Good day, everyone, and welcome to the Consumer Portfolio Services 2019 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 facts may be deemed forward-looking statements. Such forward-looking statements are subject to certain risks that are -- that could cause actual results to differ materially from those projected. I refer you to the company's SEC filing for further clarification.

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

Thank you, and welcome, everyone, to our third quarter conference call. I think overall, we're happy with the results. They're not the results we would kind of want in the long term, but I think as most people know, we've been talking about it for several calls now.We're sort of laboring through 2019 with much better prospects next year.

We're still suffering through the accounting change that's significant and having a material effect on some of the numbers. And we are also still going through the problems of the legacy portfolio.The good news there is the legacy portfolio is anything from '17 before. So theoretically, '14, '15, '16 and '17.

But of those years, '14, '15 and '16 were not particularly good, '17 was. And the good news is, '17 is better than '16, '18 is better than '17 and '19 is better than '18. And I said that before, not everyone in the industry can say that.

But -- so we need to get through having the rest of this portfolio runoff.Currently, the -- underperforming assets in the portfolio are about 25% of the portfolio, but that number should continue to decrease and even more rapidly as time goes by. So as much as it doesn't look particularly perfect today, it's going to get better.

Also it happens to be still very competitive marketplace. There's people out there pushing real hard.There's lots of PE firm-backed companies that are, again, looking for growth to try and find an exit. So we have that pressure as well. And having said that, we're still probably projecting to grow 10% or 11% this year.

So that's pretty good.And I'll go into a little more detail on all those areas after Jeff runs through the financials..

Thanks, Brad. Welcome, everybody.

We'll begin with revenues, which were $85.5 million for our third quarter, that's down about 1 percentage point from our second quarter of this year of $86.3 million, and down 11% from $95.6 million in the third quarter last year.The nine-month revenue is $260.1 million, down about 13% from the nine months ended September of 2018.

So as Brad mentioned and as we've been saying for some time now, we're seven quarters into this transition to fair value accounting. And slowly, the revenue comps are beginning to normalize somewhat as the fair value portfolio has now overtaken the legacy portfolio.So where we are today, the fair value portfolio represents 56% of the total portfolio.

And so we're going to start seeing, in the coming quarters, a little more normalization and be able to compare these periods a little more normally or somewhat favorably.On the expense side, $82.7 million for the third quarter, that's down a percentage point from the June quarter of $83.6 million and down 9% from $90.9 million in the third quarter last year.

The nine-month expense figure is $251.8 million, it's down about 12% from the nine months of 2018 -- first nine months of 2018.

And most of that reduction -- most of the operating expenses and core expenses are reasonably flat but the big decrease is in the provision for credit losses.In this quarter, those losses -- those provisions for credit losses were $19.9 million, that's down 3% in the -- from $20.5 million in the June quarter this year and down 38% from $31.9 million in the third quarter of last year.

The nine-month provisions for credit loss number is $64.3 million this year compared to $108 million in the first nine months of last year.

So the provisions, remember, only apply to the legacy portfolio.As Brad alluded to, we're still taking our medicine somewhat on those 15 and 16 vintages but the 17 vintages show significant improvement compared to the earlier ones.

Pretax earnings for the quarter, $2.8 million is flat with our June quarter and down 40% compared to $4.7 million in the third quarter last year.The nine-month numbers, $8.3 million compared to $13.9 million, a 40% reduction compared to the nine months -- first nine months of 2018.

Net income was $1.8 million, again, flat with our June quarter this year and down about 44% compared to $3.2 million last year.

And the nine-month net income number is $5.4 million, is a 43% reduction from $9.5 million in the first 9 months of last year.The diluted earnings per share was $0.08, flat from the second quarter this year and down about 38% compared to $0.13 for the third quarter last year.

And the year-to-date diluted earnings per share is $0.22 compared to $0.38, a 42% reduction compared to that first nine months of last year.So much really happening on the balance sheet. The numbers are pretty flat quarter-to-quarter. Our portfolio did grow just slightly during the quarter.

We did originate $262 million of new receivables, bringing the year-to-date numbers up to $755 million for the first nine months. And you can see, when you look at the balance sheet, how the finance receivables is shrinking and the fair value line is increasing as we go along here.No changes in the warehouse financings.

