Consumer Portfolio Services Inc (CPSS) 2006 Q4 法說會逐字稿

Good day everyone and welcome to the Consumer Portfolio Services Fourth Quarter and Full-Year 2006 Earnings Release Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties 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.

I will now turn the call over to your host Charles E. Bradley, Chief Executive Officer of Consumer Portfolio Services. Sir, you may begin your conference.

Thank you. Thank you all for joining us on this call today. I think first in addressing, this is obviously both the quarter call results and the year. In addressing both of those, we are very pleased with how the quarter turned out and we are exceptionally pleased with how the year turned out. I think for all the people that have been following the Company for the last few years, certainly several years ago, we said, "Well, we are rebuilding. We are trying to keep the infrastructure in place and refining it, so that when we start having results, they will all come the way we want them to." Now, it's nice to say we said it a little bit last year, so this may sound somewhat repetitive. But in fact, everything we worked so hard at doing three or four years ago is now really showing the results we had expected and we are very pleased to see that those plans are in fact coming to fruition.

Both last year and in '05, when we made $3.5 million or so, and this year when we are making $13 million, we are now starting to see the results of what we would certainly consider hard work and a few years before that. The platform we built, the infrastructure, the systems, all of that is really starting to pay the dividends we wanted to or expected it to. And so, from a management's point of view, sitting here today, it's great to really be able to see that '06 came out the way we expected and we can only hope the rest of these years coming forward will do the same.

The quarter was what we would expected. Fourth quarter is usually seasonally a little bit off, both in terms of performance, in terms of originations. So, as much as the third quarter was very strong, the fourth quarter certainly wasn't disappointing but it's about exactly what we had expected for that quarter. In terms of the year, as I said, this is about exactly what we had hoped for. Probably, even a little better. So, in terms of the overall performance, it's been better; in terms of the actual results, also better. At this point, let's walk through some of the numbers.

In terms of the revenue, the revenue for the quarter was $79.9 million. That compares favorably, and what's nice to say is almost all of these numbers are going to compare favorably to the previous quarter and the year-over-year. But the $79.9 compares to $73.7 for the consecutive previous quarter and $54.7 year-over-year. Year-to-date was $278.9 compared to $193.7 year-over-year. We are seeing that significant revenue growth we had wanted. Year-over-year is what, 47% or something. That's the kind of growth we had hoped for. It's nice that we have been able to achieve it. In terms of the expenses for the quarter, it was $75.4 million compared to the previous consecutive quarter of $69.4 and the year-over-year of $53. Expenses for the year, $265.7 million compared to $190.3 last year. What we obviously have done is we have grown revenues and kept expenses in line to achieve the better results. The loss provision for the quarter was $26.7 million compared to $24 for the previous quarter and $15.6 year-over-year. Annually, its $92.1 for the year compared to $59 million last year.

The pretax income for the quarter, $4.5 million compared to $4.3 previous quarter, $1.7 year-over-year. And for the year, $13.2 compared to $3.4 in the previous year, which alludes to the numbers I mentioned earlier. Going from $3.4 to the $13.2, now that's the kind of jump we are looking for. Probably the kind of jump some people had hoped for a couple of years ago, but again the patience in building our structure is starting to really pay off.

And of course, we had the tax push through this year, which made the net income $30.9 for the year and $39.6 year-to-date. Remember, you have to take out the $26.4 million of the tax benefit. And we have mentioned this previously, at some point, when we bought Mercury and TFC, we acquired some NOLs. We created a few of our own NOLs. And altogether, we had a very large tax provision on the balance sheet that at some point was going to go through. The accounting test for that decision is whether you are more likely or not to be profitable going forward. It's safe to say we think we are more likely than not to be profitable going forward, and the auditors agree with us. At that point, you then look at the -- this entire tax valuation, the NOLs and people familiar with NOLs, there is a structure to them goes over several -- over decades even, 15 years out, and you only take certain amounts of the NOLs in any given year. So, some portion of those NOLs will go away unused, but a big portion of them, the $26.4 you see is what we push through today or this quarter and for the year. What that also means is, starting in '07 we will become a regular book taxpayer. So, we will have a tax provision going forward.

There is some still remaining tax benefit on the books. As I said, part of that may come through at some point in the future more than likely most of that or a good part of that will evaporate unused because of the timing and the structure and the way the NOL process works. Even so, it's a nice number to put through in the fourth quarter. What it does is -- it is important is it does strengthen our balance sheet in terms of retained earnings because that does go straight into that retained earnings section and so our shareholders' equity improves. It does delever the balance sheet somewhat, which is also good. So, all the effects are very positive. It will be nice if that was a true P&L number but in fact, it is just the taxes going through.

What that does for us, we will skip the -- well the diluted earnings per share without the NOL effect is $0.19 for the quarter, compares to $0.18 for the previous quarter and $0.07 year-over-year. And for the year, it's $0.55 compared to $0.14, and as much as we would like to have $1.30 for the quarter, we are going to have to wait a little while to do that.

In terms of the cash, Let's turn to look at the balance sheet items. Cash today our in hand was $14.2 compared to $15.3 the previous quarter, $17.8 year-over-year. The restricted cash was $193 million versus $197.1 versus $157.7 year-over-year. Total cash, $207.2 versus $212.4, and $175.5 year-over-year. The cash is down slightly quarter to quarter because we do a smaller fourth quarter deal or we did a smaller fourth quarter deal just because the fourth quarter is a little bit weaker. We also did a couple of clean-up calls so that is not reflected. We have some cash in those calls and holding loans that aren't in the warehouse line, but we are using our cash, and so that would be another reason the cash number is down slightly quarter to quarter.

