U.S. Markets closed

Edited Transcript of CPSS earnings conference call or presentation 20-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Consumer Portfolio Services Inc Earnings Call

Irvine Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Consumer Portfolio Services Inc earnings conference call or presentation Thursday, April 20, 2017 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles E. Bradley

Consumer Portfolio Services, Inc. - Chairman, CEO and President

* Jeffrey P. Fritz

Consumer Portfolio Services, Inc. - CFO and EVP

================================================================================

Conference Call Participants

================================================================================

* David Michael Scharf

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone, and welcome to the Consumer Portfolio Services 2017 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 of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that can 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 publicity and forward-looking statements, whether as a result of new information, future events or otherwise.

With us here now is Mr. Charles Bradley, Chief Executive Officer; and Mr. Jeff Fritz, Chief Financial Officer. I will now turn the call over to Mr. Bradley.

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [2]

--------------------------------------------------------------------------------

Thank you, and welcome to the first quarter conference call for CPS. I think, overall, we're pleased. We're not excited about how the quarter went. I think generally speaking, for a long, long time, everybody was very used to having the first quarter of the year be a very big quarter, tax returns and such. And lately, in the last few years, that's changed. Maybe it's just the rolling release of tax returns are now later in the quarter. And they seem that they don't come quite as suddenly, and they certainly don't last quite as long in what we deem the tax season. And so the quarter is not -- I just think that the days of the first quarter, being the hallmark quarter of the year are probably over and that you'll see more of an evening of the quarters over the year.

But having said that, we had a very slow January and February and a very good March, and so March did wonders to sort of pull the quarter through. April appears to be a bit slow but not as slow as January and February. So again, like I said, I think it's more of a -- your scattering that tax season over more months and more towards the end of the first quarter and into the second quarter. And so maybe that will benefit the second quarter some.

Collections continue to improve slightly. They're not -- they're still not improving to the extent we want them to. I think there's a lot of sort of reasoning behind that, which we'll get to a little later on the call, but they're better. They're not great. So again, we keep waiting for some real move in the collection area, but we'll have to see when and how it's going to happen.

Losses, on the other hand, they're higher. But we think we, hopefully, are getting to a point where maybe they peak, and we could hopefully as collections does continue to improve that we sort of reached the high end of that scale, and we'll start working our way back down.

Interesting enough, there's lots of talk of tightening in the marketplace. As far as we can tell, there's a little action along those ways -- those lines. We haven't seen much tightening from what we can see. So as much as that seems to be what everybody else is talking about, we've tightened. We haven't seen too much from anyone else.

And lastly, the capital markets, even in the face of all these different things, still remain very strong. We're having no problem with securitizations. Execution is actually starting to improve again, so real good -- sort of good news there and bodes well for the future as well.

I'll get in all of those areas a little bit in more detail. But first, I'll turn it over to Jeff to go through the financials.

--------------------------------------------------------------------------------

Jeffrey P. Fritz, Consumer Portfolio Services, Inc. - CFO and EVP [3]

--------------------------------------------------------------------------------

Thanks, Brad. Welcome, everyone. We'll begin with the revenues.

Revenues for our first quarter, $107.6 million. That's down actually 1% from the December quarter and up 7% from the first quarter of 2016. So what we're seeing now here from the revenue standpoint is just the portfolio has sort of leveled out with the current volume originations. You see virtually flat revenues in sequential quarters, but still that increased over a year ago. We did do $229 million in new originations in the first quarter. But as I indicated, that really just keeps the portfolio kind of at the current level.

Expenses for the quarter, $99.8 million, a 5% increase over the fourth quarter of last year and a 13% increase over $88.4 million for the first quarter a year ago. Actually, on a sequential basis, most of our expenses -- operating expenses were flat, but we did have a significant increase in the provision for credit losses. We can look at that, the credit loss provision for the quarter was $47.2 million. That's an 8% increase from the fourth quarter and a 7% increase compared to $44.2 million a year ago. And so what I think we're seeing, continue to see is erosion in the recovery rates that we get at the auctions, which has been a big industry topic. And we're certainly seeing the impact of that in our losses and flowing back through the provision for credit losses in the P&L.

