Consumer Portfolio Services Inc (CPSS) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Consumer Portfolios Services fourth quarter and full year 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 Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarification. The company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. With us here now is Mr. Charles Bradley, Chief Executive Officer and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services.

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

Thank you and welcome to everyone on this call. Let's just start. We have lots to do. First off, we think it was a very good quarter, given the circumstances in the industry and the world today. We are very pleased with the results. I think we are probably one of the few that actually made our number in the quarter so it's an important accomplishment. It worked out very well for us.

The credit -- as much as, our credit is good. It wasn't a great quarter for credit, but, again, a good quarter in this environment is probably something also to be very proud of, and we are. We think our model works. We think our model in this industry and given the times really is going to come in very handy in terms of how it's predicting and performing as we go forward. Having said that, these are very turbulent times. The capital markets are very tight. Liquidity is very tight and everybody is still, at least in our opinion, somewhat overreacting to the subprime mortgage problems, some of the mono line issues, so on and so forth. However, like anything else, there's lots of interesting aspects to the current problems that actually could turn into positives down the road. We'll address that a little bit later in the call. So first, let's turn it over to Jeff Fritz and we'll talk about the financials.

Thanks, Brad. Highlighting some of the results for the quarter and the year, revenues for the fourth quarter were 109.5 million, that's a 7% increase over the third quarter of this year and a 37% increase over the 2006 fourth quarter. Year-to-date revenues for 2007, 394.6 million, that is a 41% increase over the 2006 revenues. Revenues are 94% consist of our interest income on our balance sheet portfolio. That is a continuing increasing trend as sources of other revenues have generally fallen off, such as servicing fees. We do have a -- the balance of that primarily is other income, which represents residual interest income or write-ups on our residual interest asset which we're consistent with the third quarter, although somewhat higher than we would have predicted as those off-balance sheet portfolios cleaned up and we'll yet again predict that the other income from the residual asset will shrink in future quarters.

Expenses for the quarter 103.5 million. That's a 7% increase from the third quarter of 2007 and a 37% increase over the fourth quarter of 2006. Expenses for the year were 370.6 million, and that's a 39% increase over 2006 expenses. One of the largest components of our expenses is the provision for loan losses, that was 38.8 million for the quarter. That's a 7% increase over the third quarter of this year and a 45% increase over the fourth quarter of 2006. Year-to-date, 2007 loss provision $137.3 million, that's a 49% increase over the provision for 2006. The provision, of course, is influenced by the volume of contracts that we originate, the current performance of the credit performance of the portfolio and expectations for credit performance for our outlook over the next 12 months. Brad is going to talk a little bit more about credit performance later in the call.

Pretax income for the quarter, $6 million. That's down 5% from the third quarter of 2007 and up 33% compared to the fourth quarter of last year. 2007 pretax income $24 million, that's an 82% increase over pretax income for 2006. Net income for the quarter $3.5 million, a 5% decrease from the third quarter of this year and it appears it is an 89% decrease over the fourth quarter of last year. You will recall when we talked about it in the previous calls this year, the fourth quarter of 2006, we had a one-time $26.4 million tax benefit, which is influenced -- significantly influenced those 2006 results.

Diluted earnings per share for the quarter, $0.17, that's up a penny or 6% from the third quarter of this year and again down significantly 87% from the $1.30 that we posted in the fourth quarter of last year. Year-to-date earnings, diluted earnings per share $0.61. That's a 63% decrease from 2006, again influenced by that huge tax benefit. Maybe to put that into a little more perspective, we can show you or offer that the earnings per share without the tax benefit in 2006 would have been for the fourth quarter of 2006, $0.16 -- excuse me, $0.11, which was compared to $0.17 which we did in the fourth quarter of this year. So that's again assuming that the fourth quarter of 2006 had the regular 2006 tax provision or the tax rate that was in effect at the time. Similarly, the $0.61 after-tax that we did in 2007 would compare to $0.32 for the full year of 2006 if, again, 2006 was just presented on a fully normalized tax basis.

Looking at the balance sheet. Total cash on the balance sheet is 191.2 million at December 31, 2007. That included $170.3 million of restricted cash. Our balance of finance receivables after the allowance for the loan losses is 1,968,000,000 at December 31, 2007. That's up about 4% from the third quarter this year and up about 40% from 2006 year end. Looking at the debt. Securitization of warehouse debt used to finance our unbalance sheet portfolio is about $2 billion. That's down just slightly from the third quarter and up compared to $1.5 billion a year ago. Our long-term and residual debt increased to $98.1 million in the fourth quarter compared to the third quarter of 82.1 million and 70 million a year ago.

Residual interest and long-term debt consists primarily of our Citigroup financing facility which has a balance at year end of $70 million and has a full capacity of 120 million depending on collateral that's available at the time of any draws. Our consolidated portfolio, managed portfolio, is now $2.1 billion. That compares to just under that $2,053,000,000 at the fourth quarter and 1.6 billion last year. That's a growth of about 36% from last year and 4% over the last quarter. Our consolidated managed portfolio consists almost entirely now of on-balance sheet receivables, virtually all of the acquisition receivables for the acquisitions that the company has done are amortized down to immaterial amounts, and [Sea West] third party service portfolio is amortized down to a very deminimous amount. All the former off-balance sheet residual portfolios have been cleaned up and those receivables are now on the balance sheet.