In terms of the finance receivables, on balance sheet was a $1.4808 billion versus $1.3841 in the previous quarter, and year-over-year, $971.3. The allowance at year-end was $79.4 versus $78.8 previous quarter and $57.7 year-over-year leaving us with a net portfolio balance on balance sheet of $1.4014 billion versus $1.3053 previous quarter, and $913.6 year-over-year.

Looking at the debt section, warehouse line, it stood at $73 million versus $64.8 previous quarter and $35.4 year-over-year. The residual interest financing is at $31.4 versus $24.2 quarter -- previous quarter, and $43.7 year-over-year. Securitization debt, $1.443 billion for the quarter versus $1.3557 billion previous quarter, and $924 million year-over-year.

The long-term debt stood at $38.6 for the quarter versus $49.9 previous quarter and the $58.7 year-over-year. What we point out in the debt section is the debt, we put in new residual line is why the residual financing piece is up slightly. But, if you look at the long term debt, which is both the senior debt, the subordinated debt, and the residual debt, you stand at $70 million for the quarter, which is down from $74.1, and down significantly year-over-year from $102.4.

So, even though we have grown significantly, our cash requirements have grown, we were able to pay down the long-term debt by $4 million on the quarter and $32 million year-over-year. So, we think things have worked out very well in terms of the debt picture. We have been able to raise better debt. We've been able to pay down debt, the residual financing. We've been able to make that more efficient. Overall, it's a very good story.

Now, looking at some of the portfolio statistics, in terms of delinquency, the delinquency for the quarter was 5.53 that compares to 4.97 previous quarter and 4.99 in the previous year. So, delinquencies are up slightly, about 50 basis points quarter to quarter and year-over-year. Again, we would still -- should be almost all of that delinquency ride just as a seasonal nature of the quarter.

In terms of net losses, December was 5.92 versus 4.51 previous quarter and 6.02 year-over-year. As I mentioned many times in the past, we are far more focused on the loss numbers. The delinquency number is a snapshot in time, the loss numbers are what you really care about and net losses year-to-date annualized were 4.5% for this year versus 5.25% for the previous year.

So, as much as the delinquencies are up a little bit seasonally, the overall loss results came down, coming from 6.02 last year to 5.92 this year, and for the year 5.25 to 4.5. So, overall, a portfolio we originate has really performed better than our expectations and continues to be strong.

Looking at the consolidated portfolio, now stands today at $1.5659 billion versus $1.4807 billion previous quarter, and $1.1217 year-over-year. So, at $1.565, we've now reached the largest portfolio we've ever had in our balance sheet, our largest servicing portfolio. Obviously, we would expect that to grow over time and increasingly set new records. But, that was kind of a goal to get to that number this year, which we did achieve. Also, to point out, a year ago, we had less -- just less than 90% of the balance sheet was on balance sheet. This year, it's up to 98%. So, the portfolios from our acquisition are almost run off other than TFC, which we continue to originate. But, the CUS portfolio probably got away substantially this year and Mercury portfolio is all but gone at this point. So, the vast majority of the receivables on balance sheet is CPS Paper and that's the best paper we have and the highest yielding paper.

Looking at some other metrics, the net interest margin for the quarter was $47.7 million compared to $45.4 in the previous quarter and $34 million year-over-year. Year-to-date, net interest margin was $170.5 versus $120.2. The risk adjusted margin, which is the net interest margin, less the loss provision, for the quarter was 20.9 versus 21.4 for the previous quarter and 18.4 year-over-year. Year-to-date, 78.4 versus 61.2.

The core operating expense for the quarter was 20.9 versus 20.3 for the previous quarter and 21.6 year-over-year. Year-to-date, core operating expenses was 80.5 and versus 79.7 year-over-year. As a percentage and this is sort of the numbers we like to look at, the annualized quarterly expense for the core operating expense was 5.4 versus 5.7 the previous quarter and 7.8 year-over-year.

For the year, the annualized year-to-date core operating expenses were 5.9% versus 8% year-over-year. That number is one we focus on very closely. The result of the infrastructure, the automation and the way we built the Company in the last few years is what's contributing to that declining core operating expense. As the portfolio continues to grow that number should continue to come down. We think we made real inroads in having it go from 8% down to just under 6% in one year. If you look at the quarterly numbers at 5.4 we're significantly beating the 5.9, we would hope with continued improvement, continued automation and leverage of the infrastructure to get that number with a target of in the low-3s over the next few years.

The return on managed assets for the quarter was 1.17% versus 1.18% in the previous quarter and 0.61% year-over-year. Year-to-date, return on managed assets was 0.96% versus 0.34%. That number also should continue to grow as we again we grow the portfolio and keep our expenses in line. We think that number could come up significantly in the next few years.

So, those are the results. In terms of looking at how the Company operated during '06, looking at the marketing, we had a really good year for hiring new reps. We have looked at the reps and the quality of the rep count we have are right around -- just under a 100 marketing reps versus something like 80 a year ago. But, the quality of our rep -- marketing rep is much stronger, at least in my opinion and some of the other senior management's opinion. We have a better quality of person, the churn over is less, and therefore the production they produce is even better.

That combined with our ability to then create strong geographical expansion, we have had little or no pushback from entering new markets geographically with a stronger rep base. We have been able to actually penetrate markets better and expand geographically more easily. We expect that trend to continue. This goes to our basic underlying belief that it's a very large market with -- even other bigger players. They are better players, but still with tons and tons of markets out there, and lots of room for expansion.

