Consumer Portfolio Services Inc (CPSS) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services 2017 Third Quarter Earnings 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 are Mr. Charles Bradley, Chief Executive Officer; and Mr. Jeff Fritz, Chief Financial Officer.

I would now turn the call over to Mr. Bradley.

Thank you, and thank you, everyone, for attending our call today. I think, overall, probably not overly surprising that our third quarter looks an awful lot like our second and first quarters. That's sort of what we told people we thought we would do. And in fact, that's come to pass. So we're generally pleased with the whole quarter.

I think as, I guess, highlights for the quarter, we continue -- we've completed our fourth securitization of the year. The cost of funds in our securitization continues to trend down. I think the comment there is really that Wall Street or the ABS market is still exceedingly interested in our industry, and therefore, our ABS deals haven't had strong demand. I mean, we keep doing deals, and the deals just keep getting better, either more buyers, lower cost, more aggressive pricing. Even with the cost of funds overall going up in the economy, we've been able to sort of mash that and go down with tighter spreads, more participants, et cetera. So that's a trend that's really strong for us, and the industry, for that matter, and we would - if that continues, it's all good, but we're very pleased with how that's worked this year.

Sort of talking about a few other things. Everybody's very interested in the hurricanes and where we were affected. In the Harvey Houston hurricane, we had about 2.5% of our portfolio or loans in that area. So we actually weren't overly concentrated by any means and, as a result, weren't particularly affected.

In Florida, we had 6.5%, which certainly is more, but the interesting thing, we've really had a very low casualty showing out of that. We have been rather generous with extensions in those 2 areas, but the good answer is, overall, there's no real significant stress on the DQ. So as much as everyone thought and certainly a lot of people wrote about the problems in those areas, as of yet, we really haven't seen very much, nor have we been affected hardly at all. So we're sort of pleased with all that. Again, maybe a tad early to say it's over and done with, but in terms of the initial fallout, as you might say, it's been very good for us and not really a problem at all.

And then, I'll get into some more details on the quarter. I'll turn it over to Jeff to run through the financials first.

Welcome, everybody. Thanks, Brad. We'll begin with the revenues for the quarter were $109.5 million. That's actually down slightly from $110 million in our second quarter this year but up 1% compared to $108.5 million for the third quarter of 2016.

Our year-to-date revenue's $327.2 million, and that's up about 4% compared to $314 million a year ago. So kind of the story there is the year-over-year increase is due to a 3% increase in growth in the organic portfolio, aided by originations of $205 million in this third quarter and $668 million year-to-date this year. The flat, essentially flat revenues from second quarter of this year to third quarter this year are largely attributable to the fact that the portfolio's largely flat in those 2 sequential quarters.

On the expenses, $101.4 million for the quarter. That's actually down about 1% compared to $102 million in the June quarter this year and up 6% compared to $96.1 million last year in the third quarter.

For the 9 months, $303.3 million compared to $277.1 million, a 9% increase. So on a year-over-year basis, the increase in expenses is largely due to increases in interest expense and provisions for credit losses. However, in the sequential quarter, the total expenses are down slightly, which is largely led by flat interest expense and a slight decrease in the provisions for credit losses.

Let's look at the provisions for credit losses, $47.3 million for the quarter. It's down 2% compared to $48.5 million in the second quarter this year and up 2% compared to $46.3 million in the third quarter last year. On a year-to-date basis, $143.1 million, and that's up 6% compared to $135 million a year ago.

And so a couple things influencing the provisions for credit losses. The growth, the originations growth has been kind of tepid this year. So the portfolio's been flat, relatively flat. And the portfolio is aging. So the portfolio has now crested 20 months of average seasoning, and so that -- to the extent that, that trend or that path continues, we're going to see sort of this leveling out, I think, of provisions for credit losses, with some seasonal degradation in the credit performance, which we'll look at in a minute, but overall, we're pleased. And credit performance is more or less meeting our expectations.

Pretax earnings, $8.1 million for the quarter. That's up compared to $8.0 million in the second quarter this year but down compared to $12.5 million a year ago. On a year-to-date basis, $12.5 million in pretax earnings. That's down compared to $37 million for the 9 months ended September 2016.

