Consumer Portfolio Services, Inc.
Q3 2013 Earnings Call Transcript

Published: 19 Oct 2013

[Operator:]

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

[Charles E. Bradley:]

Thank you, all, for joining us this morning for our third quarter conference call. As you can see, the quarter went very well, I guess, pretty much as we expected. There's certainly less noise in this quarter. And from our point of view, that's more of a normal quarter, what we would expect and what we would expect going forward. I think, just broadly speaking, in terms of originations, collections and all aspects of the business, it was pretty much in line with what we expected. It was a good growth quarter, good earnings quarter. It's almost, we're back to, hopefully, doing the boring part, where it pretty much went in line with our expectations and, hopefully, everyone else's. We'll go into a little more detail about that, but for now, I'll turn it over to Jeff, who'd walk through the financials.

[Jeffrey P. Fritz:]

Thanks, Brad. Welcome, everybody. We'll start with the revenues. Revenues for the quarter were $64.1 million, that's a 34% increase over last year's third quarter revenues of $47.9 million. It's also, if you recall on last quarter, our second quarter this year, the June quarter, we had a onetime gain from cancellation of debt. So I'm going to compare the sequential quarters without that, again, $64.1 million for this quarter is an increase of 8% over the $59.6 million, for the June quarter this year. On a year-to-date basis, again, without the gain from the cancellation of the debt, revenues are $178.2 million and that's a 30% increase through the 9-month period in 2012. Of course, the revenues were driven by the growth in the consolidated portfolio. We did originate $207 million of loans here in this third quarter and the consolidated portfolio grew 10% from the second quarter this year and 43% compared to this time last year. Moving on to expenses. Operating expenses were $53.5 million for the quarter and that's an 18% increase over the third quarter of last year and, again, without the onetime contingency expense that we incurred in the second quarter this year, our quarterly expenses of $53.5 million this quarter, were a 2% increase over what would have been $52.3 million in the second quarter this year. On a year-to-date basis, again, without the contingency expense recognized in the second quarter this year, our 9-month expenses are $153.9 million and that's a 17% increase over the $132 million in 9-month expenses last year. We continue to see a couple of positive trends in expenses. Our interest expense has decreased now, in something like 7 consecutive quarters, due to the runoff of higher ABS cost and some repayment of some other long-term debt along the way. And of course, the new ABS are coming out at lower interest rates. Generally, we're seeing, in some cases, flat and a slight growth in employee costs, in G&A costs as the costs of servicing the portfolio and originating greater numbers of contract has increased. Looking at the provision for credit losses, $20.2 million for the quarter. That's a 113% increase over the third quarter of last year and a 17.4% increase over the June quarter of this year. On a year-to-date basis, provision for loan loss is $52.7 million, and that's a 140% increase over the $22 million for the 9 months last year. This is very much in line with our expectations. The originations are higher compared to last year. The portfolio has grown at 43% compared to last year and the credit metrics are generally good, which Robert will talk about later on. Pretax earnings for the quarter, $10.6 million, that's a 293% increase over the third quarter last year, pretax earnings, and a 25% increase over pretax earnings of $8.5 million in the June quarter this year. On a year-to-date basis, pretax earning is $25.6 million, and that's a whopping 457% increase over $4.6 million for the 9 months ended September of 2012. Net income, $5.9 million for the quarter, that's 119% over the net income of $2.7 million in the third quarter last year and a 23% increase over the $4.8 million of net income this year in the second quarter. On a year-to-date basis, net income, $14.5 million, a 215% increase over $4.6 million for the 9 months ended September of 2012. Keep in mind, in the 2012 period, we had no income tax expense were recorded, no income tax expense, either for this quarter, or through the 9-month period, as we were still reducing the valuation allowance on what was then our deferred tax asset that was fully valued. Diluted earnings per share, $0.19 for the quarter, that's a 27% increase over the June diluted earnings per share of $0.15 