Consumer Portfolio Services Inc (CPSS) 2015 Q3 法說會逐字稿

Good day, everyone and welcome to the Consumer Portfolio Services 2015 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 made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the Company's SEC filings for further clarification. The Company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

With us here now is Mr. Charles Bradley, Chief Executive Officer and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Thank you and welcome, everyone, to our third-quarter earnings call. Overall, we had a good quarter; it's in line with our expectations. Pretty much what we expect, what we are doing. I don't know about the norm, but we are getting there. But, generally speaking, it was what we will loosely call a routine third quarter. We continue to grow, but not at a significant level. We are just sort of moseying along down the road at some point.

We did a securitization. That went well. We were in a rocky market, so the securitization market has been a little bumpy. So we didn't price quite as well as we might have hoped. We also, for the first time in a long time, or in this kind of structure, have a AAA/AAA. We finally got our AAA from S&P. As much as that didn't show in the pricing on this securitization, we think down the road that will have rather good positive implications on the pricing structures going forward. So having said that, we're glad we got our deal done. It wasn't quite as exciting in terms of pricing as we might have hoped, but still it was very good.

Other things to note, in terms of the DQ, delinquency continues to be a battle. I mentioned on multiple calls in a row that it's probably our sole focus right now in terms of working on something specific on improving the Company. We've done a lot in terms of retraining. This whole what we loosely call a kinder, gentler regulatory environment is still something we are trying to figure out in terms of how to get the best results from the collections.

The good news is, as of yet, none of the higher DQ in the front-end buckets, the 1 to 30 and the 30 to 60, have transferred into losses at this point and so this may just be the new way that we are going to collect in that we are going to have some higher front-end DQs that just sit there, but then don't really translate into losses, which, in the big picture, we would be fine with. Having said that, we would certainly like to have our DQ improve and we are still working on it and we will have to see where it goes.

Regulatory environment, nothing particularly new there. I think that's probably, as I mentioned -- the heavy weight on the stock is that people are worried about the regulatory environment. VW certainly doesn't help in those kinds of things. To avoid the question, I think, VWs with diesel, we have less than a dozen in the portfolio, so that whole thing doesn't affect us one bit. So I guess that's a good thing. We will talk more specifically about some of the departments in a minute. We will let Jeff walk through the financials first.

Thanks, Brad. Welcome, everybody. We will begin with the revenues. The revenues for the third quarter were $94 million; that's up about 6% from the second quarter of this year and up 22% from $77 million for the third quarter of last year. For the nine-month period, the revenues were $268 million and that's a 24% increase over the nine-month period in 2014. No surprises here really. We bought $288 million of contracts in the quarter, so our consolidated portfolio grew about 7% for the consecutive quarter and about 22% compared to last year.

On the expense front, for the quarter, $78.3 million. That's a 7% increase over our June quarter this year and a 24% increase over the third quarter of 2014. The nine-month expense numbers, $222.7 million and that also is a 24% increase over $179 million last year. Most of the expense categories were flat except for provisions for loan losses, interest expense, obviously, driven by the size of the portfolio. Employee expenses ticked up a little bit this quarter compared to the previous quarter. I think our headcount moved up maybe just a little bit and I think there's actually one more employee payday in the third quarter than there was in second quarter contributing a little bit to those differences.

The provisions for credit losses, $37.4 million for the quarter. That's a 5% increase compared to our June quarter this year and a 37% increase compared to the third quarter of 2014. For the nine-month period, $106.5 million, a 39% increase over last year's nine-month period of $76.8 million. And again, pretty much as we would have expected. Approximately 8% of the average portfolio for the quarter are the provisions for credit losses; credit performance on the net loss basis seems to be pretty steady and in line with our expectations.

Pretax earnings for the quarter, $15.6 million, a 3% increase over the second quarter this year and a 13% increase over $13.8 million in pretax earnings in the third quarter of 2014. Nine-month pretax earnings, $45.6 million, a 20% increase over the $37.9 million we posted in the first nine months of 2014.

Net income, $8.8 million for the quarter, a 4% increase over the $8.5 million for the June quarter this year and a 13% increase over $7.8 million in net income in the third quarter of 2014. The nine-month period, $25.7 million in net income, a 20% increase over the $21.5 million we posted in the first nine months of 2014.

Diluted earnings per share, $0.28, $0.01 more than last quarter, $0.04 more than the third quarter of last year. That's a 17% year-over-year increase and year-to-date, we have $0.81 in the books compared to $0.67, a 21% increase over the first nine months of last year.