Turning now to some of the metrics that we referred to help judge the performance. The net interest margin, which is interest income less interest expense, 63.3 million for the quarter, up 4% from the previous quarter, the third quarter, and up 33% compared to the fourth quarter of the last year. On a year-to-date basis, 231.1 million, that's a 36% increase compared to the full year 2006. The risk adjusted NIM, which is the net interest margin less the loan loss provision, 24.5 million for the quarter, virtually flat, just down slightly from the third quarter and up 17% from the fourth quarter of 2006. The risk-adjusted NIM for the full year $93.8 million, a 20% increase over the full year 2006.

Looking at our core operating expenses for the quarter, which the core operating expenses again is the total expenses less the interest expense and the provision for loan losses. $25.1million for the fourth quarter, that's up about 6% from the third quarter of 23.7, up 20% from 2006's fourth quarter. On a year-to-date basis, the core operating expense is 94.1 million, and that's an increase of 17% for the full year 2006. Largely, the increase in our core operating expenses, or one of the significant components, is simply an increase in the employees, the head count, primarily the servicing and the marketing and originations areas. December 2007 we have about 1,000 employees compared to 783 a year ago.

The core operating expenses expressed as a percentage of our average portfolio about 4.8% at year end 2007. That's really flat from the third quarter and it's down about 12% for the fourth quarter a year ago. 4.9 or almost 5%, again flat for the year-to-date basis compared to the fourth quarter -- excuse me, the third quarter and down 16% for the full year period comparing 2007 to 2006.

Lastly, in these metrics, a return on managed assets, which is our pretax income as a percentage of our managed portfolio, for the fourth quarter 1.1% compared to 1.2% in the third quarter and 1.2% for the fourth quarter of last year. That's down about -- that's actually down about 10 basis points comparing the two fourth quarters and for the full year period it's actually up 1.26%, that's up 31% compared to the full year 2006. I will turn it back over to Brad.

Thanks, Jeff. All right. So talking about credit, a very interesting topic. Not to bore you with more numbers, but let's go through the numbers first. In terms of delinquency, December delinquency was 6.31%. That compares to September quarter of 6.06%, so up slightly. And year-over-year, 5.53%, so up a little bit more. In terms of the losses, annualized losses for the December quarter was 6.34%. That compares to 5.57% for the September quarter and 5.92% for the year ago quarter.

Now, looking at that -- I mean, everybody is very concerned about -- there's certainly lots in the news about how auto and credit cards are going the way of mortgages. We don't see it. We don't believe it either. Our delinquency is up it looks like 80 basis points year-over-year. Quarter to quarter it's up 30% basis points. December is always the worst quarter of the year seasonally. It's where you basically start your work and after that, the first and second quarters should be greatly improved. We are already seeing the first quarter improvement. We are kind of happy with where the delinquency is. Of course, we'd like it to be over. We don't have a real problem with where it is today.

In terms of losses, they are also up a little bit. They are up about -- it looks like 70 basis points quarter to quarter. And then about -- they are actually up even less year-over-year. Again, as we have said in prior calls, the '04-'05 vintages we are terrific. We had a lot of different things going on in our favor, and so the '06-'07 is probably more of a normalization of what would be the standard performance. That's really what you are seeing in the numbers. You are not seeing -- at least we are not seeing anything particularly related to some bad economy and the things like that.

In terms of looking at some of those factors, we do think the BK law, the change in the bankruptcy law has somewhat had an effect on the early term losses in terms of moving losses a little forward in the curve. We might look at that little a bit. As a said, the fourth quarter is inherently the toughest quarter. We would look at that a little bit and, again, the seasonality of that quarter. We -- since everybody likes to pile on the economy, maybe the economy has a slight impact. We would probably think of it a little the other way around. In '06 and basically '05, looking at the '04 and '05 vintages. When the economy does really well, it certainly probably helps your performance a little bit. I don't think the converse is true, that if the economy is not doing as well, I think the impact is probably a little bit less.

The extent people have more dollars to play with, I think they probably do a little better in making their payments. To the extent things get tighter, they will still make their payments when they have to. We will jump on the economy a little bit, but not much. A couple we do that seem to be having an affect somewhat versus other folks in the industry and things like that. One of the things we have done is loan to value or LTV is something that we always focused on, in the last four years our LTV has come down a little bit. We think that's an integral part in terms of the severity of loss when you have losses. Having ours come down over the last four years versus most other folks who have gone up, we think is a very important indicator in terms of our performance.

