Good day, everyone, and welcome to the Consumer Portfolio Services 2019 Second Quarter Operating Results Conference Call. Today, the 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 facts maybe deemed 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.

This company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, further events or otherwise. With us now, we have Mr. Charles Bradley, Chief Executive Officer; and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services.I would now like to turn the call over to Mr. Bradley..

Thank you, and welcome to our second quarter conference call everyone. I think overall, we’re happy with the results. It’s sort of the summer doldrums for both our company and the industry. And hopefully, everyone’s on vacation or lots of people are at least having a good summer. But we do have some highlights.

That we think the quarter went pretty much the way we wanted it to go.One of our real initiatives this year in 2019 was to sort of get sort of some of our coupon rate back and some of our fees back. And now as the second quarter is over, we’ve been able to do that.

We raised our coupon almost 0.75% and we’ve gotten our fee to where now it’s positive as opposed to negative, and we’ll probably continue to work on the trend. So that’s a very important thing, but sort of just as important and coupled with that is we were still able to grow.

Somewhat of a new trick is about sort of raise our prices across the board and yet still manage some growth.Our growth is slow, but steady in our current environment that’s probably again a little bit tough to do. There are some folks out there growing massively and maybe radically or whatever.

But nonetheless, for us to go to carve out our piece and still maintain the fees, we think that’s worked out very well.In terms of the accounting, we’re still transitioning to the fair value accounting portfolio. That’s proved to be a little bit rockier.

In the last quarter – in the last conference call, I did mention that the legacy portfolio hasn’t performed as well as we want it to – wanted it to and that’s making the transition a little tougher.

However, the transition is now 50-50, fair value and legacy portfolio and probably more importantly, 2017 and 2018 paper is substantially better than the 2015, 2016 paper and we would assume 2019 will follow along.And so once this transition in 2019 is done, you’re going to see much stronger performance overall in the portfolio, the accounting sort of ups and downs will even out and we think the results will look better and be better.And lastly, for the overall comments, the securitization market remains very robust.

We keep saying it’s been the best we’ve ever done, and then we go to another quarter and it’s the best we’ve ever done.

And so with margins tightening, rates coming down some, we’ve talked about rates coming down yet again, it’s been a very good strong demand securitization market up and down all classes of our bonds and that’s basically the backbone of how we do business.

So having that continue to do well is very important.I’ll run through some of department analysis after Jeff runs through the financials..

Thanks, Brad. Welcome everybody. Let’s begin with the revenues. For the second quarter were $86.3 million, that’s a 13% decrease over last year’s second quarter of $99.4 million and a 2% decrease over our first quarter of this year.

For the first six months, $174.6 million and that’s a 14% decrease compared to last year’s first six months of $203 million.

And so Brad already alluded and it’s kind of old news now, we’re transitioning to the fair value accounting, hit a couple of milestones this quarter with that transition.For now – as of now on June 30, the fair value portfolio is 50% of the total managed portfolio.

And so with each passing quarter, this is going to become more dominant portion of the revenue reporting and the year-over-year comparisons are going to be more meaningful and helpful and – but for the time being, as you can see, it had a significant effect on the – particularly the top line.The quarter’s revenues were aided by, of course, by originations for the quarter of $250 million and were up to $493 million originations for the first six months of the year.

And let’s move on to expenses. $83.6 million for the second quarter, that’s down 12% from the second quarter of last year and down 2% from our first quarter of this year.For the first six months, expenses are $169.1 million, a 13% reduction compared to $193.7 million last year. So most of our core operating expenses are nearly flat.

We’ve actually had some decreases in a couple of categories. Interest expense has increased, and of course, provisions expenses have decreased significantly because there is no provision expense on the fair value portfolio.Let’s look at the provisions for credit losses.

They were $20.5 million for the quarter, that’s a reduction of 42% compared to $35.5 million in the second quarter last year and a reduction of 15% compared to our first quarter this year. For the six months, $44.4 million is a reduction of 42% compared to $76 million last year.

And so you can see that the provisions are decreasing more or less in proportion with the legacy portfolio.

