Consumer Portfolio Services Inc (CPSS) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2013 third-quarter operating results conference call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are 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 the 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; Mr. Jeff Fritz, Chief Financial Officer; and Mr. Robert Riedl, Chief Investment Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Thank you all for joining us this morning for our third-quarter conference call. As you can see, the quarter went very well -- I guess pretty much as we expected. There's certainly less noise in this quarter. And from our point of view, that's more of a normal quarter, what we would expect and what we would expect going forward.

I think, just broadly speaking, in terms of originations, collections, in all expects of the business, it was pretty much in line with what we expected. It was a good growth quarter, a good earnings quarter. You know, it's almost -- we're back to hopefully doing the boring part, where it pretty much went in line with our expectations, and hopefully everyone else's.

We will go into a little bit more detail about that. But for now, I'll turn it over to Jeff to walk through the financials.

Thanks, Brad. Welcome, everybody. We'll start with the revenues.

Revenues for the quarter were $64.1 million. That's a 34% increase over last year's third-quarter revenues of $47.9 million. It's also -- you recall in the last quarter, our second quarter this year, the June quarter, we had a one-time gain from cancellation of debt. So I'm going to compare the sequential quarters without that. Again, $64.1 million for this quarter is an increase of 8% over the $59.6 million for the June quarter this year.

On a year-to-date basis, again, without the gain from the cancellation of the debt, revenues are $178.2 million. And that's a 30% increase through the nine-month period in 2012.

Of course, the revenues are driven by the growth in the consolidated portfolio. We did originate $207 million of loans here in this third quarter, and the consolidated portfolio grew 10% from the second quarter of this year and 43% compared to this time last year.

Moving on to the expenses, operating expenses were $53.5 million for the quarter, and that's an 18% increase over the third quarter of last year. Again, without the one-time contingency expense that we incurred in the second quarter of this year, our quarterly expenses of $53.5 million this quarter were a 2% increase over what would have been $52.3 million in the second quarter this year.

On a year-to-date basis, again, without the contingency expense recognized in the second quarter this year, our nine-month expenses are $153.9 million. And that's a 17% increase over the $132 million in nine-month expenses last year.

We continue to see a couple of positive trends in expenses. Our interest expense has decreased now in something like 7 consecutive quarters, due to the runoff of higher ABS cost and some repayment of some other long-term debt along the way. And, of course, the new ABS are coming on at lower interest rates.

Generally we've seen, in some cases, flat and slight growth in employee costs and G&A costs, as the cost of servicing the portfolio and originating greater numbers of contracts has increased.

Looking at the provision for credit losses, $20.2 million for the quarter. That's a 113% increase over the third quarter of last year and a 17.4% increase over the June quarter of this year. On a year-to-date basis, provision for loan loss is $52.7 million, and that's 140% increase over the $22 million for the 9 months last year.

This is very much in line with our expectations. The originations are higher compared to last year. The portfolio has grown at 43% compared to last year. And the credit metrics are generally good, which Robert will talk about later on.

Pre-tax earnings for the quarter, $10.6 million. That's a 293% increase over the third quarter last year pre-tax earnings, and a 25% increase over pre-tax earnings of $8.5 million in the June quarter this year. On a year-to-date basis, pre-tax earnings $25.6 million, and that's a whopping 457% increase over $4.6 million for the nine months ended September 2012.

Net income -- $5.9 million for the quarter. That's 119% over the net income of $2.7 million in the third quarter last year, and a 23% increase over the $4.8 million of net income this year in the second quarter.

On a year-to-date basis, net income -- $14.5 million dollars, a 215% increase over $4.6 million for the nine months ended September 2012. Keep in mind, in the 2012 period we had no income tax expense we recorded -- no income tax expense either for this quarter or through the nine-month period, as we were still reducing the valuation allowance on what was then our deferred tax asset that was fully valued.

Diluted earnings per share -- $0.19 for the quarter. That's a 27% increase over the June diluted earnings per share of $0.15, and a 73% increase over the $0.11 in the third quarter last year. On a year-to-date basis, $0.46, which is 142% increase over $0.19 through nine months of last year.

Moving on to the balance sheet, unrestricted cash balances of $24.1 million -- that's a little bit higher then we have been carrying for the most part in the previous couple of quarters and last year. Our liquidity position has been a very strong. The asset-backed structures have helped us to conserve liquidity and use the warehouse lines less, which has also contributed to some the lower interest expense numbers that I already referred to.

The restricted cash balance at the end of the quarter includes $66 million in pre-fund proceeds for our 2013-C securitization, which was completed after the quarter. And that $66 million was used largely to pay off warehouse financing.

Our finance receivables portfolio, net of the allowance, has now exceeded $1 billion for the first time in quite a while. It's up 11% from $939 million in the June quarter, and up 56% from $670 million a year ago.

