond for the first time in a long time.

That just gives you an idea of how strong the market is. Very important for us, again, that we get the better pricing, but also that the market just continues to remain strong because that's the backbone and supporting how we fund loans in our industry. In terms of the economy, the economy still seems really good.

We don't have any problem with – there is – as I said, the one thing we care about is unemployment. Unemployment is not a problem these days. The overall car market is slowing down some, but people still need cars to get to work. So we would expect that the market will, at least, stay this way, if not improve over time.

And finally, and sort of in the summary of what we're doing as a company and looking at the first quarter, there's probably no better test of how a company performs than to have a slow growing portfolio to see what kind of performance your portfolio really has. And that's in fact what we're doing.

On top of that, we've had to switch accounting to get to the fair value accounting and so that's an extra sort of bogey we have to get through. But the fact that we have an aging portfolio, we're not growing real fast at all, very modest growth in this environment, yet our numbers are doing fine and the newer paper is doing much better.

And so those are all the kind of things if you're looking at the industry and you're looking at companies in the industry that are very telling and very important. If we were fast growing like some of the other folks, growing like crazy, we would have ridiculously good delinquency numbers, ridiculously good loss numbers.

They should too, if they don't, that should be an enormous red flag in terms of their future performance. So, it's very easy to show good numbers if you are growing hand over fist in 50% to 100% annually. Try doing it when you're not growing so much, and you're doing modest growth and then show those same numbers.

If you can do that, that's a company that's going to be there for a long time and in the end, will prosper, when those other companies, growing real fast, can't sustain the performance and eventually falls over. It's happened in the past.

We'd expect it to happen again and then we will be able to take advantage of the industry and have the opportunities we want to really grow and succeed again. So as much as the first quarter was a bit of a mixed bag, we think in the end, it's a good stepping stone for the future this year and how we're going to do in the industry going forward.

With that, we will open it up for questions..

Thank you. The floor is now open for questions. [Operator Instructions].

Thank you. And I am showing no questions from our phone lines. I'd now like to turn the conference back over to Charles Bradley for any closing remarks..

But I will highlight that it's a little unfortunate we've done the call on Good Friday, but nonetheless, we appreciate the folks who did listen. And it's recorded, so you guys can hear it next week. Again, I think the quarter went well and we expect to build off of this quarter as we go forward in 2019.

Thank you all for attending our call and Happy Easter..

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until April 26, 2019, at 3:00 PM Eastern Standard Time, by dialing 1855-859-2056 or 404-537-3406, with conference identification number 3479959.

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..