Another thing we have noticed is the reputation of CPS in the market. If you go back to -- some dealers tend to have a long memory and if you go back to the '99, 2000 time frame, CPS had a little bit of a bad name in the market, given that we had problems, we had liquidity issues, and therefore had funding problems. It took a while, several years for those dealers to really kind of either forgive us or forget about it and move on. Today, our reputation in the marketplace is dramatically different. We are seen as a strong lender, we are seen as consistent and reliable lender. People are actually really looking for a relationship with CPS, as opposed to even as little as three years ago, us really having to sell a dealer on why they should work with CPS and why we are really a better, bigger -- a better, stronger company at that point.

Today, that sale has become very easy for the reps. We just attended a National Automobile Dealers Association convention in Las Vegas a couple of weeks ago. And a couple of years ago, we spent most of our time explaining to dealers why sub-prime is a good thing and why they should use CPS. Today, or this last meeting, we stood there just taking names for people who wanted to be on the program and actively pursued CPS as a lending source. A very, very significant difference today than several years ago. We think that bodes very well for '07 and the future, and certainly it's a real compliment for sort of what the people at CPS have done to change the perception -- our perception in the marketplace.

Another point is that other lenders, whether it's big banks pulling back out of the market or some -- few of the other lenders weakening. There's been some significant shifting in terms of the buying patterns of either large banks or the large lenders. CPS has been very consistent in our buying in '06 and before that. And that really is becoming important to the dealers more so than ever with people changing programs. As we said many times in the past, what the dealer is looking for is a consistent lender who is funding timely and CPS has been able to do that now for several years and ironically, even against some larger competitors who have shifted a bit, it's made us look stronger.

In terms of the originations, the focus there is always on our -- on automation and the scorecard controls, and putting the parameters in place to make sure we buy good paper and having the appropriate staffing, and we've been able to do that. We are able to have -- we know that every year, in the beginning of the year, you grow. We did some significant staff increases in the fall and that's really set us up well for the beginning of '07. The automation we now turn -- we now approve over 90% of our applications automatically on the computer. That's a significant decrease in manpower that enables us in the originations department to be much more efficient in addressing the individual needs of dealers while being able to process much larger amount of applications and packages.

And so, just looking at the collection end of things. The overall performance -- in the '03 -- actually the '04, '05 years were brilliant performance. I think it was a combination of a great economy, a great market and the paper we bought was significantly better than we expected. '06 finally came back a little bit. What was sort of ironic is internally we saw '06 as a slight uptick in terms of the performance. When we looked out the window and finally looked at everyone else, everyone else has much more significant upticks in their paper performance. And so, as much as ours is up a little bit, everyone else was up much more significantly. So, we -- it was really sort of an eye opener in terms of how our controls and how our buying pattern and our -- actually our collection performance has really outperformed the market in '06. We would hope that trend continues. We would expect that trend to continue. But, overall, from what we saw in '06, we are very pleased with how our performance stood up to anyone else's and I think that again bodes very well for the future collection to CPS.

And looking at the asset recovery, one of the things to mention in the staffing is we now have -- we really spent some time in making our branch collection operations far more effective. We have added automation to those branches, and we have also significantly been expanding those branches which makes hiring new collectors and staying on top of it in the rising account loads much easier and far more effective than it could be in the past, when you only have one main branch collecting and it's much harder to find staffing at a very substantial level to make that work. Having multiple branches, you can break up the staffing significantly, it allows us to staff up very quickly. Giving them the specific training they need at the branch level to make them far more effective collectors when they hit the ground running, as opposed to trying to do it through one or even two branches. Having four collection branches really gives us a leg up in that aspect.

And also the use of the behavioral scorecard, we put that in this year, and that's had some real dramatic results in being able to leverage up the ability of the collectors. That will only get better as we expand the use of the scorecard on the collections side. Again, that's worked out very well for us and we expect good things in the future as well.

In terms of asset recovery, we continue to make our process of sending cards to the auction liquidation that much more efficient. Another thing we're beginning to see, which was kind of a real boost, is the old saying that size matters, and it does. The fact that we do have a bigger portfolio. We are sending more cars to auction. We are getting more specialized attention at those auctions, and we are seeing better results.

In looking at the debt picture for '06, we went out -- normally, our course or sort of our method of operation was to go out and get large pieces of senior debt, long term debt. This year that was the goal at the beginning of '06, but instead, we were able to go out and get somewhat a few more cutting edge innovative kinds of debt. We put in a residual warehouse facility, which very few other companies have had. There's only been a couple of them ever done, and certainly in the auto sector. We put one in this year that allowed us to further leverage the residual assets on our balance sheet, and borrow money significantly cheaper than going out and getting long term debt. The other thing we did is we put in a subordinated warehouse line, which dramatically increased the effectiveness of those lines. It raised the advance rate from 83% to 93%, making those lines much more effective, much more efficient, and again lowering the cost to capital.

I think the overall market, one other thing we did is we added another monoline, we added MBIA, which further increased our ability to leverage the insurance market in doing the overall securitization process. All three of those things, all areas were very positive effects for CPS in '06 and should again continue to bear fruit in '07. In terms of looking at long term capital, I think the market is still strong. We are still in the market to raise little more capital, if it's available, and we think it is. I think the sub-prime mortgage area and a few other things have caused a little bit of a dampening effect. So, I think instead of the market being super strong, it's probably just average to marginally better than average.

Again, what's really nice for CPS is given that we did those two other deals, we don't really have to go out and raise money. So, we are really looking for some capital. If we find a good deal, we will probably do it. But it's certainly rather be selective rather than in a necessary position to get capital.