We've originated $591 million in new contracts this nine months compared to $401 million through nine months in the prior year. The Fireside portfolio continues to wind down. That's our fair value portfolio. That's now at only $21 million.

Elsewhere on the balance sheet, slightly higher warehouse utilization balance -- warehouse lines balance at the end of the quarter compared to the June quarter, at a little bit higher than last year. Our residual interest debt has actually decreased by about $13.8 million from the prior quarter as a result of our repaying an older residual facility. You recall that we did add a new residual facility earlier in the year for $20 million, which is still on the balance sheet.

Securitization trust debt now, again, over $1 billion -- slightly up from $984 million in June and $720 million a year ago. And the other kind of interesting factor in this balance sheet -- our debt, secured by the fair value of the Fireside receivables, is down to about $17 million. The contractual note on that deal has actually been repaid in full, and this debt represents the fair value of future cash participation payments that are due to the lenders on that deal.

Moving along to some of the performance metrics, net interest margin for the quarter was $50.2 million. That's an increase of 12% compared to the previous quarter of the June quarter of this year, and an increase of 77% over the $28.4 million net interest margin in the third quarter of 2012.

On a year-to-date basis, the net interest margin -- $133.4 million, which is a significant increase over the $74.9 million that we had through nine months last year. Again, I think I mentioned, the NIM is really helped by the older ABS financings running off and being replaced with the substantially lower-cost ABS derivatives.

The risk-adjusted NIM, which takes into account the provision for loan losses -- [$30] million for the quarter. That's a 9% increase over the June quarter this year and a 59% increase over the third quarter of 2012. On a year-to-date basis, the risk adjusted NIM -- $80.7 million this year compared to $52.9 million last year. So even the NIM is seeing good increases, also taking into account the provision for loan losses.

Our core operating expenses were $19.4 million. That's actually a slight decrease from the June quarter of $20.3 million, but an increase of 20% over the $16.2 million in core operating expenses in the third quarter of last year. On a year-to-date basis, core operating expenses -- $56.3 million compared to $48.3 million through nine months of last year. And obviously, we're seeing growth in some of the core operating expenses, just to continue to manage the increase in volumes in the servicing portfolio.

However, as a percentage, moving on to the core operating expenses as a percentage of the average managed portfolio -- 6.9% for the quarter. That's a decrease of 13% compared to the June quarter and a decrease of 12% compared to 7.8% for the third quarter of last year. On a year-to-date basis that core operating expenses as a percent of the managed portfolio -- 7.2% this year. And that's down from 8% last year. So we're seeing good trends in our operating leverage and controlling our expenses relative to the growth in the portfolio.

Return on managed assets -- 3.7% for this quarter. That's up 13% from the June quarter and up 185% from a 1.3% return on managed assets in the third quarter of last year. On a year-to-date basis, return on managed assets was 3.3%. And that compares to 0.8% through nine months of last year. So, again, a very positive trend. Much better return on managed assets.

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

Thanks, Jeff. Looking at performance metrics on the portfolio, delinquencies at the end of September were about 6.44%, up from a little over 5% in the June quarter and up from 4.64% a year ago. Net losses for the quarter, annualized, were 4.9% -- up a little bit from the June quarter of 4%, and up from 3.35% a year ago the September quarter.

On an annualized basis for the first nine months, losses were 4.21% compared to 3.47% a year ago. And as we talked a little bit last quarter, we would expect these numbers to increase, both on the delinquency side as well as the net loss side, as the newer vintages -- the 2012 and 2013 vintages, which are larger vintages and have slightly higher loss characteristics -- as the credit trends normalize, we talked about how 2010 and 2011 vintages are running at much lower levels than what we underwrote to. So as the 2012 and 2013 vintages season, we would expect the overall portfolio numbers to increase, which we have been seeing.

At the auction for the September quarter, we were at about 45.5% compared to 48.6% in the June quarter, and then 47.2% a year ago. Seasonally, we would expect to see a little drop-off here in the third quarter, and probably see a little bit more in the fourth quarter. And from a bigger picture perspective, as production has ramped up over the last couple of years, and more of these vehicles are coming to the auctions, we would expect those numbers probably to trail down a little bit over the course of the next 12 to 18 months.

On the funding side, Jeff mentioned we closed our third-quarter securitization in September. It looked a lot like our previous deals -- rated by Moody's and S&P. Five tranches, AA down to B, for a blended cost of a little over 3%.

Similar advance rate -- 99% effective advance. And we had the pre-funding component that Jeff mentioned of about $66 million.

The cost there was a little bit higher than our second quarter, up from about 234. 75 basis points. 20 of that was from the benchmarks and 55 were in the spreads. Still, we saw good, strong demand for the paper.

