Consumer Portfolio Services Inc (CPSS) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services second-quarter 2007 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 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.

Thank you and welcome to our conference call for the second quarter. As you've seen in the press release, the quarter went very well. We are pleased with the results. They are probably, give or take, exactly in line with our expectations.

In terms of looking at the overall performance of the Company, the origination volume probably may be just a little bit off of what we would have expected but still strong and doing well. It looks like we are (technical difficulty) in the low 30s as an annualized growth rate, down slightly from 50 but well within our range of 25 to 40 or whatever we stated we might do a few quarters ago.

So actually, the originations, in terms of just expanding our geographic footprint, is really working the way it's supposed to. We've not really done much to change our buying guidelines or what we buy. Really, all we've done is continue to expand the number of marketing reps in the field, generating more and more deals.

Now, looking at the performance, there was a moment there where everybody thought the '06 vintage was weaker than past vintages and that it wouldn't perform as well and everybody got worried. It's been -- it's nice to see that the '06 vintages here at CPS are turning around really well. They might end up performing nearly as well as past vintages. The '07 vintages are starting off very strong, so we think, if anything, the performance is going to get better with the '06 pools falling into line with the other pools. Part of that is we just did our -- in our most recent securitization, we actually got lower enhancement levels from the ratings agencies, which sort of backs up that statement that we're getting credit for the performance of the prior pools and the continued future expectations by both ourselves and the rating agencies.

The other thing that we just announced yesterday, or the day before yesterday, was the new debt. We've been working diligently for it seems like a long time but certainly close to a year on refinancing our capital structure and paying off the Levine debt, which we did successfully last week. We now have a $120 million credit facility. We've drawn down $60 million initially. It easily puts the Company in the strongest liquidity position we've ever been in the history of the Company.

One of the questions we've had certainly internally, since things are going well, is, okay, in 1998 and 1997, things were going dramatically well and all of a sudden, everything went wrong. Well, one of the major reasons things went wrong then was because there was no access to liquidity. This time around, learning from past mistakes, we wanted to make sure we had an enormous liquidity position just in case, and so that's what we done. It took a long time to put together but now that we have it, it puts us in a very strong position going forward, not having to worry about outside influences on our industry and our ability to access capital.

Certainly, in the wake of the subprime mortgage problems, that was one way to look at the concern. Subprime auto, as we've stated before, is very different than subprime mortgage, but being painted with the same brush sometimes has that effect. So, having liquidity in place really should alleviate most fears in terms of us getting caught in any kind of liquidity crunch going forward. So we are very, very pleased with having that facility. We look forward with working with Citigroup on that facility. We think it's very good for the Company.

With that, I'm going to turn it over to Jeff Fritz, who is going to go through the numbers.

Thanks, Brad. We will highlight some of the components of the financial results briefly.

The revenues for the quarter were $95.8 million, compared to $86.5 million in the previous quarter and $67.2 million for the June quarter in 2006. The revenues increased 11%, quarter-to-quarter, in this year and 43% over last year. The significant driver of the revenues is really the interest income, which is generated from the on-balance-sheet consolidated portfolio, which we will look at in a little more detail in a minute.

Expenses were $89.6 million for the quarter, compared to $81.1 million in the previous quarter and $64.6 million a year ago. Expense is up 10% from quarter-to-quarter and 39% compared to last year.

The most significant or one of the significant components of the expenses is of course the provision for losses. The provision for losses for the quarter just ended -- $32.7 million compared to $29.5 million in the previous quarter and $22.2 million in the quarter a year ago. That's up 11% in the consecutive quarters and 47% year-over-year.

The provision, the methodology we use is largely unchanged, really largely unchanged over the last couple of years. So, the mechanics are pretty straightforward and really tied to the growth in originations and the seasoning of the on-balance-sheet portfolio.

Pretax income for the quarter -- $6.2 million. That's up from $5.4 million in the March quarter this year and $2.6 million in the June quarter of 2006. That's a 15% increase in consecutive quarters and a 138% increase compared to a year ago, so a pretty good improvement in the pretax income.

The net income -- $3.5 million for this quarter compared to $3.2 million in the March quarter and $2.6 million a year ago. That's a 9% increase quarter-to-quarter and a 35% increase year-over-year.

