Q2 2019 Earnings Call
Ladies and gentlemen, please standby your conference called begin momentarily once again, thank you for your patience and please standby.
Todays call is being recorded before we begin management has asked me to inform you that.
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.
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 we 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.
Oh I think overall, we're happy with the results.
You know sort of the summer doldrums for both our company in the industry and where everyone's on vacation or lots of people are always having a good summer, but you know we do have some highlights. So we think the quarter with pretty much the way we want it to go one of our really initiatives. This year in 2019 was to sort of get some of our coupon rate back in some of our fees back and now the second quarters over we've been able to do that and we raised our coupon.
Almost three quarters of a return and we've gone or fee either we're now with positive as opposed to negative and we'll probably continue to work on that trend. So thats, a very important thing, but sort of just as important and coupled with that is we were still able to grow somewhat of an eight track relative to raise our prices across the board and yet still manage some growth.
Our growth is slow, but steady and in the current environment, that's probably again, a little bit tough to do some folks out there growing massively and you know maybe radically or whatever but nonetheless for us to build carve out our peace and still maintain the fees.
We think that that's worked out very well.
In terms of the accounting were still transitioning to the fair value accounting portfolio. That's proved to be a little bit or are here in the last quarter in the last conference call I did mention that.
The legacy portfolio hasn't performed as well as we wanted to wanted 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, the 17 and 18 paper is substantially better than the 15 16 paper and we will assume 19 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 or will even out and we think results will look better and be better.
And lastly for the overall comments the securitization market remains very robust as.
We keep saying it's been the best we've ever done and then we've got another quarter and it's the best we've ever done.
And so with margins tight tightening rates coming down some time at rates coming down yet again.
It's been a.
Very good strong demand securitization market up and down all classes of our bonds and you know as basically the backbone of how we do business. So having that continue to do well is very important.
I'll run through some of the Department analysis after Jeff answer 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 Thats, 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 with that transition for now for as of now and June Thirtyth. The fair value portfolio is 50% of the total managed portfolio and so with each passing quarter. This is going to come become more dominant portion of the revenue reporting and the year over year comparison.
More.
Meaningful and helpful and.
But for the time being as you can see it's had a significant effect on the particularly the topline.
The quarter's revenues were aided by of course by the originations for the quarter of $250 million and we're 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 vaccines have 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 Delek.
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, 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.
With the legacy portfolio and as Brad alluded to we're still taking our medicine, a little bit from some of the 15, and 16, vintages, which which have not really performed expectations, but most of that is in our rearview mirror obviously.
Pre tax earnings for the quarter 2.8 million is a 40% reduction compared to the $4.7 million, we recognized in last year's second quarter, and a 4% increase compared to our first quarter of this year.
For the six months pre tax earnings of $5.4 million of 41% decrease compared to $9.2 million last year, and if you really sort of decompose all to these.
I'll answer the results you can attribute.
All of that change in reduction.
Really to primarily to the change in accounting.
Net income for the quarter $1.8 million is 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 eight cents.
And Thats, a 30% reduction compared to 13 cents for the second quarter last year.
For the six months 15 is a 40% reduction compared to the 25 cents for the first six months of 2018.
Moving on to 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 weve.
Structured the securitizations down to a single B.
A class single B rated class and that's allowed us to really maximize 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 its about 50% of the total managed portfolio in the <unk> and the fair value portfolio.
Has gone over a $1 billion for the first time, so that's going to be the dominant driver of the financial results in the revenue going forward now much change on the debt side of the balance sheet.
Yes, really no material change at all no new.
Borrowings and we continue to use our three warehouse facilities at the levels dictated by our originations volumes.
Moving on to 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 the revenue because of course the revenues for fair value are net of the expected losses and built into that comp.
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 thats, a theres a lot of moving parts. There obviously the older Securitizations or.
Or paying down and some of those older Securitizations going back to.
