Good day, everyone, and welcome to the Consumer Portfolio Services 2018 Fourth Quarter and Full-Year Earnings Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. With us here now is Mr. Charles Bradley, Chief Executive Officer; and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to you Mr. Bradley.

Thank you, and welcome to our year-end conference call. I think -- and looking at the numbers, they are a little bit garbled because in both December of this year in 2018, and December of 2017 we had some tax recurring that affected the overall numbers. Going forward hopefully the numbers would be a little cleaner, although the year is yet to figure out. But looking to those we actually have a pretty good quarter. I think importantly the fourth quarter was probably better than we expected and if you notice originations actually grew for the year, we actually thought we might have it down year in terms of portfolio size and in originations and of course that wasn't true. For the year, we actually originated 900 million versus 860 million last year. So and that's really important, because what we don't want to as a portfolio or the managed portfolio to shrink. Once it starts shrinking it kind of takes big effort to get back going again. So one of the things to take away from 2018 is that in fact the core portfolio didn’t shrink at all, it grew little bit and somewhat even as important is that the overall originations grew. And so in the year we thought it would be flat or slightly down, we actually made some progress going up. On the other side the delinquencies are up in the fourth quarter. It's probably worst than it look s like a bit because the fourth quarter is always a toughest one for collections in DQ. Also, our portfolio hasn't been growing, it’s now been really flat for almost three years, with that you're going to start to see the worst of the worst. This is when companies have bad delinquency numbers and they are growing…

Thanks, Brad. Welcome, everybody. We will begin with the revenues. Q4 revenues were $91.2 million, that's a 5% decrease from the third quarter this year at $95.6 million and a 15% decrease from the fourth quarter of 2017. The full-year revenues of $389.8 million is a 10% decrease from the full-year revenues of 2017. And of course, as we've discussed, this year the story on the revenues, there’s really two things, primarily the adoption of the fair value methodology of accounting for the 2018 originations, as we've said the losses are baked into the revenue recognition methodology for fair value. And so, we've seen a significant decrease in revenues, as result of that. And then also as Brad alluded to just the overall portfolio has been fairly flat for the year, which has had a significant contribution to impact on the revenue recognition. Moving to the expenses, $86.4 million for the fourth quarter, that’s a 5% decrease from the third quarter of this year and a 13% decrease from the fourth quarter of 2017. Full year basis, $371.1 million of expenses this year is an 8% decrease from $402.3 million last year. And really on the expenses, you've get some increases in core categories which are largely offset by on -- entirely offset by decreases in the provisions for credit losses because there are no provisions for credit losses on the 2018 portfolio, which is being accounted for in the fair value method. Looking at the provisions for credit losses, $25.1 million for the quarter, that’s a 21% decrease from $32 million in the third quarter of this year and a 43% decrease from the fourth quarter of 2017. On a full-year basis, $133.1 million of provisions for credit losses in 2018, a 29% decrease from 2017. Again, all being…

Thank you, Jeff. Again, so looking at sort of where we said, Jeff mentioned the fair value. So 2018 was a year where we were making some changes, we’re really focused on upgrading our marketing, getting more reps back in the field, connecting with dealers as much as everybody thinks automation goes beyond all, getting into the dealerships, stocking them is still very important. So we sort of changed our strategy slightly there. Originations, with the new scorecard, our originations quality has improved substantially. We've actually gave up a little bit on the APR and the discount which we’re going to try and get back as we move forward in 2019, we’re fairly confident we can do that, and that will add substantially to the bottom line if we accomplish that. With the new scorecard, we think we have sort of a shift mix where we are actually buying more higher tier and so as much as the losses there are good and it will contribute to the bottom line. We still like to have a blend a little more sort of the normal blend we've had, which is more profitable by having some of the more profitable deeper paper. So that's the project for 2019. But more importantly it sort of shows that what we were doing in terms of the scorecard and originations in 2018 has worked very well. As far as collection goes, collections is always going to be challenge but we have five branches, all five are operating quite well, at occasions that isn’t always true but it is right now. And so we are in really good shape there as we continue to expand there is a little bit of room for expansion on all of the branches. So our collections sit very well. As…

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

Brad, I'm wondering how we ought to interpret the very strong volumes to close out the year, as we think about the 2019 outlook? Because your commentary on the competitive backdrop doesn't seem to have changed and the macro environment hasn't changed. What was the big spike in volume particular -- which was particularly surprising for which usually the seasonally slowest quarter? Was it somewhat related to buying a lot of higher tiered credits as you were testing your new scorecards or is there something else going on that reflects maybe a shift in either demand or competition?

