Consumer Portfolio Services Inc (CPSS) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2014 second-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 maybe contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Such forward-looking statements are subject to certain risks that can cause actual results to differ materially from those projected. I refer you to the Company's SEC filings for further clarification. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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

Thank you and welcome everyone to our second-quarter conference call. I think to sum up the quarter it really was about as expected for us. We sort of hit the numbers we thought we would in terms of the overall numbers.

In terms of sort of the frontend, the originations part the quarter started a little bit slow. But it has picked up somewhat more in the middle and we had a very good end to the quarter.

So it was a little interesting than normally it goes a little bit the other way around. It is strong in the beginning and then slows down but either way it has worked out fine.

A couple of other highlights, as we pointed out in the press release we did -- we got back to a AAA rated securitization, which was one of our goals. That was very important to us. It also does wonders for the cost of funds.

A note on the securitization, not only do we get the AAA but it was very well received in the marketplace. Demand was 8 times and we ended up with a price of 2.37 for the average cost. Again very low and well below even our expectations in terms of what the pricing on that deal would be.

Finally we did in fact finally settle the FTC matter. And we are now in the process of putting the monitoring stuff in place. But all of that is going very smoothly and I think at this point it is much more in the rearview mirror rather than in front of us.

As I mentioned in the previous conference call, we learned a few lessons with that. We have done a few things to change a few things. But overall the whole thing has worked out rather well and we are glad to have it done and sort of moving on.

In terms of operations, from the marketing end as I have also mentioned in previous calls, we've had sort of a very steady and good structure in both the originations part of the business and the collections part of the business and the asset recovery part of the business. Marketing is something we probably sort of left to its own devices a little bit in terms of how it was structured and I think I've mentioned we have been focused on it a lot over the last six to nine months.

At this point we have right around 120 marketing reps. We've done a lot in terms of putting training programs in place and putting more management, middle management structure in place. And I think we are beginning to see sort of all of that come to fruition in that we are developing a very strong marketing force.

And again summer is the slow time. So that will really begin to show next year when we get into that first few months, or the first six months of the year which is really the growth cycle in our business.

So we're sort of pleased with the way that seems to be shaping up. There's more things to do there but I think over the next six months or the rest of the year, we will have that all in place.

Originations continues to run a very easily. They have no problem keeping up with the growth. We've been able to fine tune that some more.

It works hand-in-hand with marketing to get the best possible deals for our dealers and the best possible deals for the Company. And so that's working very well.

Collections is another area with a lot of focus on as a result of the FTC matters, including changing our collection practices somewhat. A lot of this is done at the branch level and that's taken some time -- it's been almost exactly a year since we implemented a bunch of those changes. And it probably took a little bit longer to see some of the results that we had hoped for but we are beginning to really see some good results from all the different branches that the collection practices changes affected.

And so I think probably over the rest of this year we will sort of fine tune all of that. But again by the end of this year we should be well-positioned in terms of how we do our collections at all the different branches and really probably improve that across the board at that point.

So overall in terms of the operations of the Company in the second quarter, on the one hand it was sort of steady as you go business as usual. On the other hand we have continued to do the groundwork and the legwork to set up the Company for future success. With that I will turn it over to Jeff Fritz to talk about the financials.

Thinks, Brad. Welcome, everybody.

We will begin with the revenues. And first just a clarifying note, you might recall last year this second quarter we recorded a gain of $10.9 million resulting from the cancellation of the certain debt associated with a legacy securitization that we cleaned up that quarter. So was I go to these comparisons on the revenue I'm going to omit that gain from last year's numbers because it makes this comparison a little more meaningful, I think.

So anyway for this quarter, revenues were $71.6 million, that's a 5% increase over the March quarter of $68.1 million and a 20% increase over the June quarter last year of $59.6 million. Again that's without that gain.

For the six-month period, revenues were $139.7 million and that is a 22% increase over the six-month period last year of $114.2 million, again without the gain. And so this is pretty much in line with our expectations.

The portfolio grew about 6% for the sequential quarter and 30% year-over-year aided by $211.4 million in originations for the second quarter this year. So those numbers are going to continue to track along with the growth of the portfolio and pretty much in line with our expectations.