Net income was $4.7 million for the quarter. That's up 2% compared to the second quarter this year but down compared to $7.3 million for the third quarter of 2016. Year-to-date number's similar, $13.7 million of net income for this year. That's down compared to $21.8 million a year ago.

Diluted earnings per share, $0.17. That's actually flat for the sequential quarters and down compared to $0.26 in the third quarter last year. $0.50 for the 9 months, and that's down compared to $0.75 for the 9 months ended September 2016.

Looking at the balance sheet, our cash position remains stable. Finance receivables portfolio, as I mentioned, was kind of flat going from the second quarter to the third quarter, up about 3% compared to a year ago.

Our allowance for loan losses, we actually saw some growth in that, some nice growth in that sequentially. It's up -- the net allowance is up about 4.7%, and the gross allowance is up to 5.6% of the total portfolio.

No real changes. Well, no changes at all, really, to the warehouse lines. We still have the 3 $100 million facilities that we use in a continuous fashion. Securitization debt is about flat and long-term debt is also flat sequentially but up about $2 million compared to last year.

Moving on to the performance metrics. The net interest margin was $86.2 million. That's off just 1% compared to the second quarter this year and off 2% compared to third quarter of last year. For year-to-date, the net interest margin was $258.5 million, and that's a 1% increase over the 9 months ended September 2016.

So what's happening here is the actual blended cost of all of our ABS debt for the quarter was 3.78%, and so that's actually down compared to 3.8% in the second quarter this year but up a little bit compared to 3.4% for Q3 '16. So what we've seen here, and Brad alluded to this, the ABS market has been very receptive, and we've actually seen a generally improved cost of funds since about the second quarter of 2016, which followed about 4 quarters of consecutive increase in cost of funds. And so we had that little blip in there end of '15, early '16 with increasing cost of funds, but the ABS market has been very receptive, and we have very good execution since that time.

Risk-adjusted NIM, $38.8 million, essentially flat compared to the June quarter of this year and down about 6% compared to the third quarter of 2016. Year-to-date risk-adjusted NIM, $115.5 million, and that's down about 4% from a year ago 9-month period. So the NIM improvement, slight, sequentially, is due, as I alluded to, primarily from the somewhat improved cost of funds and also due somewhat from year-over-year compression in the provision for credit losses.

Our core operating expenses, essentially flat, $30.7 million for this quarter, flat compared to the June quarter this year and up slightly compared to $28.9 million a year ago. Year-to-date, core operating expenses, $91.6 million, up about 9% from $83.8 million a year ago. So operating expenses, the portfolio did increase about 3% year-over-year. So we have some increases in the operating expenses, which were reflected in those increased numbers year-over-year. As a percentage, the core operating expenses were 5.2% of our average managed portfolio. That's flat compared to the June quarter this year and up compared to 5.1% a year ago, and the 9-month numbers are essentially the same, 5.2% for this year, up compared to 5.1% a year ago.

So the return on managed assets, the pretax income as a percentage of the average managed portfolio, 1.4%, and that's flat with the second quarter of this year but down compared to 2.2% a year ago. The 9-month numbers, 1.4% for the 9 months of 2017, and that's down compared to the 2.2% for the 9 months of 2016, largely attributed to higher interest costs and provisions for credit losses during those 2 9-month periods.

On the credit performance side, fully loaded delinquencies as of September 30 of '17, 10.27%. That's up sequentially from 9.64% for the June quarter, which is a seasonal sort of trend we'd expect to see going from Q2 to Q3.

Now that's actually down compared to 10.46% for September -- compared to September 30 a year ago. The annualized net losses for the quarter is 7.96%, up a little bit from 7.62% in the June quarter and 6.69% in the third quarter a year ago. And the 9-month annualized net loss is 7.83% compared to 7.76% for the 6 months ended June 30, and 7.05% for the 9 months ended September of 2016.

The auction percentages after really losing a lot of ground in this area, the recovery percentages of the auctions during '16, those have largely stayed flat, fluctuated a little bit, but 34.6% for this quarter is only down a little bit from 35.6% in June, and down a little bit from 36.1% a year ago.

