Consumer Portfolio Services Inc (CPSS) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services' 2016 fourth-quarter operating results conference call. Today's call is being recorded.

Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed 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. I will now turn the call over to Mr. Bradley.

Thank you and welcome, everyone, to our fourth-quarter conference call. I was actually trying to think about how to start the call, and I thought the old Chinese proverb, may you live in interesting times, which is generally considered a curse, is a good way to do it. Because we are, at least in CPS and in the industry, are living in interesting times. Again, everything you see, higher delinquency, higher losses, now in the fourth quarter, everybody slowed down, everybody dropped something between 15% and 20% in volume. There's lots of concerns, regulatory, in the economy and the industry in general. So these are your interesting times.

The good news is, CPS has been around for an awful long time, and as much as, from a personal level, the Company isn't doing exactly as well as we want it to, our delinquencies are still higher than we'd like, our losses are still higher than we'd like, but in the backdrop of everything else going on, we're actually doing pretty darn well. And so I think one of the things we've started to look at is, if this is in fact one of those interesting times when there's a lot going on, lots of moving pieces and a lot of them very negative, maybe the proper course is to stay the course and then see how it all ends up and hopefully pop out on top.

And so we'll go through this in a little more detail in the call, but generally speaking, that's a lot what the fourth quarter came out at, that's lot of what 2017's going to come out at, is us trying to stay the course and see how the rest of these moving pieces shake out and hopefully, be in a position to take advantage of it and maybe be in a position to have done the best of everyone there. So we'll see how it goes, but that is the focus we're going to have.

More specifically, as I mentioned, the business was slow in the fourth quarter, significantly slower than we would have expected. Again, our focus is on quality over quantity. You can almost feel the other companies reaching to provide their earnings or the growth that they're expected to have. We're not in that kind of position, and so we're not trying so hard, and as a result, our numbers are down a bit. But again, we would rather have the quality over the quantity any day of the week.

I think one of the other aspects is, is CPS is still quite profitable, and a lot of these other companies are not. And so if you take the combination of our focus on quality over quantity, can continue our profitability as we go forward, continue the efficiencies, continue to focus on collection improvement, again, I think we'll do pretty well. I'll get into that in more detail, but for now, I'll turn it over to Jeff to go through the financials.

Thanks, Brad. Welcome, everyone. We'll begin with the revenues. Revenues for the fourth quarter were $108.2 million. That's roughly flat with our third quarter this year and an increase of about 14% compared to the fourth quarter of 2015. For the full year, revenues were $422.3 million. That's a 16% increase over the revenues for 2015. So it's interesting, like the fourth quarter being flat, and I think we're seeing a little bit, in fact a lot of these numbers, I think, will reflect the air going out of the originations balloon in the second half of the year. We did $215 million for the fourth quarter. We did do $1.1 billion for the full year, so you saw the significant increase in the year-over-year revenues; but the second half of the year, certainly lower originations volumes impacted some of these results.

For the expenses, for the quarter, $95.5 million. That's actually down just a tick from the third quarter of this year and up 20% compared to the fourth quarter of last year. Full-year expenses, $372.6 million, a 23% increase over the full year of 2015. You'll see most of our expenses, particularly year-over-year, increases, significant increases, in interest and provisions for credit losses. But as we'll talk about in a little bit, we're continuing to see some efficiencies in our core operating expenses.

Provisions for credit losses, $43.6 million for the quarter. That's down about 6% from the third quarter of this year, but up 21% compared to the fourth quarter of last year. And for the full year, $178.5 million, a 25% increase over the full year of 2015. As I said earlier, I think we're starting to see, particularly in the fourth quarter, second half of the year, some impact on some of these numbers from the slowdown in the originations volumes.

Pretax earnings, $12.7 million for the fourth quarter, a 2% increase over the September quarter this year and a 20% decrease compared to $15.8 million in the fourth quarter last year. Similarly, full-year pretax earnings, $49.7 million, a 19% decrease compared to the $61.4 million for the full-year 2015.