Looking onto the expenses, similarly last year in the second quarter we had kind of an unusual expense item. $9.7 million in contingent liability expense, a portion of which was related to the FTC matter and another portion was this long-standing party litigation that we've talked about from time to time. So again I'm going to admit the $9.7 million contingent liability expense from last year's numbers as I go through this brief comparison.

So expenses for this quarter, $59.3 million amount. That is up about 5% from $56.4 million for the March quarter this year and up about 13% from $52.3 million for the second quarter last year, again without that contingent liability expense. For the six-month period expenses were $115.6 million and that is up about 15% for the six-month period last year where those expenses were $100.4 million without that contingent liability.

And what we are seeing here is pretty gradual increase in most operating expense categories kind of tracking along with the growth of the portfolio, the cost to service the portfolio, the cost to do ever-increasing originations every quarter. I think the one significant component as you look across these expense categories is the decrease in interest expense this quarter compared to the previous quarter and compared to a year ago.

You might recall that on the last day of the first quarter this year we paid down $38 million of our senior secured subordinated debt, which was some of the most expensive debt we had on the balance sheet. And so we actually had a 11% decrease in interest expense quarter to quarter and an 18% decrease in interest expense compared to a year ago.

And a big part of that is that paydown of the senior secured debt. Part of it also is the continued improvement in the ABS transactions blended costs, which we are going to talk about a little bit more in a minute.

Of course another big expense category provision for loan losses, $25.6 million this quarter. That is up 7% from $23.9 million in the March quarter, up 47% from $17.4 million a year ago. And for the six-month period provision for loan losses $49.5 million, a 52% increase compared to $32.5 million a year ago.

Again this is going to track right along with the growth of the portfolio, the increase in originations, 30% increase in the portfolio. And also the portfolio is [solidly seasoning] a little bit older on a blended weighted age with each month as each month goes by. And so just the way our provisioning methodology works those provisioned expenses are going to increase with each quarter.

The pretax earnings is $12.3 million for the quarter. That's a 4% increase over $11.8 million in the March quarter and a 45% increase over $8.5 million a year ago. And for the six months pretax earnings was $24.1 million, 60% increase over the first six months last year.

Net income was $7 million for the quarter. That's a 4% increase compared to $6.7 million for the March quarter and a 46% increase compared to $4.8 million for the second quarter last year. And on a year-to-date basis the net income, $13.7 million, that is a 59% increase over $8.6 million for the six months last year, the first six months of last year.

Diluted earnings per share, $0.22 for the quarter. That is up a penny, or 5% from the March quarter and up 47% from $0.15 for the second quarter last year. And on a year-to-date basis now we are up to $0.43 for this six months and that is a 59% increase, or $0.27 for the first six months of last year.

Moving on to the balance sheet, unrestricted cash balances maintaining pretty level around $14 million or $15 million quarter to quarter. We have unrestricted cash balances of $154 million at the end of June; $71 million of that is pre-fund proceeds associated with a 2014-B securitization, which was used when we closed the pre-fund portion of the securitization in the first week or so of July. And the rest of those restricted cash balances are primarily spread account balances and lock box cash that goes directly into the securitizations.

Our financial [managed] portfolio continues to grow. After net of the allowance for loan losses we are up to $1.3 billion.

That is a 7% increase over the March quarter and a 34% increase compared to a year ago. I think I mentioned we did originate $211.4 million for the second quarter.

Buyer side portfolio, really nothing noteworthy there. That continues to wind down.

The warehouse lines, reducing the warehouse lines on a pretty consistent basis. We have significant available liquidity which allows us to be a little bit stingy about how we use the warehouse lines, which helps our interest expense as well.

Securitization debt, $202 million in new securitization that assisted with the a 2014-B transaction brings that balance up to $1.3 billion at the end of June. And not much other changes in the debt side of the balance sheet.

Let's skip down and look at some of the performance matrix metrics for the quarter. The net interest margin was $59.7 million. That's a 9% increase over the March quarter of $54.8 million and a 33% increase compared to the second quarter last year.

On a year-to-date basis the NIM was $114 million; that's a 38% increase over the first six months of last year. A significant component of this NIM of course and the improvement in the NIM is the paydown of that expensive senior secured debt which took place at the end of last quarter.