And then similarly, just as Brad indicated, the servicing side of the business continues to be a challenge, although we do have some indications of improvements, some seasonal improvement in the first quarter on the delinquency side.

Pretax earnings, $7.8 million for the quarter. That's down compared to $12.7 million in the fourth quarter of last year and down 36% compared to $12.2 million a year ago. Net income for the quarter, $4.5 million. That's down 40% from $7.5 million in the fourth quarter and 38% compared to $7.2 million a year ago.

Diluted earnings per share, $0.16 for the quarter compared to $0.26 in the fourth quarter, a 38% reduction and a 33% reduction compared to $0.24 in the first quarter of 2016.

Moving on to the balance sheet. No significant liquidity-related transactions during the quarter. We continue to use our warehouse facilities to originate receivables, and we did our first quarter securitization in January of the first quarter. I'll talk a little bit more about that in a minute.

As I've indicated, the managed portfolio stayed pretty much at the same level in sequential quarters but is up about 9% compared to last year's.

No significant changes in -- to the debt side of the balance sheet. As I said, we continue to use our warehouse lines, our 3 warehouse lines. No other changes and other forms of debt.

Looking at some of the performance metrics. The net interest margin for the quarter was $85.5 million. That's down just a tick, 1% compared to $86.7 million in the fourth quarter of last year but up 3% compared to $82.8 million a year ago. We continued to see -- although we had good execution from a spread standpoint of our first quarter securitization, we have continued to see a rising cost -- blended cost of all of our ABS borrowings. So for instance, in the first quarter, the ABS cost of funds was 3.7% compared to 3.6% in the fourth quarter of 2016 and a significant increase compared to 3% in the first quarter of 2016, the year-ago quarter.

The risk-adjusted NIM, which takes into account the provision for credit losses, was $38.3 million in the first quarter of the year. That's down 11% from $43.1 million in the fourth quarter of '16 and down only 1% from $38.6 million a year ago. So the NIM compression is really significantly impacted by the increase in the provision for credit losses as we moved along here.

Core operating expenses for the quarter essentially flat at $30.6 million compared to the fourth quarter of last year and up 16% compared to $26.4 million for a year ago. I mean, we've seen pretty consistent improvement in our operating leverage. But now, I think we're seeing that kind of level off a little bit as the originations have sort of leveled out, and in turn, the portfolio leveled out somewhat. That particular metric, core operating expenses as a percent of the average portfolio, pretty much flat at 5.3% in the first quarter compared to the fourth quarter of last year and actually up a little bit compared to 5% in the first quarter of 2016.

The return on managed assets for the quarter, 1.3% compared to 2.2% in the fourth quarter of last year and 2.3% compared to the first quarter a year ago. The 2 biggest impacts on those, that particular metric is the higher borrowing costs, as I've alluded to, and the blended ABS cost of funds and the increases in the provisions for credit losses.

Looking at the servicing metrics. The delinquency, 9.7% at the end of the first quarter here. That's down significantly from 11% at the end of the fourth quarter and up a little bit compared to 8.9% a year ago. So we had sort of a predictable seasonal improvement, first quarter improvement in the DQ. Losses, 7.9% through the first quarter annualized. That's up compared to 6.9%, almost 7% in the fourth quarter and up a little bit from 7.6% a year ago.

We talked about the auction percentages. Actually kind of flat, maybe up a little bit, going to the first quarter from the fourth quarter of last year. I think we saw a similar pattern last year, after which there was significant continued degradation of that number throughout the year.

Quick look at the ABS markets. So our 2017-A transaction was concluded, closed in January of this quarter. That was for $206.3 million of bonds. The blended cost of funds of 3.9% reflected -- it was up a little bit in terms of a blended cost of funds from the fourth quarter of 2016, but that actually reflected a 19 basis points of spread compression compared to the fourth quarter of 2016. So the execution on the deals continues to be very good.

We had our 2 AAA ratings at the top of the stack as we've had now for, I think, a couple of years. 27 unique investors, 3 new investors and a very strong response, kind of at the top and the bottom of the cap structure with many of the classes oversubscribed, 3, 4 and even 1 class was 6x oversubscribed.

So with that, I will turn it back over to Brad.