and a 73% increase over the $0.11 in the third quarter last year. On a year-to-date basis, $0.46 and -- which is a 142% increase over $0.19 through 9 months of last year. Moving on to the balance sheet. Unrestricted cash balance is at $24.1 million, that's a little bit higher than we've been carrying for the most part in the previous couple of quarters and last year. Our liquidity position has been very strong. The aspect structures have helped us to conserve liquidity and use the warehouse lines less, which has also contributed to some of that lower interest expense numbers that I already referred to. To restrict the cash balance at the end of the quarter includes $66 million in prefund proceeds for a 13c securitization, which was completed after the quarter. And that $66 million was used, largely, to pay off warehouse financing. Our finance receivables portfolio, net of the allowance, has now exceeded $1 billion for the first time in quite a while. It's up 11% from $939 million in the June quarter and up 56% from $670 million a year ago. We've originated $591 million in new contracts this 9 months compared to $401 million through 9 months in the prior year. The fireside portfolio continues to wind down, that's our fair value portfolio, that's now at only $21 million. Elsewhere on the balance sheet, a slightly higher warehouse utilization balance. Warehouse lines balance at the end of the quarter compared to the June quarter and a little bit higher the last year. Our residual interest debt has actually decreased by about $13.8 million from the prior quarter as a result of our repaying an older residual facility. You recall that we did add a new residual facility earlier in the year for $20 million, which is still on the balance sheet. Securitization trust debt now hooked in over $1 billion, slightly up from $984 million in June and $720 million a year ago. And the other kind of interesting factor in this balance sheet, our debt secured by the fair value, of the Fireside receivables, is down to about $17 million. The contractual note on that, the deal has actually been repaid in full and this debt represents the fair value of future cash participation payments that are due to the lenders on that deal. Moving along to some of the performance metrics. Net interest margin for the quarter was $50.2 million, that's an increase of 12% compared to the previous quarter, the June quarter this year, and an increase of 77% over the $28.4 million net interest margin in the third quarter of 2012. On a year-to-date basis, the net interest margin, $133.4 million, which is a significant increase over the $74.9 million that we had through 9 months last year. Again, I think I've mentioned, the NIM is really helped by the older ABS financing's running off and being replaced with the substantially lower-cost ABS structures. The risk-adjusted NIM, which takes into account the provision for loan losses, 30 point -- $30 million for the quarter, that's a 9% increase over the June quarter this year and a 59% increase over the third quarter of 2012. On a year-to-date basis, the risk-adjusted NIM, $80.7 million this year compared to $52.9 million last year. So even the NIM is seeing good increases, also taking into account the provision for loan losses. Our core operating expenses were $19.4 million. That's actually a slight decrease from the June quarter of $20.3 million, but an increase of 20% over the $16.2 million in core operating expenses in the third quarter of last year. On a year-to-date basis, core operating expenses, $56.3 million compared to $48.3 million through 9 months of last year. And obviously, we're seeing growth in some of the core operating expenses just to continue to manage the increase in volumes in the servicing portfolio. However, as a percentage, moving on to the core operating expenses, as a percentage of the average managed portfolio, 6.9% for the quarter. That's a decrease of 13% compared to the June quarter and a decrease of 12% compared to 7.8% for the third quarter of last year. And on a year-to-date basis, that core operating expense, as a percent of the managed portfolio, 7.2% this year, and that's down from 8% last year. So we're seeing good trends in our operating leverage and controlling our expenses relative to the growth in the portfolio. Return on managed assets, 3.7% for this quarter, that's up 13% from the June quarter and up 185% from a 1.3% return on managed assets in the third quarter of last year. On a year-to-date basis, return on managed assets was 3.3% and that compares to 0.8% through 9 months of last year. So again, a very positive trend, a much better return on managed assets. With that, I will turn it over to Robert Riedl.