Another thing is PTI, payment to income, again, ours has trended down. That may not be the case for everybody in the industry. Lastly would be the extended terms. The extended term became very popular about three years ago, three or four years ago. We were never really huge believers in it and neither were some folks on Wall Street, like the rating agencies; however, given that it was a standard, we went along with it somewhat. Nothing to the extent that other folks may have. To that end, our average term has gone up from 62 months to 63 months out of the last four years. When we did do extended term, we had much tighter loan-to-value, we only financed lower mileage cars or kept the mileage caps lower even though it was extended term, and we only did newer cars as opposed to old cars that maybe haven't been driven as much but had higher depreciation. By doing, that our extended term has performed very well. It wasn't been a problem. It still out performs the majority of the core portfolio. Again, we didn't do it as much as a lot of other folks. We did it a lot more conservatively. Maybe it's that types of things that helped our portfolio performance.

We also have to give some kudos to our models. The models really seem to be working. I would be the last to say that I'm going to totally bank everything on the model performing or being predictive, but it certainly seems to be having a very good impact in terms of being predictive. We still do a lot of collections, in terms of making sure it all works. We don't really trust the model, but the model seems to be working. The other thing to do -- well, in terms of looking -- well, we'll get to that part in a minute in terms of some other parts. So that's really the credit. We think the credit overall is good. We think with upcoming quarters the credit should hopefully pick up a little bit but, overall, we are very happy with where we are.

So now we can look to the capital markets which is truly the interesting question of the day. The capital markets are doing something in our industry that really has never happened before. We have been in this business for 17 years and the capital markets have always been there. They have sometimes gotten a lot tighter but we haven't seen sort of a breakdown in the capital markets ever. Now we -- it's interesting that the closest we came to seeing this kind of thing was back in '98 or 10 years ago when it was actually the auto industry that was experiencing problems. And so there was tremendous liquidity in the auto industry part of it and also very difficult to get deals done because most of the auto industry performance wasn't very good. Having said that, even then, the auto industry performance then probably wasn't even close to the magnitude of the mortgage performance today. But as a result, Wall Street tends to move kind of in a funny way and they clamp down on everything. So that's the challenge we are facing today. The good news is it appears that the markets may be beginning to open up. A couple of deals went out this week and they got done. We think that could change. The easy answer is at some point the capital markets should open up.

Now, what's the result of what's going on? Two things. One, higher spreads. Everybody is demanding higher spreads on all the deals, up and down the cap structure. And also, there's either higher attachment points from the rating agencies or greater enhancement requirements to get your deals done. In terms of doing securitization, we are planning on doing one, hopefully soon, we think in the first quarter. That's the current status of our securitization. We bypassed doing one in the fourth quarter because we thought the market was worse, and it probably was. We think the market should recover and open up hopefully shortly but, again, our goal is to do a securitization soon or in the fourth quarter.

Now, in looking at sort of those factors which will be the wider spreads and the higher attachment point and the greater need for enhancement, what has the company done to address that? As much as we think, if you look at our numbers and you look at our performance, we are in a really good spot. We have to react to the capital markets. In a sort of stand-alone basis, CPS is doing very well. In the global stretch of things, we are prone or subject to the same problems everyone else has in terms of accessing capital markets. So what we have done along with almost, I think, everyone else in our market, is we reduced volumes. We have come down from a high of between 100 to 115 million per month. We are down into the 60s today. We may reduce it just a little bit more, but somewhere right around there. We think it's rather prudent to reduce volume and kind of wait out the tightness in the capital markets. The fact that everybody else is doing it certainly makes it easy enough to do. There's no sense in guessing that the capital markets will return. If you look at our stock price, no one is particularly paying us for a lot of growth.

So our way of thinking is that this is the time to sort of slow things down, wait for the capital markets to sort of regroup and then when we can have easy access to them we can go back to sort of doing what we were doing. In terms of wider spreads and the higher requirement for cash, or for enhancement levels, interestingly enough, give than the market place is now retracting, lots of -- if all the lenders are pulling back on volume, one can imagine the next thing everyone is doing is tightening on credit and everyone is. And so as much as we like our credit position, it's certainly easy opportunity to tighten credit up and down the spectrum and basically sort of weed out the weaker points of our portfolio, of our buying guidelines and strengthen the overall production. So we have.

The other thing that we have done, which we have not been able to do for nearly 10 years is we are having some price increases. We have been able to easily pass along relatively significant price increases on our portfolio purchasing, or on our loan purchasing, again because mostly everyone else is doing it. As a result, we're going to end up having a tighter credit spectrum, a higher price and a higher margin. Now that margin, of course, we are going to turn right around and pass on to the capital markets. Given that there may be even a permanent risk adjustment in the capital markets in terms of the yields required to do these deals, I don't -- interestingly enough, we have been able to pass on a significant amount of that to dealers and also it helps by a bunch having the federal rates come down.

So net/net, we think the all-in costs of accessing capital markets, even these very difficult and trying times is only a couple of hundred basis points. And we think -- and that's both for cash and for the spreads. We have been able to pass significant amounts of that on, and over the next quarter or two we think we can probably get, and certainly our goal, is to get to a neutral position. Now, if the rates come down some more that's also good, and now the flip side of that is that the capital markets open up or become a little more realistic, we -- and the spreads come in a little bit, we might have significantly higher margins coming out the other side. So, again, like I said in the very beginning of the call, as much as this is trying times and lots of difficult things, there are some interesting aspects to it. But anyway, our current plan is to pass along almost all of the wider spreads and requirements for enhancements on to the dealers. It seems to be working well, not to mention we have been able to tighten credit at the same time. Let's see, what else?