In terms of looking at the industry, as I mentioned, we saw some significant fluctuations in the lending patterns of other lenders, specifically the banks kind of pulling back. I think as the cost of funds has risen a little bit, banks have become a little more selective. I think some of the banks pushed into this sector a little too strong and have pulled back. A few of the large lenders, our competitors, have also changed their buying patterns somewhat this year in '06. And both of those things, as I mentioned a little earlier have created some real opportunities for us as a lender in the overall market. That combined with a geographic expansion and penetration of our market has really been an interesting sort of, not surprise but an interesting event in '06. I think the banks and other players have allowed us to penetrate our own markets better and the fact that we have hired better reps and being able to add significant reps in '06 has allowed us to expand better geographically.

There is always a little negative of something. And I think the mortgage -- the sub-prime mortgage specifically with the overall mortgage industry has put a little bit of damper on maybe our equity performance and some things like that. There is nothing we can do about that. There are significant differences between autos and mortgages. We have collateral that is much easier to get at if we need it. Our collateral does not fluctuate in price anything like just the mortgage business, specifically sub-prime, and our business is not built on refinancing loans. Our business is built on providing transportation for people who need it every single day and our people replace their cars when they break, not just because the rates change. And those are just a couple of the many significant differences between us and mortgage business. So, we wouldn't expect to see any of the kind of problems they do.

Auto -- sub-prime auto had their problems in '98 and '99. I haven't seen any of the other competitors having those sorts of problems again. We don't really foresee that. Anything can happen in any given time. As much as people look at the sub-prime mortgage and the overall mortgage industry as being bad in '06, we are relatively happy that the spillover effect has been rather mild. So, overall, we have high hopes that they won't have big blowup and they still haven't so far. And I think people are now realizing the economy is in fact turning a bit and either it's bottomed out the housing market hopefully has bottomed out, and that coming back will end or solve some of the problems in that industry, would certainly take the light off of it, and therefore the spillover into the autos.

We were always been bullish on the economy. We think the economy is doing just fine. We -- if you look at the beginning of '07, '07 started off far strongly than we expected. So, people who say the economy is weak or we are in for a weak '07, that may be true or may not be true, we certainly don't see it in the marketplace. We think the economy is still doing very well and probably may not as strong as been in the past, but certainly we don't see any real recession coming, certainly not in the auto industry and certainly not in the patterns we have seen so far in '07. So, when looking at '07, going forward, it's easy enough to say, we just hope '07 is as good as '06. Again, all the work we put into in the last few years, we think we are just beginning to see the effects of that and those effects should stretch long into the next few years. So, we see '07, '08, '09 as all very good years going forward. We think the economy will be fine and we think the -- our industry is fine. We think the ability to grow in this industry is substantial. And as long as we mind our Ps and Qs and keep everything going the way we should, the result should work out for themselves.

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

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Thank you. Our first question is coming from Dan Fannon of Jefferies. Please go ahead.

Good morning and thanks for taking my questions. The loss percentage for the quarter looked very good. Can you remind us what the impact was last year from the bankruptcy law change because I think you guys had probably some negative implications on your loss number in the fourth quarter of last year from that?

We did. The bankruptcy change -- the rising industry vernacular is this pull forward effect of the bankruptcy laws. And so, what you saw was some early filing as a result of the bankruptcy law in the fall of '06, excuse me, of '05. We -- I think that is what really affected the fourth quarter then. So, as much as we would like to take credit for '06 being a good year, I think probably '06 fourth quarter was more of a normalized year. The overall effect of bankruptcy law will probably continue because a little bit of an earlier default in some of the paper as a result of not being able to file. But, I think much like some other things, the one that comes to mind is DealerTrack. When DealerTrack started, we initially had to swallow this fee that all summer we were getting free -- getting apps for free, we had to start paying for them to go over to DealerTrack service. Once -- and initially that was a significant economic hit. Once you get used to it, it just goes on. And I think the bankruptcy filing is much of the same. Over time, I think you won't really see us any different once people get used to the fact that people can't file as easily.

So, to clarify, you did in the fourth quarter, have a kind of a one-time spike in loss as a result, and then since then, you have kind of had a pull forward of losses throughout following the change in bankruptcy?

I mean, to the extent, the '05 change is probably only maybe 10 to 15 basis points.

Okay, okay.

But again, we think, once -- like I said, once you start to get to the sort of different [formation of losses and all], the pull through will be something that nobody really talks about. But currently, it is in fact something that we are looking at. And certainly we have identified that it to cause a little bit of an early default. We don't think in the end it's going to change the overall performance by very much.

Okay, great. And that was -- you gave us some good color on the, obviously the mortgage market and the differences between you guys and the auto. Can you remind us what percentage of your kind portfolio today are homeowners to kind of just even gauge what it might be a potential impact if any from the shakeout in the sub-prime mortgage side?

Sure. Our homeowners are about 18%. They have always been less than 20%. We've been relatively consistent in the 16% to 18% range. In terms of our homeowners, if that's compared to -- one of the -- one of the easy things to point out is one of the things the mortgage guys did in the last year and I am not picking on them particularly, they made a lot of unverified no income kind of loans, or no verification of income. And so, that can cause lots of problems, when you are really not backing up your loans strongly enough. Whereas our folks get vetted very directly in terms of having jobs and having income, it's all verified upfront as opposed to the mortgage thing of doing no verifications upfront. We would think certainly in terms of the customer profile, again, we would just flat out say it's tremendously different and leave it at that, point out a couple of particulars as I just did. I mean there are certainly many, many more. But, I think what we are more -- as I sort of alluded to, what we are more either not concerned with but what we think is more of an effect is really in the equity markets. I think in terms of the debt picture, what's ironic in some ways is people are now looking at auto to sort alleviate their exposure to mortgage, but at least from a capital markets view, they look at them as similar categories. And so, people say, "Well, we used to have all those mortgage exposure, let's put in auto instead." So, that's actually helped. We haven't really seen that in the equity markets yet. And I think maybe we would say in the equity markets, we have been probably seeing a little blowback from the performance of mortgage and specifically sub-prime mortgage in '06.