Moving on to the ABS market, which Brad alluded to. I actually talked about both our third quarter deal, which was our 2017-C transaction, which we completed in July of this year. That was a $224.8 million transaction. It was a little unique in that it included about $18 million of called receivables, which were loans that we pulled out of, of prior securitizations that we closed out, or cleaned up as we say, and contributed to lowering the weighted average remaining term of this pool of receivables. We got really good execution on that deal in July and resulted in a blended coupon of 3.52%.

However, in 2000 -- our 2017-D transaction, our fourth quarter transaction, which we just closed last week, was $196.3 million, and this was maybe the best -- well, in fact, it was the best spread execution transaction that we've had since 2014-A, and so what I mean to say there is the weighted average spread over the benchmarks of that deal was 160 basis points over the benchmarks. And as I said, that was the best execution we had since 2014-A and resulted in a 3.38% blended coupon. And so, again, we continue to see a very robust response to our bonds when we go out to the market every quarter.

And with that, I'll turn it back over to Brad.

Okay. So to run through some of the departments, marketing has been a focus of ours for the last several years. Interesting though, we sort of thought that with all the automation involved these days that the marketing would be somewhat more of a commodity with dealer tracking all of the dealers. As it turns out, we sort of think that, actually, being in the dealerships is still very important. So we're sort of working on new strategies to do that. The other part is that the marketplace is still very competitive. Sort of regardless of what other folks are saying about competition and such, our feeling is that people are just as competitive today as they were before, and so that has an effect in the overall efforts here as well. But we're almost okay with that, given sort of where we think we're going to be for the near future.

In originations, we continue to focus heavily on improving our credit metrics. We actually put out some of the best credit metrics we've had, and the LTV is quite the lowest LTV we've had in almost 5 years or even more at 111. But generally speaking, all credit metrics are improving. So in terms of our stated aim of not really chasing the competition and not really chasing the market and instead, improving our credit, focusing on what we do best, that all seems to be doing -- coming true exactly the way we thought in that our credit metrics are improving, we're not really pushing the marketing effort and we're getting the paper we want to get, rather than sort of needing to go out and buy paper.

In the collection area, we've been working on increasing the analytics involved, looking at different ways to work on delinquency and different ways to work on losses. As much as the numbers don't totally reflect any grand improvement in our collection effort, there's some -- there's trends involved that actually seem to be very strong, whether it's year-over-year, month-over-month, we're tracking an awful lot of stuff, and a lot of numbers really seem to indicate that maybe we've really gotten a handle on collections and, at some point, that should translate to more numbers you can see. But overall, we're kind of pleased with the way that's going. ARD, the recoveries at auction, Jeff mentioned, I think, we probably could still go down some. We seem to be flattening out in that 34%, 35% range, and that would be nice. We're sort of prepared either way. But again, it looks like it's trending sort of flat over the last few quarters.

We do continue to do our share repurchase. We had a very large repurchase quarter. We repurchased 1,189,000 shares in the third quarter. Normally, we purchase around 0.5 million, so that was a bit significant. We've almost purchased 6 million shares since the first quarter of '15. So that program continues to run and be effective in terms of trying to increase shareholder value and take those shares out of the market.

And moving on to the industry, I think, I mentioned, I think, a lot of folks out there sort of say, gee, the market's good, it's not as competitive and we want to grow. That's not the way we look at the market. We think the market is very competitive. We think that with car sales down, it puts more pressure on other companies to grow anyway.

So one thing we saw, they had a big ABS conference down in Miami last month, and they had some panels that sort of talked about the state of the industry and things like that. And what was sort of nice is they sort of reinforced sort of the 3 areas I usually focus on when I talk about the state of the industry.

One being the regulatory environment. There was some thought, with the new administration, regulatory environment might either get a whole lot better and certainly wouldn't get any worse. We probably ended up with it's not going to get any worse. Not a lot has happened in the regulatory world lately, which I think is actually fine.

As much as some people might have thought things would loosen up and get better, I'm not so sure I really believe that. Probably the better angle is that we now understand where the regulatory environment is, people don't need to be afraid of government agencies coming in and kind of wiping out their business. So that part seems good. If anything, maybe they'll get better down the road, but it probably won't get any more punitive than it has been in the last few years.