As you may know and you may recall, if you look at or if you're comparing our net income numbers and our earnings per share numbers from '07 to '06, the '06 numbers had no tax provision, as we were still maintaining this big valuation allowance against our deferred tax assets. That was eliminated in the fourth quarter of 2006, so that's something you need to keep in mind when we're looking at comparing after-tax numbers, '06 to '07.

The earnings per share, diluted earnings per share for this quarter, $0.15. That's up $0.01 from last quarter and compares to 11% -- or $0.11 from the year-ago June 2006 quarter.

We will look at a couple of aspects of the balance sheet. Our free cash or regular cash position was $13.4 million at June 30, 2007. That's a comparable level of unrestricted cash that we maintained over the last few quarters, really over the last year.

Restricted cash is $261 million compared to $236 million last quarter and $207 million a year ago. The restricted cash balance includes $109 million associated with the pre-funding of 2006 B, so that's a balance that -- that portion of that restricted cash really drops off shortly after the quarter. The remaining components of restricted cash reflect credit enhancements and payments in-process for the securitization trusts.

I mentioned before that the primary driver of revenue was the on-balance-sheet portfolio. The gross balance of that portfolio is $1.8 billion at June 30, compared to $1.7 billion in March of '07 and $1.3 billion a year ago. As every passing day goes by, we buy new loans, even with the amortization. This is the largest portfolio the Company has ever had on the balance sheet and has ever serviced. We are approaching this milestone, looking forward to approaching this $2 billion milestone in the coming months.

The allowance for finance receivables -- $95.6 million at the end of the quarter, compared to $83.5 million in the March quarter, $75 million a year ago. I mentioned the allowance is driven by the provision and reduced by the charge-offs. The mechanics are all very similar to -- really largely unchanged over the last couple of years.

One aspect of the allowance that has changed subtly is the acquisition portfolios, Mercury, TFC and C West have all but completely amortized and gone away. Their components of the allowance has more or less dissolved along with those portfolios, so the bookkeeping and the methodology for the allowance is almost entirely based on our core business, our CPS programs.

On the debt side of the balance sheet, the warehouse lines were $80 million at the end of June compared to $128 million a year ago -- or last quarter -- and 59 million a year ago. The warehouse balances fluctuate in a very straightforward manner with the on-balance-sheet portfolio.

The residual interest financing was 27.9 million at the end of the month, compared to 28 million in the previous quarter. This financing was repaid in conjunction with the new debt that we put on the balance sheet subsequent to the end of the quarter.

Securitization debt -- up to $1.8 billion. That's all obviously collateralized by the on-balance-sheet portfolio. The long-term debt was $34.8 million. Again, $15 million of this long-term debt was repaid after the end of the quarter in conjunction with the financing that Brad alluded to earlier.

Moving on, we used to go to some lengths to break out the components of the managed portfolio. The aggregate managed portfolio is $1.9 billion, and the vast majority of that really now is simply the on-balance-sheet portfolio that generates interest income. The nonconsolidated portfolio or the portfolio that's off the balance sheet and that's associated with the residual interest is down to $9 million compared to $22 million in the previous quarter and $67 million a year ago. So you can see how those portfolios continue to pay off and amortize and have a much less significant influence on the results than the on-balance-sheet portfolio.

A couple of the metrics that we look to, to summarize the results -- the net interest margin for the quarter is $55.7 million. That's up about 9% from the previous quarter of $51 million and up 37% from last year's quarter of $40.7 million.

The net interest margin, less the loss provision for the quarter, up to $23.1 million, a 7% increase from $21.5 million in the March quarter of this year and up 24% from $18.6 million in the 2006 quarter.

Core operating expenses -- we continue to see good leverage as our revenues have increased. We've been able to control the core operating expenses, which exclude interest expense and the loss provision. For the quarter, those expenses were $23.2 million, increased from just 5% from $22.1 million in the previous quarter and increasing 15% from a year ago.