The residual financings, the securitization market and those balances. We'll talk about a little bit later here in the call. But otherwise, there's really nothing happening on the balance sheet. Look at some of the performance metrics.

The net interest margin was $57.6 million for the quarter, that's down 2% from $58.6 million in the second quarter this year and down 17% from $69.8 million in the third quarter of last year.The year-to-date net interest margin is $177.1 million, and that's down 21% compared to the first 9 months of last year.

So the fair value receivables, of course, whose interest yield is net of the expected losses are contributing to this downward trend, and then the -- on the other side of that coin, the actual blended cost of all of our ABS deals for the quarter was 4.5%, which is up just slightly from 4.26% in the third quarter of last year.The risk-adjusted NIM, which takes into account the provision was $37.7 million, that's down 1% from the June quarter of this year and also down about 1% from the third quarter of last year.

And the year-to-date NIM -- risk-adjusted NIM, $112.8 million is down 2% from the first nine months of last year.

And what's happening here is as we -- as the fair value portfolio overtakes the legacy portfolio, the risk-adjusted NIM and the net interest margin will converge and be the same number because the provisions for credit losses will eventually go away.Core operating expenses for the quarter, $34.9 million is down 1% from $35.4 million in the second quarter this year and up 5% compared to $33.2 million in the third quarter of last year.

nine-month core operating expenses are $104.6 million, which is up about 3% compared to the first nine months of 2018.And as I've said earlier, although we have significant reductions in provisions for credit losses, the operating expenses are pretty level. As a percentage of managed portfolio, those operating expenses were 5.8% for the quarter.

That's compared -- that's down slightly from 5.9% in the second quarter this year and up about 2% from 5.7% in the first -- excuse me, the third quarter of last year.

And the nine-year core operating expenses as a percentage of the managed portfolio are 5.8%, which is flat from the nine months -- compared with the 9 months of 2018.And lastly in this category, the return on managed assets is 0.5%, that's flat with our second quarter of this year and down a little bit compared to 0.8% for the third quarter of last year.

And the 9-month numbers are similar, 0.5% for this year compared to 0.8% for the first nine months of last year.Moving on to the credit performance metrics. The delinquency at September 30 of this year is 5.74%, that's up a little bit from 14.8% in the June quarter and up a little more compared to 11.58% in the third quarter of last year.

And we talked about this, I think a little bit in the last call.One thing we've done during the course of this year, beginning late last year and through the course of this year is significantly fewer extensions on accounts that are past due.

And so we're really working with our branch -- collection branches to press the customers to make payments instead of granting them extensions, and we've traded off a few points of delinquency in that exchange.Extensions in September this quarter were down about 380 basis points compared to the third quarter of last year.

Although the delinquencies were up, the losses are pretty flat.

The losses for the quarter, 8.07% that's up a little bit from 7.82% in the June quarter and up just a little from 8.03% in the third quarter of last year.The nine-month losses, again, pretty flat from a trend standpoint, 7.96% for the first 9 months of this year compared to 7.92% for the first nine months of last year.

We've seen pretty normalized and level results in terms of the returns at the auctions for our collateral hovering right around 34% all year and that's only down a little bit from 34.8% for the third quarter of last year.We'll talk a little bit about the ABS market, which continues to be a consistent shining bright spot in our business.

Our third quarter transaction was 2019-C, which we concluded in July of this year.

And tighter benchmarks and generally tighter spreads compared to the April deal resulted in a blended coupon of 3.36%, with the significant demand throughout the cap structure.Our fourth quarter deal just completed a couple of weeks ago, 2019-D had a blended coupon of 2.95%, this is the lowest blended coupon we've had on one of these deals since the second quarter of 2015.

And it was also sold during one of the busiest ABS weeks of the year when there was over $7 billion of bonds in the marketplace. So we're very pleased about those results. With that, I'll turn it back over to Brad..

Thanks, Jeff. I mean, focusing on sort of operations for a minute. On the front end in terms of sales and marketing, our focus has been to reevaluate the states. I mean the whole game here is to find the niches where you can buy paper. And so we look at both states, we look at dealers, we look at programs within states.

And so a lot of 2019 has been the focus of trying to figure out what areas where we can get the competitive advantage in our programs in different states. And it's been relatively effective.Like I said, with all the competition out there, we still managed to grow at about 10%, 11% this year.

