Consumer Portfolio Services Inc (CPSS) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services' 2012 third-quarter operating results conference call. Today's call is being recorded.

Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meanings of the Private Securities Litigations Reform Act of 1995. Any statements made during this call are not statements of historical facts and 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 the further clarification. The Company assumes no obligations 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; Mr. Jeff Fritz, Chief Financial Officer; and Mr. Robert Riedl, Chief Investment Officer, Consumer Portfolio Services.

I'd now like to turn the call over to Mr. Bradley.

Thank you, and thank everyone for attending this morning for our third-quarter earnings call. As everyone can see from the earnings that we put out last night, we had a very nice quarter. We're very pleased with the results. I think it's safe to say we're exactly where we want to be at this point in the year, if we could have predicted it a year ago.

So everything is going according to plan. We're very satisfied with the results.

Some of the highlights -- originations continue to be strong. We really had a target of around $50 million and we've stayed right around there. But we've -- in terms of the course of the year, they're about where we want to be. And for the quarter, they remain as strong as they've been all year. And they tend to generally begin to weaken in the third quarter.

We were also able to maintain our credit quality throughout the quarter. The results in terms of the parameters we originate under have all been very consistent and continue to look very good. And we were also able to maintain our margins.

This discount remains strong, probably significantly stronger than we expected, along with the APR and the cost of funds is probably the most surprising piece to that, in that we did our third securitization of the year, and got the lowest cost of funds to date. And we've been very impressed with the cost to funds each quarter. So each quarter they get better, is certainly a significant change. And given that our volumes are growing is very good for the Company.

I think, with that, we'll go through a little more detail in a minute, but for now, we'll switch it over to Jeff Fritz to talk about the financials.

Thanks, Brad, and welcome, everybody. We'll begin with the revenues. Our revenues for the third quarter, $47.9 million. That's up about 8% from $44.2 million for the June quarter and up 42% from the 2011 third-quarter of $33.8 million. For the nine months ended September 2012, revenues were $137 million. That's up about 40% from the 2011 nine-month period of $97.4 million.

Almost all the revenues are driven by our interest income, which has grown significantly, and is driven, of course, by the growth in our organic portfolio. As Brad mentioned, originations have been strong. We bought $143 million of new contracts in the third quarter. And that's helped to drive those revenue numbers that we just talked about.

Moving on to the expenses. For the quarter, $45.2 million. That's up about 6% from the June quarter of $42.8 million and up 19% from $37.9 million a year ago. For the nine-month period, the expenses were $132 million. That's up about 18% from $112 million for the nine-month period ended September 2011.

The sequential and year-over-year increases in most expense categories reflect the growth in the originations volume and the growth in the managed portfolio. One notable exception is that our interest expense has actually decreased now in three consecutive quarters, due to the lower cost of the new asset-backed securitizations that we put onto 2012, and as the higher cost of funds, sort of legacy ABS deals have been amortizing off.

Moving on to the provision expense, provision for loan losses for the quarter was $9.5 million. That's up about 23% from the June quarter of $7.7 million, and up a significant 137% from $4 million for the third quarter 2011. Year-to-date basis for the nine months, provision expense is $22 million, and that's up about 83% from $12 million a year ago.

As we've been talking, the management portfolio is increasing; the originations are increasing; the provisions expense is increasing ratably along with those volumes. And, as Brad mentioned, the credit quality has been very good, and so we're also seeing some increases in our allowance for loan losses on the balance sheet.

The pretax earnings for the quarter were $2.7 million. That's a 110% increase over $1.3 million in the June quarter and a huge increase -- 168% increase over a $4 million loss in the third quarter last year. For the nine-month period, we're up to $4.6 million in pretax earnings, and that's a significant improvement over the $14.7 million nine-month loss in the nine months ended September of 2011.

The net income numbers are exactly the same. We continue to not post a provision for tax expense as the nominal amount of tax expenses being offset by reversal of the valuation allowance that we're currently carrying on our deferred tax assets. The diluted earnings per share were $0.11 for the third quarter, and that's up about 120% from the nickel at the June quarter, and up significantly from the $0.20 loss in the third quarter of last year. The year-to-date diluted earnings per share is $0.19, and that's up significantly from the $0.78 per share diluted loss for the nine months ended September 2011.