Secondarily is car sales. Everybody knows the car sales are dropping off and won't be as strong in 2017 as '16. I think, generally speaking, a lot of people didn't buy cars coming out of recession. And that's sort of 2007, '08, '09 and '10. Then people started buying cars '11, '12, '13, '14, '15, and then, I think, the manufacturer sort of tried to keep the needle moving into '16. And then, '17 is where it all stopped.

And so now, you have too many cars. You have all that leasing coming off market. So you're seeing all that in the used car prices. And the folks in Miami said that they thought that, that would be a continuing trend through 2019. I sort of was thinking it was at least through 2018, and so what you're really going to see is less cars out there to finance. And so that makes things a little more interesting. But certainly, that was the second trend.

And the third thing that was brought up, which I also heavily agree with, was the very lack of M&A activity in our industry. I think, everyone thought that there would be a lot more M&A activity so far, and there really hasn't been hardly any. But having said that, I think, most people, including myself, believe that, that will increase over the next year or 2. So it's going to be an interesting time.

What you really have is you have a lot of people that got in this marketplace in 2012, 2013, and thought, well, we can do a start-up. We're going to grow real fast. We're going to get real big. We're going to go public. We're going to make lots of money. And that's a lot like the first cycle back in the '90s when people didn't quite do the things they're supposed to do, didn't have the controls in place, and so you've seen the delinquency and the losses, and lots of these companies really did not do very well at all.

And so the problem is once you get in a position where you originate all this paper and it doesn't perform very well, you have a couple of choices, you can slow down and sort of take your lumps, fix what you're doing and start again, or you can hope you fix it and grow real fast.

So in our current industry, I might lend towards the second part, which is people think they fixed it, have grown real fast, and they're growing -- trying to grow real fast in a competitive environment because car sales are down, which puts more pressure across the board. And I say all this because CPS isn't doing any of that. We reached the point where we can sort of buy what we want to buy. We don't have any pressure to grow. Our portfolio's been relatively nongrowth for almost 3 years. We've been kind of running flat for a while now.

What's interesting is, in 2007, 2008, after getting whacked around in that recession, even though CPS is doing very, very well, I sort of said, gee, if we could get to $50 million originations a month, we could probably run a very stable company and be very successful. But we instead grew a whole bunch and got up into the hundreds for a while, but now, after doing that, we are sitting in that $70 million to $75 million a month range and, in fact, doing exactly what I said.

We're running a very stable company. We're quite profitable. Our numbers all look good. The hard part is this is something we've never done before. We're, generally speaking, an aggressive, growth-oriented, move the ball forward kind of company. But given the environment I just described and given where we stand as a company, it just doesn't seem like the right course to get out there and slug it out in an industry that's you're going to have problems going forward.

We think, doing what we're doing right and doing it for a while here is probably the best course. Having said that, we are very opportunistic. We think there will be opportunities in the future. And sort of keeping some dry powder, doing the things we're doing the way we are. We could be in a really good spot going forward.

But it is hard to sort of stick to your knitting when there's -- you think there's things to be done out there, but given what people say about the industry, the potential of M&A activity in the future, we sort of think this is the right course for us, and it's proved to be really good. We've reached that sort of level of critical mass where things kind of take care of themselves in many different ways, we would love the stock price to go up and things like that, but people are still worried about the industry, or maybe worried a little bit about regulatory. And certainly, now, they're worried about car sales. So we're just going to have to sort of see how that plays, but we, again, like our spot. And overall economy, it certainly seems like the economy is trending up. There's a chance if they ever pass a tax reform act or whatever, that the economy could really jump. If that happens, we would be able to go with it as you probably get an increase in car sales, and that would benefit everyone, but of course, we would get to play on that game as well.

So overall, I think, the prospects of the economy are pretty good. In terms of that maybe turning a corner and helping us, we'll have to wait and see. But generally speaking, it all looks very positive. And again, in terms of the overall economy, it's where that performance in the ABS market is almost most important. That securitization outlet is hugely important to us. The fact that it's operating so well today certainly bodes well for the immediate, if not long-term, future.

And I think that's pretty much all the comments I have, so we'll open for questions.

(Operator Instructions) Our first question comes from the line of John Hecht of Jefferies.