That's understandable. Clearly, a big difference in customer as well as underwriting practices, no doubt. And then lastly, if you could just give us kind of some -- a little bit of guidance, your forward thoughts on kind of your monthly origination levels that you kind of, or targets that you anticipate as you look into '07 or quarterly?

Sure. Again, the -- I could say, well, mortgage people can predict it better than us, but that would be a bad thing to say. We are -- we have grown originations production about close to 50% two years running. The ironic thing with the way our portfolio works today is if you shoot for 50% and you don't get there, you actually make more money because your provisioning is less. And so, we would probably to be conservative, and this is what is ironic, we would say conservatively we want to go 25%, but if you say that and you grow more, your earnings are going to come down. So, our target will be 25% to 50%, again just like last year or the year before, and you are going to see where we fall. We really, other than the seasonal nature, which is a big first quarter, a decent second quarter, softening third quarter, and a weak fourth quarter, that's about the way to look at it. If you took something in the neighborhood of anywhere between 125% or 150% annual growth in production, and then softened it seasonally over those quarters, that would give you a picture. Having said all that, we are going to grow with what we get. And what I usually tell people is we don't know what's going to happen in February, March and April, but that's when you see all your growth and whatever level you achieve then, you just try and hang on to for the rest of year. And so, this year has started off big. So, we will see what happens. But, I think a realistic goal is somewhere between 125 and 150.

Okay, great. Thank you very much.

That's as much specific answer I can give you with being as vague as possible.

Thanks.

Thank you. Our next question will be coming from John Hecht of JMP Securities. Please go ahead.

Good morning, guys. What tax accrual -- GAAP tax accrual rate do you expect we should see going into '07?

Right around 40% is what we are expecting for '07.

Okay. Brad, as you think about expansion, obviously, one of the key methods you guys have benefited from is just simply putting more bodies out there in new geographies and then letting them take share. You also have, I guess, additional products and you also have maybe a little bit more focus on going into the independence. As you look into '07, is it, how do you cast your focus on expansion? Is it simply more bodies or is it a combination of those three?

That's a good question. I might have even said it better in a call if I thought about it in that sense. But in terms of '07, what we try to do, we did a few things and certainly bodies in the field is one of them. But one of the things we did is we tried to hire and I mentioned we hired in originations, we tried to really over staff in the fall quarter so that we would be fully staffed and able to handle the volume push in March and April. And the reason for that is that is if you get this huge onslaught of volume in March and April and you can't handle it, you lose some of it. And so, by staffing up appropriately or more than normal, we want to try and hang on to that. So, that's sort of phase one. Phase two is we also want to try, we went on a big hiring spree in the fourth quarter for marketing reps and also right now. And so, we hired a lot of reps during the fall, in the fourth quarter of '06. We are currently hiring a lot of reps right now with the expectation that those two groups or the hirings from those two groups should get up to speed and seasoned enough to where they can really kick in and help production in sort of what would be the May, June, July time frame. So, to the extent we have a little drop off after the April, May or -- February, March and April push, we can then supplement that by having those reps hit the ground hard during that period, and again try and hold on to that production or increase it by the virtue of that.

So, and to answer Dan's question, I told him we would be seasonal and we will have a big first quarter, softening second, weaker third and a bad fourth, but in terms of originations growth. So, to kind of counteract that, the idea is you are going to have a big first quarter anyway. You staff up to try and maintain it into the second quarter, supplemented with more reps in the second and third quarter and then just as a third phase, you try and look at other products, whether it's to access an independence dealer, other ways to get more penetration in the current base, and that would be ongoing throughout the year. We don't put any of that third thing in the projections. But, all three areas or all three phases, if you will, with any kind of luck, in a perfect world, we would be able to hit the number hard in the first quarter and carry it or grow it in the second and third and then just kind of watch the fourth quarter go by.

So, it continues to be a -- again, put more bodies in the field and watch them mature and I guess scale as they get market share?

Correct.

Okay. In terms of modeling, how would you think about your other income line? I mean, should we think that that should stabilize or may potentially go down a little bit given that the -- what your off balance sheet portfolio is or what are the constructs with that line item?

It's a little bit of catch all, but it certainly is -- it accounts for the fees, for sort of pay by phone or pay by check. And so, it's convenience fees and it's also going to be a lot of the repo lines, the recovery lines. And so, it's a little hard in terms of forecasting it. I would forecast it to flat to slightly up, and occasionally depending on things like, if we write up assets, and for instance, we had one asset we wrote up by a little bit over $1 million, but that would fall into that line. So, it's going to jump around a little bit to the extent we have unusual things like a charge-off sale or something like that, it would also flow through that line. So, I think the safe bet is to model it flat and then adjust as things come through.

Okay, thanks. And, the last question is, you suggested it looks like a big first quarter. Is that -- does that mean are you guys see in terms of kind conditions going into the year that, given where we see the Manheim index going, give us some of your commentary as well as others going to the shares, is the used car market which I guess would be the non-prime arena. Are we seeing a shift toward more greater component of transactions in the auto industry on -- in your -- in used cars in your mind, which is going to help produce volumes as well as protect recovery rates?