Moving on to the balance sheet, we currently continue to maintain free cash balances of around $10 million, both this quarter and last quarter. Restricted cash balance of $107.2 million in September includes about $42 million in pre-fund proceeds associated with our 12C transaction, and those funds were distributed shortly after the quarter when we closed the pre-funding portion of the 12C securitization. The balance of finance receivables net of the allowance for loan losses at the end of the quarter is $670.2 million. That's up 11% from $605 million in the June quarter, and up significantly 38% from $487 million a year ago.

Separately, we carry, on a fair value basis, the fireside portfolio, the portfolio we acquired, well, about a year ago now. And that portfolio fair value basis is down to $78 million, approximately; decreased 24% from $102 million in the June quarter. And it's decreased significantly from the $193 million that it was when we acquired it in September of 2011.

On the debt side of the balance sheet, we continue to maintain our warehouse lines, about $20 million of those balances outstanding at the end of the month -- at the end of the quarter. The residual interest financing has amortized down to $13.8 million from $15 million in June and $26 million a year ago.

The securitization debt is increasing consecutively with every quarter as we do new securitization ABS transactions. And the fair value debt associated with the fireside portfolio continues to amortize down in relation to that portfolio. And the long-term debt has remained fairly static at about $75 million or $76 million over the last few quarters.

Looking at a couple of the other key metrics, well, first, just stopping briefly at the portfolio size. As I mentioned, the managed portfolio has continued to increase. The total managed portfolio, $845 million at September 30, 2012; that's up 5% from $806 million in the June quarter, and up significantly from the 2% from $827 million of the September quarter last year, although the September quarter last year had that sort of windfall, if you will, of the acquisition of the $192 million fireside portfolio right at the end of the September quarter last year.

Looking at a couple other key metrics, the net interest margin for the quarter was $28.4 million. That's up 17% from $24.3 million in the June quarter, and up significantly, 92%, from $15 million a year ago. On a year-to-date basis, the net interest margin, the NIM, was $75 million. And that's up significantly from the last year nine-month period of $40 million.

As I mentioned, the newer ABS transactions, 12 A, B, and C, have significantly lower cost than the older securitizations that are rapidly running off. And it's contributed significantly to these improving net interest margin numbers. The risk-adjusted NIM for the quarter was $18.9 million, a 14% increase over the $17 million in the June quarter and a 75% increase over the September quarter last year.

On a year-to-date basis, the NIM -- risk-adjusted NIM was $53 million compared to the nine-month risk-adjusted NIM last year of $28 million. And, of course, the risk-adjusted NIM takes into consideration provision for loan losses. And even with increasing provisions for loan losses in correlation with the increasing portfolio, we've still seen significant improvements in the risk-adjusted NIM.

Our core operating expenses for the quarter were $16.2 million. That's up 6% from the June quarter of $15.3 million and 9% from the third quarter last year. The year-to-date core operating expenses, $48 million compared to $43 million for the nine-month period last year. Our core operating expenses are increasing sort of ratably in conjunction with the originations increases and the size of the managed portfolio.

Finally, our core operating expenses as a percentage of our average managed portfolio, 7.8% for the quarter, and that's up just a little from 7.7% in the June quarter, but down significantly from 8.6% for the third quarter of last year. For the nine-month period, 8% core operating expenses as a percent of the managed portfolio, down significantly from 8.5% for the nine-month period last year. Now that the portfolio is growing consistently, even though our costs are increasing on a dollar basis, we're starting to see some economies and efficiencies that we'd expect to see as the portfolio grows.

With that, I will turn it over to Robert Riedl.

Thanks, Jeff. Looking at a couple of the asset performance metrics, delinquencies for the quarter ending September finished at 4.64%. That's up from 3.81% at the end of the June quarter, but down significantly from a year ago, 6.54%. Seasonally, we will typically see increases from the second -- from June to September, due to kind of back to school shopping. So a little uptick is -- was expected.