And as Brad alluded to, we’re still taking our medicine a little bit from some of the 2015 and 2016 vintages, which have not really performed to expectations, but most of that is in our rearview mirror obviously.Pretax earnings for the quarter $2.8 million, it’s a 40% reduction compared to the $4.7 million we recognized in last year second quarter and it’s a 4% increase compared to our first quarter of this year.

For the six months, pretax earnings of $5.4 million is a 41% decrease compared to $9.2 million last year. And if you really sort of decompose all these components of the results, you can attribute all of that change and reduction really to – primarily to the change in the accounting.Net income for the quarter, $1.8 million.

It’s a 44% reduction compared to the second quarter last year. For the six months, net income $3.5 million, also a 44% reduction compared to the six months of 2018. Diluted earnings per share is $0.08 and that’s a 38% reduction compared to $0.13 for the second quarter last year.

For the six months, $0.15 is a 40% reduction compared to the $0.25 for the first six months of 2018.Moving onto the balance sheet. Our liquidity position remains stable.

We’ve done now two consecutive securitizations, our second quarter securitization, which we did in April and the securitization we just closed this week and hopefully you saw that press release, where we’ve structured the securitizations down to a single B class – single B rated class.

And that’s allowed us to really maximize the leverage on the securitizations and it’s very good for our liquidity position.The finance receivables portfolio. The declining legacy portfolio, you can see now, is about 50% of the total managed portfolio and the fair value portfolio has gone over $1 billion for the first time.

So that’s going to be the dominant driver of the financial results and the revenue going forward. Not much change on the debt side of the balance sheet, really no material change at all. No new borrowings and we continue to use our three warehouse facilities at levels dictated by our originations volumes.Moving onto some performance metrics.

The net interest margin for the quarter was $58.6 million, that’s down 21% from last year’s NIM of $74.2 million and for the six months, it was $119.6 million, down 22% for the six months – compared to the six months last year.

So, of course, the fair value receivables is kind of – is driving down the top end of the revenue because, of course, the revenues from fair value are net of the expected losses and built into that computation.And then on the debt side for this NIM calculation, the blended cost of all of our ABS borrowings for the quarter was 4.5% compared to 4.2% in the second quarter of last year.

So – and that’s a – there’s a lot of moving parts there obviously. The older securitizations are paying down and some of those older securitizations going back to 2015, for example, have really low cost of funds.

So we’re paying down some cheap debt and putting on – even though we’ve got really good execution of the last deal, a lot of them – last year’s worth of deals are higher blended cost than the ones that are rapidly paying down.The risk-adjusted NIM was $38.1 million for the quarter, that’s about flat actually compared to the second quarter of last year and for the six months, it was $75.1 million compared to $77.6 million, again, nearly flat.

And what’s interesting about this metric is there’s going to be a convergence between what we call the risk-adjusted NIM and the normal net interest margin NIM because the provision expenses incline to go away with the – if the legacy portfolio goes away.

So what we’ve been reporting is two separate metrics will eventually just become a single metric of the net interest margin.Core operating expenses for the quarter were $35.4 million, that’s up just a little bit, 4% from $34 million in the second quarter last year and for the six months, $69.7 million is a 2% increase compared to the first six months of last year.

So again most of the core operating expenses really haven’t grown the portfolio significantly and the amount of originations we’re doing every month has grown just nominally, so we haven’t needed to increase our operating expenses significantly.

The ratio of those core operating expenses to the managed portfolio of 5.9% for the second quarter, that’s up just a little bit compared to 5.8% in the second quarter last year.For the six months, it’s 5.8%, which is just a little bit lower than 5.9% last year.

So this ratio is sort of poised for improvement in this ratio if we – the market conditions give us an opportunity to grow the business, which we think will be able to do here at some point.The return on managed assets, pretax income as a percent of the managed portfolio, 0.5% for Q2 this year.

That’s down from 0.8% in the second quarter last year, although it’s up just a little bit compared to 0.4% for the first quarter this year. And for the six months, it’s also 0.5% compared to 0.8% for the six months – for six months of 2018.Moving on to the credit performance metrics.

Delinquency was end of June at 14.8% and that’s up from 10.07% a year ago and up a little bit from 12% here in the first quarter of this year. And so this is a combination – it’s not a good delinquency month for us and we were a little disappointed in it. But we can point to a couple of things. The portfolio continues to age.

