Consumer Portfolio Services' (CPSS) CEO Charles Bradley on Q2 2014 Results - Earnings Call Transcript

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Consumer Portfolio Services (NASDAQ:CPSS)

Q2 2014 Earnings Call

July 22, 2014 1:00 pm ET


Charles E. Bradley - Chairman, Chief Executive Officer and President

Jeffrey P. Fritz - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


John Hecht

David M. Scharf - JMP Securities LLC, Research Division

Kirk Ludtke - CRT Capital Group LLC, Research Division

Jason Stewart - Compass Point Research & Trading, LLC, Research Division


Good day, everyone, and welcome to the Consumer Portfolio Services 2014 Second Quarter Operating Results Conference Call. Today's call is being recorded.

Before we begin, management has asked me to inform you that this conference call maybe 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 can cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarification. The company assumes no obligation to update publicly any forward looking statements, whether as a result of new information, future events or otherwise.

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

Charles E. Bradley

Thank you, and welcome, everyone, to our second quarter conference call. I think to sum up the quarter, it really was about as expected for us. We sort of hit the numbers we thought we would in terms of the overall numbers. In terms of, sort of, the front end originations part, the quarter started a little bit slow but it has picked up somewhat more in the middle and we're having a -- we had a very good end to the quarter.

So it was a little interesting that normally, it goes a little bit the other way around. It's strong in the beginning and then slows down, but either way, it's worked out fine.

A couple of other highlights. As we pointed out in the press release, we did our -- we've got back to a AAA-rated securitization, which is one of our goals. That was very important to us. It also does wonders for the cost of funds. And a note on the securitization, not only did we get to AAA, but it was very well-received in the marketplace. Demand was 8x, and we ended up with a price of 2.37% for the average cost. Again, very low and well below even our expectations in terms of what the pricing on that deal would be.

Finally, we did, in fact, finally settle the FTC matter and we're now in the process of putting the monitoring stuff in place. So all that is going very smoothly I think, at this point, it's much more in the rear view mirror rather than in front of us. And as I mentioned a little bit in the previous conference call, we learned a few lessons with that. We have done a few things, we changed a few things. But overall, the whole thing has worked out rather well and we're glad to have it done and sort of moving on.

In terms of operations, from the marketing end, we, as I've also mentioned in previous calls, our big -- we had sort of a very steady and good structure in both the originations part of the business and the collections part of the business and the asset recovery part of the business. Marketing was -- is something we probably sort of left to its own devices a little bit in terms of how it was structured. And I think I've mentioned we've been focused on it a lot over the last 6 to 9 months. And at this point, we have right around 120 marketing reps, we've done a lot in terms of putting training programs in place and putting more management -- middle management structure in place. And I think we're beginning to see, sort of, all that come to fruition in that we're developing a very strong marketing force.

And again, as Summer's a slow time, so that will really begin to show next year, when we get into that first few months or the first 6 months of the year, which is really the growth cycle in our business. And so we're sort of pleased with the way that seems to be shaping up. There is more things to do there, but I think in, over the next 6 months or the rest of the year, we'll have that all in place.

Originations continue to run very easily. They have no problem keeping up with the growth. We've been able to fine-tune that some more. It works hand-in-hand with marketing to get the best possible deals for our dealers and the best possible deals for the company. And so that's working very well.

Collections is another area we've had a lot of focus on as a result of the FTC matters, including changing our collection practices somewhat. A lot of this was done at the branch level. And that has taken some time. It's been almost exactly a year since we implemented a bunch of those changes. And it has probably took a little bit longer to see some of the results that we had hoped for, but we're beginning to really see some good results from all the different branches that the collection practices changes affected. And so I think probably over the rest of this year, we'll sort of fine-tune all that. But again, by the end of this year, we should be well-positioned in terms of how we do our collections at all the different branches and really probably improve that across-the-board at that point.