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [4]

--------------------------------------------------------------------------------

Thank you, Jeff, and looking at a few of the different areas, starting with marketing. Our workforce is fairly stable at the moment. We're not really trying to grow it, particularly. We're really -- we've maybe individually try to improve in certain areas of the country, but overall, just keeping it stable. As I mentioned, the market seems to be slowing down yet again. And furthermore, we're not really looking to grow very aggressively in this market. So again, it's more of internal -- improving-the-marketing situation internally rather than growing it on a national level.

New car sales are now starting to slow down. Certainly, it's my belief that last year, towards the end of the year in particular, the manufacturers pushed real hard to get those sales number up for the rest of the year, and now you've seen the result of that. I would fully expect new car sales to continue to trend down. You then move on to the used car sales, the somewhat glut of cars in the market, which is impacting our resale prices. Overall, it certainly feels like there's too many cars out there. And until that changes, it's going to be a bit of a burden on the industry.

In terms of originations. As I mentioned, we haven't seen too much signs of tightening overall in the industry. I think some of the bigger folks, some of the larger banks have certainly talked about tightening, and you may be seeing a little bit of it there. Down in our end of the woods, our neck of the woods, you really haven't seen too much of it lately. We did tighten our LTV. We contracted our LTV some to where it's the lowest it's been since the second quarter 2014. We think LTV is one of the real indicators of what you're buying, so that would be an easy way to indicate that we certainly did do some tightening in the first quarter. I think other players will tighten as they go, or maybe we'll see more tightening. But at the moment, and certainly through the first quarter, we haven't seen too much other than sort of ourselves.

In terms of collections, this is the long road of change. And there's a bunch of things at work. I mean, everyone -- when we've talked about probably all these things I'm going to mention before, first, you have the regulatory environment. You had a lot of regulatory changes in the way we could contact customers. And pretty much, we had to rewrite the book, and we started doing that in 2012, 2013. And it's been long, slow process. As I've said in the past, I think it's getting there. And I think sooner or later, we're going to see some improvement as our collectors are used to collecting the new way, and even some of the folks that never could learn to do it the new way are gone. And so we're having a much stronger overall collection for us, and that's certainly what we're seeing. Now of course, we want to see the results.

The other thing that also we've now sort of been able to recognize is that our customers change. We've mentioned before, I used to get a call at home. The phone would ring on the wall and such. Today everybody has an iPhone or some kind of smartphone, and they can see the calls. And so what we've seen more is an ongoing trend of customers being able to sort of put off making the payment and then making the payment when we either talk to them and tell them this time we're going to take their car. Or in fact, when we've actually taken the car, the reinstatements are going up significantly over time in that when we have their car, obviously, they're much more interested in getting it back. In the past, that wasn't so true. That we repossessed a car, most times a customer wasn't in a position to buy it back. Today, that just is one more indication that the customers are willing to sort of play the credit game, if you want to call it that, and it is a whole different thing for the industry in terms of how you work through collections with what appear to be higher delinquencies in the front end but not really seeing the results in the back end in terms of losses that you might have expected 10 years ago.

Also, recoveries. As Jeff mentioned, recoveries ticked up a little bit in the first quarter. We might want to say that, that shows that recoveries are stabilizing. But unfortunately last year at exactly the first quarter, they ticked up as well, and then they continued to slide down. So again, we're not really looking for recoveries to improve. I don't think they're going to slide too much further, but I'm not really a proponent that they're going to either level up or go up anytime soon.

And looking at the industry overall. We have the same 3 themes on a fairly repetitive basis, the regulatory environment, where we are in the cycle and the competitors in the marketplace. Regulatory environment certainly has become far more stable than it has been over the last 8 years. If anything, it really hasn't improved. But as I've said in the past, I'm not really looking for improvement, I'm looking for stability and what we should expect, and I think we are getting that. And so at some level, we would like to check off the regulatory environment as a problem for our industry.

The cycle is still a problem. We've been in this business a long time at this point, 25 years or more. And right now, in a 0, 0 and a 1, you could sort of see the industry having sort of a shakeout. We had again that same shakeout in '08, '09. Both those were somewhat a result, if not a lot of a result of a recession. We haven't had a recession this time. But it certainly, feels a lot like there's going to be some consolidation in the industry. We're going to lose some of the competitors in the industry, and so it may not be a direct result of recession, but we certainly had a very weak economy for a while there. And maybe that's what's going to cause a readjustment within our industry. But having said that, people are all waiting to see that play out in terms of, "Am I buying into the down to the end of a cycle when I'd much rather be buying into the beginning of a new cycle?" And so that is yet to be determined. Maybe we'll see it soon.