[Robert E. Riedl:]

Thanks, Jeff. Looking at performance metrics on the portfolio. Delinquencies at the end of September were about 6.44%, up from a little over 5% in the June quarter and up from 4.64% a year ago. Net losses for the quarter annualized were 4.9%, up a little bit from the June quarter of 4% and up from 3.35% a year ago, the September quarter. On an annualized basis, for the first 9 months, losses were 4.21% compared to 3.47% a year ago. And as we talked a little bit last quarter, we would expect these numbers to increase both on the delinquency side, as well as the net loss side, as kind of the newer vintages, the '12 and '13 vintages, which are larger vintages and have slightly higher loss characteristics, as the credit trends normalize. We talked about how 2010 and 2011 vintages are running at much lower levels that what we underwrote to. So as the '12 and '13 vintages season, we would expect the overall portfolio numbers to increase, which we've been seeing. At the auction for the September quarter, we're at about 45.5% compared to 48.6% in the June quarter and then 47.2% a year ago. Seasonally, we would expect to see a little drop-off here in the third quarter and probably we'll see a little bit more in the fourth quarter and from a bigger picture perspective, as production has ramped up over the last couple of years and more off-lease vehicles are coming to the auctions, we would expect those numbers, probably, to trail down a little bit, over the course of the next 12 to 18 months. On the funding side, Jeff mentioned, we closed our third quarter securitization in September. Looked a lot like our previous deals, rated by Moody's and S&P, 5 tranches, AA, down to B, for a blended cost of about little over 3%. And similar advance rate, 99% effective advance and we had the pre-funding component, that Jeff mentioned, of about $66 million. The cost there is a little bit higher than our second quarter, up from about 2.34%, 75 basis points, 20 of that was from the benchmarks and 55 were in the spreads. Still, we saw good, strong demand for the paper. From a bigger picture perspective, Jeff alluded to this, we're still seeing a very good improvement in our blended funding cost. Those have come down from 6.9% in the first quarter this year, 5.6% in the second quarter and this quarter, we were at 4.9%. So even as our incremental ABS transactions are getting a little more expensive, we would expect to see continued improvement on the blended funding cost, as the older, more expensive ABS deals run off, and as we repay some of the more expensive corporate debt. One other thing, worthy of note, Jeff highlighted the unrestricted cash of about $24 million at the end of the quarter. If we had pledged all our unencumbered receivables, a total liquidity number that we could have had would've been in the mid-50s, approximately $56 million. And that's pretty close to where we were at the second quarter at $60 million and we repaid the $14 million of city residual debt. So liquidity position remains very, very strong. With that, I will turn it back to Brad.

[Charles E. Bradley:]

Thanks, Robert. And sort of looking at operations, right into the list, in marketing, we are, once again, trying to rapidly grow, I guess or I should say, continuing to rapidly grow. If you recall, at the end of the last cycle, we were down about 20 marketing folks, we're now over 100. We had around 125 of them when we were doing about $120 million a month, so our goal is to get back to that number. As I've mentioned in the past, we thought that it would take about 6 months for marketing people to get trained at abilities needed to do pretty well, we think that's more like a year now. So in anticipation of that, we're hiring a little bit sooner, a little more quickly, to get a lot of folks in the field and up to speed so that we can take advantage of their newfound expertise next year and the year after. And so again, starting at 20, a couple of years ago, to getting over 100 today, and on our way to 125 and 130 over the next year or so. Marketing's a very growing spot and we put in a lot of training, a lot of things that have really seem to be paying dividends today. Originations is running about as smoothly as we could expect. A high degree of automation in those processes, allowing our people to be very attentive to the dealers. I think that kind of service is paying significant dividends. A lot of companies that grow real fast, they sort of drop the ball a little bit, in the dealer service aspect, because they're getting a lot of business and they have a little trouble handling it on the front end. With us having on a lot of folks, who are all well-trained and seasoned, we're able to give a lot a very specific dealer service to get them to work into the deals. And I think the dealers appreciate that and I think it gives us a little bit of a boost in terms of how that area performs. So they're way ahead of the curve, as I mentioned before, the company is growing 50% annually, or more, in originations and we're able to handle that without any problems at all. Collections, it's finally a time for our collection department to start growing again. I think, as we mentioned in the past, even though we were growing, the portfolio was running off so quickly, we weren't really in need of any staff and actually were shrinking a little. As of last quarter and continuing now, we're finally, really, starting to grow the collections staff