From a bigger-picture perspective -- Jeff alluded to this -- we're still seeing a very good improvement in our blended funding costs. Those have come down from 6.9% in the first quarter this year, 5.6% in the second quarter, and this quarter we were at 4.9%. So even as our incremental ABS transactions are getting a little bit more expensive, we would expect to see continued improvement on the blended funding costs as the older, more expensive ABS deals run off; and as we repay some of the more expensive corporate debt.

One other thing worthy of note -- Jeff highlighted the unrestricted cash of about $24 million at the end of the quarter. If we had pledged all our unencumbered receivables, a total liquidity number that we could have had would have been in the mid-50s, approximately $56 million. That's pretty close to where we were at the second quarter, at $60 million. We repaid the $14 million of Citi residual debt. So liquidity position remains very, very strong.

With that, I will turn it back to Brad.

Thanks, Robert. And looking at operations, running through the list -- in marketing we are once again trying to rapidly grow -- or I guess I should say continuing to rapidly grow. If you recall, at the end of the last cycle we were down to about 20 marketing folks; we're now over 100. We had around 125 when we were doing about $120 million a month. So our goal is to get back to that number.

As I mentioned in the past, we thought that it would take about 6 months for marketing people to get trained in the ability needed to do pretty well. We think that's more like a year now. So in anticipation of that, we are hiring a little bit sooner and a little more quickly to get a lot of folks in the field and up to speed, so that we can take advantage of their newfound expertise next year and the year after.

So, again, starting at 20 a couple of years ago to getting over 100 today, and on our way to 125 to 130 over the next year or so -- marketing is a very growing spot. We put in a lot of training and a lot of things that really seem to be paying dividends today.

Originations is running about as smoothly as we can expect. A high degree of automation in those processes, allowing our people to be very attentive to the dealers. I think that kind of service is paying significant dividends. A lot of companies that grow real fast -- you know, they sort of drop the ball a little bit in the dealer service aspect, because they're getting a lot of business, they have a little trouble handling it on the front end.

With us having a lot of folks who are all well-trained and seasoned, we are able to give a lot of very specific dealer service to get them to working through the deals. And I think the dealers appreciate that, and that gives us a little bit of a boost in terms of how that area performs. So they're way ahead of the curve, as I mentioned before. The Company's growing 50% annually or more in originations, and they are able to handle that without any problems at all.

Collections -- it's finally a time for our collection department to start growing again. I think as we mentioned in the past, even though we were growing, the portfolio was running off so quickly, we weren't really in need of any staff; and actually, we were shrinking a little. As of the last quarter and continuing now, we're finally really starting to grow the collections staff again and hiring on a regular basis. And I think that's good. It allows us to get more people ready to go when we hit next year's growth phase.

As to recovery -- the auctions are still strong, Robert pointed out a minute ago. So that's also a good effect. No real problems with any of that.

Looking at the earnings -- the earnings are probably a little bit ahead of schedule. I think we -- as we have also mentioned in the past, the lower cost of funds continues. As much as it has gone up a little, it is substantially lower than we would have had in the last cycle. Our margins are much stronger than we might've expected. We have no problems or complaints about that program. The earnings will continue to roll if that all holds true. And we expect it to do just that.

As I think both Jeff and Robert mentioned, we did pay off the residual last quarter. It was sort of nice. Normally when we pay pieces of debt off, we usually go out and get new debt. We're now in a position where we can actually pay a lot of this debt out of cash.

The fact that we paid $14 million in debt and still have $56 million, if we want to, in cash puts us in a very strong position. You know, we have the Levine debt coming up next year. But the way things are going, we may not need to do anything except pay that out of cash as well. So in terms of how everything is working, it's working very, very well -- in some areas, exactly the way we expect it to; in some ways, much better than expectations.

So in looking at the industry, I think the thing we hear about constantly is the competition. As much as I've said numerous times, we don't particularly see it. We view it a little differently. To us, competition is when the big banks were there, forcing the amount of money we could charge way down.

That isn't the case to this cycle. There's a bunch of little guys. In some ways I think that a lot of the smaller companies that are starting out and wanting to grow -- they have lots of growth expectations. They may not have realized that you get all your growth in the first five months of the year, not that much the rest the year. So the extent they're trying to grow right now, or have been trying to grow in the last two quarters, or during the summer -- that is tough to do. And so you may argue it's competition, but this is somewhat of a seasonal business. And we think it's much more that than the other.

You know, having said that, our good geographic expansion plan continues to work very well. We have been cutting our price, which is what we've always expected to do. We've given away our discount down to about 2%. We've maintained our APRs above 20, which is, for anyone following along, exactly what we have said we were going to do.

With that discount cutting, we have been able to get the growth to just what we want. It's probably been a little bit higher than we expected, but certainly right in line with our expectations.