A key ratio is the percentage of the core operating expenses compared to the managed portfolio, the average managed portfolio. This ratio is down 5% to 5.03% from last quarter at 5.3% and down significantly from 6.06% in the year-ago quarter. So again, that demonstrates that, fortunately, as we are growing the business and growing the portfolio and growing the revenues, our sort of nuts-and-bolts infrastructure expenses are not growing as fast, helping to contribute to those margins.

Lastly, the return on managed asset -- return on managed assets pretax income over the average managed portfolio. This is increasing nicely, 1.35% in the June quarter, up from 1.3% in the previous quarter and up from 0.79% or a 71% increase to the June 2006 quarter.

I will turn it back over to Brad.

Thank you, Jeff. In looking at some of the other numbers, one of number I sort of missed and I'm sure everybody is interested to hear is delinquency in the performance numbers. In terms of delinquency, the delinquency for the quarter was 4.85%. That's up about a little more than 1 point from the previous quarter of 3.55% and up about 1 point from last year at 3.87%. Delinquencies are always seasonally up around now. At 4.85, it's well within a range of 4% to 5%, so we are very comfortable with that delinquency level.

In terms of the losses, the annualized losses for the quarter were 4.13%. That's down from the previous quarter of 5.12% and up a bit from 2.78% a year ago.

In looking at those numbers, I mean, the '04 and '05 vintage portfolios were tremendously strong. You had all sorts of kind of Perfect Storm things going the right way, a good economy, good auctions, good everything, low interest rates. So you had a position where those portfolios were going to be some of the strongest. As everyone has seen, the '06 vintages were a little bit worse, and we think, at least here at CPS, that the '07 vintages are going to be better than '06. We will see if they can match the tremendous performance of '04 and '05.

However, given everything, I mean, the overall performance today is still way better than we would have ever expected. I mean, even these numbers exceed our expectations. The fact that the portfolio is now nearly $2 billion and we've wrapped up originations three years running, to be able to produce these numbers is very pleasing to the Company in terms of where we sit.

When you compare those to the rest of the folks in the industry, I think the results look even better. We've managed to really keep our controls in-place, buy the way we are supposed to buy. I think that performance is beginning to show across the board. So overall, we are very happy with those results and (technical difficulty) expect them to continue into the future.

Now, looking at the industry, to give some comments on that, actually, I think, in terms of the quarter, it has been a relatively quiet quarter in the industry. Nothing big has really happened. I think the fact that it's summer, dealer sales are slow; the U.S. domestic dealers are obviously still having problems. I think that's affecting car sales overall, so the feeling in the market is that sales are slow. In the face of that, however, since we have been expanding routinely and somewhat aggressively in adding new reps in new areas, we've been able to maintain our growth through that kind of a slow down in this summer. We've actually, in the last couple of months, been posting what we would think would be slightly strong results in terms of originations growth during the summer months than we might normally see. Then again, we would probably attribute that almost exclusively to adding a lot of reps and getting our people out there and getting better and better people in the field, and maybe slightly to our now having a little more of a presence within the dealer industry and getting more deals as a result of that.

In terms of -- you know, there doesn't seem to be any rational competition from our competitors, which is good, good for the industry. There are no new entrants. So again, nothing much has changed along those lines.

Subprime mortgage finally seems to be slowing down a little bit, and all the bad press, and again, even in light of that bad press, we've had two securitizations now since they first announced some of the problems. We are having no trouble getting deals done. The fact that we did a very large debt deal with Citigroup shows that the people that know what's going on in the industry understand that subprime mortgage is very different than subprime auto. It's beginning to make subprime auto look far more appealing in many different ways.

In terms of the future, and without harping on it again, we're going to continue to do just what we are doing -- keep expanding our marketing base and get into more areas and get more deals. We're going to continue to tighten our controls and fine-tune what we buy, little by little weed out the little spots we don't like, and hopefully continue to grow and get better improvement and better performance out of that growth.

What's kind of interesting at this point, as sort of a final comment, is I think CPS is now getting a reputation in the deal industry where we are seen as a very solid lender and many, many dealers are looking to get onto our program. Along with that, we are now being seen within our own industry as a very strong performer, a performer within that industry. I think the results of our pools, particularly our delinquency and (technical difficulty) numbers compared to some of our other competitors, have been even stronger than we would have expected against those friends of ours. I think that says a lot for CPS. The fact that a lot of big players in the industry are not doing quite as well as they might have expected and we are is really beginning to separate CPS as a company in its own right and a large player in the industry in its own right as well.