again and hiring on a regular basis. And I think that's good, it allows us to get more people ready to go when we get next year's growth phase. Crash recoveries, the auctions are still strong. Robert pointed out a minute ago, so that's also a good effect. No real problems on any of that. Looking at the earnings, the earnings probably a little bit ahead of schedule I think, we -- as we've also mentioned in the past, the lower cost of funds continues. As much as it is gone up well, it's still substantially lower than we have had in the last cycle. Our margins are much stronger than we might have expected. We have no problems or complaints about that program. The earnings will continue to roll if that all holds true and we expect it to do just that. As I think both Jeff and Robert mentioned, we did pay off the residual last quarter. It was sort of nice, normally when we pay pieces of debt off, we usually go out and get new debt. We're now in a position where we can actually pay a lot of this debt out of cash. The fact that we paid $14 million in debt and still have $56 million, if we want to in cash, puts us in a very strong position. We have the Levine deck coming up next year, but the way things are going, we may not need to do anything, except pay that out of cash as well. So in terms of how everything's working. It's working very ,very well. In some areas exactly the way we expect it to, in some ways much better than expectations. So in looking at the industry, I think the thing we hear about constantly is the competition. As much as I've said numerous times, we don't particularly see it and we view it a little differently. To us, competition is when the big banks were there, forcing costs -- the amount of money we can charge, way down, that isn't the case of this that isn't the case to this cycle. You notice a bunch of little guys, in some ways they think that a lot of the smaller companies that are starting out and wanting to grow, they have lots of growth expectations, they may not have realized that you can only grow from the first 5 months of the year, not that much the rest of the year. So instead they're trying to grow right now, or have been trying to grow in the last 2 quarters, during the summer, that's tough to do and so you may argue it's competition proposition but it's also some of a seasonal business and we think it's much more that than the other. Having said that, our geographic expansion plan has -- continues to work very well. We have been cutting our price, which is what we've always expected to do. We've given away -- our discount is down about 2% and we've maintained our APRs above 20%, which is, for anyone following along, exactly what we've said we were going to do. And with that, discount cutting, we've been able to get the growth just what we want. It's probably been a little bit higher than what we expected and certainly right in line with our expectations. I think the new thing today, in terms of competition with the other lenders is generally miles and terms, all the dealers want more miles in the financing and longer terms of the loans. In the first cycle of the '90s, everybody wants a lower down payment. In the second cycle, it was all about extended term. So I think this cycle it's going to be about miles and term. We're not really a follower along those lines. We do very little in terms of keeping up in the market and in terms of miles and term. But it's something that we pay attention to and it seems to be new quality way everybody seems to be competing. As I said, I think a lot of this is just the smaller companies out there trying to grow. They don't have access to the capital markets, so their cost of funds are higher. Or they grew really fast, their losses are probably a little bit ahead of themselves and that's putting pressure on them to grow or do more things. We're not really in that position at all. We're growing exactly as we want to. We are a lot bigger than a lot of those small guys, we do have very good access to capital markets, so we don't really have any of those issues. And probably most importantly, we haven't told everybody we're going to triple in size over the first 2 years. So that probably is why it's working pretty well for us. We think the rating agencies are doing a really good job in keeping the smaller guys in line and not giving them access to tons of free money until they know what they're doing. That is another barrier that we've mentioned before that works very strongly in our favor as well. In terms of the overall economy. As long as unemployment is going down or staying the same, we really don't care about unemployment. We probably couldn't find anyone saying unemployment is going up. So that's a good sign. Consumer confidence seems to be building. We've seen a lot of things in the last few months where the auto industry is leading the recovery and they're outperforming every other sector of the economy. I think that, obviously, is good, and having said that it's still not doing as well as it did before, but no problem with us, riding along on that curve. So in many ways, we certainly have everything going the right way, in terms of lower cost of funds, good access to capital markets. Competition is there, but it's on a much smaller size, it's not the banks pushing us around like last time. So overall, we think the picture looks pretty good going forward. That's about all I can think of at the moment but I will open it up for questions.