The weighted portfolio age is now 23 months versus 22 months a year ago. That’s contributing to it somewhat.

Another significant aspect of this is we do far fewer extensions this year compared to what we were last year.And some time around the first quarter of last year, we made a decision to reinforce the training and the culture and the expectations and the use of extensions, which are an important tool, but we’ve really seen a decrease – significant decrease in extensions year-over-year and the trade-off there somewhat is a little bit higher delinquency.On the plus side, the annualized net losses for the quarter at 7.82% are up just a little bit from year ago at 7.58% and actually down from the first quarter of 7.98%.

So – and we’ve seen this before.

Even though the delinquencies in the – have become a real challenge in the servicing side of the business, the net losses and – the cumulative net losses also have not increased proportionately as delinquencies have increased.The annualized net losses for the six months, 7.9% is almost the same as last year’s first six months of 7.87%.

The valuation trend to the auction continue to be pretty steady. Actually, we did a little bit better in the second quarter, getting 34.1% of our loan balances, that’s better than the first quarter this year of 33.6% and down just a little bit compared to the second quarter of last year at 34.9%.A quick look at the ABS market.

Of course, our second quarter deal was executed and completed in April. So that 2019 deal closed in April and we had significantly tighter spreads and benchmarks from the January deal, the first quarter deal. So that resulted in a blended coupon of 3.95%.

And we also sold for the first time in two years a class F single B rated bond, which as I said is really good for our leverage and liquidity on these transactions.And then, although this is really a third quarter event, our 2019-C deal closed just this week, just yesterday.

And this one really benefited from sort of a perfect storm of tighter spreads, lot of demand for the bonds, all up and down the cap structure, lower benchmarks throughout almost the entire curve and then you have this kind of inverted yield curve, which really created for some good demand in the bonds really across the structure.So that deal has a blended cost of 3.36%, which is our lowest blended cost since the second quarter of 2015.

So four years, that’s the best execution we’ve had on a cost of funds standpoint for the ABS deals. And with that, I will turn it back over to Brad..

Thanks, Jeff. And looking at a few of the departments little more closely, we get the marketing or sales department, and I think really that is now even more important in terms of us accessing the dealers. I mean, the dealers are predominantly known for taking the easiest route ever, each time and always.

So it’s always a deal – for what we need to do, we need to work with those dealers to make it as easy as possible for them to use CPS and pick CPS to send the business, and we can’t do it just by lowering our price and not checking the documents.

Unfortunately, we still do all that and you need to do it if you want the results that we want.So as mentioned we’re a bit of a stakeholder in terms of verifications and our is price is imperfect, our service is better and our scorecard seems to be improving. What we put in recently in the last two quarters was a dealer portal.

The dealer portal gives the dealer much easier access to the CPS website. It’s basically you can go there and fill out everything you want and get your approval and not have to talk to anyone in CPS.And so the capture rate off of the portal is much, much stronger than the normal capture rate.

We’ve only had the portal into process for about three months, but the results in the future could be terrific. So that’s a very strong point.

Another thing we’re doing and some of you call it a sales triangle, but we blend both the sales department, the originates department and the dealers.So when we have a dealer that really knows what they’re doing, they can work with a certain group within those two other departments to fund deals faster and it gives them much better service, and again, the reward as we get all those deals.

And so we’re kind of trying to be a little bit innovative in terms of how we access the dealers because, again, the dealers are going to take the easiest way.So continuing to give them really good service and they’re giving you good paper and therefore you give them a good price, that works.

Remember, by the way, we’re doing all this while trying to maintain higher coupons and higher fees. So it’s a bit of a new trick, but so far so good, it’s working well.We also are focused on direct lending, that’s up 80% year-over-year.

It’s going to get to the point where probably with a little bit of luck at the 5% to 10% of our business this year or in the next year or so. Again, it’s a very profitable part of the business. Direct lending, you’re more in control of the customer and the performance is much better.

So again, we’re just trying to do everything we can to get different – more oars in the water, more ways to get business, more ways to service our dealers, and it’s working.In terms of the scorecard, we mentioned we have a new scorecard.