In fact, the sequential improvement in the NIM, I think I just mentioned, it was 9% quarter to quarter this quarter. Last quarter our NIM improved 3% over the December quarter. So you get a kind of feel to how important that deleveraging is to the performance of the Company.

The risk-adjusted NIM, which takes into account the provision for loan losses, $34 million for the quarter. That's a 10% increase over the March quarter and a 23% increase over the second quarter of last year and on a year-to-date basis, $64.9 million in risk-adjusted NIM and that is a 28% increase over $50.7 million for that metric last year. And so even with the increasing loss provision, the risk-adjusted NIM is continuing to show some steady improvement.

Our core operating expenses, which omit interest in loss provision expense, or $21.7 million for the quarter. That's a 13% increase over the March quarter of $19 million and a [7%] increase over $20 million for last year's second quarter.

On a year-to-date basis those core operating expenses were $40.8 million. And that's an 11% increase over $36.9 million a year ago.

Looking at those numbers as a percentage of the average managed portfolio, 6.5% for the quarter, that's actually up about 8% from the March quarter but down compared to 7.9% for the second quarter last year. On an annualized basis the core operating expenses were 6.2% of the managed portfolio for the six-month period and that is an improvement of 17% over that ratio for the first six months of last year.

And so generally although we reversed the trend a little bit this quarter, but generally we are seeing -- and certainly on a year-over-year basis -- steady improvement in the operating leverage, or the costs for the most part -- operating costs are not increasing as rapidly as the portfolio is increasing. And a very important metric, return on the managed assets, our pretax income as a percentage of our average managed portfolio was 3.7% for the quarter.

That is flat compared to the March quarter and an improvement of about 1% compared to 3.3% last year in the second quarter. And on a year-to-date basis that ratio was also 3.7% but a larger improvement, 12%, compared to 3.1% for that metric in the first six months of 2013.

We'll take a look at the credit performance metrics. The delinquency at the end of this quarter was 6.2%. That is up just slightly from 6.3% in the March quarter and up a little more compared to 5.2% in the June quarter last year.

Net annualized losses for the quarter were about 5% compared to 5.5% in the March quarter and 4% for the second quarter last year. The six-month annualized net losses, 5.25% for the first six months. That is up of course from 4.1% for the first six months of last year.

So generally what we're seeing we have a little improvement in the loss ratio for the quarter but generally we are seeing and maybe expect to see slightly increasing credit performance metrics as the portfolio ages a little bit. And we are certainly seeing and recognize that the larger portfolios of the 2013 vintages are having higher credit losses than the 2012 and 2011 vintages that came before them, which were also smaller in size.

We had a really good quarter at the auction. Liquidation percentages on our vehicles at the auction was 49.2%, which is an improvement compared to 48% for the March quarter and about again 49% a year ago. So we have been predicting that the auction values would soften.

We've been predicting that for some time but we are pleased to see that they continue to hold up although I think we continue to predict that eventually they will soften. So that's probably a pretty good prediction.

Just a quick look. I know we talked about a little bit, the asset backed market continues to sizzle. We pre-marketed our 2014-B deal the third week of June or so and we were really pleased with the enthusiastic response from the investors, the pool of investors, that buy these bonds.

There is nothing really unusual about this structure, it is typical of our last probably four or so deals. Sequential pay, five tranches.

The landmark here for us is that the most senior class earned a AAA rating from the rating agency DBRS. And then of course those subsequent tranches or subordinate tranches go all the way down to a B rating, as they have done before.

But that AAA rating brought in some new investors who only buy AAA-rated securities and that helped. That response together with the higher rating helped the blended cost down to 2.37%, which I think is three quarters in a row now of improved blended cost under an ABS deal.

So really pleased to see that. It obviously has a major impact on the Company's results and interest expense. And I don't know what to predict for the future but the ABS market continues to be very strong, lots of traffic, lots of investors and we will look forward to taking advantage of that. With that I will turn it back over to Brad.

Thank you, Jeff. In terms of the industry, I think of the one hand we certainly are very happy where we sit within the industry.

I think looking at the competitive environment, I think a lot of folks say how competitive it is. I think from our opinion it would appear that a lot of the competition has eased a bit.