[Operator:]

[Operator Instructions] Our first question is from Kirk Ludtke of CRT Capital.

[Kirk Ludtke:]

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

[Charles E. Bradley:]

Last quarter, probably wasn't that much better, it might have been 2.5% or something in an area of 3. But it hasn't really -- I think we were fairly willing to give it up, to give up the discount over the last year or 2. Now we're done to the -- I think our target is 1 to 1.5, which is what it was on average in the last cycle. So we've been somewhat free in lowering the discount in certain areas to grow. Once we got sort of below 3, we'd slow it down. I think one of the huge drivers to our whole strategy on the discount, was cash. Because in the beginning, we really needed cash to fund the operations and so having a larger discount was very important. As we've all mentioned now 6 times, we have more cash than we know what to do with and so it just isn't so important to the point where we could give it all away if we wanted to. So I think, going forward, we probably, ironically, the discount also sort of folds into this statutory, the regulation or regulatory environment with dealers and so in some level, I'm not sure the discount won't go away completely for everyone down the road. So for us to be a little ahead of the curve and get rid of it sooner than later, as long as it's bringing us a competitive advantage, works out fine. That's probably not a horribly helpful in terms of where we're going to go, but I think you could guess that it could drop in to the one area, at some point after that, it will probably go away entirely.

[Kirk Ludtke:]

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

[Charles E. Bradley:]

Sure. Yes, I didn't really touch on the big guys. It's interesting, as much as there seems to be lots of little guys running around. We really don't see a lot. Occasionally hear about one or another in the regional kind of setting. But the big guys, as I mentioned, most important part is all the banks backed out considerably from our industry of that top end of our industry. So you're left with the Santanders, the Capital Ones of the world, who, when they want to, can be very aggressive. Very nice for us and for whatever reason they have not been all that aggressive lately. And even when they are, it's only for a little while. And so -- and in some ways, if you look at sort of Santander has recently said they want to go up market and do more prime, they have that deal with Chrysler. You have AmeriCredit, used to be the big guy in the street, now busy doing leasing and foreign with GM. And as much as they're still all there and they're all competitive, they are doing some other things and their focus isn't to grow so prime much like ours is, and they have other things to do and we're focused on just growing. So we're all there and they all have their moments when they come in and take some of the business. But the market is very large, and without all those banks, there's plenty of room for them to get bigger without really putting a lot of pressure on us, because we're all trying to fill in the hole. If you take out an HSBC and a Citibank and a bunch of those lenders that don't exist in our market today that were there 5 years ago. You can have a Capital One and a Santander grow quite a bit and doesn't faze any of us littler guys. And it certainly shouldn't faze even the littlest guys. So I think that's probably the fairest estimation I can give you on the large players.

[Kirk Ludtke:]

That's helpful, thanks. And then with respect to a couple of follow-ups. I thought you mentioned that it's taking you longer to train people, this time around, than last. I was curious why that is, if that's true? And then also, I was hoping to get a little color as to where, what the target corporate debt level is and the timing? And then also, if there's a settlement, when do you expect to pay the settlement from last quarter?

[Charles E. Bradley:]

Sure. Let's see, first the training. I wish we had a real good answer for that. We certainly were a little surprised. I think the best estimation I can give is it's a little bit of a complicated process. On the one hand, we sort of figured we can teach a given a marketing person, all the ins and outs of the system and then you can teach them all ins of our , program and we would have thought that would taken them some time and it does. But on top of that, it then takes them a little bit of time just to get to know the dealer base and sort of to figure out how the whole process works together. And so, on the one hand, it might take 6 months to learn the basics of our marketing programs, the programs we sell, not to mention the computer systems and all the things we do internally. And then you can go out there and teach them how to be marketing folks but then they need to blend it all together to have them work in an effective way for them to gain business and that involves getting to know the dealers and, truly, you're not going to be overly successful at day 1, so you're going to have to go back and do it some more. And so we just found it's a little bit a longer process from getting them all geared up, to have them actually run real fast. But as it is, I think that's given us some time to figure out even better ways to train them and they'd be more effective. So they may go faster, but the most recent go around has taken a little bit longer than we might have expected. But I just think there's a lot to do. The good news is, once we get them up and going, they're very, very good at it. So let's see, moving on to the number 2 question, what's corporate debt? Our target is $0. We really have 3 pieces of debt. We sort of look at it these days. One is Levine Capital Partners debt, which is $37 million is due next June. We will pay that off some time before that, maybe a little bit earlier. We have that residual debt, which is $20 million as, I think, Jeff or someone mentioned, that will start getting paid off towards the end of this year. It will run out over the next year or so. And then, we have about $20 million of public notes. That may stay for a while. It seems to be slowly going down, those notes are somewhat subordinated, we've lowered the price and cost of funds for those, essentially the last few months and so if they want to keep renewing, that's just great because it's real subordinated kind of money. But we would expect, over time, that probably being our last piece of debt to run off over the next couple of years. And lastly, for our FTC thing, the government shut down probably didn't help that process too much but we would expect to have that tied up in the next month or 2.

[Operator:]

Our next question is from Kyle Joseph of Stephens.

[Kyle M. Joseph:]

I wanted to touch base on originations. The Q-on-Q originations pacing, the slow down a little bit in the third quarter? I just wanted to get your thoughts. Are you guys still comfortable getting up to that $100 million a month level and was there some seasonality there?

[Charles E. Bradley:]

There's certainly a little seasonality there, as I mentioned. Usually, you grow from late January until sort of end of May and then you sort of try to hang on. And sometimes, you can pick a little growth in September, October and then you drop off a little bit, November, December. So in some ways, it's almost very predictably -- predictable, in a sort of seasonality point of view. Having said that, as long as the economy overall doesn't have some weird thing happen in terms of the government doing this, that and the other thing, we would expect a lot of substantial growth in that first quarter and that will tell the tale on whether we hit the 100-plus kind of monthly origination run rate next year. Where we sit today, given that we were busily hiring and training marketing folks and staffing up originations and collections to handle it, certainly, our projection or our thought is that we will get there.