We would definitely agree with that statement. If you use the NADA and talking to a lot of the dealers, dealers are far more interested now -- I'm not far more interested. Now, we're looking for different ways to make money. They can't -- the vast majority of the dealers, short of being a Toyota dealer, need ways to supplement their bottom line, and that comes into used cars, that comes into sub-prime, that comes into finding ways to make more money in a deal. And everyone's heard me say a thousand times, you make around $700 or $800 selling a new car, you make $3000 on a sub-prime car. And you are now getting ironically, manufacturers telling their stores to look at doing those kind of things because they don't want their stores to go under. And if you are a Ford store or something like that, you desperately need different ways to make money. So, yes, emphatically, we're seeing dealers looking for ways to make more money pushing the used cars and therefore pushing that market. So, as much as the rates have dropped a little bit in the fourth quarter, we would expect them to stay, stabilize or even go up in '07. That would be a natural result of what's happening.

All right. Thanks very much.

Either way, at the end of the day, the fact that all of these different dealerships are now pushing for ways to make more money, and as I said, we're looking for ways to getting the business with people like CPS, you have view that as a very interesting new thing that could have real benefits going down the road.

Okay. Thanks guys very much.

Thank you.

Thank you. Our next question will be coming from Richard Eckert of Roth Capital Partners. Please go ahead.

Thank you. My question has already been answered.

That's it.

Thank you. Then, our next question will be coming from [Mike O'Connell], Jefferies Asset Management. Please go ahead.

Hi, a couple of quick questions. What's the status of the Levine-Leichtman sort of piece of your holding or holdings of you? Do you guys have any sense as to kind of timing or maybe another offering or are they going to distribute the shares to shareholders? Do you guys have any update for the market on that?

The Levine thing we break it into two pieces. They have a piece of debt is due in May, which we would probably either refinance out internally or we could go out and get senior debt to replace. And we may do either one of those things. In terms of the equity position, they have expressed an interest to sell it. The problem is, of course, that the stock price isn't reflective of the level they think is worthy of being sold. So, at the moment, they're holding. I would think at some point, easy answer, at some point, they either want to sell it or they are going to distribute it. At the moment, they're holding because they think the stock is too low, but we don't have really much more of an update on that today.

Okay. And then, what would you attribute the better performance of your 2006 paper, you were saying they performed better relative to what you see in the marketplace. What would you attribute that to?

That's certainly the $64,000 question for us. I would guess that again, a part of the answer to that question is guessing what everybody else is doing. And I can only sort of compare what will happen if we did it. If we were trying to grow real fast, or we really want to -- and part of that I think is whether you are a big bank or a big company and you want to grow, you've got to figure out a way to do that. To the extent you release your buying guidelines or change them some, you are going to get a lot more business, you may not get what you hope for. Regardless of what we do, we don't change the buying guidelines. And so, to the extent someone else, one of our competitors changed their scorecard slightly, or maybe significantly, and then they let their scorecard run, and I think the paper they got probably wasn't what they expected, and therefore they had poor performance. But, to the extent you make an effort to buy deeper, whether you are a big bank or a player in the market, you need to make sure you have tested that paper. And then, I think to the extent you are either waiving guidelines or you are losing the guidelines, that's probably what happened to most of them. Again, I am not -- I can't probably speak for them, but that would be one potential idea. For us, when we want to grow, we are going to add marketing reps, we're going to try and add programs, as I think John or someone mentioned. We gave it sort of what we would do to grow. What I didn't say was we're going to buy deeper or we're going to buy more aggressively or something like that. And probably the easy answer is that's probably the significant difference between us and everyone else this year.

And the last thing I would say is if we were smarter, we do things different. What we didn't do is we were getting enough growth as it was. We didn't really need to grow, we weren't stretching for deals and things like that, and maybe our controls were a little stronger. It's just hard to say.

I think a lot of them said they were making an effort to buy deeper. I think one other sort of global way to look at it there is a lot of these other guys said we think the lower-end of sub-prime is under serviced. We might even agree with that, other than the fact that we are sitting in the middle it. I think it's perfectly well serviced by us. But, to the extent everyone else wants to sort of get into that market, they are going to have to make some effort to change their guidelines to buy that paper. For us, it's easy because we're in the market. We have paper performance to rely on how we change our guidelines. If you are a non-prime lender trying to get down, you are going to have to guess a little and that can get you into trouble, maybe with something just as simple as that.

Okay that's very helpful color commentary. Sort of on a housekeeping disclosure, at what point would you guys kind of re-examine the question of disclosing the performance of your trust, which is obviously private today?

I'm doing an internal battle. I'm relatively freely ready to disclose everything. We disclosed more data today than we have in the past. I would look at that as a trend and expect us to increasingly release more and more data. I would, without putting a timeframe on it, I would expect to see significantly more data in '07 and -- either in '07 or '08, you will see as much data from us as everyone else. We're just cautiously moving along, as opposed to -- all of our data is good. I think again, I leave it at that. You'll see more and more as time goes by.

Okay, great. That's helpful. I mean speaking toward that data, you mentioned, you had -- you grew the sales force from 80 to 100. What do you think that number will be at the end of the year? And do you kind of look at it on a sort of originations per employee? I mean, is that a good metric for us to look at, as follow-on to that?

There is two parts to that and that's certainly something we wish we could look at it. I mean the way we actually start with a rep, we start with zero. We want them to get to 70 or more loans per month. We pay on a commission at around 70. He's making good money, and he is at a point where he shouldn't be going anywhere. One of the problems you do have though is turnover within the rep force. Either, for whatever reason, some of the people look like they can do it, and they turn out not to be able to do it. And so, one thing we have focused on, we're very pleased to see in '06 is that the quality of the rep or the turnover seemed to level off or started to decline, and actually decline. And so, we -- maybe, we are finally getting it right. We're hiring better reps, but if we hire better reps and we continue to hire a lot of reps, we could get a very interesting increase in business over and above what we expect.