Moving on to the balance sheet, the cash balance is pretty much in line. We continue to get really good execution in the ABS market. In terms of the leverage, there's been no changes in the deals from a leverage standpoint. We are in a little bit of a volatile market from a cost of funds standpoint that I'm going to talk about maybe a little bit in a second here. The restricted cash balances, about half of that $206 million represents the pre-funding portion of the 2015 C transaction, so that actually clears off the books in the month of October. It's already been cleared off the books since we've already closed the pre-funding. The portfolio financial receivables net of the allowance for losses is $1.8 billion. That's a 7% increase over the previous quarter and a 30% increase over a year ago.

And I mentioned our managed portfolio -- or maybe I didn't mention -- the managed portfolio is a whopping $1.940 billion and so we are inching towards that $2 billion milestone, looking forward to hitting that sometime soon.

Moving onto the liabilities side of the balance sheet, really nothing of note here. We continue to amortize down the little residual interest financing and that's going to be paying down probably within the next two quarters, much more significantly or maybe altogether. The securitization debt, obviously, tracking right with the portfolio, $1.9 billion.

Looking at some of the performance metrics, the net interest margin for the quarter, $79 million, a 6% increase over the $74.7 million in the June quarter and a 22% increase over last year. On a year-to-date basis, the net interest margin, $226.6 million, a 26% increase over last year's nine-month net interest margin.

The 2015 C transaction that we just completed, the blended cost of that deal was 3.78%, which is up a little bit from the 3.17% for the second quarter. I'm going to get back to that in a second. The actual cost of all the ABS debt on the balance sheet for the quarter was 2.8%, which is flat with our second quarter this year and actually down from 2.9% in the third quarter of 2014.

The risk-adjusted net interest margin, $41.7 million for the quarter, up 7% from the June quarter and up 11% from a year ago. The nine-month risk-adjusted NIM, $120 million, an increase over 17% -- an increase of 17% over the first nine months of last year.

Looking at the core operating expenses, we continue to achieve pretty good operating leverage, controlling our other operating expenses, $26.1 million for the quarter. That is a 10% increase over the June quarter and also a 10% increase over a year ago and those core operating expenses were $74.5 million for the nine months, a 15% increase over the nine months of last year.

Looking at those numbers as a percentage of the average managed portfolio, over the quarter, 5.5%, up just a little bit from 5.3% for the June quarter, but you can see down very significantly from 6.5% in the third quarter of last year. And for the nine-month numbers, those core operating expenses as a percent of the managed portfolio, 5.5% for the nine-month period this year, down from 6.3% for the nine-month period last year. So you can see how the operating leverage has manifested itself this year.

The return on managed assets, the pre-tax income as a percentage of the average managed portfolio, 3.3% for the quarter, down just slightly from 3.4% for the June quarter and down even more from 3.8% a year ago and on an annualized basis for the nine months, 3.4% compared to 3.7% for the nine-month period last year.

Looking at the credit performance metrics, Brad mentioned that delinquency continues to be a challenge in this environment. 8.8%, the full delinquency number for the September 30 cutoff. That's up from 7.5% in June of this year, the previous quarter, and up from about 6.7% a year ago. The annualized net losses, however, remain kind of in the same relevant range for quite some time now, 6.27% for the quarter. It's actually down a little bit from 6.6% in June and up a little bit from 6.2% in the third quarter of last year.

Auction percentages, we have that in the press release. We continue to see softening in the wholesale vehicle market where we liquidate our collateral after defaults. 40% was the third quarter number. That's down from 44.8% in the June period and down from 44.6% a year ago and there's a lot going on there.

I think one thing that caught our attention is there is a publication that covers this segment of the market and they pointed out that, this year, there has been a significant influx of off-lease vehicles and they are starting to see that more so than in the previous couple of years because the leasing market has had a resurgence, which has begun a couple of years ago coming out of the financial crisis and now those cars are starting to flow through that segment of the market.

Moving on and looking at the ABS market, we've talked about 2015 C. That was a $300 million transaction. We achieved a long-time milestone of getting the second AAA rating. So now both Standard & Poor's and DBRS give our senior class of bonds the highest possible investment grade rating.

It was a volatile marketplace, but we did -- we were actually pleased with the execution. We were able to achieve 18 unique investors in the 15C transaction compared to 12 in the 15B transaction. We had three brand-new investors, two of whom bought the Class A bonds. So as you can see, we had good demand, particularly at the top of the cap structure where the spreads stayed about the same, but we saw kind of less demand and somewhat of a widening of the spreads as you move down the cap structure in that deal.

Okay, with that, I think I will turn it over to Brad.

Thank you, Jeff. So walking through the market, the departments; the first one is marketing. Marketing is relatively unchanged from last quarter. We are sitting right around 117 marketing folks, reps. I think our goal was to get to 125, so we are -- we might have eased off that goal a little bit. We probably have what we need for now and we will probably edge up there in the next few months anyway, so we sort of achieved the people we want.