On the net losses, the third quarter finished at 3.35% on an annualized basis. That's up slightly from the second quarter at 3.16%. But once again, year-over-year, down significantly from 4.13%. The second quarter typically, seasonally, is the best quarter in the year for losses so, once again, we would expect a little uptick there. For the nine months, this year, the annualized net losses were 3.47% and that compares favorably versus last year of about 6.5%.

At the auction, we saw a little bit of a downtick in the third quarter but expected. We were at 47.2%, down from 49.1% in the June quarter, but up fairly significantly from a year ago at 43.2%. We did see September was close to 50%, so we would expect a decent fourth quarter.

Turning to the financing side, Brad mentioned that we completed our third securitization of the year in September. And, once again, we were able to improve on the structure and the cost to funds. It was $147 million deal. And this time, we had five rated tranches. We added one more tranche to the structure, which was rated AA on the senior tranche by S&P. Our blended cost there was 2.45%, which was a significant improvement versus our June deal at 3.15%.

We had four incremental tranches, so we went from a AA tranche down to a B tranche, a blended sort of net advance similar to our last transaction at $0.99. The transaction also, as Jeff mentioned, had a pre-funding component, so we were able to fund, on a long-term basis, our September originations at this 2.45%. So that helps continue to drive down our cost to funds.

The asset-backed market today continues to be strong. There's been a lot of deals in the market place this month, so we continue to see very significant investor demand for our paper.

With that, I'll turn it back to Brad.

Thank you, Robert. I think it's -- we can go through a few of those sort of highlights of what we're doing. At the beginning of the year, our originations target was around $50 million a month. We started out last December at about $30 million a month. As we've probably all mentioned at some point, we've hit that target and we're sort of sitting at that target today.

We might, this month, do a little bit more than that, depending on the amount of days in the month for the rest of the year. That number should bounce around right around $50 million. Point being that that was the target we set out to hit, and we hit it. So we're going to spend the better part of the rest of this year just planning for next year.

And I think next year, our target could be in the $70 million, $75 million range. And then continue to grow even that target, relative to what we grew this year, wouldn't be that much growth. But I think it's a very reasonable and certainly doable target. I think it will take another year or two before we get back to the $100 million, $125 million range we used to do.

But I think, as I mentioned in many calls, our goal is just to go back to where we were. So it's somewhat easier than a lot of folks who are new in the industry and growing. We know exactly where we're going. We're going to sort of pace ourselves in getting there. Fixed in along the way, we can have some opportunities to do it a little easier, then we'll take advantage of that.

I think, along those lines, our primary focus for the rest of the year is going to be to increase our marketing staff and our marketing footprint across the country, to get into some more markets and get a much larger funding dealer base. So when we hit sort of the beginning of the year, spring growth season, we'll be well prepared to take advantage of it. And I think it's somewhat helpful for us that we can spend a lot of time in the next quarter focused on doing that kind of growth, or sort of preparing for that kind of growth, rather than pushing real hard for the rest of this year to get growth for this year.

As Robert and Jeff both pointed out, our margins remain strong. We're still running around a 5% discount, which is in excess of what our targeted discount was for this year. Our APR remains over 20%, also in excess of the target for this year. I think, over time, we probably are perfectly willing to give some of that back, with the very low cost of funds, again, both guys have referenced.

It gives us even stronger margins if we hang on to the discount and the APR. I think, over time, we would expect the APR -- excuse me, at least the discount to drop down, remembering that a few years ago, our discount was around 1% to 1.5%, so you can almost figure that, as a target by the time we get back to our $100 million, $125 million originations, that the discount would get back to that kind of a level.

For the early part, keeping the discount up was very good for us, because it increased our capital that we got out of the originations. And so I think, as we've gotten bigger and we have more time to scale, we'll be able to easily give back some of that. And again, you can't underestimate the strength of that cost of funds.

We all sit around each time we do a securitization and marvel at how cheap they're getting, and how aggressive Wall Street is getting, which is all very good for us and anyone else in doing these kinds of deals. We would somewhat expect that to continue, though we plan for it to go up in all of our projections. But the longer it stays down, as we continue to grow and expand, the better off we'll be.