Originations, we put in a scoring model or an updated scoring model last year, it's performing wonderfully well. That can be seen by the production, as I said earlier, '17 is better than the '16, '18, '19 same thing. So we're very pleased.

And more importantly, as those portfolio season or the new production seasons, the results will improve even more.One of the things we've done this year, which is a little bit of an neat trick is, we were able to raise our APRs that we charge by almost a full point from the low 18% to over 19%.

And also lower the fees we pay for the deals but still get better performing loans.

And that's probably the best indicator that we're probably doing something relatively right there, in that we're getting better paper, but we're getting to charge more for it.So the whole process from the front end of sales marketing through originations and risk is really doing well.

And the problem is, you can't really see that because of all the other stuff I mentioned earlier. Once we get clear of the accounting change, the older portfolio performance, lots of good things have started to happen. And so we're -- more importantly, what we've done this year has been very, very effective.

In terms of collections, as Jeff pointed out, we've lowered the extensions.If you do the math, and you put the extensions back in, the delinquency hasn't gone up at all. But there's a lot of focus on other folks doing too many extensions. We think our extension policy has always been very strong.

But we didn't really have a big problem of trying to tackle it a little different way and put it back in the DQ and then push DQ down.The other thing about what we're doing this year, and this is also probably true for last year is, we're not really growing, we're only having modest growth of 10% or so.

And when you're not growing, those numbers show basically as ugly as they can possibly be. And so when we can start growing again, our numbers will really look a whole lot better.Whereas other folks are growing hand over fist, and their numbers still don't look very good. So there's some telling things going on in the industry.

But for us, with slow growth and still having pretty good performance, we think that the future looks good in terms of what we're doing once the market opens up little bit and we can grow.Moving on to the industry, like I said, it's still very competitive. Having the lower interest rates out there creates better liquidity.

It gives a lot of people who maybe not have originated as well as they should, a little more breathing room because of the lower cost of funds.We appreciate a lower cost of funds. I'm not so sure it's, in the end, not hurting us a little bit and the industry because I think with higher cost of funds you might push a few folks out.

Beginning, again, to see a few small folks pull out, get out of the market.

We would expect, at some point, that to continue with some bigger folks maybe next year.As I've said, the amount of liquidity in Wall Street, there's lots of money chasing all sorts of deals and that shows in the securitization market, it also shows in lots of other fundraising activities where you're getting probably some of the best deals we can see in the last 5 or 10 years.So again, that helps us, that helps everybody out.

But we're doing what we can to take advantage of those opportunities, and we'll continue to going forward. The real trick is, of course, to see if we can find some opportunistic acquisitions or if we get some more servicing.If we can do that then, again, that would help out a ton.

But really, 2019 is going to end up being this transition year in terms of most of the accounting but also getting rid of the drag or, sort of, lesser-performing portfolios from '14, '15 and '16 and predominantly, probably '16.Economy still looks very good certainly from a consumer point of view. They all seem to be doing well.

The employment, again, is the most important thing for us, unemployment is fine. So we think the health of the economy is good, not particularly worried next year, maybe the year after it gets more interesting.

But overall, we think the health of the economy helps, obviously, our industry.As we've said before, our consumers kind of the tip of the spear in terms of what's going wrong with the economy. And they seem to be performing quite well, still. So we think that's another good sign. And again, we would expect it to continue.

So again, 2019 was, get through it. 2020, hopefully, would be brighter things.With that, we'll open it up for questions..

[Operator instructions] Our first question comes from John Rowan of Janney..

Just one housekeeping item, so you had $40 million of net charge-offs in the quarter, correct? That's -- I back into that number?.

That sounds about right..

Okay. And what is -- I want to just look at the net charge-off rate on the legacy portfolio.

What number would that be? Because I think the 8.07%, that's inclusive of both the legacy and the fair value portfolio, correct?.

Because that's an aggregate number, right?.

Right. So if I'm trying to run out the legacy portfolio, I need a different charge off figure for the legacy portfolio, which I'm calculating is somewhere in the 14-ish percent range.

Does that sound right?.

Yes. We'll have to -- have to circle back with you, and I'm trying to picture the disclosures in the 10-Q if we break it out, either in the fair value footnote or somewhere else. But we don't get into that detail in the press release, I can see that. But that's a hard number.

There's no sense -- we don't need to guess that, and I can get it for you, John..