I think the new thing today in terms of competition with the other lenders is generally miles and terms. All the dealers want more miles in the financing and longer terms on the loans.

In the first cycle in the 90s, everybody wanted a lower down payment. In the second cycle, it was all about extended term. So I think this cycle, it's going to be about miles and term.

We're not really a follower along those lines. You know, we do very little in terms of keeping up in the market in terms of miles and term. But it's something that we pay attention to, and it seems to be the new quality way everybody seems to be competing.

As I said, I think a lot of this is just the smaller companies are out there trying to grow. They don't have access to the capital markets, so their cost of funds are higher. If they grew real fast, their losses are probably a little bit ahead of themselves. And that's putting pressure on them to grow or do more things.

We're not really in that position at all. We're growing exactly the way we want to. We are a lot bigger than most of the small guys. We do have very good access to capital markets. So we don't really have any of those issues. Probably most importantly, we haven't told everybody we're going to triple in size over the first two years.

That probably is why it's working pretty well for us. We think the rating agencies are doing a really good job in keeping the smaller guys in line, and not giving them access to tons of free money until they know what they're doing. That is another barrier that we've mentioned before that works for strongly in our favor as well.

In terms of the overall economy, as long as unemployment is going down or staying the same, we really don't care about unemployment. We probably couldn't find anyone saying unemployment is going up. So that's a good sign.

Consumer confidence seems to be building. We've seen a lot of things in the last few months where the auto industry is leading the recovery and outperforming every other sector of the economy. I think that obviously is good.

Having said that, it's still not doing as well as it did before. But no problem with us riding along on that curve. You know, in many ways we certainly have everything going the right way in terms of lower cost of funds, good access to capital markets. Competition is there, but it's on a much smaller size; it's not the banks pushing us around, like last time.

So overall, we think the picture looks pretty good going forward. That's about all I can think of at the moment, but I will open up for questions.

(Operator Instructions). Kurt Ludtke, CRT Capital.

I wanted to just double back to the competitive landscape for a second. I think you mentioned that the discount was now 2%. How is that -- can you give us a little more color as to where it was last quarter, and how it trended throughout the third quarter, and where you see it now, and where you see it headed?

Last quarter it probably wasn't that much better. It might have been 2.5%, or something in the area of 3%. But it hasn't really -- I think we were fairly willing to give it up, to give up the discount over the last year or two.

Now that we're down to -- I think our target is 1% to 1.5%, which is what it was on average in the last cycle. So we have been somewhat free in lowering the discount in certain areas to grow. Once we got sort of below 3%, we slowed it down.

I think one of the huge drivers to our whole strategy on the discount was cash. Because in the beginning, we really needed cash to fund the operations. So having a larger discount was very important. As we have all mentioned now six times, we have more cash than we know what to do with. So the discount isn't so important -- to the point where we could give it all away if we wanted to.

So I think going forward, we probably -- ironically, the discount also sort of folds into the statutory -- the regulatory environment with dealers. So on some level, I'm not so sure the discount won't go away completely for everyone down the road. So for us to be a little ahead of the curve and get rid of it sooner than later, as long as is bringing us a competitive advantage, works out fine.

That's probably not horribly helpful in terms of where we're going to go, but I think you could guess that it could drop into the 1% area next year. At some point after that, it will probably go away entirely.

Okay. That's helpful; I appreciate it. With respect to the competitors, it sounds like there are a lot of startups. Could you talk a little bit about what the larger, the better-established players are doing in terms of expansion and pricing? And then I have got a couple of follow-ups from there.

Sure. I didn't really touch on the big guys. It's interesting, because as much as they're -- and there seems to be lots of little guys roaming around -- we really don't see a lot. I occasionally hear about one or another in a regional kind of setting.

And then the big guys, as I mentioned, probably the most important part is all the banks have backed out considerably from our industry, or that top end of our industry. So you're left with the Santanders, the Capital Ones of the world, who, when they want to, can be very aggressive. Very nice for us. And for whatever reason, they've not been all that aggressive lately. And even when they are, it is only for a little while.

So in some ways, if you look at sort of -- Santander has recently said they want to go upmarket and do more prime. They have that deal with Chrysler. You have AmeriCredit -- used to be the big guy on the street. Now busy doing leasing and foreign with GM.

So as much as they are still all there, and they are all competitive, they are doing some other things, and their focus isn't to grow subprime, much like ours is. They have other things to do. And we are focused on just growing.

So they're all there, and they all have their moments when they come in and take some of the business. But the market is very large, and without all those banks --there's plenty of room for them to get bigger without really putting a lot of pressure on us. Because we're all trying to fill in the hole.