So overall, in terms of the operations of the company in the second quarter, on the one hand, it was sort of steady as you go, business as usual. On the other hand, we've continued to do the groundwork and the legwork to set up the company for future success.

With that, I'll turn it over to Jeff Fritz to talk about the financials.

Jeffrey P. Fritz

Thanks, Brad. Welcome, everybody. We'll begin with the revenues. And first, as a clarifying note, you might recall last year in the second quarter, we've recorded a gain of $10.9 million, resulting from the cancellation of the -- certain debt associated with a legacy securitization that we cleaned up that quarter. So as I go through these comparisons on the revenue, I'm going to omit that gain from last year's numbers because it makes these comparisons a little more meaningful, I think.

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

For the 6-month period, revenues were $139.7 million, and that's a 22% increase over the 6-month period last year of $114.2 million, again, without the gain.

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

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

So expenses for this quarter, $59.3 million, that's up about 5% from $56.4 million for the March quarter this year, and up about 13% from $52.3 million for the second quarter last year, again without that contingent liability expense.

For the 6-month period, expenses were $115.6 million, and that's up about 15% for the 6-month period last year, where those expenses were $100.4 million without that contingent liability.

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

And you might recall that in the last data, first quarter this year, we paid down $38 million of our senior secured subordinated debt, which was some of the most expensive debt we had on the balance sheet. And so we actually had an 11% decrease in interest expense quarter-to-quarter and an 18% decrease in interest expense compared to a year ago. And a big part of that is that paydown of the senior secured debt, part of it also is the continued improvement in the ABS transaction's blended cost, which we're going to talk about a little bit more in a minute.

Of course, another big expense category provision for loan losses, $25.6 million this quarter, that's up 7% from $23.9 million in the March quarter, up 47% from $17.4 million a year ago.

And for the 6-month period, provision for loan loss is $49.5 million, a 52% increase compared to $32.5 million a year ago. Again, it is going to track right along with the growth of the portfolio, the increase in originations, 30% increase in the portfolio. And also, the portfolio is somewhat seasoned and I think a little bit older on a blended weighted age with each month -- as each month goes by. And so just the way our provisioning methodology works, those provision expenses are going to increase with each quarter.

Our pretax earnings is $12.3 million for the quarter, that's a 4% increase over $11.8 million in the March quarter, and a 45% increase over $8.5 million a year ago.

And for the 6 months, pretax earnings was $24.1 million, 60% increase over the first 6 months last year.

Net income was $7 million for the quarter, that's a 4% increase compared to $6.7 million for the March quarter, and a 46% increase compared to $4.8 million for the second quarter last year.

And on a year-to-date basis, the net income, $13.7 million, that is a 59% increase over $8.6 million for the 6 months last year -- the first 6 months of last year.

Diluted earnings per share, $0.22 for the quarter. That's up $0.01 or 5% from the March quarter, and up 47% from $0.15 for the second quarter last year.

And on a year-to-date basis now, we're up to $0.43 for this 6 months, and that's a 59% increase over $0.27 for the first 6 months of last year.

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

Our finance receivable portfolio continues to grow. After -- net of the allowance for loan losses, we're up to $1.3 billion, that's a 7% increase over the March quarter and a 34% increase compared to a year ago.

I think I mentioned we did originate $211.4 million in the second quarter. Fireside portfolio. Really nothing noteworthy there. That continues to wind down.

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

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

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

On a year-to-date basis, the NIM was $114 million, that's a 38% increase over the first 6 months of last year. A significant component of this NIM, of course, and an improvement in the NIM, is the paydown of that expensive senior secured debt, which took place at the end of last quarter. In fact, the sequential improvement in the NIM, I think I just mentioned it was 9% quarter-to-quarter this quarter. Last quarter, our NIM improved 3% over the December quarter. So you get a kind of feel as to how important that de-leveraging is to the performance of the company.