In terms of collections, one of the really sort of neat parts about what we're doing is that we are growing a lot, as we've said, where you can see by all the numbers, and yet we are not even -- we're not adding any collection personnel, because, as the portfolio is growing with new originations, some of the old originations are running off. And, as a result, even though our portfolio is growing from a dollar basis, the account loads are dropping down. And so we've actually been able to maintain the collector loads exactly where we want them without having to add anyone.

And then along those lines, we don't really expect to add a lot of collectors probably until spring of next year. And as, I think, Jeff pointed out, the efficiencies we've always talked about having, as we started to grow again, are really going to start kicking in. For anyone who hasn't followed along, one of our key things to do when we put this plan together, while we're sitting around in a recession doing nothing, was to make sure that we kept the infrastructure in place, and when we did grow, we'd be all set up to do it.

So we have four collection branches. They all have tons of room to grow, and we'll be able to take advantage of that real easily when we eventually do need to add personnel. Also, we put a new scorecard in the collections, which helps us more efficiently target who we're collecting. And it seems to be paying very good results in terms of how we get the accounts, and get them paying and back in line in the most efficient way.

In terms of financials, Wall Street, as I just mentioned, it's about -- couldn't be stronger, considering we couldn't get anyone to even talk to us during the recession. The fact that Wall Street has come back so strong is rather amazing. The result of that, of course, is there is lots of available capital. We've talked to lots of folks about doing different things.

We currently have $200 million warehouse lines. As we grow, we'll continue to expand those. Probably we'll move them up to around $300 million. Remembering that in our past life, when we were doing around $120 million or $100 million a month, we had $400 million warehousing. So again, we think we would stairstep those lines up to $400 million over the next couple of years, as we get back to those origination levels we had in the past.

I think, as I mentioned, this year, we're going to spend most of the rest of this year preparing for next year in terms of setting up the marketing staff, the originations staff, and everything else to get ready to grow next year. Next year is going to be about delevering the balance sheet. We've been able to do some of that this year. And next year, that will be the extreme focus in getting our balance sheet squared away.

We have a large piece of senior debt coming due at the end of next year, so we'll be prepared to do that. But overall, given the Wall Street and everything else, we think that will all work out very well.

In looking at the industry, I think most people have noticed that there were two acquisitions done in the last couple of months -- even last month. One was DriveTime, other was First Investors. Those are both companies that have been around in the industry for a very long time. We thought both deals were very attractive and good execution.

So -- and again, all that really does is make the market or our industry that much better. It probably puts more focus on the auto sector or the particularly subprime. Both of those companies were sort of different areas of subprime -- DriveTime a little bit lower; First Investors a little bit higher. We sort of sit in the middle of those two companies. And I think the success of those two deals helps our availability to capital; certainly will create more interest in our stock price as well.

Finally, in terms of the economy, we're sort of expecting next year to be somewhat similar to this year. The economy appears to be limping along. Ironically, as much as that's not great for almost -- I don't know, most people out there, for our little industry, having the economy that does not grow superfast and cause increase in interest rates, is terrific for us.

As much as we hope unemployment improves, what we really care about is that unemployment doesn't go up. The fact that it's come down some and probably not too many people think it's going to go back up, again, that's a very strong metric for how our Company and our industry will perform going forward. So, if next year kind of folds out the way most people think, without superfast rising interest rates, unemployment coming down slowly, that bodes for, again, a very good economic year for us and what we're trying to accomplish.

I guess, finally, it's easy enough to say we put a plan together over a year and a half ago, a couple of years ago. That plan is actually working perfectly. We're exactly where we expect to be. As long as the economy and the rest of the world hangs in there, we think we can execute the plan very well and have tremendously good results in the future.

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

(Operator Instructions) Kirk Ludtke, CRT Capital Group.

(multiple speakers) Boy, a lot of positive trends in the numbers this quarter -- originations, credit experience, pricing, funding, you know, all improving. Can you talk a little bit about the trends in your underwriting standards? Are you moving down the credit spectrum, staying where you were, moving up, any kind of color on that?