Net income for the quarter, $7.5 million. That's up 3% compared to the September quarter this year, but down 17% compared to the $9 million in the fourth quarter of 2015. And for year-to-date net income, $29.3 million, a 16% decrease compared to the $34.7 million for 2015.

Diluted earnings per share, flat for the fourth quarter compared to the third quarter this year, at $0.26, and a decrease of $0.03 compared to $0.29 in the fourth quarter of last year. Full-year diluted earnings per share, $1.01 this year compared to $1.10 in 2015.

Moving on to the balance sheet, our liquidity position continues to be strong. One thing about lower originations volumes is that it provides more liquidity or it puts less stress on the liquidity picture, to the extent there would be any, with rapid growth, so we maintain a very strong cash position. You can see the portfolio finance receivables roughly flat from the third to the fourth quarter, but still a 14% increase over 2015.

Somewhat more interesting, on the debt side of the balance sheet, we continue to utilize our three warehouse lines. You'll see that we repaid in full that remaining residual interest financing that was $7 million at the end of the third quarter. We repaid that, I think, in November of this year. And so we don't have any of that remaining type of debt on the balance sheet.

The other thing that happened on that side of the balance sheet that was a small transaction, but kind of interesting in its way, is you may recall a year ago, in our 2016 A transaction, we retained the class F bond, because at that time, there was really no market for that particular bond. And so we retained that in our balance sheet for the full year. But in December, we sold that bond, which was a $10 million bond, and we sold it and just basically created $10 million of debt on the balance sheet and got those proceeds in December, I think, December or November. So you can see that otherwise, the securitization trust debt is roughly flat for the quarter and the remaining long-term debt, those renewable notes, also roughly flat.

Moving on to some of the performance metrics. The net interest margin, $86.7 million for the quarter, that's down about 1% from the September quarter, but up 9% compared to $79.3 million a year ago. The full-year net interest margin, $342.3 million, up 12% from the full year of 2015.

One thing that we noted throughout this year, and I think we're going to continue to see somewhat in the future, in the near future anyway, is the increased blended cost of funds for the on-balance sheet ABS securitizations. So the cost of ABS, the blended cost of ABS debt for the quarter was 3.6%, which is up from 3.0% in the fourth quarter of last year. So what's happening is, the debt that's paying off is generally at lower coupons than the debt that we're putting on as new securitizations, because obviously the rates have gone up a little bit over the last year or so.

The risk-adjusted NIM, which takes into account the provision, $43.1 million for the quarter. That's up 4% from the September quarter, but roughly flat to the December quarter a year ago. Full-year risk-adjusted NIM, $163.8 million, which also is roughly flat for the full year last year.

The core operating expenses, $30.4 million for the quarter. That's up 5% from the September quarter and up 11% from the fourth quarter a year ago. And the full-year core operating expenses, $114.2 million, up 12% from a year ago. That number as a percentage of the managed portfolio, core operating expenses, 5.3% for the fourth quarter. That's up just a little from 5.1% from the third quarter, but down compared to 5.5% from the fourth quarter of last year. And the full-year core operating expenses as a percentage of the managed portfolio, 5.1% for 2016, down from 5.5% in 2015. So as I've said, and the pattern we've generally seen over the last couple of years as the portfolio has grown, is that we're continuing to get some operating efficiency in our core operating expenses.

Return-on-managed assets, 2.2% for the fourth quarter, roughly flat with the third quarter this year, but down 3.2% compared to the fourth quarter of last year. Full-year was also 2.2% and down from 3.3% for the full year of 2015.

Moving on to the credit performance metrics, as Brad said, we continue to see higher delinquencies than we would like, but fourth quarter is typically a challenging credit performance month. Full delinquency was 10.96% at December 31. That's up a little bit from 10.46% at September 30 this year, or in 2016, and up compared to 9.5% a year ago.

Net annualized losses for the quarter, 6.97% for the fourth quarter. That's up from 6.7% for the third quarter of 2016 and up compared to 6.2% last year. Full-year net losses, 7.03%, and that's up from 6.42% for the full year of 2015.