Then, the easy answer is -- sort of the easy method we use, which is hire everyone. We have got our guys out there hiring as many people as they can find to the extent we are getting to the point where we are growing at more than 150% annually, we will just start cutting out parts of the program. Since all the program in all the states is done, we have scorecards for everything. So what we would do is, if we ever get into a position where we have too many reps producing too much paper at a given point in '07, we would just start scaling back various programs in different markets. So, if you pick the state, just for fun like Indiana, and you said, "Well, our low-end programs aren't performing as well as our low-end programs in other states." We would significantly increase the pricing in Indiana on the low-end programs to cut back that volume. In that way, we would improve our mix, but still with the amount of decline that we want. So that would be a really good problem for us to have and to be perfectly honest one we have never had. We've never had the problem where we've had too many reps producing too much paper that we could not handle it. If we get to that problem, it would put us in the enviable position of being able to go in and price pick the places we really want and therefore improving portfolio quality and also profitability at the same time. It would be a big fun exercise to go through.

Yes, assuming there is no risk of that happening in the near-term, what's your outlook for sales force growth this year?

Currently, we have around, just under 100, I would call it 90 to 95. Currently, their mission is to hire 45 more, which obviously is 50% growth.

And then attrition, is that gross hires or net hires?

Net hires.

Okay. Wow, that's significant. Thanks so much for taking my questions.

No problem. Thank you.

Thank you. Your next question will be coming from [K.C. Ambrecht] of Millennium. Please go ahead.

Hi, gentlemen. Thank you very much for taking my questions. I just wanted to start off by thanking you, it was a great quarter and a great end to a great year. So, Brad, you mentioned that you expect the expenses to receivables are now kind of running around 5%. I know there is a couple of components that make up the ratio, but you expect to get it down to in the low 3%, I mean that's a goal over the next couple of years?

Certainly it is. I think again, a little -- a lot of it's going to depend on the volume and how fast it comes in, a lot of it's going to depend on sort of how the infrastructure works. But certainly, our goal is to get into the 3% to 3.5% range in the next three to four years. How soon we do that? I think a realistic goal is to sort of look at the trend line you've seen. The trend line is probably a little aggressive, but if you look at the trend line, it was 12% a couple of years ago. But what you are going to see is less and less incremental shots each year. This past year, it came down a full percent. Maybe this year it will come down a little -- actually this year it came down almost 2.5%. So, maybe it comes down a point or something. But, the easy answer is it's going to improve consistently over time. What we are, I guess -- much like hiring the reps, we are going to go and hire as many reps as we can until we get too many. We are going to continue to monitor expenses, improve expenses without really regard for focusing on a number. We want that -- we want both those things to develop themselves as opposed as to sort of force development.

Okay.

And we think that's the best way to do it.

And then, maybe you can just kind of keep walking us -- you kind of touched on it, but just to kind of finish the thought. So right now, the portfolio is about 1.5 billion and at the end of the fourth quarter. And if you're thinking about, you said maybe 25% to 50% growth, just pick a midpoint in there, 35%, 40%. That kind of gets you over 2 billion by the end of '07. That sets up for some pretty big earnings numbers in '08, if you slow that down to say 20% or 25%, is that -- is it a fair way to think about it, given the portfolio so big?

Certainly, 2 billion is achievable by the end of '07. In terms of the way the business runs, it's sort of a global comment, overall we used to be in the business of doing gain on sale, and gain on sale and thank God we're not anymore, but -- and gain on sale, you take all of your earnings upfront and your portfolio is just there to make it come true later. Today, you take all or you push all your earnings into the future and because you are provisioning as opposed to taking gain. And so, the ironic thing is at some point in life when you do slow down, all of a sudden those earnings catch up, and to the extent you are growing dramatically early, and you slow down significantly later, those earnings catch up in a very dramatic way. So, to the extent we are growing 50% annually, if we were to slow down significantly at some point in the future, you have somewhat of a tidal wave of earnings that will push through, and that's assuming you do every other thing right as well.

Yes.

That's the way the economics of the new accounting works that if you have significant growth early and slower growth later, then the earnings because you're not provisioning yet receiving lots of revenue from the portfolio will increase. Depending on how fast you slow down, they could increase substantially. Whether that happens to CPS is totally up in the air.

Okay. Well, I think it was a great quarter and I'm drawing the line on the sand. I think stock is done going down. And now --

I like the way you think.

-- these numbers you put down. Thanks very much.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We could have a question coming to you from [Mark Lepart] of One Hill Capital. Please go ahead.

HI, actually [Mark Alpert]. I was under the impression that Levine-Leichtman had to make a decision of what they were going to do within something like June that the fund itself was liquidating. So, could you correct me on that? And the second thing is, how much debt do they have that you're looking at? And I was also under the impression that that was supposed to be resolved by now. And then the last thing is, just to reiterate, I mean I think the stock loses value because you do not have adequate disclosure on the trusts.

Okay. First question, we're not horribly certain on what Levine's time frame is in the stock. We were under the impression as well that the fund ends sometime this year. They may have some wiggle room in terms of when it ends, it may not end for more time than that. We were just told that at some point they would like to sell their stock. So, unfortunately, I can't give you too much more certainty in terms of a date. The easy answer is it's certainly -- they are in the time horizon where they would like to still sell their stock. I don't know that they have the pressure that we as well as you might have thought they had previously. In terms of the debt question, they had 25 million in debt. Last May, they extended that debt for a year till this May. So, there was a piece that was due in December, which we paid. I think previously it was due earlier, but since certainly last May, it's all been due, the final piece this coming May. And the third question was I think you said that --

It wasn't a question, it was an observation, just about lack of transparency on the securitizations.