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

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

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

Looking at those numbers as a percentage of the average managed portfolio, 6.5% for the quarter, that's actually up about 8% from the March quarter but down compared to 7.9% for the second quarter last year.

On an annualized basis, the core operating expenses were 6.2% of the managed portfolio for the 6-month period, and that is an improvement of 17% over that ratio for the 6 months -- first 6 months of last year.

And so generally, although we reversed the trend a little bit this quarter, but generally, we're seeing -- and certainly on a year-over-year basis, a steady improvement in the operating leverage or the costs, for the most part, operating costs are not increasing as rapidly as the portfolio is increasing.

And a very important metric, return on managed assets, our pretax income as a percentage of our average managed portfolio was 3.7% for the quarter, that's flat compared to the March quarter, and an improvement of about 1% compared to 3.3% last year in the second quarter. And on a year-to-date basis, that ratio was also 3.7%, but a larger improvement, 12%, compared to 3.1% for that metric in the first 6 months of 2013.

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

Net annualized losses for the quarter were about 5% compared to 5.5% in the March quarter and 4% for the second quarter last year. The annualized -- or the 6-month annualized net losses, 5.25% for the first 6 months, that's up, of course, from 4.1% for the first 6 months of last year.

So generally, what we're seeing, although we had a little improvement in the loss ratio for the quarter but generally, we're seeing, and maybe expect to see, slightly increasing credit performance metrics as the portfolio ages a little bit. And we're certainly seeing and recognize that the larger portfolios of '13 -- 2013 vintages are having higher credit losses than those 2012 and 2011 vintages that came before them, which were also smaller in size.

We had a really good quarter at the auction. Liquidation percentages on our vehicles at the auction was 49.2%, which is an improvement compared to 48% for the March quarter and about, again, 49% a year ago.

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

Just a quick look, I know we talked about it a little bit. The asset-backed market continues to sizzle. We pre-marketed our 2014-B deal in the third week of June or so. And we were really pleased with the enthusiastic response from the investors, the pool of investors that buy these bonds. There's nothing really unusual about this structure. It's typical of our last, probably, 4 or so deals. Sequential pay, 5 tranches. The landmark here for us is that the most senior class earned a AAA rating from the rating agency DBRS. And then, of course, those subsequent tranches or subordinate tranches go all the way down to a B rating, as they've done before.

But that AAA rating brought in some new investors, who only buy AAA-rated securities. And that helped -- that response, together with the higher rating, helped to put blended cost down to 2.37%, which I think is 3 quarters in a row now of improved blended cost on our ABS deal. So really pleased to see that. It obviously has a major impact on the company's results and interest expense. And I don't know what to predict for the future, but the ABS market continues to be very strong, lots of traffic, lots of investors. And we look forward to taking advantage of that.

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

Charles E. Bradley

Thank you, Jeff. In terms of the industry, I think on the one hand, we certainly are very happy where we sit within the industry. I think looking at sort of the competitive environment, a lot of folks say how competitive it is. I think, sort of, from our opinion, it would appear that a lot of the sort of the competition has eased a bit. Now whether everybody's just taking a step back for a variety of reasons, it's a little hard to tell. I mean, on the one hand, we can say we think that the competitive environment eased some. We really have a few ideas on why, but we're not having anything definitive to point out.

On the one hand, we think there was a few companies out there, particularly large ones, maybe growing on purpose, maybe before an IPO or something. And so maybe they've slowed down. Some of the larger guys probably have slowed down. But if you look at sort of in the 3 segments, at the very top or the really big players, no one appears to be being overly aggressive in trying to seize market share.

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

So if you look at it on the whole, what you really have is it's not like everybody's backing up like crazy, but it's really nobody's particularly pushing forward. And that has given us a little bit of a growth spurt in the middle of summer when we would never really have one at all. And so again, we're not making huge predictions. But it is interesting that people, overall, have appeared to at least slowed down or aren't pushing aggressively forward.