Okay. But you're going to continue releasing reserves, right? I mean when -- I mean there is a big reserve release in the quarter, obviously, just given the charge off relative to the provision. I mean when does that stop? I mean at some point, you're actually not going to have a reserve on the legacy portfolio.

And what -- where do you see that? Can that be in 2020?.

Well, what's going to happen is, in January 2020, we'll have to make a decision on the legacy portfolio, right? So we'll have -- I mean these are the options. One, we could adopt fair value for the legacy portfolio, which I think we've ruled that out.

We'd not do that.Option number two would be to take the -- to defer adopting CECL for one year because the FASB just in the last few months gave smaller reporting companies that option to differ adopting CECL.

And then the door number three would be to early adopt CECL in January 2020 and put the remaining lifetime allowance -- establish that allowance at that time.And so I think we're leaning towards the door number three slightly, but we haven't made that final decision.

But at that point, there would be no -- there would be a lifetime allowance in the legacy portfolio, assuming that allowance was adequate for the remaining life, there would be no more provisions for credit losses on that portfolio..

Okay. And then just lastly.

Brad, I think you mentioned getting better rates on new loans, right? As we transition to the fair value portfolio, it's kind of important to know what the net rate is to the company, right? So can you give us an idea what the yield is and what the implied credit costs are, adjusting the fair value portfolio for new loans, we know what the net yield is to show on just that portfolio?.

On the fair value -- on the new receivables and the fair value portfolio?.

Correct. Yes..

Right. So when we take -- like in this quarter, for example, we originate receivables -- for the most part, their coupons were around 19%. For the most part in the aggregate, we're purchasing them at par. And we look at that credit mix on those and make an estimate of future losses.

And when we bake in the losses and do the net present value and compute a flat internal rig return, it's around 11%. And it's hovered around 11% for really every monthly and quarterly cohort this year..

Okay.

So it's like 19% yield, 8% loss, 11% net yield to CPSS?.

Yes..

Our next question comes from Kyle Joseph with Jefferies..

Jeff, just wanted to talk about rates and the impact on the business. Obviously, you guys gave us -- that you've actually been able to increase pricing but just seeing if you guys have seen any relief in the cost of funds side.

I know you mentioned it was up on a year-over-year basis but sequentially, did you get some relief?.

Well, on the ABS deals, we -- the deal we put on is the lowest cost of funds in 4 years. And what's happening is, I mean, if you -- if I look back over the last -- over the ABS deals over the last 4 years, we've had some cycles or some ups and downs in that market.

And I think we did a few deals in 2015 and '16 where the blended cost was above 4%.So what's happening is, some of the real cheap stuff going back to '15 is running off. And we've got this kind of bulge in the middle with higher-cost deals, and now we're putting out some lower-cost deals.

And so the current blend is at 4.5% or so.We've got a really nice table in the 10-Q that takes all those -- all the interest expense components and shows kind of what the current quarter and that comparison over the previous year.

But I mean, we certainly can't -- and we can sort of lament a little bit about the credit performance of some of these deals going back to '15 and '16. We can lament a little bit about the competitive landscape and the difficulty in growing the business. One thing we can't complain about is the ABS market..

Got it. And then, looks like your recovery rate fell a little bit year-over-year.

Can you just give us your outlook for used car prices and your expectations there?.

I think we feel good about that space. It's really normalized over the last 2 years in spite of -- a lot of people sort of predicting more dire results there. But I don't think there's anything in the horizon that would suggest to us that those -- that marketplace is going to change very significantly in the next 12 months or so..

[Operator instructions] Our next question comes from Jeff Zhang of JMP Securities?.

Jeff, you there?.

[Operator instructions] I'm showing no further questions. I'll turn the call back over to Mr. Bradley for any closing remarks..

Thank you. We appreciate everyone attending the call. Like I said, we got two more months in the year, can't wait to have those months be over, put this behind us.

But like I said, there are bright spots in terms of how we're running the company, what we're doing to improve everything and all we need is sort of a clear field next year and see how it all shakes out. So again, we appreciate your time, and we will look forward to speaking with you next year..

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until November 6, 2019, 3:00 p.m.

Eastern standard Time by dialing (855) 859-2056 or (404) 537-3406, with conference identification number 7170238.A broadcast of this conference call will 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..