And lastly, the competitors. There's a lot of competitors in our industry struggling. Lots of small ones that came into the industry over the last couple of years are now having some real significant problems as the paper they bought hasn't performed are going to have more difficult access to the capital markets, and that also applies to some of the larger players in our industry who have grown real fast and haven't really done as well as people might have expected. And so again, many folks are waiting to see how that shakes out. Having the press write numerous articles on a continuing basis about how terrible everything is and how this is going to be the new bubble, which is not, and all these other things hasn't helped. But in terms of the investor universe, loads of people are looking at those kind of factors in determining when they want to play in these stocks.

I'm sort of trying to go back to some good news. The capital markets, on the other hand, are doing great. We recently renewed our Fortress Credit line, and that worked out very well. As Jeff pointed out, we did a securitization in the first quarter in January. We recently done another one. The trend now appears to be, even in the face of rising interest rate, we have tightening spread. And so that's a very strong sign that the capital markets are very healthy and very good and particularly good with CPS.

It would appear that the pricing is now going to be on an improving trend from what appears to be around a high for us, around 4.5% about a year ago. And we can keep that pricing below 4%. I mean, that's a very good advantage, and again, particularly in the face of rising interest rates if they continue to rise as we might expect.

So the securitization market is quite strong. The credit line market also is quite strong. And to the extent we needed some capital, I think that market is pretty good. We're not really in the market right now. But just overall, I think the capital markets are as good as they've been. In some ways, they might have taken a little bit of a holiday last year. But now, they seem to be much stronger this year, which I think is a very good indication of what we can do in the future.

In terms of credit, I mentioned there are a few of the larger people have said they're pulling back, some of the big banks. And we've seen that. And so I think at this point, we're waiting to see what our competitors do. We've also, in many instances, said there's tightening and readjusting credit, which as I've mentioned, we haven't really seen, but maybe we will see it sort of as the time rolls by. I think that would be a good thing for the industry. It certainly would help us as well.

In terms of stock repurchase, we bought 562,000 shares, give or take, this last quarter with an average price just under $5. That brings us to over 4 million shares over the last couple of years. So we are continuing to do what we can to buy in that stock, and I think it's beginning to have a good effect.

Probably something that's worth noting, as much as our stock price doesn't seem to want to go anywhere, is our book value. Our book value in the first quarter of 2015 was $5.31. Last year in the same period, it was $6.69. And today, it's $8.14. So again, as much as lots of things going on in the industry, lots of companies struggling, we are doing quite well. Not -- a few people out are going say that their book value is continuing to rise like ours has. You can only assume that if we continue to do things right, we continue to perform strongly, continue to increase our book value that someday we'll be rewarded for that with a better stock price. We can control an awful lot of things in CPS and how we do business and what we do. We cannot control the stock price. And it's very unfortunate when would we expect it to be much better these days. But as I've said before, with all these different factors out there, people just want to wait and see how it all boils out. Given our -- one of our goals is to continue that book value to where it's just too attractive to ignore, and I think we're doing a good job with that. But 2017 could be an interesting year for the industry.

CPS is very well positioned within the industry. Our credit -- we've been tightening credit for 3 years. We should see the results of that in the future. We think we've gotten a handle on the collections. We should see improvement in that in the future. And so most importantly, we're not going anywhere. Our company is doing well. We're going to weather whatever industry out-shake there is or shakeout there is. And with any kind of luck, we'll take advantage of it. So it's been a little bit of a long, slow grind the last couple of years, and it may continue to be for a little while longer. But at some point, we're going to do very well as a result of being very tenacious and conservative and moving along at the right pace.

With that, I'll open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from David Scharf with JMP Securities.