We’re using advanced analytics and alternative data to mind our very large database to find the very best paper we can buy at the very best pricing and that’s also starting to yield good results. We’re getting – again, we’ve been able to find better paper and get higher prices.

And so that’s all – these are all very super positive things that we’ve been working on for the last six months to a year. They’re beginning to really show good results in that. We’re still growing. The paper performance is better. We’re getting higher prices in a very tough and competitive market.On the collection side, as Jeff mentioned, the DQ is up.

We did make a fundamental decision to slow down the extension use. We’ve been able to defend our extension use forever, and we have the data to prove our extension usage works. Having said that, the industry seems to be running away with a little bit. So we thought rather than be stuck in that quagmire, we would back off the use of extensions.

If the DQ goes up, as Jeff pointed out, the loss is down.So we’re still – the model still works. I think probably in the long run, using less extensions is better as much as you suffer a slightly higher DQ. The real trick, which is, of course, what we’re working on now is to get that DQ back in line without the use of extensions or as many extensions.

And so we know something to watch in the future is to see if we can do it. We have a lot of confidence we can, and so we’ll have to see how that works out. And again, as long as the losses are flat, we’re pretty good on what the DQ is doing. But we think we can do both. We can have lower extensions and better DQ performance.

So we’ll see.Moving on to industry, which is always the big question what’s going on. The industry is still exceedingly competitive.

People are growing like crazy and trying to grow like crazy because this is the moment where a lot of the PE guys need to make some decisions and so trying to have these companies do well is exceedingly important.So again that puts pressure on us to eke out our meager growth and our performance amongst these people that are doing very excessive and competitive things.

So it’s a very tough market that way.

However – and it’s not like car sales are growing, so there’s a lot of different factors that make this sort of a rough environment right now.So the fact that we’re growing at all and doing a pretty good job of growth, hopefully, 10% or 15% this year and still getting higher coupons, higher fees, we would look at that as a success with a backdrop that our accounting has to get straightened out in terms our change to fair value.

2019 is not going to be the shiny year we would like, but it’s going to be a really good year in terms of all the things in the back side and the future of what we’re doing.I think the other thing that’s helping in terms of the – in the industry is as we’ve talked about there’s a lower cost of funds, basically a very good economy.

You can get away with buying a little rougher paper and having it work with a lower cost of funds and a decent economy.

Any turn in the economy would be very interesting to see how that shakes out, but in the end, everybody, including us particularly, are waiting for the shake out of some of these players that are PE backed and looking for results.So we’ll see.

We’ve said this now probably for well over a year that we keep expecting this to happen and you just see little nicks in a few companies here and there that are going over, going away, but we haven’t seen the big changes we’re looking for. But at some point it’s going to happen.As I mentioned, the economy is still doing fine in terms of our borrower.

We always say that our customer’s probably the tip of the spear in terms of economic performance and they seem to be doing fine. Our customer has become a whole lot smarter. Everyone has the cell phone. Everyone on this call has probably decided, what do I need to know something about it, and you google it.

Well, if you are a borrower and you google, G, how do I not make a payment or how do I work a payment, it will tell you.And so I think our customer today is far smarter in terms of understanding how this works as opposed to just call him up and say, "hey, you need to pay if you want to keep your car." And that method just isn’t quite as friendly anymore and you can’t use it anymore.

And so that’s part and probably one of the main reasons that DQ runs significantly higher over the long term. But again, it’s a challenge. It’s one we can work with. With that, we’ll open up for questions..

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

Thanks for taking my question. Brad, wanted to start just on the pricing, and I know you talked for most of the year of trying to claw back some more coupon.

What’s your sense of how much it’s impacted sort of volumes in your capture rate? And was the 0.75% – I mean, did a lot of this occur at the beginning of the quarter? Just trying to get a sense how we are to think about $250 million of value of the sort of a benchmark going forward?.

I mean, I think our goal is to get back into that 19-plus coupon and we’ve achieved that goal. I would think – we’re going to try real hard to keep it there. I mean, I don’t know that we got too much higher, we’re at about 19.25. If we could stay there, that would be fine. I wouldn’t mind moving it up a little bit.