Well, as I mentioned, we are diligently working on resolving that transparency issue. We would certainly strive to be transparent as everyone else. And as I said, I would expect to see that sooner rather than later.

Thank you.

Thank you.

Thank you. We do have a follow-up question coming from Mike O'Connell, Jefferies Asset Management.

Hi, one last question. Do you guys have a target sort of reserve level as a percent of your loans? I mean certainly, it's at certainly a healthy level, it's come down a little bit, but where do you kind of see that number over time?

That's the question we are always waiting for. What's interesting is, and then, without throwing the big name out there, there might be a certain other big company that has a targeted reserve level, which they seem to hit like every time. And so, we've just done a little homework on all of this, and without calling them and asking them how they do it, there's two -- there is probably certainly one or two different methodologies on how you do reserving. We do our reserving by providing 12% -- excuse me, had 12 months reserves or loss reserves day one when we fund the loan. And so, what we do is we look at the 12 month -- coming 12 months loss expectation and we take that provision day one when we fund the loan. We then each month going forward add on additional provision so at any given moment that loan always has 12 months provisioning.

What's interesting is, at the end of the day, you have a provision number you show as a percentage of the outstanding portfolio. And ours has coasted downward and certainly moves around. And there's a certain other big player in the industry has a loss provision I'm going to say is really relatively consistent. Now, that may -- theirs may stay consistent as a result of just being a very large portfolio, or they may be reserving to keep that number consistent, which you can also do. You could reserve, instead of doing 12 months, you could say at any given moment, we want 5.5% or 7% on the outstanding portfolio as a reserve.

And what's interesting is, in either methodology, it just doesn't matter, and you start there. If your portfolio performance deteriorates, you don't get to say, "Well, we have plenty of reserve, so we don't need to provide more." It's not what the auditors do. The auditors say your portfolio is deteriorating, you need to provide more. Because whatever the number is, whether a 7% against portfolio amounts to 14 months versus our 12 months, you set a standard of 14 months. And therefore, if your portfolio deteriorates, you have to add to that standard. You can't say, "Well, we've got two months over reserve, we don't need to provide anything." It doesn't work that way. So, either way, you set a number, whether it's 12 months at any given moment for a particular loan or a percentage of the overall portfolio at a given point. Either way, that's where you have to sort of move off of as you go forward.

Over an extended amount of time, as the portfolio performs very, very well, you could adjust going forward and bring some of that provision back to the earnings. But, again, it takes a significant amount of time of good performance. So, if anything, maybe you have some future earnings way down the road. What's ironic is many people think that an increased reserve percentage actually protects you in a downturn. But, in fact, it doesn't at all. Because, in a downturn, you have to add to that reserve and it affects you just as much as the other guy. So, in terms of what we do, we manage to the 12 months and leave it at that. Now, what you are seeing a little bit in us is that we've had some -- the acquisition portfolios that we had, had significantly larger reserves, because they were much deeper paper. And over time, those portfolios have run off lowering our overall percentage -- our overall number as a percentage of the portfolio, which is why you see our percentage as a portfolio has decreased over the last year or two. And that's really more from us running off high discount or high on provision paper and just normalizing to what will be the CPS standard.

In terms of the comparison, we did 12 months or we think ours works out just fine. Other people do whatever and I'm sure that works out just fine for them, but that would be the difference. And that's an enormously long winded way of saying we don't really have a predictable percentage against the outstanding portfolio.

Thank you.

Thank you.

Thank you. We do have a final question coming from [David Welm] of Wachovia. Please go ahead.

Hello. Just a couple of fast questions. Number one, what's the average loan at this point of your loans?

The average amount of loan is right around $15,500.

Now, that's come up considerably, hasn't it, in the last five years?

That has. It's migrated up from around as low as 10,000 or 11,000 five or six years ago probably.

That's what I remembered, yes. Okay, and then, the only other thing, I would like a little comment on the restricted cash principally, do you receive a reasonable interest on that, is that dead money sitting there, what can or can you not do with that restricted cash?

It's somewhere between dead money and reasonable.

I see.

We -- it's there to protect the portfolio and as much as we would like to figure out a way to make more money on it, it's up to the trustee, and they are obligated to provide a manageable rate, but it's also got to be a rate that's readily liquidable or whatever so that, if they need access to the money, they can have it. From the grand scheme of things, that's the price of doing the securitization business and we don't mind doing it at all. It would be nice, there is no really way to take anymore benefit on that than you can.

Okay, thank you.

Thank you.

Thank you. There appear to be no further questions at this time. I'll turn the floor back over to the speaker, Mr. Charles Bradley for any closing remarks you may have.

Okay. Well, as we said, '06 was a very good year. We are looking forward to '07. It's nice that we got a lot of good questions getting asked. We've added a little coverage, which we certainly appreciate and we think again, without being very repetitive, we think what we built or what we worked on in '01, '02, and '03 has really started to show the results in '04, '05, and '06. We would hope that trend line continues and we think '07 is off to a good start, and we think things are going really well. So, thank you for your time and we look forward talking to you in about a month or two months. Thanks very much.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Thursday, February 22nd by dialing 877-519-4471 or 973-341-3080 with pin number 8442344. A broadcast of the conference call will also be available live and for 30 days after the call via the Company's website at www.consumerportfolio.com and at www.streetevents.com. Please disconnect your lines at this time and have a wonderful day.