So I think all of those things really bode well for us. We can't [criticize] the debt. Getting that debt deal done was a huge thing for us to do. Having done that, once again, what we're going to do now is focus on shareholder value, try and improve that and get that stock price up.

With that, we will open it up for comments or questions.

The floor is now open for questions. (OPERATOR INSTRUCTIONS). John Hecht, JMP Securities.

Good morning, guys. Congratulations on a good quarter and the additional liquidity.

A couple of questions on the new lending facilities -- can you maybe provide us a couple of the terms, maybe the borrowing rate or the change in borrowing rate versus the Levine Leichman debt? Is this capital that you can use for working capital, or is it really related to just origination activities?

Sure. The facility breaks into two pieces. One is a $60 million term facility for two years, and the second piece is a $60 million revolving piece. It's all based on the residual within the portfolio, or on the residual within the $2 billion managed portfolio today.

What we like about it and (inaudible) sort of another way to look at it is this $60 million, two-year piece takes the place of our normal sort of every-other-year or every 18 months residual piece, the significant difference being we've done two residual deals in the past and they were actually a little larger each time, but somewhere in the neighborhood -- I think the last one was around 50-or-so million. But the difference was in those deals, one, we had to go through the rating process and two, they amortized. So they took the cash off the waterfall as payments came in, and they amortized out. The significant difference in the $60 million Citigroup piece is it does not amortize, so it gives us much more access to that capital for a longer period of time.

The second part of the facility is the $60 million revolver, based on what would be sort of not -- or actually, it's just an addition advance rate on all the rest of the pool over and above the $60 million two-year piece. We had a similar facility, but this facility is slightly more aggressive in terms of what it will advance and gives us more sort of immediate access to capital based on the size of the portfolio and gives us a little room to grow into it as well.

In terms of the pricing, what's kind of important in terms of comparison is you probably try and compare those two deals to the residual funding we've had in the past. What [isn't] interesting is, in paying off the Levine Leichman capital debt, we no longer have any capital debt at that level, other than the retail notes at the bottom of the capital structure. That Levine Leichman capital was the most expensive piece of the capital structure, so not having to go there for funding was certainly a benefit of doing this deal. It also leaves us that ability to go and replace that Levine Leichman -- for lack of a better phrase -- debt in the future if we need additional capital. So that's sort of a real another plus to the whole thing, among many.

In terms of the pricing, two pieces are slightly better than the other one. I think it's in the area of 600 over LIBOR for each.

In terms of what we can do with the capital, there's not a lot of restraint on the capital. I think we could do acquisitions; we could use it for working capital. At the moment, we're not really looking to do anything other than use it for working capital.

Okay, so the simple way of looking at it is similar pricing, more flexibility and simply more liquidity?

Right, and better advances in terms of lending against the portfolio without the rating agency issues.

Okay. [Bud], you gave us some good commentary on the auto finance market. Can you give us any color on maybe are there any changes in sort of average terms, meaning the loan-to-value or the duration in the market? Where are you guys finding your sweet spot at this point, either from a geographical perspective or for maybe an average loan size? Is there any changes in the nature of your business from that perspective?

In terms of the industry, nothing really has changed; the average loan size hasn't changed. There's been an overall movement to the extended term. You know, AmeriCredit announced that they've changed their standard loan format to 72 months; ours is still at 60. That shift is a little bit old news. So I think, overall, not a lot has changed. The average coupons are about the same; the average term is about the same. The prepayment speed has picked up a little bit over the last year but not significantly.

In terms of our sweet spot, probably the easiest way to look at what we do is we've got a lot of history in this company, we've had a lot of information to build our own scorecards. The easy answer is we don't buy off of FICO and everyone else does. The fact that everyone else is using a FICO score in some form or fashion really I think gives us a real nice spot in that we get a lot of deals that may have a low FICO but have a lot of very strong characteristics about them to get them to perform. So because of that, as much as we may, at least to the outside world, appear to operate at a slightly lower part of that spectrum, because of our internal scorecards, we are able to buy a very strong piece of paper in there. So, I think that's an easy way to describe our sweet spot. Certainly, we're somewhere in the middle of the subprime zone without trying to pick where.