--------------------------------------------------------------------------------

David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

--------------------------------------------------------------------------------

Brad, as usual a very thorough presentation, so maybe just a few follow-up questions. And one is, and we discussed this every quarter, the competitive landscape out there and your observations that you really haven't seen much tightening by others. I'm curious, do you have any thoughts about when we may see the first signs of a shakeout, if you will, of some of the smaller lenders? Are you seeing anything, either in some other marketed ABS transactions or just what you hear through the grapevine, about the ability to secure funding or warehouse lines that gives you a sense of whether perhaps in the second half of the year we may see things ease up? Just curious what your broader observations are.

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [3]

--------------------------------------------------------------------------------

I think we're as curious as the next person on what's going to happen in the industry. In terms of signs, it almost sort of makes sense. What we're beginning to see is the smaller players. The guys that have come in a few years back and they haven't really gotten to some critical mass are beginning to show signs of trouble. We certainly heard rumors of companies having trouble. Some of the equity investors or sponsorships in those companies wanting to get liquid or get out. We -- it's public knowledge there's been some management changes in some of those companies. And so I guess, that would be the beginning of what you might see. Certainly, you might also begin to see some companies having -- particularly the small ones, having much tougher times having access to the securitization market or having access to capital in general, and so we are beginning to see that with some of the smaller players. Sort of the downside is the smaller players don't have that big of an effect on what we do, but it's a good start in terms of trying to see what's going to happen next. I think the problem you have and I think sort of just to give context is you buy all this paper. Let's just take a small company. A small company comes into the business with equity sponsorship and capital. They start buying a lot of paper, and they think it's working out fine. And let's just say that will happen in 2014 or so or '13. Well by '15, '16, you're starting to see that paper's performance. And if it's not working and you're not a big enough company, then you've got a problem because you still need more capital. If you think about it, if that paper doesn't perform that originated in '14 and '15, when you get to '16 and '17, the capital requirements to move forward with securitizations will be more. The capital or equity requirements to draw more capital in will be more. And now all of a sudden, you've got all sorts of pressure on those companies in terms of staying alive. And you can then take that sort of same analogy and roll it to the bigger companies. If you don't have critical mass, you don't have enough capital and you're not making money, all sorts of problems start to evolve in terms of how you can access capital you need to run your business and how you can access the capital you need to fund your securitizations. And so we haven't seen that with the big players yet. But certainly, you might expect we might. So we'll see. But the answer to your question, yes, we are beginning to see it with the smaller players. If that trend continues, this might be a very interesting year across the board.

--------------------------------------------------------------------------------

David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

--------------------------------------------------------------------------------

Got it. That's helpful. And maybe a similar topic. But switching to credit, you made the comment, and I know it wasn't written in stone. But you were hopeful that perhaps the net loss rate you experienced in the quarter was close to a peak. Is that based on your observations of how your most recent originations have been performing after tightening a bit and reducing LTVs? Is it based on a belief that recovery rates have finally bottomed out? Trying to get a sense for how we should be thinking about that in the context of, obviously, the rest of the industry.

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [5]

--------------------------------------------------------------------------------

(inaudible) so that's exactly not the way to think about it because -- but it is a very interesting question because it sort of gives me a good chance to give you an interesting answer in that if your paper isn't performing, and this goes back to your previous question. And it's true for us, but not to the extent maybe for lots of other folks. But our '13 and '14 paper at this point, we know how that paper is really going to perform, and it's not going to perform as well as we wanted it to. And so we also might have known some of that a while back. And so what you do in that arena is you start tightening, and so we did. And so on the one hand, we have a lot more faith in our '15 and '16 paper performing much better. And so that's sort of the hedge. When you're sitting there in 2014 and '12 and '13 don't look very good, in '14 and '15, you try and buy better paper, which we did. And so on the one hand, we think the paper from '14, '15 and '16 will all improve, but that doesn't help collections today. Collections today, you're collecting all of it the same. And so our originations and marketing hedge was to buy better paper to tighten, and we did. But that paper -- so therefore, even if collections doesn't improve, the paper performance down the road should improve because we bought better paper and nothing to do with collections, which is why it's sort of funny. Then the second thing, we don't really -- the recoveries again. We don't think the recoveries are going to improve, so that's not in the solution or the equation either. But what we really see is we just think our branches are performing better. The branches are working together better. Everyone's now marching to the same tune in terms of how we collect loans, and that's what we see. And again, that's much more of a CPS thing than anything else, which is why I try to distinguish it from the other 2. Better recovery rates will flow to all boats. To the extent people tighten like we did, buying better credits will flow to all boats equally as well. But improving your collections internally and the way you collect your loans, that's much more of an individual thing company to company. And so we think that we're beginning -- as unfortunately I've said this before and haven't been quite accurate. But again, we think we're finally getting some progress in just the overall way we collect our loans. And we see that at the branch level. We see that at the way all the different collecting groups perform, and so that's why I'm optimistic that maybe these things have finally peaked. Having said that, I've been slightly wrong in the past, if not a lot of wrong in other things. But in this thing, we're rather hopeful but it's because of that way our collectors are now collecting much more than buying better paper because we won't see the results of that for another year or 2.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Kyle Joseph with Jefferies.