Now whether everybody is just taking a step back for a variety of reasons is a little hard to tell. On the one hand we can say we think that the competitive environment has eased some. We really have a few ideas on why but we are not having definitive to point out.

On the one hand we think there was a few companies out there, particularly large ones maybe growing on purpose, maybe before an IPO or something. So maybe they have slowed down, some of the larger guys probably have slowed down. But if you look at sort of in the three segments at the very top of the really big players, no one appears to be being overly aggressive in trying to seize market share.

And so in the medium segment of players there's probably a few guys that might have gotten a little ahead of themselves. And so we see some true backing off in sort of the mid-level. And then at the lower-level you have a bunch of small companies that are trying to go in and grab market share and maybe they finally have been getting a little bit burned and backed off some.

So if you look at it in the whole, what you really have is it's not like everybody's backing up like crazy but it's really nobody's particularly pushing forward. And that has given us a little bit of a growth spurt in the middle of the summer when you would never really have one at all.

And so again we are not making huge predictions. But it is interesting that people overall have appeared to at least slow down or are not pushing aggressively forward.

I think the other thing to mention, there's been obviously a few articles out including the one last Sunday in the Sunday Times that sort of comment on the industry overall and saying it is probably worth us commenting as well. On the one hand and the Times article basically said, gee, this industry has grown, whatever it was, 140% since -- it has just grown way too fast. But if you actually looked at the numbers, at this point the auto industry is now almost back to where it was in 2007.

It is not like the industry is growing out of control or anything like that, which they sort of tried to imply much like the mortgage mess. They were nice enough to point out that the auto industry as wonderful as it may be isn't probably 1/100 the size of the mortgage deal. So it would be very hard to even associate the two.

So on the one hand we are way smaller. On the other hand, we've only really gotten back as an industry to where we were in sort of 2006, 2007. So it's not like the thing is growing like crazy.

We are just recovering like most any other industry. The fact that the mortgage industry is sort of on its back a bit and there's a lot more spotlight on auto because it is a large industry, I think that's really the way to look at it. It is a large industry.

It is a place where a lot of Wall Street money is going to find a home. And in fact that is maybe, as everyone has watched over the last two years, has caused our industry to recover faster than many. But that's really all it is.

It isn't like this thing is going crazy. That's one point.

Another point, I think are some articles out there that sort of said bad times are ahead but same old game. It's like okay we are currently in an environment with one of the lowest interest rate environments we have seen in decades if not longer. As Jeff pointed out the recoveries of the auction are the highest they've been in years.

The used car market is the strongest it has been in years. New car sales are doing great. So on and so forth.

So gee, if everything is going great, it is very easy to say it is going to get worse. Because sure, one of those elements eventually is not going to be as good as it was.

So the more important way to look at it is it's very easy to say doom and gloom, that people -- delinquencies are rising, their losses are going up. But again if you look a little more closely what you really have is everybody came out of the recession being very conservative and us in particular. And so in some ways what you are really seeing is a more normalization of what the numbers should be.

Now the fact that they are going out that's fine, everybody is buying very conservatively and they are beginning to buy more normally then of course they're going to go out. So again, and that sort of does typify what we have been doing because when we bought paper in 2010 in 2011, that paper was very conservative. We didn't buy very much.

We bought it very carefully. And so as that runs off our normal, we are going back to normalized annualized loss rates and things like that.

And so again if you sort of look at it and sort of take a few steps back it's a little easier to see. And granted obviously people want to sell newspapers and such and so I got a lot of calls on the Times article, for example.

But I think as I have mentioned in previous phone calls -- conference calls -- this is sort of the third cycle for CPS. And I go back to the second cycle was dominated by large banks and those large banks were able to compete very aggressively on price, cost a lot of the independent players to really work hard and cut price and maybe buy more aggressively.

That was the cycle going into the last recession and all of those companies did just fine. We all went through it. I don't think anyone particularly went out of business for credit reasons.

A couple of people went out of business because they ran out of funding but that is a very distinct difference. But you go back to the cycle before that, which was sort of an auto finance industry problem, we had a lot of new companies growing very fast and then a lot of them didn't go out of business and then to be replaced in the second cycle by the banks.