The way we’re doing it is, we’re trying to find pieces of the market where other people don’t see the benefit in the paper that we do.And so we can sort of buy that paper either a little cheaper and it’s better paper, which allows us to buy some little nice good paper with a higher rate.

And so that combination’s allowed us to move up the APR without losing the business. There’s always the chance, there’s lots of folks out there buying strictly on price or strictly on the lack of credit verification. And so that’s kind of a shark-infested waters you have to navigate.

But I feel pretty confident with where we sit on the coupon and the fees. We’ll continue to try and find ways to edge them up, but I don’t foresee them going down..

Got it. And maybe just a follow-up, I guess, for Jeff. Listen, I don’t want to get too much into the weeds on the accounting. But regarding the legacy portfolio, obviously, the transition to fair value initially was in part – in response to the CECL requirements.

Can you give us sort of an updated sense for where that portfolio balance will be by year-end? And what potentially the book value impact of lifetime reserving for that will be, maybe sort of compare that to maybe what the original expectations were when you adopted fair value?.

Well, yes, the legacy portfolio is running off. I mean, you can almost look at the quarter-to-quarter. So we were at about $1.4 billion in Q1 and were $1.2 billion on the legacy portfolio here in Q2. And that runoff should accelerate a little bit each quarter as that thing goes – as we progress.

But still when we get to the end of the – at the end of the year, it’s probably going to be just under $1 billion, $800 million, something like that.So it’s still a significant asset.

And because the allowance – the traditional allowance is only really forecasting 12 months, you’re looking at potentially a significant additional – in a pro forma CECL adoption environment, you’re looking at a significant additional supplement to the allowance. And we’re probably not far enough along to estimate that.

But it’s a material number, right? But the ground is shifting below our feet on the CECL implementation time line.Because, as you know, a couple of months ago, the accounting standards folks decided to allow a fair value election for folks who would otherwise be subject to CECL and that was something for years that they would never do.

And then, just this week, although it’s not formally yet, they made a very strong indication that they’re going to allow up to a two-year deferral for CECL election for smaller reporting companies.And for public companies, the smaller reporting definition is based on the float.

And just – for instance, we would qualify to defer a CECL implementation for two – up to two years. And so – and of course that’s something also they said they would never do. So – it’s very much up in the air what we will do.

Actually, we’ve got some decisions to make and talk amongst the management and the Board of Directors and decide what the best approach would be for the company, but – and today, that’s not totally in focus yet..

Got it. And then maybe just one last fair value accounting question because we get sort of differing views from some different parties. The mark-to-market, we never hear about marking your liabilities, and particularly with the shifting interest rate environment, I would imagine there might be a catalyst for remarking the securitization.

Is that something that factors into the fair value adjustments each quarter? Or should we just be focusing ultimately on the auto loan?.

Yes, you should just consider the assets because we do not – our debt is not fair value accounting, okay? So the debt – even the asset-backed debt, which is used to finance the auto portfolio, the portfolio of our receivables, the debt is still the traditional accounting and the election that you make is for one side of the balance sheet is independent of election to make the other side of the balance sheet.

So yes, you don’t need to worry about the – things that would – like you’re right though in a changing interest rate environment, you’d have the sort of whipsaw mark-to-market effects on your debt.

Because unlike our auto receivables, the debt is – it’s almost like a real market-based environment and you could look at what similarly rated securities are being written at every quarter and you’d be constantly marking that debt to market.That’s not one of the issues we face.

We do have that hoop to jump through on the asset side of the balance sheet where there are receivables trying to determine what an exit price would be for those assets using fair value, but it’s a little tricky since it’s not really a commodity type of product and there’s not an active trading market for some prime auto receivables in and of themselves.

So we have – the other point, I guess, to make is we haven’t had that sort of whipsaw effect because we’ve sort of deemed that while we’re tearing the math, the initial fair value recognition what they’re accreting at is the right carrying..

Got it. Thank you..

Thank you. And the next question comes from Kyle Joseph from Jefferies. Your line is now open..

Good morning, guys thanks for taking my questions. In terms of the new deals, you guys talked about pricing.