With regards to the recovery rates at the auctions, we continue to see some erosion there. For the quarter, we did about 35% recoveries at the auction. But that's a significant decrease from a year ago, which was 38%, and that, in itself, was a decrease from a year before that. So we continue to see, as the whole industry is seeing, some erosion at the auctions.

In the fourth quarter, we also did, which we have done frequently, from time to time or in the fourth quarter, is a charge-off sale with net proceeds of just a little over $5 million, which ripples through these numbers as a recovery.

Lastly, moving on to the ABS market, we completed our 2016 D transaction in October. That was a $206 million securitization. The structure was similar, consistent to all of our recent previous securitizations. On the positive side, blended cost of funds on that deal was 3.62%, which is the lowest blended coupon of any transaction we've had since 2015 B, or the June, 2015 securitization. Other than that, as I said, it was similar, two AAA ratings, at the top of the stack. 21 unique investors in that deal, and two new investors, which indicates that, and really throughout the year, we've seen generally, particularly the second half of the year, generally very strong response to our bonds in the marketplace.

And so we feel that while there's a lot, as Brad alluded to, a lot going on in the space, the asset-backed market continues to be very liquid, so we've continued to take advantage of that. With that, I'll turn it back over to Brad.

Thanks, Jeff. In running through the departments, I think Marketing, again, will be a focus for 2017. Given the way the industry's working today, we actually took some time reevaluate and clean up some of our marketing reps. We've lowered the rep count to around, 80 from over 100. And I think one of the focuses this year will be to grow that back to 120. Remembering that we don't really want to compete in the reaching harder for deals in the given markets.

So an easy way to get some expansion without really risking your quality is to add new markets and then take the piece of the new market that would fit what we want, rather than trying to compete more heavily in the markets we're currently in. So again, and we've done this in the past, where our focus will be to expand the footprint, rather than to reach deeper in the given markets we're already in. So hopefully, that will provide some interesting results, depending on what's really going on in the economy and the marketplace.

Originations, again the focus is on quality over quantity. Some interesting feedback on the originations front is that everybody -- a lot people in the originations area are seeing more and more challenging or bad loans that we don't want to buy. And that's a real good indicator of what's coming out of the dealership.

And the way it works is, if we're seeing a lot of good loans, it means we're getting what we want. To the extent -- and also, it means the dealers have lots of loans to send you. To the extent that problems are getting more difficult, dealers start trying to push through riskier and not as good loans, and so when you start seeing more of those, you can almost tell that in the marketplace, the dealers are struggling just as much as we are, because they're trying to push through bad deals that we don't want. And they know, most times, we're not going to buy them. So that gives you an idea, that they're even trying to send them shows you that the market's difficult. But again, keeping our originations model the way we want it an buying what we want to buy, in the end will pay off much better than any other course.

In terms of collections, and I think everybody's now, at least we are, comfortable with the new dynamic, that given all the technology, our customers are a whole lot smarter and a whole lot more aware of what's going on. So when we're looking for them, they look at their iPhone and decide whether or not to take the phone call. However, when we then tell them we're going to take their car, they pay.

And so we've now, for over a year or more, run this higher DQ, but not with horribly higher loss rates. If the loss rate truly tracked the DQ that we've been seeing, the losses would be much, much worse. And so there really is this new thing, or new dynamic, where customers pay you when you're going to take their car, as opposed to just paying you as soon as you start calling them. And so we've gotten used to that. We've redone the way we collect. And certainly, part of that is the regulatory environment, for the way you now have to speak to customers and how often you can call them and things like that.

But that whole thing is now settled in as our culture has changed, and so we're real happy with that. So now that that's been done, the trick is to see how much better we can do with this new dynamic and we're beginning to see some results.

I think one of the other things that happened was, in 2012, 2013, we were growing and we were just coming out of the recession in 2011, 2012 and 2013. And right around 2013, we started not liking what the paper looked like. So starting in 2014, we started trimming the credits, trying to improve what we were buying, and we've done that consistently from 2014, 2015, 2016 and probably a little more even in 2017. But we're beginning to see improvement in the 2014 performance, the 2015 performance. It's really early, you certainly can't really tell on 2016, but if the trend line continues, then I think we're going to see some very nice results in terms of what we've done.