So our third cycle looks an awful lot like the first cycle. The banks aren't real players. There's a few big banks that have been there all along, Capital One, Wells Fargo and such, Chase Custom.

But what you are really seeing is a lot of new guys coming and a few mid-level guys pushing hard. But one thing we have pointed out before and most people in the industry know, is almost all of those companies today are being run by people who've been in the industry for 25 years as opposed to the first cycle were a bunch of companies who are run by people who have been in the industry for five minutes.

And so as much as you will have a few companies that don't do it particularly right and a few of them that fall on their face for a variety of different reasons, by and large the industry as a whole should do just fine. It's run by better people. There isn't the lending bank pressure this time.

And so you're going to have a few fallout much like you saw the first cycle. But in terms of seeing this industry fall apart in a grand scale, it is sort of hard to figure out why people would think that.

It is run by more seasoned executives. There is no pricing pressure from banks and in fact we are sitting in one of the most favorable environments we possibly could be in.

So again, it is worth seeing those articles. It is interesting if you can sort of dive a little deeper to see what is really behind them.

So we like where we sit in terms of the industry. We are taking advantage when we can; like I said, with people slowing down a little bit this summer we picked up a little business. But overall we are looking for a nice steady growth in taking advantage of the low rates and growing when we can but not really competing.

One of the things we tell lots of folks is over the last year if anything we have tightened credit. We haven't loosened it one bit.

In terms of the overall economy, which is something we spend a lot of time on, this is about as blue skies as you're going to get. Real low rates, modestly growing economy but still growing, which happens to be the perfect environment for us in subprime auto. Because with the slow growth environment economically keeps those rates down yet people still want to buy cars and replace their old vehicles, and the same old thing, they vehicles are the oldest they have been in a long long time.

And so it's a real good set up in terms of companies like ourselves in this environment both within our industry and within the overall economy. We can't look too far in the future but we certainly think the next 6 to 12 months are pretty good. Certainly it is hard to find somebody who thinks rates are going up.

You never can be sure and that gets to the end of this long talk, which is as much everything is going great we got caught looking a little bit the other way when the recession showed up last time, so that's something we won't do this time. So we plan for the recession as if it's coming very soon just so we are prepared.

But even so it is hard to think that the next 6 to 12 months will not be quite good. With that we will open it up for questions.

Thank you. The floor is now open for questions. (Operator Instructions) John Hecht, Jefferies.

Good morning, guys. Thanks for taking questions.

First question I guess is just a bit of an accounting one. Just so we can get the shareholders equity count, it dropped in an otherwise -- you had a pretty good quarter. Was there something through the OCI, or something that we should be aware of that accounts for that?

Are you referring to the dollars, or the (multiple speakers)

Yes, the dollar equity count went from 123 to 111.

In the consecutive quarters. I guess -- I'll have to check on that, John, and get back to you because I don't know the answer to that?

Okay. And then, regarding getting the AAA rating on the recent securitization and 2.37% all in cost of financing, just to give us a sense of what kind of interest expense that might save, maybe can you characterize what the ABS said are running off now, maybe the ABS you put in place a year to two ago, what was the all-in cost to those?

I think if you go back a year ago we were probably doing in the high 2%s and 3%s of the new transactions and that was also trending down. If you go way back into the 2011 vintages I think the blended costs on those deals were about a 4% handle. So we've kind of had that steady improvement all along.

I think the only time we kind of went backwards in the September transaction of last year was I think our first increase in the blended costs in probably six or seven quarters. So you had that kind of steady generally decrease except for that third quarter of last year.

Okay. Can you talk about -- Brad, you mentioned kind of stabilizing of the competitive trends. What are you guys seeing in terms of -- it doesn't look like when we just look at our calculations in our model, doesn't look like yields moved much in the quarter. Is that a safe statement or what are you guys seeing in pricing in your main lending categories?

One of the things we looked at, we actually cut pricing a little bit to see if we could buy a little bit different part of the portfolio, the spectrum and we were somewhat very surprised to see how receptive the market was to a price cut. And you would've thought with a lot of competition that any price cut at all would really not get you much, and it got us a lot. And so that was sort of an interesting indication that the market is there if you want it.