Sure. I think, we have a sort of a loss target of roughly 12.5% to 13% accumulative loss on the portfolio. And I think we're probably well within that target. Let's assume for the moment we think that our originations are somewhere in that 10% to 11% loss range. And I think what you really have to do is you look at the historic performance to come up with those kind of numbers or projections, but you really, if you're smart, you don't factor in the economy.

And as I mentioned, with a slow rising, good economy -- though people might define "good" differently, but I've already defined it for us -- but a slow-growing economy with unemployment going down or at least staying the same, you generally are going to see better performance than you would expect. And so we probably have a cushion in that sense. And on top of that, I think our numbers are conservative in nature and how we've done this has turned out even better.

So we don't really expect to change our underwriting standards much. I think, for us, it's more focused on sort of keeping the mix we've always wanted and occasionally adjust things. I think another way to look at it is we're always looking at our model and our performance to find the pockets, where we think there's even more money to be made, or better credits to be bought with more money attached to it. And so we're not really looking to shift our overall buying profile, but if we do move it around slightly to take advantage of opportunities in given states and given areas and given programs, for that matter.

That's helpful. Thank you. During your remarks, you mentioned that you expect to give back some of the discount over time, and that at the same time your funding costs are likely to come down -- continue to come down. Where does that all shake out? Where do you see the net interest margin normalizing over the next year or so?

Well, I think so much relates to your first question in that we'd much rather give the discount a way to grow than change our credit quality to grow. And I think that's sort of an easy way for us.

In the beginning, we wanted to hang on to the discount; we were able to get all the growth we wanted. So I think, for us, giving up the discount to get a little better piece of the different margins is sort of the way to go. The thing that we probably have a little trouble guessing is the margin, as much as I've said and all the way our projections run, we expect an increasing cost of funds next year, though we're not so sure that's going to happen.

The other thing is, as Robert pointed out, we've been doing A-rated deals and we just did one that was sort of a hybrid of a A, AA. Over time, we probably can get to AA, AA. We make get to AAAA. And so, in some nice way, the better rated deals and the lower cost of funds associated with those deals would offset us giving up some discount. And it's hard to say where the floor is in terms of the cost of funds, but we have enough margin now so we could roll with it either way. But I think the trick is to give up the discount in order to grow, and ride along with those sort of a continued improving margin over time.

Okay. You mentioned that you thought recovery rates would stay relatively strong in the fourth quarter. Where do you see, just stepping back for a second, where do you see used car prices going in 2013?

Well, that's a good question. I think as the dealerships -- and they've been growing and doing better -- and I think as -- well, there's two ways to look at it. I think, let's look at it from the simple one, which is, as the economy improves, the theory is that customers will be more able to buy new cars; as opposed to today, where people are still sort of pinching their pennies and they're looking to replace their cars that are finally giving up the ghost.

And so a lot of people doing that would buy used cars. And that keeps the used-car market really strong, and the fact that dealers aren't selling new cars, while the dealers are also putting tons of pressure on the used-car market, because they're trying to put a bunch of used cars on their lot since nobody's buying new cars.

That's going to change. I think if the economy continues to roll along, as everybody is seeing new car sales are, in fact, improving out in Detroit or in all areas. And so as more new cars start to -- really start to move off the lots, the pressure the dealers themselves are putting on the used-car prices will drop. People will buy more new cars rather than used, so you'll really -- it will sort of -- not quite slingshot, but certainly, it will ease back the other way.

I think we might expect a 2 point drop or something over the following year. But the used-car, in terms of our auction liquidation values, it jumps around a little bit. And so a 2 point drop in one particular month isn't going to change a whole lot for us. And, again, I'm guessing a little bit, because what we've also seen as sort of a long-term trend is that dealers are focusing much more on being able to sell used cars because the profit margins are so much better.

So as much as when new cars really start to grow some more -- new car sales -- the pressure will ease, it's not really going to change a whole lot. Or it could. It could either move a little or it could move not at all, but we don't expect it to be some giant change.