First one is, Brad, you talked about still tight competition, but yes, on the same topic that you did have improving loan to values, some of the industry data we've seen suggests in certain categories there, prices are improving, meaning loan yields. I still understand it's tight. Is it softening up anywhere? Is it stabilized at a tight level? And how would you kind of think the next 2, 3, 4 quarters look from a competitive perspective?

I think, this is where we're hoping for the M&A activity. I think, we're certainly hearing rumors that people are struggling, and some of the -- one of the things I've heard people said is a lot of money came in, in this industry in 2011, 2012. A lot of those folks have 5-year windows, so that window is kind of there. So it's going to be interesting to see what happens. But we don't see anything in the way of easing anywhere. People are still using credit quality as their tool to compete. People are still competing on price.

Our coupon is down a little bit. We're not seeing as much as -- like I said earlier, people are saying we're growing, it's a great environment, we're not buying it flat out. So I hope they have fun. We're not playing. But I think this could be sort of that last gasp before people start giving up. And so if that happens, all the better for us. It's interesting, we don't necessarily need to buy someone to do well. People just going away helps a ton. I'm not saying it to disparage the industry in any way. It's just this is the natural way things seem to work, particularly in our industry and its cyclical nature. So we'll see.

But I think if a few players, slow down, go away, then that market and things will change. And so to answer your question, I would think that over the next 3 or 4 quarters, you're going to see some things change in terms of M&A. That will open up the market and might ease some pressure on pricing and quality, and that would be my bet, I guess. It's hard to really say that's going to happen for sure because we -- like I said, I thought it might have happened 18 months ago and it didn't. So.

Okay. That's good update on that topic. You mentioned stabilization of recovery rates or auction prices in the quarter. Is that a function of the hurricanes? Or do you see kind of a more stabilized environment with respect to used car prices as we step forward here?

I could go out on a limb and say it's sheer luck, but it's just too hard to tell right now. I think, it is interesting that for the last few quarters, it seems to have stabilized some. Whether that's influenced because of the hurricanes or what, I just don't know. But I'd give you 50-50, they could drop 3 points next quarter easily if things change. So it's just too hard to tell right now.

It's possible the hurricanes are influencing it a little bit, and without them, it would be coming down some more. So we'll see. Again, our sort of stated nature here is anything over 30, sort of 30 was the worse it ever got. We're sitting at 34, 35. There's room to move down. And if it doesn't, that's fine. But I wouldn't place any bets for it going up or staying here for a long time.

Okay. And then, final question, and for Jeff, what's the right tax rate to think for you guys the next few quarters?

I think, we're hovering right around that 40.5%, John, and I don't see any reason for that to be changing over the next few quarters.

Okay. It's just my model has slightly lower tax rate the last few quarters. Is it more just like an annual rate -- okay, no, I apologize, I was just looking at that wrong. We're set. We're good.

Our next question comes from David Scharf of JMP Securities.

Brad, maybe a follow-up to the question about the competitive environment over the next few quarters. I'm wondering, or trying to reconcile maybe on the one hand, the tightening spreads in the ABS market and what that says about how freely capital is flowing into your industry versus the hope that maybe M&A activity will pick up, some of the more aggressive lenders will run into trouble.

As we think about the spreads, I mean, is there a Goldilocks or a sweet spot in which your cost of funds is optimized but at the same time, it's not an indicator that maybe there's really no shakeout inevitable here? What are your thoughts about just those trade-offs? Because it really seems like the ABS markets are a double-edged sword at this point.

Yes, it's an interesting question. I think, historically, over 25 years, we might think our cost of funds should be closer to 5 rather than 3.5. So if I were running or backing some of these other companies, I would certainly keep that fact foremost in my mind thinking, if I can't survive at 5, then this 3.5 is an illusion and I should take the opportunity to do something different. But you're right. Certainly, what is it, a high tide floats all boats, and certainly, that will have some effect. I don't know that 1 point or 1.5 points or whatever it is or 0.5 points is enough. Problem is, if you were running one of these other guys and your numbers -- there's certainly -- again, I'll do this sort of hypothetically, you can't just sit in there and you really can't look at your numbers and say, hey, these collection numbers are coming around. We've got something. This new paper is better than the old paper, and there's a right trend going and let's put the pedal to the metal and grow real hard.