And so as an aside, I'm not so sure everyone in the industry started in 2014. I'm not so sure everyone in the industry might not have started until 2016. So we're happy with where we started making some changes and hopefully, again, down the road, that will be beneficial to us.

As Jeff mentioned, the recoveries continue to go down, and that's just one of the more many negative things facing our industry today. But for us, it's down almost 10 points in two years. It probably isn't going to go down too much more, but the fact that we've been able to weather that rather easily, given everything else going on, I think was a positive, as well.

In terms of the industry, first, securitization market, this is almost the opposite. One would think, with our difficult times and some issues in the industry, that the securitization market would be more difficult. In fact, it's improving all the time now. And whether that means there's not enough other products to buy or whatever, but auto, which was supposedly being in a bubble and all these terrible things coming, instead is very much in favor in terms of the bond buyers, and the pricing continues to improve, which again, would fly in the face of all the other issues or headwinds that tend to be out there. But for us, having good price in the securitization market is, again, super beneficial.

Other things that are going on; well, this is something a little interesting. We certainly -- we've always, in terms of the strategic planning at CPS, we've always been a fast-growing Company for a lot of different years. It's almost like we'd always be pretty fast-growing, you'd hit a recession, the whole thing would fall apart and we'd start over and we'd be fast-growing again until you hit another recession. We were fast-growing, in 2012, 2013, 2014, but in 2014, 2015 and 2016, we've really leveled off. In 2014, we did about $950 million. In 2015, we did a little over $1 billion; and in 2016, a little more, just over $1 billion. But those three years, about as flat as we've ever been as a Company, in terms of growth.

And we always wondered, well, gee, if you flatten out, how's the cash flow? And when you're growing, no matter what, if you're growing significantly year over year, you're always in the market to raise money, because you're going to need the capital to grow. But now that we've flattened out a bit, the capital, we're generating lots of cash. And so we don't really have this need for growth capital today. And that's probably the first time in the history of the Company where we're running at a nice status quo in terms of growth, generating lots of cash. As Jeff mentioned, we paid off all the debt.

So we're in a really good spot in terms of the strength of the balance sheet, both in terms of debt we currently have or don't have, or in terms of cash. It's very interesting to see that if we run the way we're running, we don't really need to raise money for the next year or two, unless we start growing again. So that's, again, an interesting thing to think about, given all the other things going on in the industry.

Also, we continue our program on repurchasing our stock. We bought back another 0.5 million shares or so in the quarter. We've now bought back about 3.5 million shares since we started buying back shares. And that's over 10% of the Company, significantly over 10% of the Company. And we're doing it slowly and almost quietly. But again, it has a big effect in terms of the overall balance sheet and certainly the shares.

Another positive, certainly you can almost see the trend here is we're doing lots of little things that you really can't see too much of, but again are all very positive for the overall health of the Company and how we will sit and fit through the problems in the industry and/or the economy.

I think the other thing that happened was, we've, or certainly I've said in previous either calls or talks or things like that, there's three big things facing our industry. The first one is regulatory. Well, with a new President, the regulatory environment certainly will solidify. A lot of people think it will actually improve, but much more importantly, we know it probably won't get any worse. So the regulatory box can almost be checked off as being a positive, or at least no longer a negative in our industry.

Secondarily, everybody says, gee, is it the end of the cycle, should I be buying into these companies or wait for the recession? That's still out there. But again, it's starting to feel like a recession. So maybe that will, one way or another, take care of itself soon.

And thirdly, it's the participants in the industry. There's lots of talk about either the smaller guys and some of the larger folks who aren't doing very well and everybody wants to see how that shakes out. And certainly we do, too. We think we've always been an opportunistic player in the industry during changes or shake outs. So again, we may have that opportunity, given the way things are going. And so we're almost, in some ways, more focused on being prepared to be opportunistic than really trying to focus on our own growth, again, given the backdrop that people seem to be fighting too much for growth and the credit quality isn't what it should be.