In terms of the environment, competition appears to be relatively flat. We haven't heard any resurgence of anybody, no new kids on the block. It's really pretty much steady as she goes. Originations, more of the same. I think the origination staff has been and is set up to do somewhere between $100 million and $120 million a month, so they are perfectly set. If we are slightly overstaffed, it gives us much better dealer service. So we kind of like where we sit there too.

In terms of what we are buying, it doesn't seem to change much at all. Moving on to collections, collections, of course, is our challenge. We've had to revamp the way we collect. It's kind of different when you collect the same way for about 20 years and all of a sudden, you need to change a lot of how that works and so it's an ongoing process. I keep saying we see the light at the end of the tunnel. It's definitely not a train, but we are getting there. It's is just a very time-consuming -- just as an example, some of the people that are the hardest to turn around are your best collectors, ones that have been there forever and they are just sort of ingrained in doing it one way and so trying to get them to learn how to do it another way is a long process.

But as I said, the good news is there's nothing that shows it's translating to losses. At the end of the day, we only care about the losses. So we are working with it. Going into the fourth quarter, the DQ will probably go up a little bit more, but it's expected and as long as we keep where we are supposed to go with it, then it will work out fine. But having said that, we want better results in the DQ and that is one of our focuses.

ARD, Jeff mentioned that the auctions have softened up. I think it was, we will say, certainly a particularly bad quarter for the auctions, but I don't know that it will stay at that lower recovery rate. We will see what the leasing really does in terms of driving that market. We are not overly concerned about it, but it is something we are keeping an eye on.

Overall, in the industry, as I said, there's nothing really going on in terms of competition. I think the regulatory environment really hasn't changed either. The VW thing is a little interesting; again, doesn't affect us, but certainly gets some attention, or a lot of attention. It may have a little bit of effect on the securitization market. What we have seen, sort of moving onto the big picture, is it looks a little bit like or it feels a little bit like the economy is softening again. It doesn't look like there is this huge demand in the car market in terms of people trading up on their cars or refinancing or trading in their cars. So we don't see the growth that you might hope to see here and there.

Also, in the securitization market, some of the lower-end tranches aren't quite as popular. So you almost kind of feel like, on one hand, the consumer side is pulling back a little bit and on the other hand, the financial side is pulling back a little bit and so we will see what next year brings, but it is a little bit interesting that -- I used to say we thought consumer confidence was very good. We would also now say that maybe it looks like it's softening a little bit.

I think people really were hoping the Fed would raise the rates and give some people some confidence in the strength of the economy. The fact that they didn't, the fact that you have a bunch of people running for president telling everybody how the economy isn't really getting where it needs to go -- who knows what the answer is -- but it does appear that people aren't overly encouraged in what's going on.

But bottom line, not a lot of that affects us in any monumental way. Like I said, on the inside part, we are working on collections mostly. On the outside part, things move around a little bit, but not in any way that we are particularly concerned about.

With that, we will open it up for questions.

(Operator Instructions). Kyle Joseph, Jefferies.

Can you talk just a little bit about the terms on new loans? Have those been relatively consistent and talk about average FICO score, the duration on the loans and everything and trends you are seeing there?

Sure. I can talk about most everything except the FICO scores since I don't have that in front of me. Like I said earlier, I think in terms of what we are buying, all things being equal, it hasn't changed hardly at all. The APR is identical as last quarter. The acquisition fee is down a little bit. We never had much of one anyway. The LTV is dead flat. Payment income is up a tiny bit, so we will call it flat. Even our credit scores -- actually our credit scores are a little down, which is in a positive direction, so we might argue we are buying a little bit tighter. Lower tier is also down from last quarter. Extended term is about flat.

So I could almost -- if I'm looking at the last twelve quarters -- if we do nothing else, we buy the same stuff very consistently. We've been buying in the range I just described for well over two years with very little fluctuation and so, at some level, that's where it starts. To the extent I gave you a bunch of different numbers or said, oh, these numbers are creeping up from the last whatever, then we might look at the collections a little differently, but the fact that we've been buying the same way for a long time now, and I've only got the last 12 quarters, but it probably goes further back than that, we have a lot of confidence in that. The loans we are buying should perform the same. To the extent they don't, it's either because the way you are flexing them or because of the economy. Even though we are not wonderfully excited about the economy, we think the economy is steady enough that it doesn't affect our collectors.

The real key in the economy that hurts us in terms of customers is unemployment. And as much as unemployment is probably not as low as everybody says, it's probably not going up. So we are really kind of happy with the consistency at that level. Like I said, we are working on making the collection results match that too.

Great, thanks. And then just in terms of -- the charge-offs are relatively flat despite the decline in the recovery rate. Can you explain what's going on there? Are you guys seeing sort of lower gross charge-offs to offset the lower recoveries, or just what sort of dynamics you are seeing there, or I can wait for the Q to when we get the actual numbers?