And because remember, if you've got a bigger portfolio, you cover up your past sins, and so there's a whole lot of folks out there probably thinking real hard that's what they can do. And so granted, the ABS, low-cost ABS is going to help them and give them a little bit more margin for that. On the other hand, to the extent those numbers aren't turning around, they're not going the right way and you've got some hocus-pocus to make it all work, then you're looking at the wrong end of the barrel. So the ABS isn't going to save you by any means.

We've heard some rumors where some companies sort of like, let's slow down and fix it, and all of a sudden now they're growing real fast. And so the problem is, a lot of people know and lots of people may be learning, is if you got that -- if you have -- if you bought a lot of bad paper or paper that hasn't really trended the way you wanted to and you slowed down, it makes those problems look a whole lot worse. And so to the extent people are like, oh, we'll slow down and we'll fix it and then we'll start going again, and they've slowed down and realized these numbers are going to be really bad, then they've said let's grow anyway.

And there may be some of that out there. And then, maybe the ABS, the low cost of ABS is keeping a couple of guys in the game for a little bit. But the bottom line, if your portfolio isn't performing -- like I said, our portfolio is probably off in terms of its performance by somewhere in that 15% range. But we've heard people in the industry in terms of their targeted loss numbers -- our targeted loss number is off 15% over the last few years. A lot of these companies' target loss numbers are off 40%, 50%, and you don't survive that. And so that's why a lot of folks, including myself, thought the M&A activity over the last couple years would be significant.

But I think there's people that are backing some of these companies that are stronger, and they're in for a little more long term, and so they're putting the cash in, and that was the comments some folks down in Miami made as well. And so maybe. So it's almost more if you're really going to make sort of the observation, it's probably that the money backing some of these companies is stronger, and that's why they're hanging around much more so than the ABS having a low cost of funds.

In having said that, at some point, you really got to look in the mirror and go this is not working the right way and then decide what to do next. And so -- and again, you can almost see, you can see the growth numbers of companies, to the extent they're growing real fast, the number is getting worse, that's a real problem to look at because if you're growing real fast, you can cover it up.

At some point, that thing has to slow down and normalize and then those numbers pop up in a big way, whereas you look at CPS, and we've done really close to the same kind of annual originations for 3 years or almost 4 years running, and so -- and to be fair, as Jeff points out, our portfolio is leveling, getting older, and so it's not helping us performance-wise. And even so, our performance is okay.

So that's one -- those are the kind of things. So I mentioned, we don't see the collection numbers perfectly in terms of some improvement, but the fact that we've slowed down and are almost running at a steady state, the portfolio is getting older, you're really -- we're not doing these sort of things like growing fast to help our performance. Again, our performance is just fine, but that's sort of a good, maybe, measure to some of the other guys because to the extent you grow real fast, you can cover it up, but again, you better be doing it right, or sooner or later, you're going to pay the piper.

I might also add, David, related to ABS market and the recent deals is it's been very receptive. There's a lot of capital that's looking for the kinds of yield that come out in these bonds. And you think like a AAA bond or BB bond, it's kind of a commodity, but in reality, when the investors line up for these bonds, they're also taking into consideration the issuer and the track record of the issuer.

And so we've been in business for 26 years, these last 2 deals marked our 75th and our 76th structured asset-backed Wall Street type of deal, and so a component of our execution has to do with our track record and our stability, and another player in the marketplace who maybe doesn't have that isn't necessarily going to get the exact same execution.

The last comment would be, we've been making money all along. And I think I mentioned it at least a few quarters ago, we were shocked when somebody was saying, well, how you guys make all this money? People don't make any money. And that surprised us a lot. And so to the extent you aren't really making any money, then, obviously, trying to grow to make that happen is very important, and maybe the ABS helps you there. But in the end, you need to make money or the game doesn't play at all. So there's lots going on out there. I'd be interested to see what happens over the next 12 to 18 months.

Got it. Maybe a follow-up on credit. And it's more just the math surrounding the portfolio aging since there's less of a denominator effect. Jeff, is there any way -- I mean, given a stable, if you feel like, in general, a stable credit performance, but it's sort of the $800 million to $900 million annual origination profile. How should we be thinking about loss rates next year in that context? Just as that average age of the portfolio expands beyond 20 months and you get a little less. Brad said there's less ability to cover it up through growth. Just trying to get a sense for how it trends towards ultimately the cumulative loss rate when the portfolio kind of stays flattish?