So we'll see how that plays out. But those are really the three things. One of them is probably addressed, two yet to come. But until those other two areas have been addressed, it's probably not a great time maybe trying to grow really fast and get real big, because you're really fighting against the tide in those areas.

And lastly, in terms of the overall economy, I know that the stock market's booming, and certainly there's a lot of what appears to be consumer confidence, but our borrowers, generally speaking, seem to be usually the tip of the spear of consumer confidence, and our borrowers aren't really buying cars. The new car sales were strong in the fourth quarter. That was the biggest incentive area for the manufacturers ever. So it's a little hard to think that's a true reflection for the fourth quarter car sales.

Certainly, in the used market and the sub-prime market, we would think things have slowed down dramatically. Again, from the economy point of view, if our customers aren't buying cars, they're probably feeling that their wallets are a little tighter than usual. And maybe, we'll see what happens, but again, it feels like a recession.

With that, we have, the DQ is higher, the losses aren't as bad as you might expect, but still not what we would like, but we'll have to see how this economy works and the interest in how it works with all our friendly competitors. In terms of whether they can either survive it, they can benefit from it. But in the end, we want to position ourselves to where we certainly get through it without any problems, which I think we can, and also that we can be in a position to be opportunistic when other things happen to other folks. Again, it's interesting times. We'll see how this all plays out.

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

(Operator Instructions)

John Hecht, Jefferies.

Thanks very much for the commentary. Brad, trying to synthesize your comments on volumes. And clearly, you're being selective, you have been selective for a while. And if I recall, because some of the seasonality with respect to originations became a little bit strange over the past few quarters, in part maybe because of the selectivism. So the question is, given your pipeline, the competitive environment, what would you expect this year in terms of seasonality and direction of volumes?

That's an excellent question. Because we're sitting here in February, being tax season, and again, the government announced they were going to push back the release of the tax refunds. But boy, considering this should be the beginning of tax season, it seems awful quiet out there. And so with that, we would, again, think volumes are going to be even less than what we might have initially expected. And so as much as our forecast would be around that $1 billion number again, if things don't start picking up -- and to address your seasonality question, it's been weird that the middle of the year for a couple years seemed to be when we saw business, instead of the beginning of the year, and then it switched back last year to the beginning.

Well, this year, there doesn't seem to be much going on in the beginning, so we'll see if that pushes back a quarter or so. But it's easy enough to say overall, I would expect less rather than more. Our target is around $1 billion, at the moment. I might lower that by as much as $100 million, depending on what's going on.

That's helpful. Thanks. And then second, Jeff, you talked about, you noted the increased financing costs related to spreads and ABS markets and interest rate environment and so forth. Do you expect to be able to pass that increasing cost of funds on to borrowers or what are you thinking on the yield side of the portfolio?

Yes, that's always a possible -- mechanically, that's always possible, because we decide what the floor buy rates are for the contracts we buy from the dealers, we decide how much the acquisition fees we set for the different programs. So that's always at least within our toolbox. But that, in turn, has an impact on your competitiveness in the marketplace, too. So we actually raised prices a little bit back in the middle of 2016 and we saw a little bit of an impact to that. I don't know that we have a lot of that on the drawing board to do anytime soon.

The headwinds -- for us to raise prices even 25, 30 basis points, which is what we did in 2016, we got it done, and I don't think we really lost much business doing it. But given this market, to try and do that again. And remember, that isn't all that much, 25 Bps. But to do it again, I'd be wondering whether, given the market, that wouldn't hurt us more than help us. So if you saw some drop off with the other players out there, maybe we could get it done. But certainly for right now, we wouldn't think much about raising that up. But again, that can change, given what other players in the marketplace do.

Okay. And then last question, you guys have increased your capital base pretty consistently over the past few years. You're now around 8% equity to assets. Do you have a target? I know you've talked about improving the balance sheet in preparation for the next downturn. So do you have a target? And at what point would you think, if you got excess capital, would you think of buying back stock?