Well, yes, I can comment a little bit on that, Kyle. So there is a couple of components involved in the net charge-off figure that influenced that ultimate net number. You alluded to one. Some of your charge-offs in a quarter are what we call gross charge-offs where we've been unable to locate the vehicle, but it's gone over the line where it needs to be charged off, so we take that gross charge-off at that time and then continue to search and find, ultimately locate and repatriate the vehicle and that becomes a recovery down the road.

So depending on the relative mix of gross versus net charge-offs in a quarter, that will influence your net charge-off percentage. The other thing too -- those aren't a significant component of the total charge-offs in a quarter -- not a significant number of units, but their dollars are over double what a deficiency balance would be and then probably more significant would be the fluctuation of deficiency or charge-off recovery. So these are accounts -- dollars collected from accounts that we charged off in earlier periods, but our back-end deficiency collectors are working those accounts and those are significant dollars that flow through, but they have their own sort of ebb and flow of actual activity and that will have a significant impact on that net percentage in a given quarter.

Got it. Thanks. That's very helpful. And then just in terms of share repurchase activity, I don't have your period-end share count yet, but can you talk about -- it looks like your average share count did decline. Did you guys buy back some shares? And then going into the fourth quarter, the last few years, it has been a little slower. Would that give you the potential to repurchase more shares in the fourth quarter?

Guessing what the stock price is going to do is certainly an interesting game, which we suck at. We did buy shares in the third quarter. We bought about 184,000 shares. We bought 285,000 shares the quarter before. So we didn't buy quite as many. Our average price in both quarters is higher than it currently trades today, so we are not wild about buying the stock when it's at the high end of the peers. We bought our stock in the third quarter at an average price of $5.85, in the previous quarter at $6.21. And currently our stock trades at, I don't know, $5.60.

So we are not a fan of that program, but we are still doing it and I think if the stock goes up, we are going to continue to buy it as we sort of see fit and are capable or we see the dips in the market. So far we seem to be buying on the highs, but whatever. Of note also is we continue at this point to trade below the book value of the Company, so that's also fun.

But all things being equal, the one part of the thing we have the control over and certainly we would love to have more control over is the stock price. We've done an awful lot of things well these last three quarters, these last three, four years and we've not been rewarded in the stock market and we are working on it. Like I said earlier and on other calls, the regulatory environment has a lot to do with people being scared of the industry. I don't think particularly that people compare us to the mortgage industry as the next bubble or anything like that.

So I think as the next year rolls forward, I think that environment is going to change and people are going to realize that there aren't that many unforeseen regulatory issues in our industry and eventually that will translate to the stock price. Sooner or later, somebody is going to make that determination and then they're going to start buying us and everyone else they like like that and then those stocks will move up. But again we will have to wait for it.

All right. Thanks a lot for answering my questions and congratulations on a good quarter.

David Scharf, JMP Securities.

So, Brad, wanted to maybe follow up on some of your observations at the macro level and maybe translate that into how we should be thinking about origination growth going forward. I know you've been talking for a few years about a couple goals ultimately working back to kind of the pre-recession level in the portfolio and you are bumping up against $2 billion, so you are pretty close there.

You were also talking about a $100 million monthly run rate on originations. You are getting close. Should we be thinking about you as sort of bumping up against the ceiling, or, without pinning you down on guidance, should we be thinking about 2016 as a continuation? You talked about you're staffed to basically originate as much as $120 million a month, just trying to get a sense for the message you are delivering, whether you feel like things are sort of peaking here or if you feel like you still have a fair amount of capacity that you are going to grow into.

Interesting question. There's two people. The first guy would say we are going to be dead flat. We will sit at $100 million a month and we will just kind of roll through 2016 thinking that maybe a recession is going to [roll] on. The other guy is going to say, well, since the first guy said it's not going to go anywhere, the second guy is going to say it's going to do great and will bump up to $125 million a month and things will be terrific. Identifying which guy is me becomes a little difficult.

We are somewhere in the middle I think. On the one hand, I think the downside of the first one is that we kind of cruise along, the economy doesn't particularly do anything, everybody waits around for new elections and we kind of bump along. Having said that, that's not a terrible thing. We are making $60 million pre-tax, so we are making lots of money, we've got a real stable portfolio, we get to tinker along with the collection thing some more and it's a good place to be. I have zero problem if that's the result.

On the other hand, particularly the more I lean towards option one, the much more likely option two happens because it's always what you don't expect. So to the extent we expect it to be flat, we will probably grow. But I think the good news is we are built for number two. We are built to grow to that $125 million. We've got all the staffing we need upfront. We've got plenty of collection space and the people we need and the growth room to do that. So if we bump up, that would be great.