--------------------------------------------------------------------------------

Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

Wanted to talk a little bit about tax refunds during the quarter. I know you talked about sales in January and February being weak and recovering in March. Can you give us a little sense for the credit performance? Did it sort of mirror those trends as well? Were delinquencies elevated earlier in the quarter? And did they recover later in the quarter?

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [8]

--------------------------------------------------------------------------------

Probably that's a fair statement, that in January and February, they weren't as good as in March. Yes, that trend is -- and that was probably somewhat typical to the quarter. Ironically, as I think I've mentioned, used to be the tax refund started like in January 5. Now they don't start until the end of February or something along those lines. And so it would make sense that certainly March was another very strong month, both in terms of originations and in terms of performance. So yes, I would agree with you that it trended in a positive fashion over the quarter and probably both areas. April hasn't fallen off a cliff by any means. It slowed a little bit, but we would still expect to have a pretty good, so far, start to the second quarter. Again, we would kind of hope that the credit performance would also drift to the quarter as well.

--------------------------------------------------------------------------------

Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

Got it. And then shifting over to used car prices, was there any impact in the quarter from tax refunds being delayed? And the indices that we look at, there's 2 in particular, and they're kind of showing diverging trends. What would you say used car prices have done year-over-year for you in terms of auction values you're receiving?

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [10]

--------------------------------------------------------------------------------

Jeff has the direct numbers.

--------------------------------------------------------------------------------

Jeffrey P. Fritz, Consumer Portfolio Services, Inc. - CFO and EVP [11]

--------------------------------------------------------------------------------

Yes. I mean, it's interesting, Kyle, because our recoveries at the auction were 35.2% for the first quarter, and that compares to almost 40% in the first quarter or 39.9% in the first quarter of 2016. So we really lost a lot of ground over the course of 2016. 2 years ago in the first quarter of 2015, our returns at the auction were 43.8%. I mean, so there's just no denying what the change in that market has done to our recoveries. And it's had a significant and material impact on our loss rates, and we've had to increase our provisioning as a result of all those factors. So -- and from what you read and hear about in the industry about this never-ending pipeline of vehicles heading towards the auctions at some point, I mean, I think we have to be realistic about the prospects for that market in the near term not really changing very much, certainly not improving.

--------------------------------------------------------------------------------

Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [12]

--------------------------------------------------------------------------------

Got it. But -- so given those trends, your net charge-offs only increased marginally year-over-year. Is it fair to say that your gross charge-offs are either stable or down a bit year-over-year? I know we don't have that until the Q comes out.

--------------------------------------------------------------------------------

Jeffrey P. Fritz, Consumer Portfolio Services, Inc. - CFO and EVP [13]

--------------------------------------------------------------------------------

Yes. I mean, I think that, particularly in the first quarter, we typically see a little bit of a rebound in the credit performance, mostly in the delinquency side, not so much on the losses. But yes, you're probably right. There's probably some stability in the gross loss numbers.

--------------------------------------------------------------------------------

Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

All right. And then moving over to competition. I think -- sorry, I think I missed some of your remarks. But we have seen 2 of the larger public players sort of pull back, and they've seen volume trends down year-over-year. So who's really -- who are the companies that are still continuing to make these loans and whether it's an industry in particular or you can name names if you want?