So we are thinking about what we might want to do because obviously were not really wanting to compete on credit and we have lots of room on price. And so we've been running with a 20% APR for a long time. We would expect probably to bring that down into the 19%-ish, low 19%s at some point over the next probably 6 to 12 months.

Okay. Great, thanks for a much guys.

John, I was just looking at a couple of notes here and I think our shareholders' equity went up in the consecutive quarters. It was 103 at the end of March and it went up to 111.7 at the end of June, so I don't think (multiple speakers)

Okay, it might have been an error in our March model.

There you go.

Thanks very much.

David Scharf, JMP Securities.

Hi. Thank you, good morning.

Brad, I want to just follow up on your comments on the marketing side and the 120 reps. You have talked kind of over the past year of ultimately kind of working your way back up to about $1 billion of annual origination volume.

Given the bodies you have in place and your assessment of the competitive environment, is that a realistic target for next year? I don't want to pin you down on guidance but trying to get a sense for ultimately where those bodies could ramp to once they become productive.

Yes, and that is a fair question. I think an easy way to look at it is when we were doing about $120 million a month we had around 120 reps, maybe we had as many as 130, something in that neighborhood.

And so I think we have now got the 120, so I think my expectation or hope would be to get up to that at least $100 million kind of number given the competitive environment or lack thereof will sort of determine how fast that happens. But I think on the one hand, I don't mind sticking my neck out a little bit, I would hope -- our goal is not even that.

Our goal is to get to that $100 million per month level next year. Now whether we get there or not is a little bit up in the air but certainly we think we are well-equipped in both the origination staffing is there for that.

Now the marketing staffing is there for that. The only problem is whether the market will play along.

And recent signals may as I sort of mentioned or alluded to, might if I had to flip a coin I would be flipping it -- I would be betting on a little on the positive side that we hit that number. But things change somewhat rapidly so it's hard to say.

Got it, got it. Reflecting on the competitive environment I know you just talked a little bit about some of the price moves in the quarter. Given that summer is a slow time and maybe some people naturally are backing off, do you have a sense if the competitive environment, particularly from the large guys, has in fact eased or was it just maybe the impact of some cuts to dealers during what is typically a slow period of the year?

Again, it is tough to crystal ball it but I still kind of think that the big guys have probably eased some. It's a little hard to say.

Santander is a big player in the industry. They recently had this sort of federal banking issue come up. And so it's hard to say what they are doing.

But the way, truly the way we see it is what we hear in the marketplace. And what we currently see is the big guys in particular aren't being overly aggressive. Whether that is Wells easing back or Santander easing back, or Capital One, it is a little hard to say.

It is almost easier to say that none of those three, which I generally throw in Chase Custom, none of those four are being overly aggressive. Now to say they are all backing off, I probably wouldn't say that. But it is easy to say none of the four are pushing hard.

GM Financial came back and seemed to be making a little bit of an aggressive move a quarter or so ago but that doesn't seem to be overly apparent either. So if you call it the big five, or whatever you want to call it, and that pretty much sums up the top end of our industry.

I would safely say none of them are being overly aggressive. Probably I would put more emphasis that they are all sort of coasting or whatever, maybe some have pulled back.

But again it's a little hard to tell. Because if two pull back and two are holding even and two our modestly aggressive you are sitting still. So --

Got it. No, that is helpful.

Thinking about pricing, I know the average yield on the portfolio was still a shade above 20% but in terms of the 2014 vintages, are the APRs on those loans below 20% now? I know you have talked about dipping below 20% for the last couple of quarters.

I would think on the 2014 vintage is it will be below 20% in terms of they will have a 19% handle.

Okay. Got it. And is there a charge-off number for us this quarter, not the rate but the actual number?

Yes. I will have to get back to you on that, David. I just would do the math or look at a sheet but we can talk later and I will give you the number.

Okay, great. Thanks very much.

Kirk Ludtke, CRT Capital Group.

Good morning, everyone. More strategically for a second, when you think about where the auto finance, particularly the subprime auto finance market is today relative to where it was pre-crisis, does it matter how many consumers are subprime today versus how many consumers were subprime pre-crisis?

I'm guessing that there are more people that are subprime today and your market is therefore -- the addressable market is therefore bigger? Do you agree with that, or --?