Trying to tell you which one we are going to do is very difficult. I think if I were going to guess, I think if you look at the -- the industry competition certainly allows for either one. There's nobody coming in, so if there is an opportunity for growth, there shouldn't be anybody there to push too hard. I think to the extent the Fed raises rates and everybody starts thinking the good times are coming, then you could get to option two. Because where we sit today where everybody looks nervous and the financial markets look a little bit soft and the car markets look a little bit soft, it's a little easier to lean towards door number one kind of thing.

So we are set up, we are hoping for the second one, but we will see. I honestly can't give you -- like I said, if I said it was going to be flat, we will grow. If I said we are going to grow, we would be flat. So that's really as clear as I'm going to get on that whole topic.

Got it, got it. Clear as mud.

(multiple speakers) a lot of different things than run this company.

True. Back to the delinquency and collections practices, I'm just curious, hasn't it been close to a couple of years since the FTC settlement when you had to really start instituting different practices on the servicing and collection side? Just curious, it seems like it's really just these last couple quarters where there's been a noticeable change in the delinquencies and the frequency of late payments, but maybe you can give a little more color on perhaps whether there's been some incremental practices in just the last six months of why just suddenly we are seeing this as opposed to we didn't see this magnitude of an increase when these new collection rules were put into effect?

Well, I think you're absolutely right because I would agree with what you are thinking or saying. Remember, when the FTC showed up, we didn't really get the results until probably the beginning of 2014 or the middle of 2014. So we settled with them in June of 2014, if I recall, or July of 2014. And so somewhere between call it January we might have started getting an inkling of what was going on. In June might have been really when we sort of figured out what we were supposed to be doing.

So we would have started to try and implement stuff then and you figure it would have taken, I don't know, the first three months or whatever from June, somewhere around the middle of the year to the end of the year to sort of get a handle on what was really wrong and what needed to be fixed. So truly we didn't really start implementing stuff until January, February of this year and so your timing in terms of where you are seeing the change almost fits exactly with -- it took us, I don't know, three to six months to figure out what we needed to fix and then we implemented those fixes starting in January of this year, then you would start seeing the results of those right around then, I guess. And so that's where you've seen the last few quarters the rise in delinquencies.

Now, of course, we've seen a rise as well and so as much as we wanted to make the changes and we needed to make the changes and we are making them still, we still think we can get better results and that's what I've been saying all along. But it's kind of a weird thing where the bottom line and what we are seeing in the way collections works, certainly if you call up and you push real hard, you get the guy to pay real soon. Shockingly, to the extent you push a little more or you do whatever we call it, he's going to pay because he wants to keep the car.

So the fundamental answer is, one way or another, he wants to keep the car. How soon you push them to make that payment is the regulatory environment we sit in today. And so what we are starting to see is you don't have to push him as hard to get the result. Having said that, we still would like to see our DQ a lot lower than it is because the bottom line is -- the general rule of thumb is DQ turns into losses.

Having said that, there's a couple of big companies like us that are still out there that all have run much bigger 30 to 60 buckets than we ever did back in the day. And so there's something to be said that this is what it is supposed to look like because we watch those companies -- and I won't name them, but they are out there -- but they ran much higher 0 to 30, 30 to 60 and those all [cured], they all did fine and their portfolio did great and this is from the stuff we looked at four years ago. So it's not like they are faking it and it's all going to fall apart. Those companies did fine running almost the same DQs we run or a little bit higher still and had fine results.

So it's not like we are worried about it, but we are certainly on one hand trying to get used to it. On the other hand, we still think we can do better. But in terms of the timing you are seeing, that's really probably the answer.

And just last question on the same credit topic. As we think about the ending allowance rate, which is pretty much flat from a quarter ago, is that predicated more on the expectation that this 31-day, 30-day bucket continues to consist mainly of late payers and that they don't roll into losses, or is it predicated more on the expectation that the recovery rate was unusually low this quarter, a bit of an anomaly and it will probably tick up a little?

It can go either way. On the one hand, I think the allowance is mostly based on losses. The DQ doesn't really have that much to do with it, if anything. In terms of -- the provisioning is a complicated big-time model that you are not going to change on one quarter's information. So certainly in terms of the recoveries at auction, this one quarter is not enough to make us move on that yet. And again, we not going to move on it at all based on the DQ.

Got it. Okay. Very helpful. Great quarter. Thank you.

J.R. Bizzell, Stephens Inc.

Good afternoon, guys and congrats again on another earnings growth quarter. Brad, we are beating this to death. I guess my question around the delinquencies, and that was the one observation that you clearly pointed out, that they are not turning into losses. And I'm just wondering if you or Jeff could kind of walk through maybe the front-end DQ process and collection process and what's so successful once you get past that 60 day to turn those DQs into non-losses?