Geographically, you know, I think we are more and more becoming a national lender. We don't have any increased concentration in any particular state. Any subprime lender will tell you the big states are California, Texas and Florida; that would be the same for us.

We are beginning to get penetration in the Northeast, something we've been trying to do for years but never have been able to do. Our penetration in the Midwest is still very strong. Our penetration in states where we really haven't had much penetration at all is beginning to grow too. For whatever reason, some outlying states, maybe in Arizona or something like that, we've never done particularly well and we are beginning to even have pretty good footholds in all of those states as well, places like to Mexico, Arizona, that have good population but not enormous population. So we are beginning to pull in all those states as well. Again, that's directly from the expansion of the geographic footprint of all of our marketing reps.

So you know, I think we buy off of a scorecard. Ours scorecard is probably a little different than everybody else's. I think that FICO comment probably gives you a good idea of how we do it. Overall, it's just a real good market for us, and I think it should continue to be.

Okay, I appreciate all the color there. The last question and I will let someone else hop in here -- is in terms of your sales or marketing headcount, where have you moved in the last quarter? Do you guys have a specific number for how many dealerships you're serving at this point?

Right. The headcount -- I think we're right around 115. We are probably adding anywhere between 10 and 30 folks a quarter. Our goal for the year was 140, so we're probably getting close to where we will start leveling out and just replacing people, remembering it takes around six months to get a marketing rep to the level where they really are a big participant for us. So right about now, what we doing is we're trying to do all of the hiring so we're ready for next year's push in February, March and April, which is, again, as everyone knows, the big annualized -- or the big annual growth push has been. If we put on the reps now and can get to the 140, maybe a little bit more at this point, they will be ready to go when we get to February and we will be able to handle the growth that naturally comes at that time of year.

In terms of dealers, we are running right around 5,500 right now. We are adding dealers on a really regular basis. Given that you could do as many as 12,000 14,000, there's still a lot more to do.

Just as one last side comment, it's still amazing how many dealers say they don't do subprime at all. Without telling them they are stupid -- I mean subprime is an enormously profitable part of the deal for a dealer. For them not to be accessing that market is still amazing to us. Somewhat importantly, many, many more are accessing it every day and are getting involved in subprime, which again is adding to the ability to grow for both us and everyone else.

Richard Eckert, Roth Capital Partners.

Okay, thanks for taking the call. Since my predecessor was so thorough, I only have a couple of modeling questions. The tax rate seemed a little high in the quarter, high at 44%. I had been assuming 40. Also, the other income line item was a little higher than I would expect. Does that still contain some fair-value adjustments on your older residuals?

Yes, it does. There's two things. If you go back to the tax rate, we are projecting a forward tax rate of about 42%. We still had a little bit of an adjustment to the tax provision in sorting out some of the implementation of FIN 48, which was effective in the first quarter. But particularly for your forecasting purposes, I think 42% for a tax rate is a good number.

On the other income, the aggregate other income for the quarter was $6.2 million. As you mentioned, and the residual interest write-up for the quarter was $1.1 million compared to $2.5 million in the previous quarter. That's obviously a smaller number. There may be yet another write-up in the future of that, but it will certainly be an even smaller number than the one we booked here in the second quarter.

Another component, a significant component of other income for the quarter was kind of a one-time thing or a relatively non-recurring item. We sold a little over $100 million of charged-off accounts, deficiency balances. The net return on that was about $[1.7] million. We did do a charge-off sale like two years ago, but it's a pretty infrequent event for us.

The only other component which didn't come through the other income line but it was influenced by a couple of these things is we did have some non-recurring expenses associated with the early cleanup of the residual deal and a couple of these other securitizations that resulted in some kind of one-time write-off of deferred financing costs.

Okay, thank you very much.

[Matt Heinz], Jefferies & Co.

Yes, has anything changed from a competition perspective? Are you seeing less of the larger bank players with the (inaudible) concerns in general about subprime, or has everything held pretty steady?