If you take out an HSBC, and a Citibank, and a bunch of those lenders that don't exist in our market today that were there five years ago -- you can have a Capital One and a Santander grow quite a bit, and it doesn't faze any of us littler guys. It certainly shouldn't faze even the littlest guys. So I think that's probably the fairest estimation I can give you on the large players.

That's helpful, thanks. And then with respect to a couple of follow-ups, I thought you mentioned that it's taking you longer to train people this time around than last. I was curious why that is, if that's true.

And then, also, I was hoping to get a little color as to what the target corporate debt level is, and the timing? And also, if there settlement -- when you expect to pay the settlement from last quarter. Thank you.

Sure. Let's see. First, the training. I wish we had a real good answer for that. We certainly were a little surprised. I think the best estimation I can give is that it's a little bit of a complicated process.

On the one hand, we sort of figured we could teach a given marketing person all the ins and outs of the system, and then you can teach them all the ins and outs of our program. And we would have thought that would have taken some time. And it does.

But on top of that, it then takes them a little bit of time just to get to know the dealer base, and sort of to figure out how the whole process works together. So on the one hand, it might take six months to learn the basics of our marketing programs -- the programs we sell; not to mention the computer systems, and all the things we do internally.

And then you can go out there and teach them how to be marketing folks. But then they need to blend it all together to have it work in an effective way for them to gain business. And that involves getting to know the dealers, and truly, you are not going to be overly successful day one. So you're going to have to go back and do it some more.

So we just found it's a little bit of a longer process from getting them all geared up to having them actually run real fast. But as it is, I think that given us some time to figure out even better ways to train them, and they have been more effective. So they may go faster. But in the most recent go-around, it's taken a little bit longer than I might have expected. But I just think it's a lot to do. The good news is, once we get them up and going, they're very, very good at it.

Moving on to the number two question was corporate debt. Our target is zero. We really have three pieces of debt we sort of look at these days. One is Levine Capital Partners debt, which is -- $37 million is due next June. We will pay that off some time before that, maybe even a little bit earlier.

We have that residual debt, which is $20 million, as I think Jeff or someone mentioned. That will start getting paid off towards the end of this year. It will run out over the next year or so. And then we have about $20 million of public notes. That may stay for a while. It seems to be slowly going down, but those notes are somewhat subordinated. We've lowered the price or the cost of funds on those somewhat substantially in the last few months.

So if they want to keep renewing, that's just great, because it's real subordinated kind of money. But we would expect over time that probably being our last piece of debt to run off over the next couple of years. And lastly, for our FTC thing, the government shutdown probably didn't help that process too much. But we would expect to have that tied up in the next month or two.

Kyle Joseph, of Stephens.

Congrats on a great quarter, and thanks for taking my questions. I wanted to touch base on originations. The q-on-q origination pacing did slow down a little bit in the third quarter. I just wanted to get your thoughts -- are you guys still comfortable getting up to that $100 million a month level? And was there some seasonality there?

There's certainly a little seasonality there. As I mentioned, usually you grow from late January until end of May, and then you try and hang on. Sometimes you can pick up a little growth in September, October; and then you drop off a little bit in November, December.

So in some ways it's almost very predictable in a seasonality point of view. Having said that, as long as the economy overall doesn't have some weird thing happening in terms of the government doing this, and that, and the other thing, we would expect a lot of substantial growth in that first quarter. And that will tell the tale on whether we hit the $100 million-plus kind of monthly origination run rate next year. Where we sit today, given that we are busily hiring and training marketing folks and staffing up originations and collections to handle it, certainly our projection or our thought is that we will get there.

Okay, thanks. And then touching on credit a bit, can you talk about how 2012 -- mostly 2012 -- how 2012 is performing versus how you modeled it?

Yes. I think, as Robert pointed out, in 2009 we didn't originate hardly anything. In 2010 and 2011 we started growing a little bit. But still, the originations were rather low, and we were in a position to be very conservative in how we originated.

So we originated super good paper -- you know, single-digit kind of losses. So there is a possibility some folks looked at that paper as a baseline, which isn't accurate. Our goal is always to originate 13% to 14% cum loss paper. That's what we did in the past, and I think going back to the last cycle, we had 13% to 14% cum loss paper that got hit by this huge recession and went up to 18%, 19%.

So we're certainly familiar with that whole area. And so that's where were targeting. So what you're really seeing is us getting back to that kind of number. 2012 will probably come in almost exactly right around there.

I think there was a time where we thought it might do a little bit better, but as it has seasoned, it's ticked up a little. So I think our expectations are sort of in that range for that. Maybe not 14%, but some were over 13%.

Going forward, again, I think everything will be somewhat consistent in that range -- which is, of course, where it's supposed to be. But since we did originate a bunch of paper that was substantially lower, it does make the numbers look like they're going up a bit -- and they are, but not to somewhere that we're not very comfortable with.