Good question. I think we look to other sources. We've done some sort of -- not quite joint ventures but some flow programs with some other vendors and so we’re getting some looks and other sources just above and above beyond our normal dealer flow and so there’s still sort of in the beginning of seeing how they go but that could provide some additional volume during 2019 and certainly probably did in the fourth quarter. We are not really quite sure how it’s all going to work out, but it's an interesting avenue of getting some looks at some turndown from some banks and other various companies. But that would probably be the answer to the volume in the fourth quarter. If that continues to work, that would be great for 2019. And I agree with you that the industry has been -- moreover we said but the industry is still quite competitive, people are still out there, they want to put the best possible picture on their company in the hopes of getting something to happen. So still that changes is going to be that competitive background. But even having said that we've been in a lot time and so we've been able to set-up some alliances and stuff that should hopefully provide generally good paper regardless of what's happening in the industry.

And normally, we would be thinking about the first half of the year both Q1 and Q2 being strong origination quarters than the fourth. Were these slow programs, extra looks, I mean should we interpret the fourth quarter as a bit of an outlier or is that a good jumping off point for modeling the typical seasonality?

Well, I guess. In terms of typical seasonality I would look at it as an outlier because I wouldn’t expect this fourth quarter of 2019 to have a better volume and the first three quarters. So what we would hope is that the first three quarters of 2019 do jump off than the fourth quarter 2018 we will then maybe get the seasonality back for the fourth quarter 2019. But there is a little bit -- with the government shutdown, tax turns and other stuff, that first quarter maybe pushed a little further out. But generally speaking we would expect first quarter, second quarter, third quarter particularly first and second to be the growth quarters. And then soften a little bit in the third quarter and then slow down in the fourth. So the good news is we kind of hope the fourth quarter is the jumping off point for the next couple of quarters but I wouldn’t bank on that being a change in the seasonality of the fourth quarter.

And maybe a question for Jeff. Obviously a 31.5 months that legacy portfolio is becoming quite aged, I know there’s a lot of forecast going to answering this question, but can you give us some sort of ballpark of how we are to think about maybe quarterly provision expense exiting this year. It seems like some time in 2020 it should go away, would it be below $10 million do you think in the fourth quarter of 2019?

I don’t know if I can predict that, but I can tell you in 2020 it will go away because what will happen, if we adopt CECL for the legacy portfolio which we turns out that may have an option there that we haven't talked about yet, but if we adopt CECL for the legacy portfolio in 2020, we will take a provision, a one-time provision to establish the remaining lifetime allowance on that portfolio, right? And so there won't be any provision expense in the legacy portfolio. In fact, I can tell you really after January 2020 there won't be any provision in terms of the legacy portfolio one way or the other. For this year, I mean I think what you can do maybe a little bit is look at the progression, the sequential decrease in provision expense during 2018 and probably extrapolate off that a little bit and it gets you kind of in the right ballpark.

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

Jeff, just a quick modeling one. Any outlook on the tax rate going forward here, any changes there?

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

Okay. And then just change the swing back to cost of funds. It sounds like the first quarter deal actually had a stable cost of funds with the fourth quarter where we're seeing the cost of funds up year-over-year given we’re getting a little bit of a pause from the Fed. Can you give us the sense for your expectations for your cost of funds going forward?