I think your question was have we seen less play by the larger banks and people in the industry? I think, interestingly enough, most of the large players like banks have pulled back several quarters ago, not particularly as a result of the subprime mortgage. So I think, in the last two to three quarters, there's been probably nothing in this quarter and very little in the quarter before. So maybe as much as two to three quarters ago, you saw some of the large banks and players retract in their presence in the industry. Not much has changed since then, and I don't think much of anything has changed as a result of the subprime mortgage. So, to the extent they were out, they were already out. No one has made any real moves lately, and not as far as we can tell in reference to the subprime mortgage issues.

Okay. You had earlier made a reference to some potential (inaudible) in your underwriting model. Has anything -- I guess has there been any tweaks implemented already or is that something you're looking at down the road?

We are probably looking at it down the road. When I say "tweaks", you know, we do enough analysis where we can literally look at -- we have six or seven programs running in 40 different states. We go in and look at programs in individual states and decide that some programs perform a little better in different states. We would tighten -- continue to tighten different areas. But overall, the amount of change there would be very minimal. But you know, every little bit helps to the extent you can tighten off loose spots in the entire program. But it's not like we're making any major changes when I [reference] tweaking the model.

Michael Cohen, SuNOVA Capital.

Hi, guys. Great quarter, and certainly John asked many of the relevant questions. I guess I have one quick question. As you think about your business, longer-term, do you see any opportunities for sort of product expansion within auto finance, more specifically maybe some type of Direct-to-Consumer or refinance product, as well as kind of expansions around the margins of the segments that your in, either a little bit up or a little bit down, in terms of credit quality?

Sort of a two-part question -- in looking at other sort of add-on things, I think we mentioned in the past we're looking at -- a few of our competitors have done Direct-to-Consumer lending. It's been, it looks like, relatively successful. So we're looking at that area. We have sort of a very elementary program going there, or sort of a test program. If it works out, we might expand that some.

The other thing is some over larger competitors run very active programs to keep their customers when they refinance, whereas we have none. So to the extent we have a good customer, he pays his loan and then refinances or then trades it in, we lose that customer in almost all cases. Many of our competitors run another program to try and recapture that customer since they've already obviously had a very good long experience with them. We are, in fact, working on that program as well. So both of those would be very additive to the process. You know, that is something we probably will continue to experiment with and try and fine-tune in '07 any maybe implement in '08.

In terms of lending on the margins of the program, we also continue to do that. Our very best program is called Preferred but it's only 2% to 3% of our number, of our overall production. We wouldn't mind expanding that area a little bit. We continue to look at maybe doing a little bit with the independent program or the independent dealers, but again, that also is less than 5%. So you know, if you look at all four of those areas, those would be areas we would be looking at in addition to our basic growth scenario, which is expanding the marketing and rep base.

So I think the easy answer is we are growing at about the rate we want to. I don't know that -- we're certainly not in a hurry to implement any of those four programs, but I think, in '08, you know, we might look at doing that. We're certainly smart enough to look at all of those areas and think what they might do for us in the future.

Great. Thanks, Charles.

(OPERATOR INSTRUCTIONS). Mark Alpert, Orr Hill.

Yes, a couple of questions -- one, is there any income statement impact from the finance, the residual that you did, post-quarter?

In terms of -- well, we probably wrote off a bunch of fees and all, but not a significant one as of yet.

Okay, so there wouldn't be any gain or anything like that?

No.

Okay. Secondly, what is in the $100 million of other assets now that are on the books?

Well, they include about $25 million of repo inventory. The most significant component would be the deferred tax account, which represents future tax benefits as a result of primarily the allowance for loan-losses.

How much is that number?

About $45 million.

So is that $45 million something that will be realized at some point, or like do you take another one-time true-up, or --?

No, that would be realized over the life of the Company. As the Company continues to be profitable, those are tax benefits that the Company will realize. However, I mean, that number -- while the Company grows and the allowance grows, the deferred tax number will actually get larger as the Company grows. But that all represents a future tax benefit to the Company that will be realized as long as the Company continues to be profitable.