I think the other thing to sort of mention, there has been obviously a few articles out, including the one last Sunday in The Sunday Times, that sort of commented on the industry overall and so I think it's probably worth us commenting as well.

On the one hand, and the Times article basically said, "Gee, this industry has grown, whatever, it was 140% since -- it's grown way too fast." But if you actually looked at the numbers, at this point, the auto industry is now almost back to where it was in '07. It's not like the industry is growing out of control or anything like that, which they sort of tried to imply, much like the mortgage mess. They were nice enough to point out that the auto industry is, as wonderful as it may be, isn't probably 1/100th the size of the mortgage deal. So it would be very hard to even associate the 2.

So on one hand, we're way smaller. On the other hand, we've only really gotten back as an industry to where we were in sort of '06, '07. So it's not like the things are growing like crazy. We're just recovering, like most any other industry. The fact that the mortgage industry is sort of on its back a bit and there's a lot more spotlight on auto because it is a large industry, I think that's really the way to look at it. It is a large industry, it is a place where a lot of Wall Street money is going to find a home. And in fact, that is maybe -- as everyone has watched over the last 2 years, has caused our industry to recover faster than many.

But that's really all it is. It isn't like the things are going crazy, so that's one point. On another point, I think there are some articles out there that sort of said, "Bad times are ahead." But same old game, it's like, okay, we're clearly in an environment with one of the lowest interest rate environments we've seen in decades, if not longer. As Jeff pointed out, the recoveries at the auction are the highest they've been in years. The used car market is as strong as it's been in years. New car sales are doing great. And so and so forth.

So gee, if everything is going great, it's very easy to say it's going to get worse because, sure, one of those elements eventually is not going to be as good as it was. So the more important way to look at it, it's very easy to say doom and gloom, that people's delinquencies are rising, the losses are going up. But again, if you look a little more closely, what you really have is everybody came out of the recession being very conservative, and us in particular.

And so in some ways, what you're really seeing is a more normalization of what the numbers should be. Now the fact that it's going up, that's fine. But everybody is buying very conservatively and they're beginning to buy more normally, then of course, they're going to go up.

So again, and that sort of does typify what we've been doing because when we bought paper in '10 and '11, that paper was very conservative. We didn't buy very much, we bought it very carefully. And so as that runs off, our normal -- we're going back to normalized annualized loss rates and things like that.

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

But I think as I've mentioned in previous phone calls -- or conference calls, this is sort of the third cycle for CPS, and if you go back to the second cycle, it was dominated by large banks. And those large banks were able to compete very aggressively on price, caused a lot of independent players to really work hard and cut price and maybe buy more aggressively. Now that -- and that was the cycle going into the last recession. And all of those companies did just fine. We all went through it. I don't think anyone really particularly went out of business for credit reasons. A couple of people went out of business because they ran out of funding. That's a very distinct difference.

But if you go back to the cycle before that, which was sort of an auto finance industry problem, where you had a lot of new companies growing very fast and then a lot of them did go out of business and then to be replaced in the second cycle by the banks.

So our third cycle looks an awful lot like the first cycle. The banks aren't real players. There's a few big banks that have been there all along, Capital One, Wells Fargo and such, Chase Custom. But what you're really seeing is a lot of new guys coming in and a few mid-level guys pushing hard. But one thing we've pointed out before, and most people in the industry know, is almost all of the companies today are being run by people who have been in the industry for 25 years, as opposed to the first cycle, where a bunch of the companies are run by people who have been in the industry for 5 minutes.

And so as much as you will have a few companies that don't do it particularly right, and a few of them fall on their face for a variety of different reasons, by and large, the industry as a whole should do just fine. It's run by better people. There isn't any bank pressure this time. And so you're going to have a few fall out, much like in the first cycle, but in terms of seeing this industry fall apart in any grand scale, it's sort of hard to figure out why people would think that. It's run by more seasoned executives. There is no pricing pressure from banks. And in fact, we are sitting in one of the most favorable environments we possibly could be in. So again, it's worth -- seeing those articles, it's interesting if you can sort of dive a little deeper to see what's really behind them.