At 8%, a lot of folks would still say that's so extremely weak. But given the way that they do that measurement, it's probably not a fair measurement. And having said that, yes, we would like to continue to see that improve. If we have the opportunity, it's funny, everybody and his brother wants to give us money, but they all say, we don't want you to use the money to buy back stock. So that's a little bit of an issue. But we're certainly out there looking. If we find a deal we like, we might figure out a way to do it.

At the moment, the real answer is, it's going okay. Like I said, we've been able to buy a fair amount of stock on a regular basis. So even though we probably aren't exactly in a position to go out and raise money to do a big stock buyback, we are taking stock off the Street all the time. A lot will depend -- it's very hard for me to really figure exactly what 2017 is going to do, though I would think that there will be some interesting opportunities. To the extent some other peoples fall apart, and we actually have the ability to step in and do something, the stock will do fine. To the extent other people fall apart and money's available, maybe we will be able to buy some stock back.

But yes, we certainly would like to see the equity ratio continue to improve. I know that's a rather vague answer, but it's about all we've got.

All right. Well, thanks very much, guys.

Thank you.

David Scharf, JMP Securities.

Good morning. Thanks for taking mine, as well. Brad, we always appreciate your commentary and candor. I'm wondering, relating to some of your comments about the macro environment, we've become accustomed, from all the sub prime auto lenders every quarter, discussions of heightened competition has almost become a throwaway sound bite. But you've really stood out these last couple of quarters in your opinion about the state of the consumer. And terms like recession, we haven't heard a lot in definitive terms lately.

Can you give us a little, maybe just anecdotes, either comments you're getting from dealers or whether it relates to just the percentage of credit apps that you're approving or bidding on? I'm wondering what you're seeing that has you concluding that, you know what, maybe the sub-prime borrower's running out of gas here, at least in the auto cycle.

Again, I wish I could point to some hugely definitive answer, and of course, I can't. But if I was going to point to something, it's 25 years in the industry. What's interesting is, for one, I'm a history guy, and recessions are supposed to happen every seven years or so, and we're late, and this is the longest recovery ever, or something like that. So there's lots of macroeconomic reasons why there should be a recession.

And having said that, everybody is like, I agree with you, almost nobody's talking about a recession. We've got a new President, he's going to boost the economy, and maybe it will all happen. But it doesn't feel that way. And the reason it doesn't feel that way is, you can almost go from top to bottom. In the beginning, dealers are pushing bad deals towards us they know we won't buy. But that means they're desperate to get more cars sold.

So that's one indication. You hear that from the marketing people, you hear that from the originations folk that either they tell you that it's really slow at the dealerships, or that they're seeing these bad loans getting pushed to see if we would buy them. And of course, we won't. But still, it's a continuing struggle, because we would also like to at least buy something. And so you see that at the front end.

From the collection side, it's a little bit harder to read, just because of the new dynamic culture thing where the borrowers -- in the past, if we were running this delinquency, you'd say that the borrower was struggling dramatically to make their bills. But of course, we don't think that's true these days, because the losses would be much higher, and the losses aren't. So on the collection side, it's more they've learned how to work with the program of we're going to call a lot, and then we're telling you it's time to pay, then they pay.

What we haven't seen, which would be, obviously a big indicator is people saying, well, we added something called voluntary repos, where you call up the customer and the customer says, I don't have a job, I don't need the car, come and get it. That certainly would be a massive indicator that real troubles are coming, and we haven't seen that yet. Voluntary repos have not really increased or done anything in a long time. But if we see it, that would be a massive indicator that the recession is coming quickly.

But unemployment is still low. Unemployment and that voluntary repo are two real big tells in terms of bad times coming quickly. But generally the way our customers pay, the way the dealerships are operating, it just seems like -- and then you look at the rest of our competitors, who have all grown real fast, a lot of them aren't profitable, a lot of them are struggling with the collections and the performance. So it's almost like we're in this weird spot. Because in many past times, we were more like them. And this is a time where CPS isn't like them. And obviously, we don't want to be.