In terms of staffing, we don't foresee any real staffing cuts. We still have a portfolio that is going to either grow a little bit or be neutral. Having a full collection staff is very important. To the extent we have had -- we had three years of very significant growth. Again, as much as this is not quite the plan and isn't the market that we expected, after three years of very significant growth, 35 to 45% annually, having a year where we kind kind of take stock, tighten up and rejigger things a little bit, we'll be in really great shape when the markets open and we can then start growing again. But it's not even a bad setup in terms of where we are today. And so as a result of that, though, we will have better service to the dealers, attrition in our business is -- is significant.

We think attrition will take care of a lot of this -- the sort of the turnover without us being forced to have layovers. The one little exception to that, which is a little unfortunate is that as we said in previous calls, the way we have grown our business, which is one of the reasons our credit is maintained, is we grew by adding marketing and increasing the geographic footprint, whereas opposed to growing by loosening credit or being more aggressive in credit, we grew by expanding our footprint. The negative to this is it is going to hurt our [RevPAR] somewhat, the fact that we are cutting down somewhat our volumes. We will might have some turnover there, which is unfortunate, because we think we hired a terrific group of people, but there are some costs to going through these problems. In terms of the core operating staff, we have every intention of maintaining a full collection staff for the portfolio, and also originations and just providing a higher level of dealer service which, again, will help us get the better deals and sort of move through our program of having tighter volume guidelines and actually higher prices, but with increased service you kind of get something on the other side from the dealer.

In terms of liquidity, we have good liquidity. We did our CitiGroup deal last July. We have been able to manage our liquidity rather well. So we think we're in a good position liquidity-wise. I think over the next few months as we do pass some of the -- this on to the dealers, that will strengthen our position further and put us in pretty good stead in terms of going forward this year.

The other thing to think about in liquidity, unlike, say ten years ago, the access to the equity markets, you can imaging, that given our stock price and our performance, that there is lots of opportunity to go raise money. We are not particularly interested in raising money today, but if we had to we could. And so it's a little different than the mortgage business, which I think that statement would be rather difficult to say if you were a surviving mortgage lender today. But in the auto business, the extent you can show you have the performance, you can show you have the controls and the models at work, I think there is opportunity to access capital if you needed it.

Moving on to the industry, we kind of touched on most of this. All of our competitors are tightening. All of our competitors are reducing volume. All probably experienced a little bit of a worse credit issue than we did. The credit problems for some of the competitors can range anywhere from a 30% increase in credit to a 50% increase in credit. Ours is right around 10%. So we're very happy with that positioning.

Now, here comes some of the good news. Given all of these things, a lot of banks, given all their other problems, mortgages or otherwise, are beginning to retreat from the industry. Many large banks have already said they don't want to be in subprime anymore. They want to go back to near prime or prime lending. That's going to create some real interesting opportunities because if you go back, sort of historically, in 1998 we had a shakeout of the subprime auto industry. We went from 35 or so independent public companies down to about five or ten. What happened was a lot of banks came in and they saw the opportunities. They acquired a few of those five or ten and then began to access the market. So now we had new competitors in the form of very large banks.

Well, given recent problems in the mortgage industry and the CDOs and a lot of the things that puts pressure the big banks, a lot of them decided to retreat and be much more conservative. As a result of that, lots of the banks are pulling back. They are upscaling their credit. They no longer compete with us. A couple of examples might be Household HSBC. They used to be a competitor. We don't even see them in the market place anymore. Places like Wells Fargo pulled back. Big companies like Capital One have pulled back. It's very interesting to see the result of some of this. If those guys pull back, one can see that our industry becomes fewer players, better credit, higher prices. It becomes some interesting opportunities within the industry.

Having all of those things, the next thing that comes along, maybe there's some acquisition opportunities, maybe there's some portfolio acquisition opportunities. This is kind of what happened last time. Last time in '98 you had an industry shakeout. The survivors had some real opportunities to grow and to buy some other players. So we think those opportunities would be interesting too. So overall, we think we sit very well in where the industry shakeout is today.

In comparing us, one of the things some people ask is why is this so different than mortgage? Well, one, the mortgage industry you got the '05 and '06, they still wanted to grow a lot and I think there was some pressure on them to relax their underwriting in order to grow. So in '05 and '06, the mortgage guys got more aggressive. One of the things we saw -- there's an estimate out there that 35% of the mortgage business was no doc, no documentation before funding. That compares to the auto industry or certainly with CPS where we verify every single job verification, every single residence and we talk to every single customer before we fund anything. Now, that's an enormous difference compared to sort of the bankruptcy thing -- excuse me, I keep saying, that the mortgage companies.