Can you give us a sense for other terms on new deals, LTVs, durations, et cetera?.

We’ve had a slight trend up in LTVs probably over the last nine months, and we don’t necessarily attribute that to anything that we’ve engineered.

I mean, I think that to a degree our – when we implemented our gen six scorecard back in July and August of last year, it really helped to dial in the risk-based pricing and it’s one of the side effects of the production that we had during that period of time is the slight uptick in LTVs.

Last year at this time, we were probably around 112 and this year at this time, we’re probably around 114 or 115.That doesn’t trouble us, but it’s something we’ve observed and we’ve seen that. Terms haven’t changed significantly.

The weighted average original term of anyone of these recent pools of receivables is still probably around 68 or 69 months, and we’re still doing a significant portion of our business, probably 75% of the volume here in the second quarter was 72-month contracts.

And which is – as we’ve stated in the past, I think, it’s kind of the new normal for a new or a late model of used vehicle..

Got it. And then it looks like recoveries are fairly stable year-over-year.

Can you just give us a sense for your thoughts on used car pricing and where that’s adding?.

Well, I think those markets have really normalized, right, because – so – despite of maybe two years ago, where we did see a big decrease from what have been historical highs, now they really hovered around the levels we’ve seen for almost two years with just a little bit of fluctuation back and forth.

So the sort of complete collapse of those markets that people predicted two years ago didn’t really pan out, and I think they’ve normalized.What we sort of keep an eye on is, the news about manufacturers really maybe building too many cars and these cars starting to pile up on dealer lots or expected to pile up on dealer lot sometime in the future.

That – I don’t know what that’s going to do. If that comes to pass, that may have an impact on these markets, but that’s not really an area that keeps us up at night..

We would probably think the trend’s going to improve as opposed to go down. So we’d be optimistic in terms of used car pricing going forward..

Got it, thanks very much for answering my questions..

[Operator Instructions] Our next question comes from Mitch Sacks from Grand Slam. Your line is now open..

Thanks. Question on G&A expenses.

The increases that have been going on in G&A, is it partially driven by the fair value accounting rules?.

No, the fair value accounting is only really impacting two lines of the operating statements, right? The revenues, so it has the effect of less revenues compared to the traditional accounting and less provisions for credit losses. And Max I’ll take that back a little bit.

It’s – there is one aspect of the operating expenses that did – was impacted by the fair value accounting.

In the old days, we used to defer a significant component of our loan origination expenses.So it was about – I think it was about $80 or $90 per loan, primarily attributable to employee costs that were deferred and recognized over the life of the contracts. And so that was the case with the old accounting.

However, if you’re comparing sort of the year-over-year results, Mitch, that change is baked into both second quarter of last year and second quarter of this year because that affect really took place in its entirety once we adopted fair value accounting..

Okay. Yes, because G&A expenses have been kind of ramping throughout middle, latter part of 2018 through now.

What’s driving that increase in G&A?.

I think that really we had nominal increases in staffing, so I think you may suppose that’s maybe attributed to part of it. We’ve made significant investments in the sales side of the business and technology in the sales side of the business.

So we have this sales force CRM platform that has really helped our sales people in the field with more technology and tools to service the dealers and that is from an – that’s a new – certainly a new incremental level of technology and there is material expenses associated with that and a few other things.

But we have early – like there is no new physical space or anything really in the last 12 months, although we did – prior to that, I mean, building up to say during 2017 and 2018, we did add some space in a couple of the branches, but most of that’s been pretty static for the last year..

Okay. And then on the lead side, I seem to remember you guys were starting to work with multiple third parties, and I may have missed this earlier in the call.

Can you just kind of update on how that’s going? And how that’s driving sales volumes?.

It’s going quite well. We’ve got a couple in process. We’re probably going to add a couple more. It certainly takes a little bit of time to sort of workout the kinks between the flow provider and us. We now have two that are going very well and two that are just starting out.

But in some level, it’s a little bit of the new anything, which is everyone’s using it and lot of people want to get involved. So if you’re one of the lenders on the platform, it’s a good thing, and we are. And we’ve actually been asked to be on more.