I can do the whole thing for you in two sentences. Back in the day, you could call the customer up and say, hey, you're 30 days down or one payment down or two payments down. You need to pay me today or we are going to repossess your car. And the regulatory folks didn't like us saying that to them. So you don't get to say that until they are about 90 days down, three payments. And shockingly, when you say it then, it works. It certainly worked when you said it upfront too.

But that's one of the fundamental differences and the loose term was it was threatening. We may not particularly agree with the term threatening, but to the extent you push them to say, hey, you need to pay us today or you are in serious risk of losing your car, a lot of people pay. To the extent you say, hey, it's really important you pay and let's work something out, shockingly, they still pay; it just takes them an extra two months. But that's really fundamentally the exact difference of what we are doing, is rather than pushing, I just use the term pushing since it's better -- rather than pushing right away -- I will give you one other example.

The other example is, a lot of the way collections is driven in many companies, including ours, is you want the collector to collect the payment today. You want them to get the customer to send something today. In the new world, that isn't really the way to do it and so it's taken us a dramatic amount of time to convince our collectors not to try and get them to pay today.

If the customer says, hey, I can probably pay you next week, that wasn't good enough in the old dynamic. And today, I can pay you next week is just fine. Now, of course, they don't all pay next week and then you do it again and they don't all pay until the next week, but eventually they do because, at the end of the road, you are going to tell them you are in danger of losing your car and that's when they pay.

So I know it's a little -- it's hard to actually think there's that much in those couple of sentences, but there really is. It's how fast you can push. In the regulatory environment, you don't push anymore and you give them the time to not string you along, but take some more time.

But there's two aspects. One is the manner in which you have to address the customers and two, the dynamic of how the collection arms work and the collection arms used to work, you get that money in today, period. Now that's not true. And so as much as it's a simple explanation at some level, it is a lot tougher to make it all work.

Thank you, that's very helpful. I guess switching gears, last quarter, you talked about kind of the stages of the headcount maturation process and the last phase being the focus around penetration at dealerships. And given kind of the volume level you are at, right at between $95 billion and $100 million a month, just wondering, with that 117 marketing rep headcount, where do you think you are from a penetration of your current dealer partners and how you see that moving forward as we go forward to the next maybe call it 6 to 12 months?

I think it's probably -- well, certainly penetration is better than it has been and I think it will continue to improve. And so back to the earlier question about growing, (inaudible) penetration continues in the market, doesn't get worse or flatten anymore, we may get the growth just from that. So that's why I was somewhat clearly vague on where we would end up. I don't think we are going backwards in terms of numbers at all. I don't think the economy is such, I don't think the environment in the market or anything would make me think that originations are going down.

Whether they are going to jump is really the question everybody wants to know and I wish I knew it too on the answer. But we are doing everything in exactly the right way. Our penetration continues to improve all the time. Our experience in the rep market for us is getting better all the time. I think our program with the dealers is very consistent and they rely on it more and more all the time.

And so to the extent one of our fellow competitors had a problem, our business would jump dramatically. To the extent the economy starts doing better, our business might jump dramatically. So all the tools are there for a big year. Maybe I should be talking like it is to try and push the stock up, but that's not a good plan. So we are going to run the Company the way we are supposed to and see how it all works, but certainly the elements are on the table for us to have a real big next year. We are just going to have to see how it comes out.

Great. And kind of building on that, Brad, last quarter, and you've talked about it before, just not last quarter, but multiple quarters, further down the curve as you call it is kind of providing maybe a competitive opportunity for you all. Just wondering if you took advantage of that this quarter and if so, at what level do you think that still provides an opportunity for you moving forward?

We've probably moved down the curve as much as we are going to. We bought a little bit deeper, but numbers-wise it's very marginal, but to us it was a little bit deeper. We've probably fully gone onboard with what we loosely call extended term. I looked at the numbers just while we were talking and the one number that has moved up is we do buy a higher percentage of extended term in the portfolio today. But the funny part is none of our competitors call what we call extended term extended term anymore. Everyone uses 72 months as a standard contract and we still think of anything over 60 as extended term.

So the fact that we are finally coming and doing what everybody else is doing is sort of novel, but some people are now buying more than 72 months, which we don't. So maybe that's a little bit -- as an example of us being more down the curve is that we are doing more extended term at least the way we look at it. But in terms -- I think the opportunity moving down the curve is still there. We are probably not inclined to move down the curve any further than we have already right now.

So where we might pick up is -- again, I think our -- in the environment we are in, the place we will have the best chance to pick up is if other people pull back and there's a chance, there's always an interesting opportunity where people start doing other things. And just to pick -- Santander is now a bank, so they are being a little more careful of what they can buy in terms of the regulatory environment and so things like that might play bigger for us down the road. But you never know, so we will see.