One of the things that the mortgage industry is dependent on ever increasing home values. The mortgage business is dependent on refinancings. Neither thing is true in autos. Our asset class value doesn't change hardly at all. There is no real refinancing of autos. If you do it, you trade. A lot of those other problems are not there in the auto business. The complicated structures that mortgage companies did in the capital markets don't exist in auto. In auto, it's pretty much AAA. You might sell a subordinated tranche or two. There isn't all of these different IO strips and other things. There are not pieces being thrown into CDO and things like that. It's really different all the way up from the capital markets and to actually how we buy paper. That's one of the reasons why the auto industry, particularly subprime, should do way well and really not comparable to the mortgage problems today.

It is probably important to point out our portfolio, as we said before, is less than 20% homeowners, currently around 17%. Our homeowners have performed great. They still outperform the bulk portfolio without any problems. We haven't seen any deterioration in the homeowners performance in and of themselves as well. In addressing the recession, some people say we are in a recession, some people are heading into a recession. Nobody cares what we think, but we think the economy is doing fine from what we can see in the borrower base. It certainly looks like employment looks good. We think with what we see it is not nearly as prone as what people are saying.

Having said that, our place at CPS in terms of our customers is a little different. We buy, you know, sort of down the curve. We never used the FICO score to borrow and ironically the FICO scores kind of reward people that have higher credit, things like homeowners, payment on credit cards and things like that. We don't use FICO scores. We use our own proprietary score models that emphasize things like job stability, resident stability, low payment to income, low LTV. Now, as a result, our customer, he basically doesn't have a lot of credit cards. He doesn't have a lot of other debt. He's not the overburdened consumer that basically was relying on his home equity lines to help things work. Most of our customers who own a house would leave that house and go rent and keep their car because they have to have that car to drive to work.

One of our fundamental tenants in our business model is to lend to customers on their primary means of transportation, not the car for the wife, unless she's working, not the car for the kid, not their secondary car. We are trying to finance the car he has to have to drive to work everyday. That becomes vital. In a recession or in tougher economic times, our guys are still going to need to drive to work. In terms of our business going forward, same thing. Our customers are going to need to replace their cars again giving us the tune to finance those cars. Also, our customer tends to be a little more flexible in his job. He's not the high end guy. He's not the very low end guy. In terms of job losses, our guys can move around. There's things like that.

One of the things we look at was earlier recession in California in the early '90s and our customers did very well. We didn't see any real deterioration in performance during that time. So that's another indicator that even in a recession, our customer would do very well. Overall, that's just how we feel about the recession and how our customer would do it. In terms of the outlook, it's easy enough to say it's a tough environment out there. We think because we are going to slow down the portfolio, we will have a rather flat portfolio little or no growth, at least in the moment. It's kind of an interesting moment because we think the capital markets will loosen up shortly and we are going to access those markets. That will really determine kind of how '08 shapes up for the company.

Having said that, what we are going to do at least going forward, we are going to basically assume the worst. We will assume it will be costly to access the capital markets, that the spreads are going to be very significantly wider and that we are going to have to post larger enhancements, but we are building all that in and so going forward we are going to have a very cautious view of the market place in '08. If the market place opens up, then we will access the markets to the extent the spreads narrow, then we will basically make more money. At the moment, I think the cautious approach is to slow down, preserve liquidity, and you can access those markets and then be able to grow again. That's pretty much where we sit today.

In many, many ways if CPS were an island, we would be doing just fine. The company's operating model works. Our liquidity position is strong. The only thing we need is the capital markets to open up. We, like everyone else, is relying on the capital markets. We think we are in a very good position to weather the storm and get through to the other side and the opportunities, in terms of higher margins, better credits and other opportunities are very interesting going forward. With that, we'll open it up to questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Your first question is from Dan Furtado with Jeffries.

Good afternoon. I'm not trying to harp on the point of the securitization market, but the way I look at it, that's really the only -- the only real risk right now in your, for your company, and you are speaking of deals that have gotten done recently. Are any of those in the subprime space or are they prime auto securitization?

It's mostly prime so far. So, there was a deal done late last quarter that was subprime. We haven't seen a true subprime deal done this year yet. Having said that, there aren't a whole lot of us doing big securitizations. So it's not unusual. It's kind of like we are all waiting. No one particularly wants to go first but everyone is going to go. I think, like I said, it's not too much, you think about it, we went to an industry conference recently and everyone, we were a little curious to see what the reception would be and we were rather pleased to see that people have an awful lot of money out there. And as everyone knows, and you can read, there's a ton of money, a ton of equity or liquidity on the sidelines looking for some place to go.

And so we were -- we had a very good reception in terms of people looking for asset classes to go to, now that CDOs and mortgages aren't really -- certainly aren't in the eye of the beholder any longer. Having said that, everyone wants significantly higher yields. I think the trick is to pay the higher yields and not have a significant effect on the going forward deal and that's what we are really working towards. You are absolutely right. Accessing the capital markets an integral part of our business plan. We are perfectly willing to pay the higher spreads. The I think that's how the market works going forward. The real question, as that market moves along, do those spreads come back to normal, things like that. As I said, we have to prepare that they don't but one would think over time they will.