[Kyle M. Joseph:]

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

[Charles E. Bradley:]

Yes. I think as Robert pointed out, in line with the origination or other thing, in '10, '11 we've started going a little bit. But still, originations are rather low and we were in a position to be very conservative on how we originated and so we originated super good paper. Single-digit kind of losses. And so there's a possibility some folks look to that paper as a baseline, which isn't accurate. Our goal is always to originate 13% to 14% cum loss paper. That's what we did in the past and I think going back to the last cycle, we had 13% to 14% cum loss paper that got hit by a huge recession, went up to 18%, 19%. And so it's a very -- we're certainly familiar with that whole area and so that's where we're targeting. And so we're really seeing is us getting back to that kind of number. 2012 will probably come in almost exactly right around there. I think there was a time where we thought that might do a little bit better but as it seasoned, it picked up a little and so I think our expectations are sort of in that range for that. And maybe not 14%, but somewhere over 13%. And going forward, again, I think everything will be somewhat consistent in that range, which is of course, it's supposed to be. But since we did originate a bunch of paper that was substantially lower, it does make the numbers look like they're going up a bit and they are, but it's not somewhere we're not very comfortable with.

[Kyle M. Joseph:]

Okay. And then, so as the '12s and the '13s to make up a higher percentage of the portfolio, and so we can expect to see delinquencies and potentially charge off start to revert to the main, if you will?

[Charles E. Bradley:]

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

[Kyle M. Joseph:]

Okay. And with that, sounds like you're hiring some more collections employees. To that extent, what sort of impact to that on net charge-offs?

[Charles E. Bradley:]

Well, I think, the charge offs seem to run the way they're supposed to. We have seen a little bit of uptick in the delinquency as we might have expected. We may play around, with different times in the history of the company, we've originated to 400 account loads per collector or 450. And currently, we're running a little higher in 450 and we're going to bring that down. Given us a lot of other issues going on, we think probably 400 is probably a better number and we'll probably target that going forward. And we think that will certainly not -- it certainly can't hurt and it may produce even better results than we might expect.

[Kyle M. Joseph:]

Okay. And then on a cost of funds basis, it looks like it's come down about 70 bps the last 2 quarters, do we start to expect that to level off? I don't want you guys to try and predict interest rates, but do you expect that to start to settle down over time?

[Charles E. Bradley:]

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

[Jeffrey P. Fritz:]

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

[Robert E. Riedl:]

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

[Charles E. Bradley:]

Right. As much as the overall, the easy thing to do because even though the cost of funds have gone up dramatically, I don't know -- 3%. We used to have 5% all day, so we're not overly concerned. And the fact that we do have this old debt rolling off, forcing the overall number to come down, even when that number starts to finally normalize, we're paying off all this expensive corporate debt, which is going to push it down yet again. So at least another couple of years probably, where we really benefit more from just the changing environment we're living in, as opposed to really worrying too much about interest rates. Having said that, we have interest rates stay up better where they are the next 2 years.

[Operator:]

Our next question is from David Scharf of JMP.

[David M. Scharf:]

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

[Charles E. Bradley:]

Excellent question. I think, given the regulatory environment today, I think, we've sort of we have done a lot of training. We now record all the phone calls and we monitor them heavily. And we do a lot more training, and that's slowed down what we'll call the overall collection practices a little bit and around here we refer to it as the kinder, gentler deal. And I think, it has had a little bit of effect in the DQ, it has not showed up in the losses and so take some kind of in general the same effect, we're doing very, very well. Having said that, we're well into the process and have been doing it for over a year, probably puts us in a very good spot going forward in terms of its effect on the rest of the portfolio. But what we have noticed in doing this and as a direct result of some of that stuff that it does slow down the collection process a little bit, which is one of the reasons we are going to drop the account loads. And so, obviously, it's something we look at a whole lot where we're certainly right on top of. But we are all wondering, we have not seen any translations of delinquency at all, so far. And so as much as we sort of expect maybe there might be a little. At the moment, we think between the new processes, the added collections folks and the lower account loads, you may not see any real results, any changes at all, which of course, will be the best result for us. But so far, it all looks pretty good.

[David M. Scharf:]

Got it, got it. And then just lastly, revisiting kind of sales rep productivity and ultimately working your way back up to what had been peak origination levels, the $100 million a month. Can you give us, maybe a rough time frame from when you think you could get to that '07 level again? I mean, based on kind of the hiring, the training schedule, what you're seeing competitively, just trying to get a sense for when we would be seeing that level of volumes.