15 for example have really low cost of funds. So we're paying down some some cheap debt and putting on even though we've got really good execution of the.
The last deal a lot of them last year's worth of deals are a 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 theres going to be a convergence between what we call the risk adjusted NIM and the normal net interest margin NIM, because the provision expenses im going to go away with as the legacy portfolio goes away. So what we've been reporting as 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 as a 2% increase compared to the first six months of last year. So again most of the core operating expenses were really havent.
Grown the portfolio significantly in the amount of originations were doing every month has grown just nominally so we havent needed to increase our operating expenses significantly.
The ratio of those core operating expenses to the managed portfolio, 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.
Sorta poised for improvement in this ratio.
If we the market conditions give us an opportunity to grow the business, which we.
I think we'll be able to do here at some point.
The risk return on managed assets pre tax income as a percent of the managed portfolio, 0.5% for Q2. This year that's down from 8.8%.
In the second quarter last year, although it's up just a little bit compared to <unk>, 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.
First six months of 2018.
Moving on to the credit performance metrics delinquency was ended June at 14.8% and Thats up from 10 point.
Oh, 7%, a year ago and up a little bit from 12% here in the first quarter of this year and so this is.
This is a combination its 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 nope.
Weighted portfolio ages, now 23 months versus 22 months, a year ago, and that's contributing to it somewhat.
Another significant.
Aspect of this is we do we do far fewer extensions this year compared to where we were last year in sometime 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 weve really seen a decrease significant decrease in extensions year over year and the trade off there somewhat as a little bit higher delinquency.
On the plus side the 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 a tick from the first quarter of 7.98% So and we've seen this before even though the delinquencies and have become a real challenge in the servicing side of the business.
The net losses and the cumulative net losses also have not.
Increased proportionally as delinquencies have increased.
The annualized net losses for the six months, 7.9% as almost the same as last year's first six months of 7.87%.
The valuation trends at 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 last year at 34.9.
A quick look at the ABS market of course, our second quarter deal was executed and completed are in April So that 2019 deal closed deal closed in April .
And we had.
Significantly tighter spreads and benchmarks from the January deal in 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 class F. single B rated bond, which as I said, it's really good for our leverage and liquidity on these transactions and then although this is really a third quarter event. Our 2019 Si deal closed just this week just yesterday and.
This one really benefited from sort of a perfect storm of tighter spreads a 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 than the bonds really across the structure. So that deal has.
Our blended cost of 3.36%, which is our lowest blended costs since the second quarter of 2015 for years.
That's the best execution, we've had on the cost of funds standpoint for the students.
And with that I will turn it back over to Brad.
Thanks, Jeff and looking at a few other departments a little more closely.
We get the marketing or sales department.
I think really that is now even more important in terms of us accessing the dealers and the dealers are phenomenally known for picking the easiest route ever.
Each time and always so it is always a good.
Deal or 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 cpis 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 much as a little bit of a stickler in terms verifications and our prices and perfect. Our service is better and our scorecard seems to be improving.
Well, we put in recently in the last two quarters, where the dealer portal dealer portal gives the dealer much easier access to the Cps website is basically you can go there and fill out everything you want and get your own approval and not have to talk to anyone and Cps and so and the capture rate off of the portal is much much stronger than the normal capture rate. We've only had the Portland process for about three months, but the results in the future could be terrific. So thats a very strong point nothing we're doing something we call sales triangle, where we blend both the sales department originates department and the dealers to where and when we have a dealer that really knows what they're doing they can work with a certain group within those two other departments. The fund deals faster and it gives a much better service and again the reward is we get all those deals and so we're kind of we're trying to be a little bit and innovative in terms of how we access the dealers because again the deal is going to take the easiest way. So to extent you can get really good service and they're giving you good paper and therefore, you give them a good price that works.
And remember by the way we're doing all this while trying to maintain higher coupons and higher fees. So let me try it but so far so good it's working well.