Yes. I would agree with that. What do you, like just kind of -- what are you thinking -- what does your gut tell you -- what the new credit enhancement -- the initial credit enhancement levels will be?

Well, we would think that they are going to be probably -- well, the interesting part is more or less the attachment level is probably going to be singleish. So for us that will probably be in the 18 to 20% range, one would think.

Okay. And then I guess so far -- and then slightly different and please don't misinterpret this question, but CPSS is one of the only companies in this space to show decent growth in the fourth quarter. And I'm just wondering, have you guys done kind of an internal calculation as to how that growth benefits the credit metrics in the quarter? Is that an immaterial benefit? What I'm thinking is we are going to slow down originations here to preserve liquidity, which is the absolute perfect thing to do. I would anticipate that credit is probably going to weaken if growth slows, it's a consumer portfolio. And what do you -- if you were to disaggregate that growth, where do you feel that your credit would be showing you as of 4Q?

You will like this answer and first off, I don't mind any question. I have been doing this for a long, long time. I have been asked a lot tougher, and we work through them all. In any event, interestingly enough, our fourth quarter was actually less than the last quarter. So we actually were slowing during the fourth quarter. Certainly substantially by December. So I would almost say that if we had gotten some real growth in the fourth quarter, our numbers would have been better. Having said that, they weren't -- they were decent. And so it's a little hard to put a number on if we hadn't -- if we had run less.

Right, no. I understand.

We slowed down growth starting in really in November/December, and so, as I said, we ended up growing certainly a lot less than we expected. I think we probably would have grown another $50 to $80 million in the fourth quarter if with had had normal growth.

Is it -- is it correct for me to assume that we should see credit weaken slightly as -- as we're waiting for the securitization marks to reopen? In terms of the fact that we are not really going to grow the portfolio so, therefore, credit tends to season?

You might think that, except we really started tightening our credit back in October. And so, actually, if anything, as that new paper with the tighter credit builds up, it's going to have a very positive effect on overall performance. So, I guess -- the way to look at it -- and actually, there's a couple of things. If we were going to kind of look at it, we would say that '06 is the year that we are not particularly proud of. '07 was -- we kept saying we knew we had already tightened credit before '07 started based on the '06 performance and '07 was lagging. It wasn't really starting to move, but '07 is beginning to come around. We have pretty high homes that '07 will perform pretty good. '08 is going to be record setting, in terms of the performance given what we have done through credit tightening.

So, I think what we are going to see, we have LTVs by almost a full point and by the end of the fourth quarter. So it's a little -- again, given the market is a little tough to make the call, but what we have first quarter that we didn't have in the fourth quarter, generally, it's one of the best two quarters of the year. We have a lot of new paper coming on with much tighter credit. The '06 paper, which is sort of the worst of the three, is now peaking out and coming down the other side. So there is an opportunity for it to get better. Now, again, I mean, I don't know if you believe in the economy thing, which we are not big fans of, maybe that has a tempering effect, but we are looking -- we are thinking positively.

I understand. Thank you for your time. I appreciate it.

Thank you.

Thank you. Your next question is from Kevin [Wenk] with [Polynews].

I have a couple of questions. One is you mentioned that loan to value is decreasing and what's the average now? And for the whole for the portfolio and for fourth quarter originations, what might have been the average?

I can give you the average and somebody can tell me the fourth quarter. Right. All right. Our overall average in the portfolio today is 114. For the fourth quarter, it was 113. And going forward today it's at 112.

Okay. And then the employee costs from Q3 to Q4 went up about 1.5 million, if I have my numbers right. And sorry if I might have missed this in your introductory remarks, were there comments on that or what was going on there?

Well, we had some growth in the head count during the fourth quarter. We did certainly increase the head count on the both the marking side and the servicing side for the collections staff and then we true up bonus accrual for staff and management bonuses in the fourth quarter when could have contributed somewhat to that as well.

Okay. Were there smaller quarterly bonus accruals in earlier quarters or do you wait until the fourth quarter to book the whole thing for the whole year?

We book a little bit each quarter based on an estimate of where we are at and how close we are to meeting the goals that result in those bonuses. And then often in the fourth quarter there's a little true up. But we also did add significant head count in the fourth quarter too.

Okay. With the --

One of the interesting parts is this market is really turned in a hurry. So even through almost, I don't know, September, October, we were still growing and thinking things were going to move along. And so we had to do a little bit of a pretty quick turn and so we probably were still staffing like things were going to be fine as early as the beginning of October.

Okay. When you look at the whole managed portfolio, roughly 2 million or 2.1 billion, how much of that will burn off as loans mature?

It's -- if you look at the portfolio and without considering new originations growth, a rough estimate is a run off of about 2.5% per month to 3% per month, something like that. So you can assume 30% or so over the course of the year but without figuring in new originations.

Okay. And then the current origination rate of 60 million a month, I mean, is that something that you think you are going to do for the next three to six months or and have it pick up later in the year or what are your thoughts there? Because as you can see from just the burn off rate you described, the portfolio -- unless I misunderstood something, would shrink I think a bit more than what you might have suggested.