Yes, actually that's an interesting question. On the one hand, a statement we have made many times, is our industry is so large that the pure size of it at $80 billion or whatever it is per year lends itself to having enough room for just about anybody and everybody. However, I think you are absolutely correct.

I think given a couple of things since the last recession everyone is far more credit driven and it is not so much -- shockingly is, it isn't so much that they are trying to look at credit to how they buy, they are looking at credit so they try and know what they are buying, if that makes sense. And so to the extent that the recession has put a far larger class of consumers sort of in that subprime category, I think that is probably a fair statement.

I think interestingly enough I don't think that is particularly causing lenders to shy away from this sector. I think if anything it encourages them to get more into it because now it's even bigger than it was before and it was very large to begin with.

And so as much as, again, and I said this a few conference calls before, that we weren't really seeing that much competition and then more recently I said we finally have. But again I think that the universe of subprime customers has expanded greatly over certainly since the last recession and through better credit reporting could continue to expand over the last decade.

And so I think the interesting thing is everyone today is so much more at least trying to establish the credit criteria of their customers and even would make one more point, I guess, if you look at the way the mortgage thing went, when the subprime mortgage or the mortgage mess or whatever you want to call it basically caused the last recession, it wasn't -- everybody blamed it on subprime but it wasn't the subprime mortgages that all fell apart. They weren't very good but that's not what caused a huge problem.

The huge problem was caused by everything they are buying nonprime and saying okay, these guys are a significant cut above subprime so we won't charge them this much. But when those losses came through that blew that part of the market out way worse than the lower part. And so I think people are far more interested in sort of correctly sizing where the credit person should be.

We are not much to differentiate between nonprime and subprime but I think a lot of the world now looks at that a lot more closely. And nonprime is probably given a far wider berth than it used to be based on the residential mortgage problems.

So yes, I think not only is it sorted by virtue of better credit reporting these subprime borrower market expanding over the last decade, I think the way lenders look at it now has probably further expanded it. So it's a nice healthy place to be.

Yes, that's helpful, thank you. You also mentioned that you brought down or you may bring down your APR into the low 19%s over the next was it a couple of quarters?

Well, we started this quarter and I think in all honesty we were somewhat surprised at how effective it was. And I think as I mentioned before, we have tried -- a few years ago certainly is we tried very hard to keep our APR and discounts up, to generate cash and as I also mentioned that worked very effectively.

Se we're now in the position where we are toying around with it. We lower the APR, how much business are we really going to get? We were a little surprised in our first foray that we picked up so much.

So I think you could expect to see that trending down. I think our goal certainly is to keep it above 19% but we not too worried if he gets into the low 19%s, almost soon.

Okay. That's helpful. And the cumulative loss rates you are still targeting about 14%?

Yes. I think 14% I think I might've mentioned that given that we had to sort of move around the collections from policies and procedures a little bit, we might have a pool or two that takes over that just because it didn't -- it was sort of in the middle. If we get caught right in the middle of us changing the policy it might not perform quite as well as it should have but even so 14% is the target.

Okay, great. I think on the last call you mentioned that you thought by say the first quarter of 2015 you would have paid off the subordinated notes. Do I have that right?

Well what we have done is sort of I guess an easy way to look at those notes is on the one hand they are particularly equity debt. And so we are not -- we are certainly not aggressively -- we used to put that money out, or at least advertise that money at about 10% or more.

Today we advertise it at 3%. So you can well imagine there isn't a lot of people running for that money like they were before.

So its natural runoff has been something close to $1 million a month or there is currently I think $18 million on the balance sheet. So it may not run off entirely but I think by the next 18 months you could say it will be gone.

So on the one hand way we are not actively trying to get rid of it. On the other hand we are not trying to grow it one bit. How long it takes to run off will depend on whether people want to renew at those lower levels.

Got it. And the residual interest financing, that will run off by the end of --

Yes, that's got a finite period. It will be gone within a year.

Okay, so the recourse debt will pretty much be gone?

Yes, that's really what we truly care about and it will be. As Jeff mentioned and we have talked about before, paying off Levine Leichtman, our good capital lenders, last quarter was a huge step. The real only piece of debt we look at is that residual piece and I believe we can pay it off in full next March, which we might do.