We also focused on direct lending and 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 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 yes, I'm 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 are very large database to find the very best play will come by 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 that are beginning to really show. Good results in that we're still growing paper performance is better we're getting higher prices in a very tough and competitive market.
And 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 way with a little bit. So we thought rather than be stuck in that quagmire, we would back off that used to extensions. The DQ goes up but as Jeff pointed out the losses don't so we're so.
The model still works I think probably in the long run.
Using less extensions is better as much as you suffered a slightly higher DQ the real trick, which is of course, where we're working on now is to get that DQ back in line without the use of extensions or as many extensions and so were going on 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.
Uh huh.
And again as long as the losses are flat, we're we're pretty good on what the DQ is doing but we think we can do both we are going to have lower extensions and better DQ performance. So we'll see.
Moving on to the industry as 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 where the moment, where a lot of the p. you 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 in our performance amongst these people are doing very excessive and competitive things. So it's a very tough market that way. However.
Not like ourselves 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 are fees. We would look at that as access as a success with a backdrop that our accounting has to go straight now in terms of our change in fair value. You know 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.
And I think the other thing thats, helping in terms of the competitive in the industry is as we've talked about is 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 shakeout as some of these players that you know our PE backed and they're 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 do see a little Nixon a few companies here and there that are going over going away, but we haven't seen.
The big changes were looking for but at some point, it's going to happen.
Yes, as I mentioned the economy is still doing fine in terms of our borrower, we always say that our customers for 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 as a cell phone.
If everyone on this call is probably decided what do we need to know something about a new Google it well if your borrower new 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 as calling them up and say hey, you need to pay if you want to keep your car in that method just isn't quite as friendly anymore and you can't use it anymore and so that part and probably the main reason that DQ runs significantly higher over the long term, but again, it's a challenge was when we can work with.
With that we'll open up for questions.
Thank you Sir.
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Thank you and our first question is coming from David Scharf JMP Securities. Your line is now open.
Hey, good morning, guys. Thanks, Thanks for taking my questions.
Hey, Brad one at the start.
Just on the on the pricing and I know you.
Talked for most of the year of trying to.
Claw backs some more coupon.
Hey, what's your sense of how much its impact sort of volume.
Your capture rate and was the three quarter percent.
I mean, there's a lot of this occur at the beginning of the quarter just trying to get a sense.
How we ought to think about $250 million.
Volume.
You know 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'll go to much higher at about 19 in the quarter.
We can stay there that would be fine I wouldn't mind, moving up a little bit and the way. We're doing 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 better paper, which allows us to buy some of the little not as good paper with a higher rate and so that combination has allowed us to move up the PR without losing the business. There is always a chance.
There's lots of folks out there are buying strictly on price or strictly on.
The lack of credit verification, and so thats kind of a shark infested waters, you have to navigate but.
Feel pretty confident with where we sit on the coupon and the fees. We will 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, Jeff listen I don't want to get too.
You mentioned.
We've done the accounting, but.
Regarding the legacy portfolio.
Obviously, the transition to fair value initially was hurt.
Let's see so requirements can you give us sort of an updated sense for.
You know.
Where that portfolio balance.
We will be by year end.
And what potentially the book value.
Impact of a lifetime reserving for that will be you maybe it sort of.
Appear that maybe what the original expectations were when you adopted.
Well, yeah, the legacy portfolio is running off.
I mean, you can almost look at the quarter to quarter. So we were at about a billion for in Q1 and were <unk> billion to on the legacy portfolio here in Q2 and that run off should accelerate a little bit each quarter.
As a thing goes has 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 a $1 billion $800 million something like that so it's still.
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 and pro forma Cecil.
Of adoption environment, you're looking at and that 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 Cecil implementation timeline 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 seasonal and that was something that for years said they would never do and then and then just this week, although it's not formal yet they made it very strong indication that they are going to allow.
Up to a two year deferral for Cecil election for a smaller reporting companies and for public companies have smaller reporting definition is based on the float and just friends and we would we would qualify to defer Cecil implementation.