Okay. Let's see. I had one other question. Where do you think the 5% expense ratio could be, should be, if you look out a year from now? How much lower can we get on that?

Sort of an easy comparison is AmeriCredit with being almost ten times as large as we are, it runs right around 3%, a little higher. So I think our goal is to get -- keep targeting that number. We've come down significantly from the past. It's nice that we've gotten around 5% this quarter. You know, I think we're looking to keep moving in that direction. I think a good goal next year is to get it into the 4s and keep on moving down. We don't have a huge target in terms of doing that, but we think there's a possibility of at least another 1.5 point improvement over time.

Part of it is going to be by how big the portfolio is. There's so much automation now that portfolio growth is the main driver of that. If we slow down portfolio growth a little bit, then it might take a little bit longer, but at the rate we are going, it could come down somewhat significantly over time.

I guess I will ask just one more. What about the Levine stock ownership? Now that you got rid of the debt overhang, are you going to work on the stock overhang?

That's the next job! (LAUGHTER)

I mean, what are your ideas? Do you think you might be doing a shelf again in there?

We need to talk to them about it. We were kind of focused on a couple of other things lately. But you know, certainly we are well aware that the market perceives the overhang on that stock and we're going to work with them to figure out a way to alleviate that problem.

[Claire Baum], Wachovia Securities.

Yes, hello. I'm just wondering about the restricted cash in the residual area. Do you get any kind of benefit from that money sitting there, or is it just debt money?

Do we get any kind of benefit from it?

Yes.

Well, there's probably two ways to look at it. The easy is, the simple answer is, in terms of do we get to invest it at some great return, no. It's a very nominal return as it sits there. But again, that money is predominantly there to protect the bondholders within the (technical difficulty) portfolio. So, we don't get any huge investment interest off of it; you get some, but it's not that much.

What it really ends up doing is its number one job is to provide security for the bondholders of the portfolio, which doesn't really affect us a whole lot. But given the way the industry has moved and our ability to access doing residual deals, it provides a lending base or a significant piece of the lending base, allowing us to do past-residual securitizations and in fact the Citigroup loan. So we are taking advantage of it much better than we could have, say, two years ago. It isn't a huge interest-bearing account like it might be.

Mel Barnes, UBS.

Great report. I've been following your company for five or six years, fortunately.

The issue that seems to come along -- back in '98, you had a peak of portfolio, and currently you have exceeded that. I guess, for one, I didn't hear you state what your next portfolio target was after the $2 billion.

Well, in 1998, the largest portfolio for us at that point was $1.3 billion. Today, the portfolio stands a little in excess of $1.9 billion. I think somebody -- we've gotten a question -- we've gotten a question similar to that sort of repeatedly over the last -- about a year ago. Where would the portfolio -- when we would get to $2 billion? We saw we would get to $2 billion by the end of this year. We certainly will probably achieve that goal rather easily.

Looking forward, we want to get the portfolio to $10 billion over the next few years. But where are we going to get to soon? It's hard to say. I mean, I think $3 billion is probably the most reasonable target for the next year or two. A lot depends on how fast we can grow, and you know, we've said many times we're going to take the growth as it comes rather than try and drive growth. So, it's very hard to give an answer. I think $3 billion is a very reasonable target over the next year or so. How fast that comes along, we will just have to see.

I understand. That's a nice round number to use.

The problem that I see in this company is the difficulty in really figuring out what the earnings power is. As your portfolio is now larger than it was in '98, you also have a different accounting structure. So people are trying to make a relative comparison of earnings power now from the larger portfolio with what was achieved in '98 and extrapolating that up to another $1 billion in portfolio. It seems to be difficult.

And of course, the faster you grow, you remind us every so often about how that penalizes the announced growth or the ability to announce growth. There's some connection with the loss reserves that shows that the delay or the deferred earnings that you have available as the loans roll off. But we never get any quantification of what that is at one point in time.

Let me see if I can give you -- so again, two parts to that. One, in switching accounting, the easiest way to describe gain-on-sale accounting, which is what we use used before and might have caused some problems for everyone else in the industry, is you took all of your revenue upfront and therefore all of your earnings upfront, and you hoped like hell that the portfolio performed to back it up.