Yes, and I think, Kirk, the levels that we have right now, kind of the third quarter at 47% -- you know, for us, historically, that's still a very good number, depending upon where we've been in the different economic cycles we've seen, close to 50 kind of gets to the top range of our recoveries. And kind of the lowest was kind of the fourth quarter of '08, kind of in the low 30s. So, historically, in the low to mid 40s have been a pretty good number for us. And if we give 3 or 4 points back over the course of next year, it's still going to be a strong level for us.

Fantastic. I appreciate it. And then I've got one last, and then I'll get back in the queue. You mentioned that -- all the recent M&A activity, probably a lot of additional capital coming into your space. Did you see any change in the competitive landscape in the quarter? Or do you expect, say, over the next few quarters, things to become more competitive as a result?

We haven't really seen any particular change. And it's not -- I mean, there's probably been lots of entrants, say, in the last 12 months. So the good news is, it's going to take most of them a long -- it's not quite as easy as it looks to put out a national footprint. And so almost all of them have to start somewhat small.

And I probably know most of them, and they all agree that, you know, nobody wants to grow superfast because then you blow up. And so it's going to take them some time. So what you really see is some regional competition across the country. You don't really see a national footprint from any of the new guys, particularly. And I think the fact that the banks have still backed off significantly and stayed there, there's still plenty of room for everybody.

So as much as we've seen people on a regional basis pop up over the last 12 months or so, we haven't really seen anyone putting on a national push. Now having said all that, I could bet you right now that in two years, three of those new guys will blow up. But that will just create acquisition opportunities for other folks.

Blow up because they tried to buy somebody and they couldn't integrate the systems or their credit standards?

No, they grew too fast.

They cut their credit standards and -- okay.

They probably didn't know they were cutting their credit standards; they just tried to grow real fast, didn't realize they weren't buying very well. And then they were overwhelmed by the problem.

Interesting.

Remember the rule in the industry is, you won't see what you're doing for 12 months. So to the extent you really run fast and it doesn't work out, then you've got a real problem in a hurry.

Got it. I appreciate it. Thank you very much, gentlemen.

John Hecht, Stephens.

Good morning, guys, and congratulations on a good quarter. First question is, you did discuss pricing and there was some questions from the prior caller about the competition and so forth. I'm wondering, can you tell me your high-end customers, the higher-end credit quality, and to lower-end credit quality based on your various programs, what are the APRs and discounts you're getting right now, just to kind of get a sense for the range? And then within those ranges, is there any compression at all?

Let's see, John, hey. At the higher end, I think our APRs are probably right around 16%, 17%. That's the higher credit end. Down to the weaker credit programs are 21%, 22% APRs. From a discount perspective, at the high end, we're probably right around par, versus at the weaker credits, we're 11%, 12%. When you blend it all out, we're right around 5% and an APR, a little bit above 20%.

And we've done some things over the course of the last couple years. Because two years ago, our discounts were close to 10%, but we've made targeted changes where we've reduced the acquisition fees in certain segments that we think will perform better, so that we get more of that paper. So we've done probably half a dozen of those over the last couple of years, which have bought that blended discount down to 5%.

Okay. With respect to credit quality, I know it's pretty strong now. And I'm wondering and you already talked about some of this in terms of where your expectations are, but I'm wondering where we are in the cycle? I mean, is this where your delinquencies and charge-offs should kind of trough on a static basis? And then you just hope for stability? Or is there still some downside opportunity based on the trends you're seeing?

I think, generally speaking, I think gradually, they're going to maybe move up just a little bit, but I think it's a little hard to tell. As I said, you have the magic cushion of having a really good economy or whatever. You have a slightly growing economy or a positive economy, and that dampens any real negative effect you have in terms of as we grow the portfolio.

And so I think, I would think to the extent we trend one way or another, it might trend upward a little bit, but it's a little hard to tell. Because, as I sort of mentioned earlier, we sort of picked this certain range for what we think the paper will do. It's performing better than that range; to the extent we keep buying it, it will push the overall numbers down.