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

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

In terms of the overall economy, which is something we spend a lot of time on, this is about as blue skies as you're going to get. Real low rates, a modestly growing economy but still growing, which happens to be the perfect environment for us in sub-prime auto because with the slow growth environment, economically, it keeps those rates down, yet people still want to buy cars and replace their old vehicles and same old thing, the vehicles are the oldest they've been in a long, long time. And so it's a real good setup in terms of companies like ourselves in this environment, both within our industry and within the overall economy.

We can't look too far in the future, but we certainly think the next 6 to 12 months are pretty good. Certainly, it's hard to find somebody who think rates are going up. You never can be sure and now it gets to the end of this long talk, which is, as much as everything is going great, we got hit -- we got caught looking a little bit the other way when the recession showed up last time. So that's something we won't do this time. So we plan for the recession as if it's coming very soon, just so we're prepared. But even so, it's hard to think that the next 6 to 12 months won't be quite good.

With that, we'll open it up for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from John Hecht of Jefferies.

John Hecht

First question, I guess, is just a bit of an accounting one. Just looking at the shareholders' equity account have dropped in an otherwise pretty good quarter. Was there something through the OCI or something that we should be aware of that accounts for that?

Jeffrey P. Fritz

Are you referring to the dollars or the...?

John Hecht

Yes, the dollar equity account went from $123 million to $111 million.

Jeffrey P. Fritz

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

John Hecht

Okay. And then, regarding getting the AAA rating on the recent securitization and 2.37% all-in cost of financing, just to give us a sense of what kind of interest expense that might save, maybe can you characterize what the ABS that are running off now, maybe the ABS you put in place 1 to 2 years ago? What was the all-in cost of those?

Jeffrey P. Fritz

I think if you go back a year ago, we were probably doing in the high 2s and low 3s of the new transactions. And that was trending -- that was also trending down. I mean, if you go way back into the 2011 vintages, I think the blended cost in those deals were at a 4 handle. So we've kind of had that kind of steady improvement all along. I think the only time we kind of went backwards is in the September transaction of last year, was I think our first increase in the blended cost in probably 6 or 7 quarters. So you've had that kind of steady generally decrease except for that third quarter of last year.

John Hecht

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

Charles E. Bradley

One of the things we looked at, we actually cut pricing a little bit to see if we could buy sort of a little bit different part of the portfolio spectrum. And we were somewhat very surprised to see how receptive the market was to a price cut. And you would've thought, with a lot of competition, that any price cut at all would really not get you much, and we -- it got us a lot. And so that was sort of an interesting indication that the market is there if you want it. So we're thinking about what we might want to do because, obviously, we're not really wanting to compete on credit and we have lots of room on price. And so we've been running with a 20 APR for a long time. We would expect probably to bring that down into the 19-ish -- low 19s at some point over the next, probably, 6 to 12 months.

Jeffrey P. Fritz

John, I was just looking at a couple of notes here. And I think our shareholders' equity went up in the consecutive quarters. It was $103 million at the end of March and went up to $111.7 million at the end of June. So I don't think...

John Hecht

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

Jeffrey P. Fritz

There you go.


Our next question comes from David Scharf of JMP Securities.

David M. Scharf - JMP Securities LLC, Research Division

Brad, I want to just follow up on your comments on the marketing side and the 120 reps. You've talked kind of over the past year of ultimately kind of working your way back up to about $1 billion of annual origination volume. I mean, given the bodies you have in place and your assessment of the competitive environment, is that a realistic target for next year? I don't want to pin you down on guidance, but trying to get a sense for, ultimately, where those bodies could ramp to once they become productive?