So it's very hard to say other anecdotes to what's going on. But it's almost like, as much as, there's enough out there to make me at least feel the way I feel, it's more like, if there's a chance that could be, I'd rather -- the thing that happened in 2007. In 2007, 2008, CPS was doing great. And when that recession came, it was like the roof fell in. And I wasn't prepared, we weren't prepared.

I'm not going to get caught that way again. And so I would rather be a little on the conservative side, even if we don't have a recession anytime soon, because, given our industry, there's still some benefits from doing what we're doing. But the real trick is, if there's a recession anytime in the next year or two, we're going to do really well, rather than get caught, like we did in 2007, 2008.

CPS was known in the past for being rather aggressive, always growing, always pushing. This is a new thing for us and we'll just have to see how it plays out. But we'll see.

Got it. No, a lot of moving pieces obviously. To the extent that you're, at least in advance of tax refund season, and based on how slow the year has started, you seem to be cautiously pointing us to maybe a low $900 million origination target for this year. Maybe a question for Jeff, just in terms of the math of how a less prominent denominator effect might impact loss rates and if we're exiting the year in the high 6%s, approaching 7%, even holding the credit environment stable and recovery level stable in 2017, is there a magnitude of how much that loss rate would probably go up, just based on slower growth?

It's hard to estimate the magnitude, but it's realistic to expect that one metric, so that delinquency or charge-off ratio that we put in the 10-Q and in these press releases, that measures those outcomes based on the managed portfolio. If our portfolio is flat and you take away the growth dilution, and the portfolio is going to continue to age, at the end of the year, the portfolio was about 18 months old, and we know that, in general, on a static pool, those incremental numbers tend to increase through months 24, 26 or something, before the incremental amounts start to level out a little bit. So if 2017 turns out to be a flat or down year from an origination standpoint, you're going to see the portfolio age. And you can expect some general upward trend in those types of metrics. But not necessarily indicative of -- that wouldn't necessarily be indicative of significantly decreased credit performance, because obviously where the rubber meets the road is really the static pool performance. The Wall Street people, the ABS people, the rating agencies spend a lot of time focusing on those numbers.

No, just trying to get a sense for the aging.

We're not backing off the $900 million either. Our goal is still to hit the $1 billion. But we'll see how it all plays out. If tax refunds do come through, that would be a good way to look at it.

And also, on the credit performance, again, as I mentioned, 2014, 2015 are doing nicely, are doing better. So to the extent we get some better improvement out of 2014, 2015, 2016 in terms of credit performance, that could almost offset a little bit of the other numbers. Again, we're hoping, but we'll have to wait and see.

Got it. And then lastly, on the expense side, it sounds like you've proactively scaled back on the marketing reps, back to around 80. Once again, I'm just trying to think about what the financial model looks like in a world where there's, let's say, $900 million of originations this year. We talked about the impact of the portfolio aging.

In terms of the efficiency ratio, thinking about OpEx as a percentage of average AR and how much flexibility you have to manage that, in a $900 million environment, even with the reduced count of reps, would that move back to the high 5%, 6% range or would you be able to maintain the recent performance?

I don't necessarily see it moving up. Even if we're able to add those guys and able to grow the business again and that component of expenses picks up, there are so many other significant categories where we continue to get some efficiencies and leverage that we're pretty comfortable with those low 5% figures.

Got it. That's perfect. Thanks a lot, guys.

Thank you.

(Operator Instructions)

Jordan Hymowitz, Philadelphia Finance.

I have two questions. One, with your volumes or Santander's being struggling to get good loans and things of that nature, I have a hard time equating that with the still 17 million to 18 million SARs we keep hearing from the dealers. Usually, sub prime is the incremental margin of sales. And if sub prime is tightening, who's picking that up, or are there more fleet sales? I just don't understand how the tightening I'm hearing from all the sub-prime lenders is contrasting with very strong new vehicle sales.