Great. Thanks for taking my questions.

Lucy Webster, Compass Point.

Could you talk a little bit about how you are thinking about the allowance for credit losses given that you've said that contracts you are purchasing are fairly flat quarter-over-quarter? Is the sort of a little north of 4% level something that you would look to keep consistent going forward?

I think that we'd expect the allowance potentially to grow. A lot depends on how -- as a percentage -- and that depends mostly on how much our originations volume grows or doesn't grow compared to the outstanding portfolio. So as the portfolio is growing, we'd expect it to grow slightly. If the originations relative to the size of the portfolio slows down and the growth of the portfolio slows down, then we'd expect the allowance percentage to creep up ever so slightly.

Ultimately, it ought to approach -- it would never fully -- as long as we are buying new loans, it would never fully reach something that approximates our annualized loss rate of 7% or 8%, but it should approach those levels if the portfolio size ultimately stabilized based sort of where the originations balanced out to the run-off of the portfolio.

Great. That was it for me. Thanks for taking my question.

Mitchell Sacks, Grand Slam Asset Management.

The first question I have is regarding the extended collecting process, does that end up driving more fees because people are in arrears for a longer period of time?

Well, it drives more accrual of late fees for sure because -- that's a good point actually. Because you have more people who are rolling out of the casual delinquent and into beyond the grace period where they accrue late fees. And so we do accrue a substantial amount of late fees in accordance with what the various state guidelines are. We don't book those accruals as income. Rather we only recognize them as income if and when we collect them in cash. Now that amount of cash is a significant amount. We do collect probably $500,000 to $700,000 a month in cash late fees, which contributes to interest income, we classify it as interest income.

Now would we expect that number to increase as a result of higher front-end delinquencies? I think the jury is out on that a little bit. Part of the whole compliance-minded environment is to try to work with the customer and be nice to the customer, cooperate with the customer. I'm sure that we are probably negotiating and waiving a number of accrued late fees in order to secure payment. And so I don't know that we will see a material or significant increase in late fee collections.

But does that accrual of late fees impact your delinquencies at all?

No, it's completely independent of the delinquency calculations.

Okay. And the second question has to do with employee costs. You had talked on that briefly. Can you just sort of give me just a little bit more clear explanation of the increase in employee costs? And I think one of things you said was there was an extra pay period, an extra day. Does that mean the next quarter doesn't have that and it should go back to more a trend line?

Well, it kind of depends. I don't have the next -- some quarters have 66 workdays and some paid workdays and some have 65 and it's not going to fluctuate a lot, but it could be plus or minus one or two days in any given quarter. It's not a giant number, but it's a measurable number. And I thought I had the headcounts here, the exact headcounts by department. I'm sorry, I don't. But I know that historically we do some hiring -- we continue to hire on the servicing front, so we really continue to add collectors in almost all the branches where we have seats. So clearly the headcount on the servicing side, the collection side is increasing every month and every quarter.

And then often beginning in the fall, the third quarter and on through the fourth quarter, even though we are generally not growing a lot, we often hire people on the credit and marketing side. I don't think we did much in the marketing side this quarter, but we hire people in the fall and train them to get ready for what is usually a robust first quarter on the credit side. So that will often influence those third and fourth-quarter employee expense numbers.

Then I thought I heard you say on the call, I think it was Charles saying that the residual interest financings probably go away over the next two quarters. Did I hear that correctly?

Well, it's paying down according to its terms. I don't know that it will get to the end in the next two quarters, but you are going to see significant reductions in that balance over the next two quarters for sure.

Okay. Great quarter, guys. Thanks.

(Operator Instructions). Charles Frischer, LF Partners.

Good morning, gentlemen. Another very nice quarter. Thanks for taking my questions. I had a couple of minor questions. One is were we a federal taxpayer in the quarter?

You bet. We've been a federal taxpayer -- sad to report. Yes, we've been paying federal and state income taxes for probably a little over a year. We had that massive deferred tax asset that was a result of all the losses we incurred going back to 2008, 2009 and 2010. And then we've been eroding that, eating away at that and sadly that is long gone. So we are paying taxes.

Okay. And could you just talk for a second or two about the state of the securitization market? I heard in the grapevine that Santander had a -- maybe it might have been a consumer loan portfolio that they pulled and maybe you guys could talk a little bit about how the health is and how you think about it in the next 12 or 18 months?