Charles E. Bradley

That's a fair question. I think an easy way to look at it is, when we were doing about $120 million per month, we had around 120 reps, maybe we had as many as 130, somewhere in the neighborhood. And so I think we've now got the 120, so I think my expectation or hope would be to get up to that at least $100 million kind of number. Given the competitive environment, or lack thereof, will sort of determine how fast that happens. But I think on the one hand, I don't mind sticking my neck out a little bit. I mean, I would hope -- our goal is not even that. I mean, our goal is to get to that $100 million per month level next year. Now whether we get there or not is a little up in the air. But certainly, we think we're well-equipped in both -- the origination staffing is there for that. Now the marketing staffing is there for that. So the only problem is whether the market will play along. And recent signals may, as I sort of mentioned or alluded to, might -- if I ever had to -- if I had to flip a coin, I'd be flipping it -- I'd be betting on -- a little on the positive side that we'd hit that number. But things change somewhat rapidly, so it's hard to say.

David M. Scharf - JMP Securities LLC, Research Division

Got it, got it. In reflecting on the competitive environment, I know you just talked a little bit about some of the price moves in the quarter. I mean, given that summer is a slow time and maybe some people naturally are backing off, I mean, did you have a sense if the competitive environment, particularly from the large guys has, in fact, eased? Or was it just maybe the kind of the impact of some cuts with the dealers during what's typically a slow period of the year?

Charles E. Bradley

I would -- again, it's tough to crystal ball it, but I would -- I still kind of think that the big guys have probably eased some. I think -- it's a little hard to say. Santander is a big player in the industry. They've recently had this sort of federal banking issue come up, and so it's hard to say what they're doing. But the way -- truly, the way we see it is what we're hearing in the marketplace. And what we currently see is the big guys, in particular, aren't being overly aggressive, whether that's Wells easing back or Santander easing back or Capital One, it's a little hard to say. But it's almost easier to say that none of those 3, which I generally throw in Chase Custom, none of those 4 are being overly aggressive. Now to say they're all backing off, I probably wouldn't say that. But it's easy to say none of the 4 are pushing hard. GM Financial came back and seemed to be making a little bit of an aggressive move 1 quarter or so ago but that doesn't seem to be overly apparent, either. So if you call it the Big 5 or whatever you want to call it -- and that pretty much sums up the top end of our industry. I'd safely say none of them are being overly aggressive. Probably, I'd put more emphasis that they're all sort of coasting or whatever, maybe some have pulled back. But again, it's a little hard to tell because if 2 pull back and 2 are holding even and 2 are modestly aggressive, and you're sitting still, so...

David M. Scharf - JMP Securities LLC, Research Division

Got it. No, that's helpful. And thinking about pricing, I know the average yield on the portfolio was still a shade above 20%. But in terms of the 2014 vintages, are the APRs on those loans below 20% now? I mean, I know you've talked about dipping below 20% for the last couple of quarters.

Charles E. Bradley

I would think the 2014 vintages will be below 20% in terms of the -- they'll have a 19 handle.

David M. Scharf - JMP Securities LLC, Research Division

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

Jeffrey P. Fritz

Yes, I think I'll get back to you on that, David. I just looked through the math, or look at our sheet, but we can talk later and I'll give you that number.


Our next question comes from Kirk Ludtke of CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

More strategically for a second. When you think about where the auto finance, particularly the sub-prime auto finance market is today relative to where it was precrisis, do you -- does it matter how many consumers are sub-prime today versus how many consumers were sub-prime precrisis? I'm guessing that there are more people that are sub-prime today in your market, is therefore -- the addressable market is therefore bigger. But I -- do you agree with that or?