Okay. Can you guys -- where are you selling down to in the securitizations now? In other words, what's the kind of initial cash and OC requirement? What does that grow to?

Well, let's see. We sell the complete stack, so $147 million of collateral. We had $147 million of bonds. We put up one point in a reserve account, and then we build over collateralization up to -- we build 11 points of OC initially, which typically, has seven, eight, nine month time frame before cash flows start coming back to us.

Okay. And last question. Can you give us -- what's the reserve for the DTA right now? And based on -- just give me a status of kind of when, based on -- I don't want you guys to give any forecast if you're not comfortable with it, but based on kind of run rates of profitability, when would you take that back into book value?

Well, the valuation allowance is about $60 million on the -- against the deferred tax assets. And the key component to the relevant accounting standards call for us to make a determination of when it's more likely than not that we'll realize those tax benefits with future earnings. And so, and in the process of doing that, the standard goes on to say you evaluate various positive and negative evidence in order to make that more likely than not determination.

So we look at things like consecutive positive quarters. We obviously have projections of future income, and we evaluate all those things.

Just to give you a benchmark, we've been around the track once before. And the last time we reversed the valuation allowance of about $23 million or $24 million, we had at that time sewed together six consecutive profitable quarters. And so that's not a single benchmark, but that's just something that we might look at as we go forward.

Great. Thanks very much for the color, guys.

(Operator Instructions) K.C. Ambrecht, IceCap Capital.

Thanks much for hosting the call and taking the questions. Good quarter; good quarter. First question I have for you, it looks like you have of your two facilities -- funding facilities of $200 million, which the Goldman Fortress one is going to expire this December and the Citibank one in May of next year. Can you just give us an update on what you're doing with those facilities?

Sure. The Citi facility is an annual facility. We do a lot of stuff with them. We more than likely expect to just renew that, maybe expand it. The Goldman facility is a two-year facility; it's up in December. We are currently actively talking about renewing that one with them. And again, as I mentioned, at some point, we would expect to expand both facilities as well.

And having said that, there's other folks we're talking to. I don't know that we'd go to three facilities, but we might. And it's actually a good time to be looking for facilities.

How much of the warehouses do you actually use (multiple speakers) before the securitization?

Well, we use it all for about two days of a quarter. (laughter) You know, we fill it up monthly, but right before the securitization, it's getting pretty full, and then we do the securitization and it empties again. So but the easy way to look at it is, we fill most of it over a quarter; we dump it after the quarter and then start over.

Would the pricing improve? I mean, would that be a big savings of your interest expense on these (multiple speakers) --?

I think -- the pricing on the lines isn't particularly bad in any sense. So maybe it would improve a little bit, but it's probably within 100 basis points of where it's going to be, so.

Keeping in mind, K.C., the paper doesn't stay in there very long. So one of the reasons we do the quarterly deals is to get them into -- get the receivables into the long-term ABS funding, where the cost to funds is several hundred basis points lower. So you won't see a huge benefit to the P&L, I think, from improved warehouse funding costs.

Okay. And then when I look back on some historical numbers for you guys, back in 2006, in 2Q '06, you guys earned $0.11. You're actually producing more, I think, than you were back then. And this is also when you did not have your -- did not recapture DTA back then.

But on an annual basis, you printed in 2006 $0.55. Stock traded up to over $8. Right now, you're printing $0.11. That's pretty clearly, without recapturing DTA, is going to be a $1 run rate by the end of next year. And so you're trading at half the level. What can you tell investors that we're not going to round-trip this thing? That you're trading at half the valuation and the Company is stronger today, with kind of like a Goldilocks scenario on the economy -- not too hot, not too cold.

Up until the last part, I was going to say, I love the way you think. But that was after you said it was a dollar run rate. (laughter) But (multiple speakers) --

Well, I mean, if you just without the DTA, though, it will be $1. I mean you're probably going to be around $1 run rate by the end of -- by the fourth quarter of next year.

I'm listening. So, but the DTA is really more of a balance sheet item than anything else. And you can't really -- to the extent you -- I think I know what you're saying -- to the extent we split the DTA, it's going to have its momentary massive spike in the earnings that nobody's really -- should pay that much attention to. But it does wonderful things to the balance sheet.