[Charles E. Bradley:]

Well, I think, we've now been growing at, give or take a 50% annualized growth rate for originations for a couple of years. We hope we'll not continue that forever but I think personally, we're shooting for a 40% to 50% next year. If you pick a base of 70%, which is lower than most of the summer, I can get you to 105%. If you lower that a little bit more and said 25%, 30% of that the following year to gear up to that number. So I think loosely speaking, in a couple of years, it could get us back to where we were. Peak was $125 million. So if you said, if you did 50% on the $70 million, it gets you to $105 million. If you did 40%, it gets you to $100 million. Once you get to $100 million, 30% gets you to $130 million. So you can sort of play around with the math a little bit. But I think what we would anticipate is not to maintain a 50% annualized growth rate in origination volumes year-over-year forever. But we also don't think it will drop to 10% next year, either. So and to be fair, it's tough to tell because I can see it and say well, it looks like it's going to be more like 35% to 40% next year. It could come in at 55%, no problem. So a lot just depends on what's going on a little bit in the economy and people getting out there and consumer confidence and such. So a little bit on competition, if one of those couple of big guys come in, in the first quarter, want to grow real fast and take a lot of business, we'll go down there. But everything kind of rolls along the way it's rolling, our target next year is certainly in the -- obviously, it's easier to get to $100 million and go from there.

[David M. Scharf:]

Good, good. Helpful. Just lastly, Brad, circling going back to the FDC. I'm assuming that your comment that you hope to have things kind of tied up within a month but that's purely on the administrative front, there are no additional changes to any of your practice biz that they're asking for?

[Charles E. Bradley:]

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

[Operator:]

Our next question is from Ryan Zacharia of Jacob Asset Management.

[Ryan Zacharia:]

The first one is, have you noticed any changes in the extension experience in Q3 and even through the first couple of weeks of October?

[Charles E. Bradley:]

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

[Ryan Zacharia:]

And can you help me understand, I guess, a little bit of the denominator effect here? I mean, the portfolio has grown dramatically. And if we think, even on a sequential basis, the portfolio has grown, let's say, 10%. So to my way of thinking, 10% of the receivables are basically 45 days old, on average. So if that's the case, to see delinquencies up so much, even taking into account the fact that there's purposefully looser credit standards now than there were a year ago. And this FTC thing, I'm still a little bit surprised by that. So I mean, is it something that you guys are surprised about or is it -- I mean, explain to me how this is kind of just par for the course, I guess?

[Charles E. Bradley:]

Well, I think it's a combination of both the new regulatory environment and sort of -- and that would be the part where we probably would easily say, we're not exactly sure how the -- our kinder, gentler practice would work. But it has, as delinquency go up, which we might expect, we've seen nothing in the losses which is a little counter-intuitive. But nonetheless, it seems to play that way. Other than that, I think we're in, sort of a response to that, we are, in fact, going to drop the account loads, as I mentioned. We think there's a very decent chance it drops it right back to where it was. It's a little too early to tell right now. The easy answer is, given where our origination levels were in terms of our expected loss cases, it doesn't matter. It's kind of like, if everything was going perfectly, our numbers would've been in the 12 kind of range to extent. We sat there with these DQs and rolled them out in sort of what we call a negative way, you might hit 14. So one is going to be the low end of the range and one is going to be in the high end of the range. Being how it's our range, we're not overly worried about it or care for that matter. But having said that, we're not going to sit there over the window and hope that it takes care of itself. I think that's far -- the easiest way to look at it, if things -- if we drop the account loads, get used to this new sort of kinder, gentler deal, the numbers could drop back down to that 12% side of the loss spectrum. To the extent it's just an easier way to collect and you know a better thing or whatever, maybe we drift to 14, but that's where we're focused on. We're not worried about them going to 17 or 18, that's just not going to happen.

[Ryan Zacharia:]

And the rating agencies haven't expressed any kind of concern or issues? Or are they even embedding it, was it in the 13c deal, that they've asked any questions about it, the rise in early-stage delinquencies, that is?

[Charles E. Bradley:]

No. I mean, I think the backdrop though Ryan is that, when we started, when we came back into the market, they had an expected loss case that was in the high teens, based on the kind of the end of the last cycle. And they kind of slowly brought that down. But certainly, they never got into kind of where our '10, '11 originations are tracking sort of single digits, as Brad mentioned. So they're still right along kind of within the range that we expect. And no, it wasn't a concern of theirs, on the 13c transaction.