Charles E. Bradley

Yes. Actually, that's an interesting question. On the one hand, a statement we've probably made many times, our industry is so large that the pure size of it at $80 billion or whatever it is per year. It lends itself to having enough room for just about anybody and everybody. However, I think you're absolutely correct. I think given a couple of things, since the last recession, everyone is far more credit driven. And it's not so much -- shockingly, it isn't so much that they are trying to look at credit to how they buy, they're looking at credit to try and know what they're buying, if that makes sense. And so to the extent that the recession has put a far larger class of consumers sort of in that sub-prime category, I think that's probably a fair statement. I think interestingly enough, I don't think that's particularly causing lenders to shy away from the sector. I think if anything, it wants -- it encourages them to get more into it because now it's even bigger than it was before and it was very large to begin with. And so as much as, again, and I said this a few phone -- a few conference calls before, that we weren't really seeing that much competition, and more recently I said we finally have. But again, I think that the universe of sub-prime customers has expanded greatly over, certainly, since the last recession. And through credit -- better credit reporting, it's continued to expand over the last decade. And so I think one interesting thing is everyone today is so much more, at least, trying to establish the credit criteria of their customers than -- and even, I would make one more point, I guess, if you look at the way the mortgage thing went, back when the sub-prime mortgage or the mortgage mess or whatever you want to call it, basically caused the last recession, it wasn't -- everybody blamed it on sub-prime. But it wasn't the sub-prime mortgages that all fell apart. They weren't very good, but that's not the cause of the huge problem. The huge problem was caused by everybody saying they are buying nonprime and saying, "Okay, these guys are a significant cut above sub-prime, so we won't charge them as much." But when those losses came through, it blew that part of the market out way worse than the lower part. And so I think people are far more interested in sort of correctly sizing where the credit person should be. We are not much to differentiate between nonprime and sub-prime, but I think a lot of the world now looks at that a lot more closely, and nonprime is probably given a far wider berth than it used to be, based on the residential mortgage problems. So yes, so I think not only is the -- is it sort of by virtue of better credit reporting and the sub-prime borrower market expanding over the last decade, I think the way lenders look at it now is probably further expanded it. So it's a nice healthy place to be.

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

Charles E. Bradley

Well, we started this quarter. And I think in all honesty, we were somewhat surprised at how effective it was. And I think as I've mentioned before, we've tried a few years ago -- certainly, we tried very hard to keep our APR and discounts up to generate cash. And as I also mentioned, that worked very effectively. So we're now in the position, where we're toying around with it. If we lower the APR, how much business are we really going to get? We were a little surprised in our first foray that we picked up so much. So I think you can expect to see that trending down. I think our goal, certainly, is to keep it above 19. But we're not too worried if it gets into the low 19s, almost soon.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay, that's helpful. And the cumulative loss rates, you're still targeting about 14?

Charles E. Bradley

Yes, I think 14 -- I think we might have mentioned that given that we had to, sort of, move around the collections policies and procedures a little bit, we might have a pool or 2 that ticks over that, just because it's sort of in the middle. If it got caught right in the middle of a change in the policies, it might not perform quite as well as it should. But even so, 14 is the target.

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

Charles E. Bradley

Well, what we've done is sort of -- I guess an easier way to look at those notes is, on one hand, they're practically equity debt. And so we're not -- we're certainly not aggressively -- we used to put that money out or at least advertise that money at about 10% or more. Today, we advertised it at 3%. So you can well imagine there isn't a lot of people running for that money like they were before. So its natural run-off has been something close to $1 million a month. There's currently, I think, $18 million on the balance sheet. So it may not run off entirely, but I think by the next 18 months, you could say it will be gone. So on the one hand, we're not actively trying to get rid of it. On the other hand, we're not trying to grow it one bit. How long it takes to run off will depend on whether people want to renew at those lower levels.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Got it. And the residual interest financing, that will run off by...?

Charles E. Bradley

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

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. So the recourse debt will pretty much be gone?

Charles E. Bradley

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

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

Charles E. Bradley

Well, I think we'll probably keep it about where it is today. I think a lot of it will depend on how much we grow down the road. If we can get to $90 million, $100 million in the beginning of next year, we would probably access a little more. But I think this steady state is probably a fair statement.