Okay. And so as the 2012 and 2013 starts to make up a higher percentage of the portfolio, we can expect to see delinquencies and potentially charge-offs start to revert to the mean, if you will?

I would think so. I think the delinquencies are almost probably about to that level now. The charge-offs should settle into to those target ranges. The difference is -- it's not like -- if we were telling everybody we're provisioning our stuff at 10%, and we were saying it's going to be 13%, that's a problem. But we provision at 13%, 14% already. So we sort of need to be operating in that range. So to the extent they started going higher than that, we would start looking at it a lot more carefully, or more in an interesting way. But today we don't see that.

Okay. It sounds like you're hiring some more collections employees. What sort of impact could that have on net charge-offs?

Well, I think the charge-offs seem to be running the way they're supposed to. We have seen a little bit of an uptick in the delinquency, as we might've expected. We may play around. At different times in history of the Company, we have either originated to a 400-account load per collector or a 450. And currently we are running a little higher than 450, and we're going to bring that down.

Given there's a lot of other issues going on, we think probably 400 is probably a better number. And we'll probably target that going forward. We think that will -- it certainly can't hurt, and it may produce even better results than we might expect.

Then on a cost of funds basis, it looks like it's come down about 70 bps the last two quarters. Can we start to expect that to level off? I don't want you guys to try and predict interest rates. But could that start to settle down over time?

Well, we have this -- as Jeff pointed out, this interesting thing where, as much as the sort of new rates are going up a little bit, there is so much paper that's got the old higher rates, the interest rate overall is coming down. It should. I don't know what day we might pick the meeting in the middle and then sort of normalizing, but it's probably still not for another -- what? Few quarters?

Yes, I would think we've got probably 12 to 18 months of further downward momentum. But, yes, I agree with you, Kyle. It is going to slow down on how much pick-up we see for the next few quarters.

That expensive Levine Leichtman debt will be paid off in the first quarter of next year. So that will help the cost of funds significantly.

As much as the overall -- it's sort of an easy thing to do, because even though the cost of funds have gone up dramatically to -- I don't know -- 3%, considering we used to have 5% all day, we're not overly concerned. And the fact that we do have this old debt rolling off, forcing the overall number to come down -- even when that number starts to finally normalize, we're paying off all this expensive corporate debt, which is going to push it down yet again.

So there's at least another couple of years, probably, where we really benefit more from just the changing environment we're living in as opposed to really worrying too much about interest rates. Having said that, we hope interest rates stay right about where they are for the next two years.

Got it. Thanks very much for answering my questions, and congrats again.

David Scharf, JMP.

Obviously, the last two callers covered most of what I had on my docket. But just a couple of cleanup questions. One is related to delinquencies. I know it's very difficult to quantify this, but I'd like you to take a stab at it. You referenced last quarter the new collection processes or modifications that you had to put in place because of the FTC oversight. Is there any way to help us understand the degree of impact that's had on delinquencies?

Excellent question. I think given the regulatory environment today, I think we've sort of -- we have done a lot of training. We now record all the phone calls, and we monitor them heavily. And we do a lot more training. And that's slowed down what we'll call the overall collection practices a little bit.

Around here, we refer to it as the kinder, gentler deal. I think it has had a little bit of effect to the DQ. It has not shown up in the losses. And so to the extent kinder and gentler has the same effect, we're going to do very, very well.

Having said that we have now -- we're well into the process and have been doing it for over a year probably puts us in a very good spot going forward in terms of its effect on the rest of the portfolio. But what we have noticed in doing this, and as a result direct result of some of that stuff, that it does slow down the collection process a little bit, which is one of the reasons we are going to drop the account loads.

Obviously, this is something we look at a whole lot, and we're sort of right on top of. But we were all wondering -- we have not seen any translations of delinquency at all so far. So as much as we expect maybe there might be a little, at the moment we think between the new processes, the added collections folks, and the lower account loads, you may not see any real results -- any changes at all, which, of course, would be the best result for us. But so far it all looks pretty good.

Got it. Got it. Just lastly, revisiting sales rep productivity, and ultimately working your way back up to what had been peak origination levels -- $100 million a month -- can you give us maybe a rough timeframe for when you think you could get to that 2007 level again? Based on the hiring, the training schedule, what you're seeing competitively? Just trying to get a sense for when we may be seeing that level of volumes.

Well, I think -- you know, we've now been growing at give or take a 50% annualized growth rate for originations for a couple of years. We'd hope we will not continue that forever, but I think personally we're shooting for a 40% to 50% next year.

If you pick a base of 70, which is what we have been sitting at for most of the summer, that's going to get you to 105. If you lower that a little bit more and said 25%, 30% of that the following year, you are up to that number. So I think loosely speaking, a couple of years could get us back to where we were.