Okay. And is there a target for your how much you will be accessing the warehouse facilities? Is there a level where you want to get it down?

Well, I think we will probably keep it about where it is today. I think a lot of that will depend on how much we grow down the road.

If we can get to $90 million, $100 million at the beginning of next year we would probably access it a little more. But I think a steady state is probably a fair statement.

Okay.

Some of the requirements -- sort of required usage parameters of those deals and so we keep that in mind as we are drawing and pledging receivables, so I think what Brad said is true. We probably maintain about the same level of usage that you have seen over the last couple of quarters.

Got it. And then unrestricted cash, do you have a target for that before you start thinking about a dividend?

You might be the first person who has asked us about a dividend. That's a great question though.

I think as I sort of have mentioned all along, we are probably in the build cash for a recession kind of mode. And so we would target a fairly large number of cash on balance sheet before we would think about what to do next. So I think one could fairly estimate we would continue to build cash for the next 18 months.

Got it. We really appreciate it. Thank you.

(Operator Instructions) Jason Stewart, Compass Point.

Thank you. One more question on the competitive environment, if I might. How much do you think that aside from Santander and aside the regulatory environment, namely the CFPB is factoring into other competitors' desire to grow?

I think shockingly I didn't mention that but I should have, so good question. I think the CFPB is certainly something everyone is really looking at, including us. We spent a lot of time -- on the one hand it is a little hard to figure out how you are supposed to be working with the CFPB because in some level putting it loosely they want us to help monitor the dealers.

And again if you read the lovely New York Times article, it certainly sounds like it's hard objectively to think the dealers aren't sort of causing their own problems. But having said that, I think all the lenders are certainly trying to pay attention and do -- including us -- what we can do to keep in line with the CFPB, unfortunately not knowing exactly what they want to require from us.

And I would think we have already been through almost a very similar situation with the FTC. So maybe we have a little more experience and certainly we had a big head start in terms of compliance factors along those lines.

So it may not be as big an issue for us and probably one of the reasons I didn't mention it prominently but I think you are absolutely right. I think with lots of our competitors who we know certainly a bunch were probably talking to the CFPB today, or now, so it probably is a significant factor.

It certainly seems like you would be ahead of the rest of the market in that with putting the FTC behind you. But have you looked at the NADA proposal, or tried to quantify the impact if that were to be what became standard industry practice?

I can only think it would be positive. I think the more you work with the dealers because of the exception is the CFPB can't go directly to the dealers and so they trying to do it through lenders and I think any easing on that would work. And there's a recently a ruling that, I think, did benefit us is but it is so hard to decide where you sit in all of this.

It is much like many other things and certainly the way we look at it, we are going to read everything the CFPB puts out, we're going to comply with it as much as we possibly can. But like you said, we think we sit in a pretty strong position to begin with, so it shouldn't really affect us the way it might affect others.

Got it. Thanks. All of my other questions were answered. Thank you.

Thank you. At this time I am showing no further questions. I would like to turn the floor back over to our speaker, Mr. Charles Bradley, for any additional or closing comment.

So like I said, second quarter went very well for us. It is kind of -- we are following our script and we are getting to where we want to go.

Interestingly enough I think we said our plan whether it's a two-, three-year plan, whatever you want to call it, we have been pretty good at sticking to that plan. And much like anything else it is interesting to see how the environment around you affects that plan and it is easy to say that over the last two years or so the environment has been very helpful in our plan. It's made it much more successful than we would have thought.

So we would like to continue to ride that wave, as you may say. But for the most part we are going to run our business the way we think is the appropriate way to do it and take advantage of the opportunities presented by the environment and then see where we go.

So it is certainly -- we certainly are doing what we are supposed to be doing. We're sitting in a very -- probably one of the most excellent auto finance environments. We like the economic environment.

So we are obviously very positive. We are very positive about how the second quarter came out, we are very positive on the future. So thank it all for attending the call and we'll speak to your next quarter.

Thank you. This does conclude today's teleconference.

A replay will be available beginning two hours from now until July 29, 2014, at 11:59 PM. By dialing 855-859-2056, or 404-537-3406 with conference ID 76956813.

A broadcast of the conference call will 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.