In terms of the run rate, you know, I mean, we can sit there and say, go back and look at '05, '06, and '07, and it's not like we're rewriting the book here. We're just following along and doing a little better and the funds are cheaper. So, you know, without getting into projecting the future, it's easy enough to say, all we're trying to do is go back to where we were. The cost of funds are better. The efficiencies are better, so maybe we can actually do it better the next -- this third time around.

Does that help?

I hope so -- I mean, do you think the balance sheet is better if we do hit some sort of pocket in the economy? I mean with the warehouses set up?

Well, that's actually -- all your questions are good, but that's a particularly good one. One of the things I highlighted on is we're going to spend the rest of this year focusing on getting our growth set up for next year, so that next year can run as well as this year.

The real thing I spent almost, I don't know, all my time thinking about is what to do to get us prepared for the next time Wall Street falls apart. And unlike last time, when Wall Street fell apart in 2007, we were fully leveraged and hanging out over a cliff. And that's not going to happen this time.

And so I think it's very fundamentally important to us as a company that next year is a good year, and we spend a lot of next year getting ourselves pulled back from any kind of leverage where we're in a position that, if something does happen in '14 or '15, then we're in a very strong spot to take advantage of it, as opposed to get our throats slit from it.

I think if we can have '13 as another year like '12 and '14 is a decent year, by '15, we're in cruise control in terms of what would happen if we had a pocket in the economy. But your question -- I interpret it slightly, is what do you do in a pocket? And we're preparing for it right now, as much as we don't really see it for at least two years.

Okay. All right. Good stuff. Thanks very much for hosting the call.

Thanks, K.C.

Our next question in the queue is a follow-up question from, Kirk Ludtke. Please go ahead, your line is open.

I just had one or two others. You mentioned that -- did you say that you released some cash -- some $42 million of cash, went from restricted to unrestricted? Is that -- did I hear that right?

Yes. Actually, this was the pre-funding component. So we put it into a restricted cash when we closed the securitization mid-September. And then when we delever the incremental receivables, it flows through and pays down our line, and the rest flows through back to us.

Okay. Got it. And is there a way to think about a normalized cash position here? Is there -- do you have a target as a percentage of assets or something like that?

Well, we have some requirements in our financial setups to have some certain amount on the balance sheet each month. In terms of an overall cash position, I think to the extent we start rolling in some cash, which we might -- or as I've just mentioned, our first and foremost thing is to pay all the debt down.

Once that's done, you know, we would probably -- well, an easy progression for us, as we accumulate cash, is get rid of all the debt and delever. Now if you say next year's plan. And any time we get close to doing that, then we probably stop selling all the way down the spectrum in the securitizations. And that would be another very good use of our cash.

Today, the cost of funds up and down the securitization structure is so enormously cheap, it doesn't behoove us to not sell everything. But over time, we're going to have -- you know, things being the right way, we're going to have an awful lot of cash to do something with. And so I think at that point -- here's something we've never had to think about is, when all the debt's paid off and you're not really selling far down the securitization structure, what do you do with all the cash? And at that point, we'll have another call and talk about it. (laughter) But it will be a really good call.

(laughter) That sounds fun. I appreciate it. Thank you.

Yes.

(Operator Instructions) Presenters, I'm showing no additional questioners. I'd like to turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. I appreciate all the questions. I think it's nice to see we're getting a little more activity in the stock. We've been trying real hard to make all this work. The plan, as I mentioned, or referred to several times, is really coming together.

We're very pleased with third-quarter results. We're very pleased with the first three quarters for the year. And we look forward to continued quarters as we go, economy hopefully hanging in there and it all working out. Quoting my good -- my favorite sports guy, Yogi Berra, it's deja vu all over again. We're just doing what we know how to do, and it's working out rather well.

Thank you all for attending. We'll see you next quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until October 23, 2012, 11.59 PM, by dialing 855-859-2056, or 404-537-3406, with the conference identification number 43148332. A broadcast of this 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.