Yes, it's kind of the $64,000 question. Currently, our thinking is we do around 60 million a month until the cows come home or until the markets open up. We would want the markets to recover significantly before we would start venturing into growing based on the market being there. So we'd want probably a couple of quarters of knowing the capital markets are strong again, so on and so forth before we would start growing. So at the moment, our plan is for the whole year is to sit in that 60s kind of range.

Remember, we are making, I would guess, two fundamental sort of industry-driven or capital markets driven decisions. One, we are going to stay with significantly low volumes even though our paper seems to be performing very well and the growth opportunities are enormous and, two, that those spreads will be significantly wider for a good long time. And so given those two things -- you have to assume that until the markets prove you different. And, now he, even as first gentleman said, you know, I think that probably we're thinking it could be this summer, but you just don't know and you certainly don't want to bet the company on it. So, but now the other part is even with that originations level, the portfolio shouldn't shrink. We should either stay even or maybe grow just a little bit. So you might have amortizing just a little bit too quickly.

Okay. And I appreciate that you are upgrading the credit profile by lowering the originations currently, but if you could give us a little bit more color as to metrics that you have, as to how much higher quality the originations are on average at 60 million a month versus what they might have been at 100 million a month.

We are still waiting to see how we think it's going to come out, but based on what we sort of use in modeling, we think the number is somewhere between 100 and 200 basis points in overall credit performance.

Okay. And one final question, and we own the stocks, I'm not trying to ask anything controversial here. But you look at the various credit metrics from Q3 to Q4. Delinquencies went up a little bit. Repossessions went up a little bit. Total delinquencies and repossession inventory went up about 30 basis points, but allowance as a percent of finance receivables goes down. And so maybe you could give us a little bit more color or commentary as to your comfort level with the allowance having gone down when the other metrics have increased a bit.

Part of it is just is the seasonality of the portfolio. When we bought Mercury and TFC and the portfolios inherently on those, those are much higher loss portfolios. Probably in the case of Mercury, higher than almost anything we buy today. And TFC not quite so much. Well certainly -- let's put it an easy way. All the paper that we bought associated with those two companies would today fall into our lowest tier or lower tier programs, which would be the lowest 25% of what we buy. So as a result, the losses on those portfolios are much higher. The provisioning was much higher. So you are going to have -- as that runs off and as Jeff pointed out, it's almost all gone now, our overall provision is going to sort of look like it's shrinking, but it really isn't in the case that we're providing 12 months of losses for the portfolio as we originated or any given moment, but that overall number will come down a little bit. Now, I think as time goes forward, I mean, if we see the losses over the next couple of quarters, if the seasonality -- it's almost a reverse. The good seasonality of the first two quarters is not there, we might look at that a little bit. As an overall number as percentage of the portfolio, given that two or three years ago a very significant portion of the portfolio was that other paper, you would you still see the overall percentage come down a little bit.

Do you think charge-offs may have peaked from what they were in Q4?

That's a good question. We're thinking they should be flat in the next quarter.

Okay. Thanks for your help.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is from Casey [Embreck] with Millennium.

Hi, guys. Hi, Brad. It's actually Jim [Aga].

Hi, Jim, how are you?

Solid quarter. I missed some of your comments, Brad. Can you spend a minute. If you did already, I apologize. Maybe about any changes in severity quarter-over-quarter and over the last 12 months. We are starting to seeing more of the Mannheim data looks more negative than it did before.

Quarter to quarter, we are down about two points in terms of the severity or what we get at the auction. So it's off a little bit. Depending on things going forward, we think, and that gets us down to around 42%. Back in the day when you had the fleet sell-off and the dealer incentive stuff, we are in the mid-30s. We don't think you can get back to that level. We might see another point or so on sort of the down side in terms of the severity or what we get at the auction.

Right.

Interesting enough, and we don't follow the Mannheim as much as one might think. The way we would kind of look at it, too, at the dealership they are having trouble selling new cars. Now, to the extent that people aren't buying cars, that is going to soften up the used car market. When the economy comes along, or they get money or whatever, then that market -- well, the easy answer is the used car market is always going to be supported by people who need a car and go buy a new car. The interesting part is if the economy is not doing great, then those people are probably more than likely be buying used cars even more so than new. So we would think that market should hang in there. We have seen a little bit of softness but I don't know that we would see a whole lot more.

Okay. And then to the gentleman before me, question about credit losses, I was going to ask about provision. If you guys go into a slow -- a slower growth mode, which is, which seems pretty reasonable given the "worldwide credit crunch," what sort of range of loss provisions for the income statement purposes? If you look at what you guys purchased -- and I know it has to do not just with purchases but with the actual dollar amount of receivables that are outstanding, you said that even -- even though you slow production, the dollar amount of receivables may not go down that much, it's probably going to be pretty constant, around $2 billion in managed. Right? If I look at 12 months ended '07 and 12 months end '06, your actual income statement provisions were a little over 10% for contracts purchased in '07 and a little, about 9% for contracts purchased in '06. Is that -- is that sort of 10% range reasonable?