In today's environment, using the accounting we now use, you take almost none of your earnings upfront. Instead, you take a provision upfront and all of your earnings come in the future. So given that, today's environment is far better in many, many ways than it was before. To the extent you can succeed today, your future only gets brighter and brighter. So that's the first part -- is it's a far better place for both the investors in the stock and for the Company in terms of future performance to use on-balance-sheet accounting rather than gain-on-sale. As much as it's a little bit of a slow process in the beginning, your future can look very bright if you follow along.

Now, the next part is you are of course right in saying that being that we take a provision initially as we grow, rapid growth causes you to take large provisions and defer your earnings even further. The good news of that is this -- is as much as we grew for 50% two years running and therefore didn't have a lot to show in the terms of earnings because we've taken such large provisions. In '07, we're going to grow, more than likely, somewhere in the 30% range, down from 50%. That's going to show or cause those earnings to begin to come through.

Now, to the extent we can grow another year at 30%, that might soften the earnings a little bit. However, as I've said a few times, a good way to look at this is it's kind of like you are climbing up a ladder. If that ladder is at an angle and you growth is steep, you're going to have higher and higher floors you get to. Well, once you decide to get off the growth ladder and onto a floor, then the earnings that come through, whatever floor you are on will be very significant. Depending on what floor you get off at, the higher that earnings stream is going to be.

So to the extent we can grow at a couple years at 50% and a couple years at 30%, that puts you farther and farther up that structure so then, when you start to slow down, the earnings will be very significant.

You know, the other part to look it is no matter what you do, you can't keep growing at 50%. You probably can't even keep growing at 30%, so naturally, as the Company continues to grow, we're going to slow down. As we slow down, those earnings will become stronger and stronger.

So that's the model we're working off of. You know, I would like to have a $5 billion portfolio or a $10 billion portfolio. We can't control that. What we can control is the quality of the portfolio we put together and how we can manage that growth to where we can make sure we can collect it and make it perform. That part of the model has worked very well for us so far.

What we're hoping is, just like you've said, once we get to that level and we slow down, the earnings should be very good and very beneficial to all involved. So again, it's almost like you are hurting yourself a little bit currently by doing well, but it makes your future better and better. (technical difficulty) us for awhile. I think if you wait a little longer, the results should be quite nice.

It's a remarkable story and accomplishment. The difficulty is people have to keep hearing it over and over, and even after you say what you've just said, you still can't quantify how wonderful it is behind the scenes. We just have to wait in time.

Well, we appreciate it.

K.C. Ambrecht, [MLT].

Thank you very much for taking the question. I think another good quarter. Just to help clarify that previous questioner -- so I mean, I'm kind of thinking about a $2 billion portfolio with a 1% ROA. It's kind of kicks out close to $1 in earnings. I know you are never going to bless that but can you think (technical difficulty) you have been marching up ROA on an after-tax basis to 82 basis points this last quarter. You continue to march it up. How long do you think before you can get to 1%?

Well, since we have this conversation with you almost quarterly, you know, you were the one who said "When are you going to get to 2 billion?" We said by the end of this year. So here we are.

In terms of your ROA, you know, your numbers have been rather accurate, so you know, we're not going to forecast that. However, if we continue doing what we're doing, those numbers are going to march right along with it.

All right. So (multiple speakers) 7 -- so, okay. Thank you very much.

We have no more questions in queue. I would now like to turn the call back over to Mr. Bradley for any additional or closing remarks.

Well, thank you. It's been a good quarter. We've done a lot this quarter. We have been able to continue the growth and have the performance, the portfolio hang in there right along with it. As I said, getting that debt deal done was a very significant step this year.

Overall, we are halfway through the year. It's been a great half so far. We look forward to a real strong half coming up. We appreciate all your time and patience with the company, and we look forward to a bright future. So we will talk to you next quarter. Thank you.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Wednesday, July 25, by dialing 877-519-4471 or 973-341-3080 with the PIN number 899-7332. A broadcast of the conference call will also be available live for 30 days after the call via the Company's Web site at www.consumerportfolio.com at www.Streetevents.com. Please disconnect your lines at this time and have a wonderful day.