Yes, that's a good question. At these origination levels, our portfolio is going to continue to hover at about the same $2.3 billion. And so as the -- and the portfolio seems to be seasoning at about a month with every consecutive quarter. And so if -- in terms of annualized loss rates in that scenario, we might expect those rates to continue to tick up a little bit until the weighted average age of the portfolio gets to be somewhere between 24 and 30 months. And then, we'd expect, I think, stability or relative flattening of the annualized loss rates.

(Operator Instructions) Our next question comes from John Rowan of Janney.

Just a follow-up on that last point. Jeff, you talked a little bit about loss rates migrating up a little bit at the current origination level, but Brad, earlier, you talked about the origination floor being somewhere around $50 million per month, which obviously would work out to a reduction near relative to where you are now as far as originations go.

How does that look if you guys -- kind of comparing your last comments about the loss rates migrating up as the portfolio ages up to a certain age at $70-ish million worth of dollars originations per month versus whether it's at $50 million? How do all those metrics look if we go back to that baseline scenario that you guys laid out earlier?

Yes. I think the first part is that I said in 2007, we would do $50 million. So we won't do that. I think, our baseline is -- yes, that's fine. Our baseline is probably that -- I would -- I probably shouldn't even say it, but I'd be shocked if we drop any lower than where we are today. I mean, we're sitting around just doing what we're doing. So at 70, 75 is probably the baseline. And somewhere right around there, the portfolio is going to stay the same size. I think, over time, we probably -- like I said, I think, by the time the portfolio starts to get old enough to where that number isn't sufficient to keep it flat, we would probably be growing again. So that's one part of it.

So on the one hand, our portfolio should stay the same size. And again, we'll have to suffer somewhat the slings and arrows of having our numbers really prove out, which is fine because if they prove out, that makes us look good. Our real task will be to continue the improvement in collections, so that whereas Jeff's point earlier was you might see an uptick, and as the portfolio ages, would be to have it stay flat. So in other words, our collections will improve to a level where you really don't see a degradation in the loss number a little bit.

And so we'll see, but that's the bet I'd be kind of interested in taking that our improvement in collections will offset that. Now I'm truly saying that sort of at the top of my head, but it's not a bad thing to think about because, in fact, that's what we're trying to do. As much as our collections are improving, you don't quite see the numbers in that. But again, it's because of all these different factors. And so that's what we'll continue to try and do.

So between all that, like I said, it's almost going to be a slightly boring world for us because we're going to continue to work on collections. And if we do everything right, we're going to stay looking pretty much the same, which is really boring. But on the other hand, it's probably good kind of boring. And if things sort of change in the economy or the industry, we should be able to do pretty well real quickly with those changes. But that's a -- it's a good way to look at what our sort of our MO is going to be for the next 6, 12, hopefully not more than that, months.

Our next question comes from Erik Volfing of Grand Slam.

This is Mitch for Erik. Assuming that you guys are sort of in a stability mode for the foreseeable future, are there opportunities on controllable cost to start to improve margins from that perspective?

There certainly are. I mean, we look at the numbers and the real trigger is we're probably almost across the board a little overstaffed here and there because we weren't exactly thinking -- we were thinking the M&A thing would go a little quicker, and so we wanted to be ready, and so we're sitting here ready.

And so, I think, given everything we just said, and we may look at that. And I mean, to be fair, we're always looking at ways to save some money. We're certainly going to monitor the sort of the benefit of being ready to grow a lot. I mean, we could probably originate $100 million in a month, no problem tomorrow, and we're doing $75 million. We could probably originate $125 million a month tomorrow, and we probably could service an extra $200 million to $500 million tomorrow -- not quite, but within 90 to 120 days.

So we have a lot of stuff ready to go. And so, yes, you're right, at some point, we might have look at that a little closer. But probably what we do instead is, you got to remember, as the portfolio continues to move, if it grows then you need more people anyway. So -- but since we're not growing, we'll sort of look at that a little bit, but there's probably some money to save along the way. What I'd rather do is find something good to happen, so we don't need to worry about it.

Your next question comes from Michael Tarkan of Compass Point.