Well, rather than expressing those percentages, I think our expectations are that certainly the slower growth is going to influence the provision and the track of the provision expense in the P&L. With what we expect to originate in '08 and with our expectations for portfolio performance, I think we expect to see sort of flat provision expense for maybe the first quarter and the second quarter and then maybe slightly decreasing provision expenses during the latter half of the year.

Slightly decreasing?

Compared to the previous -- compared to the first half of '08.

Right.

And that's dependent on the new production really performing the way we expect it to. So we have to wait and see a little bit. But that's the current thinking and sort of -- we have three or four quarters -- or whatever, two or three quarters to figure that out.

Okay. And then maybe if you could give us a little more color on some of the securitizations that you mentioned that are in the pipeline, even though they are in the early stages. What are they -- what are they like? Are they -- are they subprime? Are they near prime? What are you seeing?

Not being horribly specific. We think there are two or three subprime deals coming. We think there's probably twice that many sort of prime deals coming. I don't know about any near prime that I can think of off the top of my head.

Okay.

But one would think that -- all we know is a whole lot of people are just like us. Everybody wants to access the market. So I think sooner or later people will.

I know this is your call and not Americredit's call. Can I just ask for your opinions as to why this investment company, Lucadia, has the hots for Americredit.

Well --

I mean, they obviously -- I mean, they snow sort of the macro-economic picture as well as all of us, if not better, and they are making they are making a huge investment, a growing investment on a daily basis it seems like in a company whose numbers have largely fallen off a cliff, even though it's a great franchise.

That's an interesting and fair question. I will not speak particularly for Americredit but in terms of the industry, our industry over the last three or four years has experienced lots of acquisitions, lots of -- there's very few independents left, which is why it is kind of hard to pencil out how many independent deals are coming to market. But I think in the last three or four years, there's at least four or five companies that have been acquired, almost solely to acquire a platform in this industry. And so it's easy enough to see, much like the mortgage business, as much as the mortgage business is somewhat of a disaster, people have gone out and bought those platforms with enormous discounts thinking this is going to turn and they have something to build. I don't know if I would be doing it in the mortgage business, but in auto we are being rather unfairly tarred with the same thing.

And so Americredit which give or take has been a popular acquisition candidate for many years. If you think about it, and I think they had something like a $3 billion market. Americredit is a great franchise. Great platform. So to the extent, much like us, they get undervalued enough and someone believes in the deal. It's a great thing to do is go and buy something for a half or a third of what it was trading for two years ago. In our industry as much as -- everyone can say whatever they want but our paper in our industry has always performed very well. Now, there are times when the losses can skew around a little bit. It's not like, all the rap paper will always get paid. All the bonds have always paid and so the platform for the long term is significantly good setup. Americredit is an easily dominant player in the market. To the extent they get an attractive price, sure, it's easy enough to see Lucadia or someone else coming in and taking a position.

If you take what I said earlier about people cutting back, there's some real interesting opportunities in terms of if a lot of the banks back out and a platform is available, you can come in with some money and really do wonderful things. Now that I said nice things about Americredit, I will say it about us. It's a very attractive opportunity. Having said that, I would like to see our stock go up, oh, way significantly before somebody calls. But, nonetheless, it's the same idea. We could be growing very very much in this industry if it wasn't for the capital markets. We like our model an awful lot as much as I like Americredit, we like our model more. So, I don't know if that answers your question perfectly, but, like I said, in all of these situations, opportunities become interesting on the other side if you know what you are doing. But whether it's Americredit or us or anyone else, the opportunities to have a platform in auto, which no matter what anybody does it will be an $80 billion annual business, is really intriguing.

Good point. Lastly, was there any action on the buyback this quarter.

In terms of us buying back stock?

Yes.

Yes, we are still in the market. We continue to buy back, not every day, but whenever we can. We think the stock is significantly undervalued, as always.

Thanks a lot. Good work.

Thank you.

Thank you. There are no further questions. I will turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

Okay. I think we tried to touch on all the different aspects of what's going on and where we sit. Again, I think CPS is a company, we have done our business plan, the credit performance is a up a little bit, but certainly compared to our peers we are very happy with where we sit. We think if the capital markets open up we have a real opportunity in terms of the growth potential. It's never perfect, some of these changes on the world. On the other side, we have done this for a long time. We have been through probably things that were far worse. The problems are not in our industry, it's a different industry. We got to the problems in our industry without too much problem. We can get through whatever it takes. We think this is tough times, but we are up to the challenge, and there's some opportunities to come along as well. So it may be a little bit rocky for a bit. We think down the road this could be really good. I thank all of you for participating in the call. We look forward to talking to you after the first quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Wednesday, February 20 by dialing 800-642-1687 or 706-645-9291 with a PIN number of 34672747. A broadcast of the conference call will also be available live and for 30 days after the call via the company's web site at www.consumerportfolio.com and at www.streetevents.com. Please disconnect your lines at this time and have a wonderful day.