For two years up to two years and so of course, that's something also they said they would never do.
So that's very much up in the air what.
What we will do actually we've got some decisions to make and talk amongst management the board of directors and decide what the best approach will be for the company.
But and today, that's that's not totally in focus yet so.
Got it and then maybe just one last fair value accounting question.
We get sort of deferring.
Use from.
So.
Party parties.
You know the.
The mark to market, we never hear about.
Mark in your your liabilities.
And particularly with the shifting interest rate environment I would imagine you know.
That might be a catalyst.
<unk> is that something that.
Factors into.
You know the fair value adjustments each quarter or should we just be focusing ultimately on the.
Yeah, you should just consider the assets because we do not to our debt is not fair value.
Accounting, okay. So the debt.
In the event that the asset back dead, which is used to finance the auto portfolio has meant 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 to the other side of the balance sheet. So you don't need to worry about the relative things that would like you're right, though in a in a changing interest rate environment you'd have this sort of whipsaw mark to market effects on your 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.
Are being written that every quarter and you'd you'd be constantly marking that.
That debt to market, that's not one of the issues. We face we do have that hoops to jump through on the asset side of the balance sheet with our auto receivables.
Trying to determine what an exit price would be for those.
Assets using fair value, but it's a little a little tricky since it's not really a commodity.
Type of product and there is not an active trading market for subprime auto receivables.
In and of themselves. So we Havent said.
The other point I guess to make is we havent had that sort of whipsaw effect.
Because we've sort of deemed that.
What we're carrying them at the initial fair value.
Recognition of what they are creating add is the right carrying them.
Got it thank you.
You're welcome.
Thank you.
And our next question comes from Kyle Joseph Joseph from Jefferies. Your line is now open.
Hey, 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 LTV durations et cetera.
We've had a slight trend up and ltvs, we over the last.
Nine months, and we don't necessarily attribute that to anything that we've.
We've engineered I mean, I think that.
To a degree our.
When we implemented our Gen six scorecard back in August July and August of last year.
It really helped us dial in the risk based pricing and it's.
And one of the side effects of.
The production that we had during that period of time is a slight uptick in ltvs were last year. At this time, we're probably around 112 and this year at this time, we're probably around 114 or 115 that doesnt trouble us, but it's it's something we've we've observed and we've seen that.
Terms haven't changed significantly.
The weighted average original term of any one of these recent pools of receivables is still probably around 68 or 69 months, we still do have a significant portion of our business probably 75% of the.
Volume here in the second quarter was 70.
72 month contracts sandwiches as Weve stated in the past I think is kind of the new normal for.
A new or late model.
Used vehicle.
Got it thanks, 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 thats, adding.
Well I think those markets have really normalized straight because so despite of maybe two years ago, where we did see a big decrease from what had been historical highs.
Now they really hovered around the levels, we've seen for almost two years within or just a little bit of fluctuation back and forth. So that the sort of complete collapse of those markets that people predicted two years ago didn't really pan out and I think they have normalized and what what we sort of keep an eye on is.
The news about manufacturers really maybe building too many cars. These cars starting to pile up on dealer lots are expected to pile up on dealer lots sometime in the future.
That.
I don't know what that's going to do.
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 trends 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.
Thank you.
And once again, if you do have a question you May press star one on your Touchtone telephone.
Our next question comes from Mitch sacks of Grand Slam.
Your line is now open.
Thanks.
Question on LNG and expenses.
The increases that have been going on Genie is it partially driven by the fair value accounting rules.
No the fair value accounting is only really impacting two lines. The operating statements right. The revenues. So it has the effective.
Less revenues compared to the.
Traditional accounting and less provisions for credit losses.
And the X. I'll take that back a little bit there.
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's about I think it was about 80 or $90 per loan.
Primarily attributable to employee costs that were.