Just back on the credit questions. You mentioned you expect losses to kind of keep ticking up as the portfolio continues to season. I'm just kind of wondering how to dovetail that with the comments around provision expenses leveling off here. How do we think about reserves currently versus maybe where they're headed? And then, a follow-up on yields, just kind curious how to think about that line moving forward?

Well, I think, the way you look at sort of the annualized loss rate compared to provision expense, one of the things we do is we build the provision -- or excuse me, we build the allowance for a new batch of receivables. So the contracts that I buy this month have a very low allowance associated with those contracts because they're brand-new contracts, they're not even delinquent, right? So I build an allowance for those receivables over a 12-month period, so that I have what I feel is a fully funded allowance for those receivables once they get to be 12 months in age.

And so when we're in a situation where we're growing rapidly or the amount of new originations is a significant number compared to the existing portfolio, then you always have this kind of this catch-up sort of taking place that influences the amount of provision expense makes it, in some cases, makes it relatively low compared to the size of the portfolio.

But as the portfolio seasons and then if you have a circumstance right now where the amount of new receivables is relatively small compared to the existing receivables balance, then the provision expenses will tend to look lower compared to the portfolio. The allowance will tend to grow a little bit compared to the portfolio. And all this could be happening at the same time that the annualized loss rates are inching up a little bit. So it kind of all goes together, although it's maybe not completely intuitive.

That's helpful. I guess, just in terms of the excess provision or excess reserves that you guys had built in this sort of first half of this year, that slowed down a little bit on the third quarter. I guess, it sort of is, just so I'm clear, like just maybe a little bit more modest reserve build in dollar level is just sort how you're thinking about it with a static portfolio?

Yes, I mean, we don't really -- we wouldn't characterize it really anything in the excess necessarily. I mean, we have a methodology that we've used for some time we're pretty comfortable with. And we literally monitor each portfolio as a monthly static pool. And as that pool seasons, we can compare that pool's relative cumulative net losses at a point in time compared to previous pools, and we make adjustments from time to time as necessary.

So we have these little kind of fluctuations from quarter-to-quarter, and they're not necessarily reflective of any strategy change. Certainly, not a strategy change. They are influenced from quarter-to-quarter by some of the calendar seasonality that takes place in the portfolio. And as we mentioned, they are influenced somewhat, and these levels will continue to be influenced somewhat by the ongoing seasoning of the portfolio.

Understood. And then, just on yields, I saw them dip down a little bit this quarter. Just kind of wondering how to think about that moving forward?

We would like to figure out a way to have the yields go back up a little bit. I think, we do have a little bit of a mix. We've done more new versus used, and so that influences that somewhat. And so the trade-off is the credit metrics are way better on that. So as much as we're kind of okay with what we have, I'd certainly like to figure out a way to improve that a little bit. We'd like to keep that number above 19 and it dropped below it for the first time in a while this quarter.

Again, we're sort of -- it's not like we're solving for that interest rate, we're solving for everything else and that just pops out. But it's one of those things we'll certainly look at and see what we can do to maybe adjust. But again, our trade-off there is probably better.

However, sitting here, I actually thought I would comment on one of the earlier questions, which is as much as the ABS is down a little bit sort of if you look at things from a very objective point of view, as much as you might be getting some benefit from the low cost ABS today, or lately, the low price in auction recovery probably offsets that, and then some. So it's not like you're really going to benefit dramatically from low ABS because you're suffering from the low auctions. But back to your interest question, yes, we're looking at it.

At this time, I'd like to turn the floor back over to Mr. Charles Bradley for any additional or closing remarks. Sir?

Thank you again for everybody coming in and attending the call. Again, I probably don't need to say it again, we sort of like where we sit. We're hoping for excitement in the future. And it's an interesting time in the industry as well. So -- but there's all that money that came in, in 2012, 2011, those 5-year windows are hopefully going to close and some decisions will get made and some things will happen, and we'll be in a good spot to take advantage. So with that, we look forward to talking to you guys next quarter.

Thank you. This concludes today's teleconference. A replay will be available beginning 2 hours from now until October 31, 2017, at 11:59 p.m. by dialing (855) 859-2056 or (404) 537-3406, with a conference identification number 1857939.

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