I agree. That's certainly, when I've had that question about a dozen times in the last couple of months, which is, okay, if vehicle sales are still really strong and sub prime's cutting back, who's buying all this paper? But the niche that fills that, generally speaking, would be like credit unions, savings and loans, things like that. So maybe the credit unions are picking it all up.

If it's possible, you'd almost want one guy to say, oh, ours grew a ton, but no one's said that. So the paper's got to be going somewhere. And so maybe a few of the bigger guys are reaching a little bit, but it doesn't seem to appear that way.

So the only place it could all disappear with nobody really seeing it would be credit unions. So that would be, if I had to give an answer, I would bet that. Sub prime is mostly preowned vehicles, so you wouldn't really see the comparison with the new.

Not necessarily, because if you can't trade in your used, you can't buy the new one and you can't trade in the used unless the market holds up. You know what I'm saying?

Well, right. But the used car market isn't holding up. The auctions are going south.

Okay. My second question is, you guys, I don't believe, are in the "direct business", if you know what I'm talking about, it's basically title lending on cars and things of that nature. And my question is, A, have you thought about it? B, do you believe in your own mind that that business has half the loss rates of the indirect business? And if those first two are the case, why not be in it?

Good news is, depending on your point of view, we were in all those businesses. We did title lending for a while. The regulatory environment got to be such that we literally backed out of it. But it was doing great in the beginning. Actually, it was doing great until we pulled the plug. So we think the title lending business is terrific.

However, given the regulatory environment, it's not a business we want to be in today. But when we put the whole thing together, it ran really well, and then we slowed it down, and then we pulled the plug. So we could turn that thing on again in a minute, and we think it's a great business, we're just not going to do it in this environment.

Direct lending, we are actively doing, pursuing and growing. And we also think that's an excellent business, and we've seen a lot of people interested in -- direct lending on the internet is a huge, big deal. And here's the interesting why the -- and we think the losses are substantially less, and here's why. Because the customer, when they go to the dealership, they get wrapped up in buying a car, and they really only hear the payment. Your payment is going to be X. And gee, Mr. So-and-So, sit in your car, isn't it wonderful? And then they take you into the finance office and you sign all the paperwork.

When you come through the direct lending side, the first thing you see is you're going to be paying 18%, 19% interest, and you get the sticker shock right away. And so they understand the game better. That's a big piece of it. Secondarily, we're the ones screening them, as opposed to the dealer. And so we get a lot better feel for the customer, the strength of the customer tends to be better. So both those areas end up truly having that guy perform better.

And so we're pursuing it. We really started looking at direct lending in 2014. There are an awful lot of regulatory hoops to get through. We did most of that in 2015. So we began doing direct lending in 2016. It's one of our areas that we would hope to expand rather significantly in 2017.

And what's, if you're running 8.5%, 9% losses, I'm sorry, let's call it 8% losses in your core business, what would you think a direct business would run at?

To be perfectly honest, I'd be guessing. I don't know that I would go with your half losses thing. But I probably wouldn't be sticking my neck out to say they'd be 20% to 25% better.

So if you're at 8%, it might be 6% or something like that?

Right. Okay.

Thank you.

But again, if we're doing, we're only doing a couple million a month right now, so it would need to get rather significant to really help us in the overall numbers. But certainly, that's a very strong goal we have for this year. It would be nice to grow it enough to where it really did impact the numbers.

Okay.

I'm not showing any further questions at this time. I'd like to turn the call back over to Charles Bradley for closing remarks.

So we probably said enough about almost all parts of this. 2017 is going to be really interesting for everyone. It's going to be interesting for the overall country, the economy, our industry and our borrowers. Hopefully what I made clear is I like where CPS sits in this industry, I like where we sit in the overall scheme of things.

Our goal is to be able to, as I said earlier, to make it through whatever problems come along without too much problems for ourselves and hopefully, take advantage of what opportunities come up. So either way, either we have a nice, what we'll call for one of the first times ever, a conservative year, and maybe a very opportunistic one. But again, thank you all for attending and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.