[Ryan Zacharia:]

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

[Charles E. Bradley:]

Well, let me, as I said, and in the past, we generally sort of focus on going to find new debt to take off the old debt. We recently got to the point where, if things continue the way they're continuing, we don't need to raise any money going forward. Having said that, our next thing, which is good, I mean, obviously, we think the fact that we're doing very well, both on the cash flow side, we are in fact in good position to retire almost all this debt. Well, we'll give the pieces. We probably have money on hand to retire Levine tomorrow. We -- the residual debt pays off itself and the public notes run off so slowly, and that being about $20 million over time, that it's not hard to argue that you don't need to raise any more money. So some time down the road, however, we're going to start thinking let's go raise a bunch of money for rainy day, if it's cheap. And so, I think the easy way to put is, we don't need to raise any money going forward and shouldn't if we have to. On the other hand, you know the old saying is when you don't need the money, that's when it's the cheapest and to the extent we some real good deal to look at money, then we might just look at it.

[Ryan Zacharia:]

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

[Charles E. Bradley:]

No. Currently, we don't. Now having said that, a moment ago, I said, gee, if we have huge growth. But it depends on that sort of our growth plan or track what you want to call it, we don't need to raise any more money. To the extent we became a favorite whatever in the market, and we'd grow even more, then yes, we'll probably go raise some money. But at the moment, and many of -- that would be sort of the ultimate good problem to have, and you're growing it 50%, 60% annually, and you need more money, in this environment, particularly. But having said that, it's not what we're planning on doing. Right. And then the one final question is just on the operating leverage. You know there's been kind of lumpy progress over the last, call it, 6 or 4 to 6 quarters. I'm just trying to understand, was this quarter kind of the breakout quarter and going forward, we should expect more operating leverage basically every single quarter to the extent that the managed portfolio is growing?

[Charles E. Bradley:]

In theory, sure. Unfortunately, there's not a lot we can do that we might wind up a little bumpy, as you say, occasionally. But we're now really sort of what we'll loosely call hitting our stride, in terms of all the infrastructure we kept before should continue to pay increasing dividends as we go forward. Everything's all set up, it's not like we have to do some massive expansion or something. So we would certainly expect the operating leverage to continue to get better.

[Operator:]

Our next question is from K.C. Ambrecht of Millennium Partners.

[K.C. Ambrecht:]

Two questions, please. First, on the technical, and then a question on earnings. On the technical question, you guys have mentioned the Levine bonds. When do you expect to redeem all those bonds?

[Charles E. Bradley:]

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

[K.C. Ambrecht:]

Okay, but by June, they should be out?

[Charles E. Bradley:]

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

[K.C. Ambrecht:]

Could be earlier than that?

[Charles E. Bradley:]

Sure. Could be tomorrow, but probably not.

[K.C. Ambrecht:]

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

[Charles E. Bradley:]

I don't know. They're planning on selling their stock. Yes, they've done very well. They've been a loyal and terrific partner to us over the years. And I think, much like, I guess, I would, it's time to liquidate some of their investments. They have huge faith and belief in the company. But my guess is that over time they would continue to liquidate some of their stock. It's hard to say over what period of time, but I think it's a good thing for the market. If they weren't selling all those stocks, then all those people buying it at 5, 6 and 7 wouldn't be getting all that benefit from it. So it certainly works both ways, good for them, good for us.

[K.C. Ambrecht:]

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

[Charles E. Bradley:]

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

[K.C. Ambrecht:]

Yes, okay. And then, just a question on EPS. It looks like you guys are tracking like a $0.03 to $0.04 quarterly EPS improvement every quarter. As we thought, a year ago, I think on one of the conference calls, it looks like you guys are going to be on that run rate for $1 by 4Q '13. Should we kind of continue to expect that kind of quarterly sequential EPS improvement into '14?

[Charles E. Bradley:]

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

[K.C. Ambrecht:]

Okay. Well, if you do, do $0.04 improvement a quarter, that kind of gets you around $0.40-ish by 4Q '14. And the only reason I bring that up, if you begin annualizing that, there's a lot of specialty finance companies out there who are trading 10x or 11x. If you're doing $0.40, they can put you right around $1.50 or 4.5x earnings right now. So I just want to see if something that we're missing something.

[Charles E. Bradley:]

No. My technical view of that is sort of like the Field of Dreams. "If you build it, they'll come." So I wasn't really following what you said, but we're just going to build and see what happens.

[Operator:]

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

[Charles E. Bradley:]

Again, I think we had a nice quarter. It worked out really well. Everything is going the way it's supposed to. We've been doing it a long time so we're very happy to be growing again and then kind of delivering what we've always said we can do. We're very appreciative for all the people that have hung in there. We're very appreciative for all the people on the call today and following along. And we will continue to strive to do to bigger and better things. So thank you, all.

[Operator:]

Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until 10/25/2013, 11