Yes, I don't know that SCUSA pulled the deal. I thought they had a deal in the market a couple of weeks ago that they actually upsized, so that tells me that their deal was timed well and well-received in the marketplace. But there are a lot of other players kind of coming in and out of the marketplace. It's not the same market it was a year ago. A year ago, the bonds were selling so fast, it would make your head spin and the oversubscription, overallowance demand for different classes of bonds was many classes in our deals were 3 and 3 times oversubscribed, which really helped drive down the spreads. In these last two quarters, we haven't seen that.

We've seen oversubscription, which has helped us primarily in the upper part of the cap structure, but even not to the degree we saw a year ago and there's noticeably less demand for the higher coupon, lower-rated bonds. Although we were able to get what we still felt was a good and fair execution. So it's a volatile market. There's a lot of other stuff going on that is not directly related to our business or our segment, but it impacts the people who buy the stuff. And so you have to kind of be prepared to go with the ebbs and flows of that market.

There's two things to keep in mind. On the one hand, our bumpy terrible deal cost us about 30 basis points more and still is 200 basis points off the historical average of what our price of cost of funds is. So we are sort of complaining or whatever, preaching to the choir in terms of the pricing in our industry is still great. The fact that it's gone up a little, we've gotten so happy with where we were, that it's easy for us to complain, but in truth we have nothing to complain about.

The other part of that in terms of the securitization market is everybody is assuming the rates are going up and that's why we wish they would because, as long as everybody thinks they are going up and they don't go up, everybody is waiting, and so particularly right now. The third quarter, fourth quarter even probably more so. Everyone is going to assume the rates are going to go up and they want to wait till then to get the new environment. They don't want to be tied into these bonds when they think they can get a better return three months or six months down the road.

So it's not just us, it's just -- your question is a good one. What's the bond market doing and the bond market in a lot of ways is waiting for the uptick in the interest rates to get some higher yields and at the end of the year, people tend to sort of not run out of money, but they buy less frequently. So that's really what we are seeing.

Got you. And then, Brad and Jeff, the last three or four years, you guys have done a great job rebuilding the balance sheet and I was curious to see, get your color on how you view the condition of the balance sheet, especially if things are good, it won't be a problem. If things are a little rocky, how you feel about your balance sheet right now?

I wish we weren't paying federal taxes, but I think the balance sheet is really good. As Jeff points out, we will probably clean up -- pay off -- the residual debt will probably run off certainly by the end of this year, by the middle of next year, end of next year and so that's a strong spot. I think -- I guess the way I mostly look at the balance sheet is in terms of any oncoming recession. If we think there's a recession coming, we might actually go out and get some cash, but we are in a pretty good cash spot. We are in a very good debt spot. So we are quite happy about where we sit. This is probably the best position the Company has been in in 15 years.

That's kind of what I think, which kind of leads to my last question about the buyback. And we talked about this last quarter and the quarter before. I guess my takeaway for you guys is, I wouldn't worry about getting the low tick or the middle tick or the high tick because whether we say 620 or 585 or 575 or 600, I'm just not smart enough to know how it matters because our stock is trading at 5.5 times earnings. If you could buy a company for $50 at 5.5 times earnings, I assume you would just do the deal.

No, you are absolutely right. That was me complaining.

Don't complain. You guys are doing a great job, Bradley.

No, I understand. You are 100% right. Whatever we buy it at it a fine price. It is ironic that every time we buy a bunch of stock, our average price is higher than the current market.

Good. That's a positive. And if next quarter, you buy another 0.5 million, if you nick it by a quarter and we are too low, great. That would be (multiple speakers).

I understand. Truthfully, you are absolutely right. I was complaining a little bit. But, no, we will continue buying the stock. There are a bunch of rules on how we buy, which is why we can't buy as much as we would like, but nonetheless we will continue to chip away at it at whatever given price we've got.

If somebody has a block they want to sell, should they call Jeff up and ask him?

Sure.

Please do.

Okay, listen. Thanks a lot, guys. Keep up the hard work. I appreciate it.

Thank you. I'm showing no further questions. I would like to turn the call back to Charles Bradley for closing remarks.

So anyhow, on the one hand, an easy way to look at this is we had a very routine quarter. Things went pretty much the way we wanted them to. I think the questions that were asked were all very good. They brought out a few things. Obviously, internally, our big focus is to continue to improve collections. We spend a lot of resources on that, a lot of executive time to make sure we are going in the right direction.

I think we are well set up for growth if we can get it and we are well set up for whatever happens next in terms of our balance sheet. We would like the stock price to eventually go up. It should eventually. The regulatory environment is good. The competition environment is good. The economic environment, we will see. So overall, we thank you all. We enjoyed having the quarter. We will look forward to talking to you next quarter too.

Thank you. This does conclude today's teleconference. A replay will be available beginning two hours from now until October 22, 2015 at 11:59 PM by dialing 855-859-2056 or 404-537-3406 with conference identification number 59399169. A broadcast of the conference call 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.