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [15]

--------------------------------------------------------------------------------

I'm not going to name names. I think our feel would be -- generally speaking, we haven't seen that much tightening with anyone. And part of the problem, this goes back to a prior question, is if you bought not so great paper for a while, one of the hardest things to do is slow down. Because if you slow down, that exposes that performance even more. It's kind of like, and this is why it's so hard once you've gone down the wrong path to get out of it because what you really need to do is we got to sit down and say, okay, we fixed all our credits, and then you got to go twice as fast and hope that the new credit outruns the old credit, as I sort of mentioned when I said we looked at our '12 and '13 paper and didn't like how it's performing during 2014, and so then we started tightening credit in '14, '15 and '16, knowing that, that paper, down the road, would be better. But the problem is, we were also able to -- since we didn't really miss by that much in sort of '12 and '13, we didn't have to do some huge restart in '14, '15 and '16. But what we did do, which I think is important, is we sort of leveled off. We didn't need to grow real fast because we were doing pretty well. And so other folks, if you're not making money or you're having these issues, unfortunately, the real way out of it is to figure out what you did wrong, fix it and then go fast because the new production covers up the old mistakes and you make more money. To the extent you are suffering from any of those problems and you don't go fast, those problems just get worse. And so as much as everyone says they're tightening, it's a very thing -- it's a very easy thing to say in concept. It's a very hard thing to do in reality because -- and most cases makes your near-term problems worse. So we may yet. And the other thing we would see, and the reason I'm sort of saying this, is that everyone really started tightening. We'd see all that volume because we're not really looking -- we're not pushing volume away. We're not saying we're not going to take it. So if it was out there, we'd get it and we're not. And so that's maybe an -- probably the easiest way for us to tell, and there's no one in our marketing side of the business saying so-and-so or so-and-so are all pulling back dramatically as much as publicly you hear a lot of that talk. So I may change that, too, in the next quarter, but not right now. So as much as I agree with you, some of the big players and lots of folks have said they're trying to tighten credit and slow down. We haven't seen that in actuality really yet.

--------------------------------------------------------------------------------

Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

Got it. And then one last one for me. On expenses, as you guys were growing, we saw expenses as a percentage of asset decline towards the 5%. We've seen that number sort of increase a little bit. So as your volumes sort of trend down, do you have any sense for where that navigates towards?

--------------------------------------------------------------------------------

Jeffrey P. Fritz, Consumer Portfolio Services, Inc. - CFO and EVP [17]

--------------------------------------------------------------------------------

Well, I think that, Kyle, at this level of the portfolio, $2.3 billion, if our origination stays at these levels and our portfolio stays at these levels, I think that it just kind of -- even small fluctuations in the operating expenses from quarter-to-quarter will probably result in that number staying right around that 5%, plus or minus a few basis points. If we could get on track and buy the kind of paper we're comfortable buying in greater volumes and start growing the portfolio again, then I think we'd see some -- have the prospect for some improvement in that metric.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Thank you. I'm showing no further questions at this time. I'll turn the call back over to you, Mr. Bradley, for any additional or closing remarks.

--------------------------------------------------------------------------------

Charles E. Bradley, Consumer Portfolio Services, Inc. - Chairman, CEO and President [19]

--------------------------------------------------------------------------------

Thank you. In closing, I get accused of being very pessimistic very often. I just wanted to say we're not overly pessimistic, we're just experienced in what's going on. And I think 2017 is going to be an interesting year for our industry, and we've sat in almost this exact position in the other cycles where we've got kind of whacked in the head a little bit, along with lots of other folks. And this time, it's not going to happen. So we want to be the ones that get the benefit from everything that comes out of what's going on in our industry, and I think we're doing a pretty good job of positioning ourselves to do just that. And so as much as -- it means we can't grow as quite as fast and we have to keep working on credit and collections, we're making money, and we have a great access in the markets. And our credit, even though we missed a little, we didn't miss nearly as much as a whole lot of folks did. And so we have to wait for those variant things to sort of play out in our industry before we can expect to really take advantage. But having said that, opportunities pop up all the time, and we'll be there to do that.

So thank you all for attending the call, and we'll look forward to seeing you next quarter.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

This does conclude today's teleconference. A replay will be available beginning 2 hours from now until April 27, 2017, at 11:59 by dialing (855) 859-2056 or (404) 537-3406 with conference identification number 8553937. A broadcast of the conference call will also be available live 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.