Jeffrey P. Fritz

There are requirements -- there are certain required usage parameters to those deals. And so we keep that in mind as we are drawing and pledging receivables. So I think what Brad said is true. We'll probably maintain about the same level of usage that you've seen over the last couple of quarters.

Kirk Ludtke - CRT Capital Group LLC, Research Division

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

Charles E. Bradley

You might be the first person who has asked us about a dividend. That's a great question, though. I think, as I sort of mentioned all along, we're probably in the "build cash for a recession" kind of mode. And so we would target a fairly large number of cash on the balance sheet before we would think about what to do next. So I think one could fairly estimate we would continue to build cash over the next 18 months.


[Operator Instructions] Our next question comes from Jason Stewart of Compass Point.

Jason Stewart - Compass Point Research & Trading, LLC, Research Division

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

Charles E. Bradley

Shockingly, I didn't mention that, but I should have. So that's a good question. I think the CFPB is certainly something everyone is really looking at, including us. We spent a lot of time -- on the one hand, it's a little hard to figure out how you're supposed to be working with the CFPB because in some level, putting it loosely, they want us to help monitor the dealers. And again, if you read the lovely New York Times article, it certainly sounds like it's hard, objectively, to think the dealers aren't sort of causing their own problems. But having said that, I think all the lenders are certainly trying to pay attention and do -- including us, what we can do to keep in line with the CFPB, unfortunately, not knowing exactly what they want to require from us. And I would think we've already been through almost a very similar situation with the FTC. So maybe we have a little more experience. And certainly, we have a big head start in terms of compliance factors along those lines. So it may not be as big an issue for us and probably one of these I might have mentioned prominently. But I think you're absolutely right. I think with lots of our competitors who -- we know certainly a bunch who are probably talking to the CFPB today or now. So it probably is a significant factor.

Jason Stewart - Compass Point Research & Trading, LLC, Research Division

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

Charles E. Bradley

I can only think that it would be positive. I mean, I think the more you work with the dealers, because of the exception, CFPB can't go directly to the dealers and so they're trying to do it through lenders. And I think any easing on that would work. And there is recently a ruling that I think did benefit us. But it's so hard to decide where you sit in all this. I mean, much like many other things and certainly the way we look at it, we're going to read everything the CFPB puts out, we're going to comply with it as much as we possibly can. But like you said, we think we sit in a pretty strong position to begin with. So it shouldn't really affect us the way it might affect others.


At this time, I'm showing no further questions. I'd like to turn the floor back over to our speaker, Mr. Charles Bradley, for any additional or closing comments.

Charles E. Bradley

So like I said, second quarter went very well for us. It's kind of where we are following our script and we're getting to where we want to go. We -- interestingly enough, I think we set our plan, whether it's a 2- or 3-year plan or whatever you want to call it, and we've been pretty good sticking to that plan. And much like anything else, it's interesting to see how the environment around you affects that's plan. And it's easy to say that over the last 2 years or so, the environment has been very helpful in our plan. And it's made it far more successful than we would've thought. So we will likely continue to ride that wave, as you may say. And -- but for the most part, we're going to run our business the way we think is the appropriate way to do it and take advantage of the opportunities presented by the environment and then, see where we go. So it's certainly -- we certainly -- we're doing what we're supposed to be doing. We're sitting on a very and probably the most excellent auto finance environments. We like the economic environment. So we're obviously very positive on -- we're very positive on how the second quarter came out, we are very positive on the future. So thank you, all, for attending the call and we'll speak to you next quarter.


Thank you. This does conclude today's teleconference. A replay will be available beginning 2 hours from now until July 29, 2014, at 11:59 p.m. by dialing (855) 859-2056 or (404) 537-3406, with conference ID 76956813. A broadcast of the conference call will be available live and for 90 days after the call via the company's website at Please disconnect your lines at this time and have a wonderful day.

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