That were deferred and recognized over the life of the contracts and so that that was the case with the old accounting. However, if you are comparing sort of the year over year results Mitch.
That change is baked into both the second quarter of last year and second quarter of this year because that that effect really took place in its entirety once we adopted fair value accounting.
Okay, Yes, gn expenses had been been kind of ramping throughout.
Middle latter part of 18 through now what's what's driving that.
Increase in DNA.
You know I think that.
Really we had nominal increases in staffing so that most of those that may be 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 salesforce CRM platform that has really helped.
Our our salespeople in the field with more technology and tools to service the dealers and that is from and that's a new certainly new incremental level of.
Technology, and there's there's material expenses associated with that and a few other things, but we have early and there's like there is no new physical space or anything really in the last 12 months. Although we we did prior to that I mean building up to say.
During 17 and 18, we did add some space in a in a couple of the branches, but most of that has 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 it'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.
Yes.
Certainly takes a little bit of time sort of work out of the kings between the the flow provider in us.
We now have two that are going very well and two are just starting out but some level its a little bit of the new thing, which is everyone's using in a lot of people wanting involved so one of the lenders on the platform. It's a good thing and we are and we're actually been asked to be on more so.
Whether this will be the new thing forever or not its hard to tell but right now it's a very good thing for us is growing substantially the papers better.
We're very happy with and we'll continue to look for more.
So potentially that could help you in terms of growing.
Europe receivables balances and then potentially also maybe.
Keeping a lid on growth of sales and marketing.
It should I mean in some ways is slightly more expensive than our average.
Where we get loans, but.
Like I said, the real benefit is going to be needed. 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 probably it would depend if we get big enough to really start overtaking what we normally do yet actually could have an effect on is on the cost and marketing as well, but I think right now the focus is on the focus on it's going to give us increased volumes.
In some ways is 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 like that I guess that impacts the rate that youre recording on fair value or can you just kind of walk us what's going on there and how to think about that over.
The coming few quarters.
So yeah the way the way, we're really approaching it now as you know there's there's when we acquire a month's worth of loans that we call monthly cohort pool of loans Theres things, we know about it for sure. We know what the coupons are we know what we paid the dealers forward or what we charge the dealers for it.
We know the.
The terms of the receivables balances all these things we have to estimate the losses, but we have pretty good data and metrics that help us estimate with the losses are going to be and so you sort of put all that into a pretty sophisticated model and it it spits out what we call the IR the internal rate of return.
Which is the yield the net yield with the losses baked in what that pool of receivables should produce so for instance, like in the second quarter here.
Where we had pretty good nprs 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.
No two monthly pools are alike right. So as as time goes on you have to consider.
You know.
Again, all those metrics all those things you know and then make an estimate for the things you don't know and then also within each monthly cohort Theres a.
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 of 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 the change in the mix you might end up with a similar ire our.
So thats I mean is that that's a.
Great Oversimplification of what's really involved it's become a fairly complex process. The one that we're we're becoming more and more comfortable with and really I think despite the kind of bumpy road of the transition in 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 the financial results on the portfolio.
Okay, and then so for the second quarter I'm not sure. If I saw that you just 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.
Thanks.
Thank you and once again, if you have a question you May I Star then one on your Touchtone telephone.
Again, that's star then one on your Touchtone telephone.
I'm showing no further questions and I would like to turn the call back over to Mr., Charles Bradley for any additional closing remarks.
Thank you.
Oh, you can sort of looking towards the future. We've accomplished a lot it's hard to really point, a finger and say you know it hasn't done much for stock price, yet, but we're certainly putting the building blocks together as we make this transition to the new accounting, but more importantly, with the way we're now working with dealers and were growing the portfolio.
So 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 in what we do the best and wait for 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 you know it's not the perfect world. We'd like there are there are lots of highlights in terms of what we're doing and what we should be able to accomplish in the future.
And with that we will see you all next quarter and thanks for attending the call.
Thank you.
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