Our peak was 125. So if you said -- if you get 50% on 70, it gets you 105; if you did 40%, it gets you to 100. Once you get to 100, 30% gives you 130. So you can sort of play around with the math a little bit.

But I think what we would anticipate is not to maintain a 50% annualized growth rate in origination volumes year over year forever, but we also don't think it will drop to 10% next year, either. So to be fair, it's tough to tell. Because I could sit here and say, well, it looks like it is going to be more like 35% to 40% next year, and it could come in at 55%, no problem.

So a lot just depends on what's going on a little bit in the economy. People getting out there and consumer confidence and such. A little bit on competition. If a couple of the big guys come in in the first quarter and want to grow real fast and take a lot of business, you could lose a little down there. But if everything rolls along the way it's rolling, our target next year certainly is in the -- obviously, it is easy to say let's get to 100 and go from there.

Good, helpful. Just lastly, circling back to the FTC, I'm assuming that your comment that you hope to have things kind of tied up with a month, that that's purely on the administrative front. There are no additional changes to any of your practices that they're asking for?

No, yes. We're kind of just waiting on what we'll loosely call the paperwork. We've gone through all the discussions with them on what they wanted to know about what we worked on with them, and we've implemented virtually all of it.

Ryan Zacharia, Jacobs Asset Management.

First, I want to say, have you noticed any changes in the extension experience in Q3, and even through the first couple weeks of October?

Not yet. We've never been much an extension kind of company. Certainly a lot of folks in the industry do a lot of extensions. Ours is relatively flat over time. So no, we haven't seen it yet. Nor do we, I guess, expect to.

And can you help me understand, I guess, a little bit of the denominator effect here? I mean, the portfolio has grown dramatically. And if we think even on a sequential basis, the portfolio has grown, let's say, 10%. So to my way of thinking, 10% of the receivables are basically 45 days old, on average.

So if that's the case, to see delinquencies up so much -- even taking into account the fact that there is purposefully looser credit standards now than there were a year ago and this FTC thing -- I'm still a little bit surprised by that. So is it something that you guys are surprised about? Or is it -- explain to me how this is kind of just par for the course.

Well, I think it's a combination of both the new regulatory environment -- and that would be the part we'll probably easily say we're not exactly sure how the -- whether our kinder, gentler practice will work. But it has had delinquency go up, which we might expect.

We've seen nothing in the losses, which is a little counterintuitive. But nonetheless, it seems to play that way. Other than that, in response to that, we are in fact going to drop the account loads, as I mentioned. We think there is a fairly decent chance it drops it right back to where it was. It is a little too early to tell right now.

The easy answer is, given where our origination levels were in terms of our expected loss cases, it doesn't matter. It's kind of like if everything was going perfectly, our numbers would have been in the 12s kind of range. To the extent we sat there with these DQs and rolled them out in sort of what we'll call a negative way, you might hit 14%. So one is going to be the low end of the range; one is going to be the high end of the range. Being how it's our range, we're not overly worried about it or care, for that matter. But having said that, we are not going to sit there and look out the window and hope the whole thing takes care of itself.

I think that's probably the easiest way to look at it. If we drop the account loads; get used to this new kinder, gentler deal, the numbers could drop back down to that 12% side of the loss spectrum. To the extent it's just an easier way to collect and better fitting, or whatever, maybe they drift to 14%. But that's what we're focused on. We're not worried about them going to 17% or 18%. That's just not going to happen.

And the rating agencies haven't expressed any kind of concern or issues? Or are they even embedding it? With it in the 2013-C deal, did they ask any questions about it? The rise in early-stage delinquencies, that is?

No. I mean, I think the backdrop, though, Ryan, is when they started -- when we came back into the market, they had an expected loss case that was in the high teens based on kind of the end of the last cycle. And they have kind of slowly brought that down. But certainly, they have never gotten to where our 10% or 11% originations are tracking single-digit, as Brad mentioned. So they're still right along within the range that we expect. No, that wasn't a concern of theirs on the 2013-C transaction.

When you think about the leverage at the corporate level, you mentioned that the new residual facility will kind of run off for the next, call it, 12 to 18 months; and then you have the Levine debt. When you think about your growth objectives, and assuming that securitization structure kind of stays as is, what you think about kind of the debt needs at the corporate level? Or aren't there any, once you take out these pieces?

Well, I think -- and as I said, in the past we generally sort of focused on going to find new debt to take out the old debt. We recently got to the point where, if things continue the way they're continuing, we don't need to raise any money going forward.

Having said that, our next thing -- which is good, obviously -- we think the fact that we're doing very well, both on the cash flow side -- we are, in fact, in a good position to retire almost all this debt.