I think we feel pretty good about the cost of funds right so the Fed seems to have suggested they are going to take their foot of the gas pedal a little bit on rate increases, and even though -- and as I said they were maybe a little bit -- I don’t know if disappoint is the right word, but we observed a little bit less of kind of a demand of the feeding frenzy if you will for the January deal compared to the October deal. But even with that slightly softer market with a little bit of a depression in the benchmarks we actually did better on the blended cost of funds. And so it continues as I said, it continues to be a part of the business that we’re really pretty satisfied with not too many things to complain about on the asset backed front.

Probably, it's worth noting that as much as we've had sort of the tax things in both December '17 and December of '18 the accounting world and also our fair value change the Wall Street world is working with risk retention and so you put in the US risk retention rules earlier this year and now they are trying to put in the European risk retention rules and so that affected our first quarter of '19 deal. So assuming they sort that all out, one would assume that the demand should be just as robust as it's been with our interest rates not going up or at least a little bit, I think you probably have a fairly good outlook on what's going to happen. The good news overall of that is that the demand for these bonds has been great. It wasn't perfect, as Jeff pointed out our first deal of 2019 and I think that has much more to do with the European risk retention rules than anything about the market. So one would think -- and it's because at the very beginning of the year I think people weren’t sure how it will work, now I think they have sorted it out. It will probably go back to what we would expect going forward. As I said probably two things we care about most in the world is we care ton about unemployment, we care a ton about the ABS market being there and functioning well. And so the good news is both of those things are great. No employment, problems and the ABS markets looked that as good as they are going to be even with adjustment to risk retention both US and Europe.

And then one last one from me just a modeling follow-up question. Jeff on the $5 million of expenses you guys had to recognize upfront because the fair value accounting, which line items were those in specifically?

It's almost all on employee expenses.

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

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

Yes, I think it's actually positive for us I mean at this point I wouldn’t want to be a new car manufacturer. I think they are having a very tough time. They had high margins before, I think their margins today after being minuscule. And so there certainly was an overproduction of cars for the last couple of years so until that bubble or whatever they created goes through I think new cars are going to be a problem, and just to make that problem somewhat worse for them used car is better, used cars better made or cars are better made so the used cars last longer. I just think -- I think it is an affordability thing. I think customers are saying why wouldn’t I buy a three year old car rather than a new one. Three year old car look pretty like a new. And so I think that's going to affect the auctions somewhat, and I think it's actually really good for us. I mean if anything it's going to continue to trend the subprime vendors and neo prime vendors doing quite well. So like I said I think it's very good for us, and rather be us so the new car guys and the dealerships are also -- one of the usual things the dealerships seeing to make money, they never made all that much money in the last 10 years or something with new car sales, they’d still be pretty good on used car and they do even better on subprime. So I think the trend is very positive for our us, almost regardless of the auctions. At some point the auctions are going to actually get more competitive in terms of what they pay for the cars and our recovery rates should improve. So yes I think it is an affordability question.

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

So I think you guys got the just of what we’re doing 2018 was a better year than we expected but nothing what we were looking for. We think next couple of years, particularly 2019 the industry consolidation never happens it should happen soon and that would be a very good thing for all the players in the industry that aren’t looking to be consolidated like us. And I think in terms of all of the things we've done internally we’re in a great spot. I think the lot of things we've been waiting to see in terms of collection performance, we’re excited to come together. Like I said the scorecard is great. We've done the accounting change back to fair -- over the fair value. So we are not going to see some problem next year. We have done as much as I guess you would call it in housekeeping but we've done a tremendous amount of housekeeping in 2018 that should bode well for the future. And on top of that we've actually been able to grow some. So as much as these bottom line numbers aren't quite there yet, and -- aren’t quite there at all yet, and the stock price isn’t quite there yet. We think we’ve built the right thing to be in a position to really succeed in 2019. And so I will see how it goes. I think the remark I said the ABS market is great, unemployment is great. I think we’re in a position to continue to get growing again. So we’re looking forward to it. With that, we will look to talk to you probably in April. Thank you.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until the February 22, 2019 04:00 PM Eastern time. By dialing 855-859-2056 or 404-537-3406, with conference identification number 2286988. A broadcast of the conference call will also be available live and for 90 days after the call via the company's website at www.consumerportfolio.com. Please disconnect your lines at this time, and have a wonderful day.