So whether this would be the new thing forever or not, it’s hard to tell, but right now, it’s a very good thing for us. It’s growing substantially. The paper is better. We’re very happy with it and we’ll continue to look for more..

So potentially that could help you in terms of growing your receivables balances and then potentially also maybe keeping a lid on growth of sales and marketing?.

I mean, it should. I mean, in some ways it’s slightly more expensive than our average where we get loans, but like I said, the real benefit is going to be, it helps in volume, the credit seems to be better so far, those two things alone are enough to make it a very good deal.

But in the long term it probably – it would depend, if it gets big enough to really sort of we’re taking what we normally do, yes, it actually could have an effect on the cost and marketing as well.But I think right now I think the focus is on – the focus is on, it’s going to give us increased volumes.

And in some ways it’s probably one of the reasons we’ve been able to grow in a tough market. But more importantly, down the road, the paper we’re getting from those sources is actually better paper. So you’re going to get sort of a kick down the road as well..

Okay. And final question has to do with the fair value interest rate. I know as you get more experience on your older portfolio, that I guess even impacts the rate that you’re recording on fair value.

Can you just kind of walk us what’s going on there and how to think about that over the coming few quarters?.

So – yes, the way we’re really approaching it now is there’s – when we acquire a month’s worth of loans, we call monthly cohort pool of loans, there’s things we know about it for sure. We know what the coupons are, we know we pay the dealers for it or what we charge dealers for it. We know the terms of the receivables or balances, all these things.

We have to estimate the losses, but we have pretty good data and metrics that help us to estimate what the losses are going to be.

And so you sort of put all that into a pretty sophisticated model and it spits out what we call the IRR, or the internal rate of return, which is the yield, the net yield with the losses baked in of what that pool of receivables should produce.So for instance, like in the second quarter here where we had pretty good APRs and we basically bought the contracts at par from the dealers, with the losses baked in, the net yield is just – it’s around 11% on that pool of receivables.

But with each – and no two monthly pools are alike, right? So as time goes on, you have to consider, again, all those metrics – all those things you know and then make an estimate for the things you don’t know.

And then also with each monthly cohort, there is a blend in the credit mix, right?So like, for instance, if there is a slight trend towards the lower tier hypothetically in a particular pool compared to a previous pool, you might estimate the losses are being a little higher.

So even if you got a higher coupon, in some cases if you think the losses are going to be higher because of the change in the mix, you might end up with a similar IRR.So that’s – I mean, that’s a great oversimplification of what’s really involved.

It’s become a fairly complex process, but one that we’re becoming more and more comfortable with and really I think despite the kind of bumpy road of the transition and the comparison of year-over-year results, I think that once the whole portfolio is really measured on this basis, it’s a better way for a company like ours to report financial results on the portfolio..

Okay.

And then so for the second quarter, I’m not sure if I saw it, did the rate that you recorded the fair value receivables go up, down, or stay stable where it was versus the second quarter?.

Well, the overall blended rate might have been up just a little bit in the second quarter compared to the first quarter, but that would be very close..

Okay. Thanks..

[Operator Instructions] I’m showing no further questions and I’d like to turn the call back over to Mr. Charles Bradley for any additional closing remarks..

Thank you. I think in sort of looking towards the future, we’ve accomplished a lot. It’s hard to really point a finger and say it hasn’t done much for a stock price yet, but we’re certainly putting the building blocks together as we make this transition into the new accounting.

But more importantly, with the way we’re now working with the dealers and we’re growing the portfolio, we would need the smallest of breaks to do exceedingly well in this market.So all we can do is sort of stick to what we know best and what we do the best and wait for our opportunity.

But we are in fact building our small windows of opportunity to grow the portfolio, to increase our pricing and improve the credit, and down the road when things can move a little more, we should really be able to do some great stuff.

So as much as, it’s not the perfect world we would like, there are lots of highlights in terms of what we’re doing and what we should be able to accomplish in the future. With that, we will see you all next quarter, and thanks for attending the call..

Thank you. This does conclude today’s teleconference. A replay will be available beginning two hours from now until August 1, 2019, 4:00 p.m. Eastern Time by dialing (855) 859-2056 or (404) 537-3406, with conference identification number 3196842.

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..