Well, look at the pieces; we probably have money on hand to retire Levine tomorrow. The residual debt pays off itself, and the public notes run off so slowly -- that being about $20 million over time -- that it's not hard to argue that you don't need to raise any more money.

So sometime down the road, however, we're going to start thinking, let's go raise a bunch of money for a rainy day, if it's cheap. So the easy way to put it is, we don't need to raise any money going forward, and shouldn't have to. On the other hand -- you know the old saying, when you don't need the money, that's when it's the cheapest. And to the extent we get some real good deal to look at money, then we might just look at it.

So even to execute on the growth plan, though, in kind of a steady-state environment, you don't think you kind of do more residual-interest financing or anything like that?

No. Currently we don't. Now, having said that, a moment ago I said, gee, if we had a huge growth -- but if you're penciling out our growth plan, or track, or whatever you want to call it, no, we wouldn't need to raise any more money.

To the extent that we became a favored whatever in the market, and we grow even more, then yes, we would probably go raise some money. But at the moment, that would be sort of the ultimate good problem to have, that you are growing at 50% to 60% annually and you need more money, in this environment, particularly. But having said that, that's not what we're planning on doing.

Right. And then one final question is just on the operating leverage. You know, there has been lumpy progress over kind of the last -- call it 4 to 6 quarters I am trying to understand. Was this quarter kind of the breakout quarter, and going forward, we should expect more operating leverage basically every single quarter, to the extent that the managed portfolio is growing?

In theory, sure. You know, unfortunately, there's not a lot we can do. In fact, we might wind up being a little bumpy, as you say, occasionally. But we're now really sort of what we'll loosely call hitting our stride, in terms of all the infrastructure we kept before should continue to pay increasing dividends has we go forward.

Everything is all set up. It's not like we have to do some massive expansion or something. So we would certainly expect the operating leverage to continue to get better.

K.C. Ambrecht, Millennium Partners.

Two questions for you; the first one's technical, and then a question on earnings. On the technical question, you guys have mentioned the Levine bonds. When do you expect to redeem all of those bonds?

We have a due date of June. We expect to redeem them before that. But we're not really planning on doing it anytime soon.

Okay. But by June they should be out?

Yes. By next June they will be out, for sure.

Could it be earlier than that?

Sure. It could be tomorrow, but probably not.

Okay. They've been selling their stock. Do you know what they're planning on doing the stock?

I don't know. They're planning on selling their stock.

They've done very well. They have been a loyal and terrific partner with us over the years. I think, much like I would, at this time -- to liquidate some of their investments. They have huge faith and belief in the Company, but my guess is that over time they would continue to liquidate some of their stock. It's hard to say over what period of time.

You know, I think that's a good thing for the market. If they weren't selling all that stock, then all those people buying it at $5, $6, and $7 wouldn't be getting all that benefit from it. So it sort of works both ways; good for them, good for us.

But it seems like they're selling the stock, because if they don't own the bonds, they don't want to own the equity. I mean, the first interest seems like it's in the bonds, which makes sense.

I don't know. I mean, if I were him, I'd sit on it until the stock got to $14, but that's just me.

Yes. Okay. And then just a question on EPS. It looks like you guys are tracking like a $0.03 to $0.04 quarterly EPS improvement every quarter. As we thought a year ago, I think, on one of these conference calls, it looks like you guys are going to be on a run rate $1 by 4Q 2013. Should we continue to expect that kind of quarterly sequential EPS improvement in 2014?

I don't know. I kind of expect the Company to continue to do really well. How's that?

Okay. Well, if you do do $0.04 improvement a quarter, that kind of gets you to around $0.40-ish Q4 2014. And the only reason I bring that up -- if you begin annualizing that, there's a lot of specialty finance companies out there that are trading 10 or 11 times. If you doing $0.40, that puts you right around $1.50 or 4.5 times earnings right now. I just want to see if we're missing something.

No, my technical view of that is like a field of dreams. If you build it, they will come. So I wasn't really following what you said, but we just going to build it and see what happens.

(Operator Instructions). I'm not showing any further questions in the queue. I'd like to turn the call back to Mr. Charles Bradley for any further remarks.

Again, I think we had a nice quarter. It worked out really well. Everything's going the way it's supposed to. We have been doing this a long time, so we're very happy to be growing again and kind of delivering on what we have always said we can do.

We're very appreciative for all the people that hung in there. We're very appreciative for all the people on the call today and following along. We will continue to strive to do bigger and better things. So thank you all.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until October 25, 2013, 11.59 Eastern Standard Time by dialing 855-859-2056 or 404-537-3406. This conference identification number is 86908030. A broadcast of the conference will also be available live for 90 days after the call via the Company's website at www.consumerportfolio.com. Please disconnect your lines at this time and have a wonderful day.