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 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 are Mr. Charles Bradley, Chief Executive Officer, and Mr. Jeff Fritz, Chief Financial Officer. I will now turn the call over to Mr. Bradley..

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 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 a lot concerns, regulatory and the economy and the industry in general. So these are 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 wanted to.

Our delinquencies are still higher than we like, our losses are still higher than we like. In the backdrop of everything else going on we're actually doing pretty darn well.

And so I think what one of the things we started to look at is, if this is in fact one of those interesting times, when there's lots going on, lots of moving pieces and a lot of them very negative. Maybe the proper course is to sort of stay the course and then see how it all ends up and hopefully pop out on top.

And we’ll sort of go through this in a little more detail in the call but generally speaking that’s a lot of what the fourth quarter came out at, that’s a lot of what 2017 is going to come out at is us trying to stay the course and just 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 kind of 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 that 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 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 will do pretty well.

I'm going to add more detail but for now I’ll turn it over to Jeff to go through the financials..

Thanks, Brad. Welcome everyone. I will 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 kind of interesting, if you'd, like the fourth quarter being flat, I think we're seeing a little bit -- in fact a lot of these numbers I think will reflect sort of the air going out of the originations balloon in the second half of the year, we did $215 million for the fourth quarter.

And 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 at $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 a little bit we continue to see some efficiencies in our core operating expenses.

Provisions for credit losses, $43.6 million for the quarter, that's down just about 6% from the third quarter of this year but up 21% compared to the fourth quarter 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 the fourth quarter, second half of the year some impact on some of these numbers from the slowdown in origination volumes.

Pre-tax 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 sort of lower originations volumes is that it provides more liquidity or puts less stress in the liquidity picture to the extent there would be any with the rapid growth, so we maintain a very strong cash position.

You can see the portfolio finance receivables, roughly flat from one 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 then just basically created $10 million of debt on the balance sheet and got those proceeds in December, I think December and 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 2015.

So 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 that 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 with 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 managed portfolio, 5.1% for 2016, down from 5.5% in 2015.

So as I 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 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 for 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 ‘16 and up compared to 6.2% last year. Full year net loss is 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 the year before that. So we continue to see as the whole industry has seen some erosion at the auctions.

In the fourth quarter we also did which we have done frequently from time to time, in the fourth quarters, 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, the blended cost of funds in 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 to 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. And so we continue to take advantage of that. With that, I’ll turn it back over to Brad..

Thanks, Jeff, and sort of running through the departments, I think marketing again will be a focus for 2017 and given the way the industry is working today we actually took some time sort of reevaluating to clean up some of our marketing reps, we lowered the rep count around to 80 from over 100 and I think one of the focus this year will be to grow that back to 120.

Remembering that we don't really want to compete in sort of the reaching harder for deals in the given markets, so an easy way to get some expansion without really risking the quality, it’s just to add new markets and then take the piece of the new market that would sort of fit what we want rather than trying to compete more heavily in the markets we're currently in.

So again 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. And 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 -- lot of people in the originations area are seeing more and more sort of 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 get what we want to the extent -- and also it means that 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 and shows you that the market is difficult. But again keeping our originations model the way we want it, and 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 is 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. And so when we're looking for them they just 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 rates 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, so the way you now have to speak to customers and how often you can call them, and things like that. And 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 and 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, ’12, and ’13, 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 ’14, ’15, ’16 and probably a little more even in ’17. But we're beginning to see improvement in the ’14 performance to ’15 performance. It's really early, certainly can't really tell on ‘16.

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 sort of as an aside, I am not so sure everyone in the industry started in 2014, I am not so sure everyone in the industry might not have started in 2016.

So we're sort of happy with where we’ve started making some changes and hopefully again down the road that will sort of be beneficial to us. As Jeff mentioned, the recovery continues to go down and it's just one of the more many negative things facing the industry today.

But for us it's down almost ten points in two years and 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 is a positive as well.

In terms of the industry, first, securitization market, this is almost sort of the opposite, one would think with very 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 sort of find the face of all the other issues that are headwinds that tend to be out there.

But for us having good price in the securitization market is again super beneficial. So the other things that are going on, well this is something a little interesting, we certainly -- we've always been in terms of strategic planning at CPS, we've always been a sort of fast growing company for a lot of different years.

And so almost like we’d always be pretty fast growing, hit a recession, all things would sort of fall apart, we’d start off and we’re fast growing again to hit another recession. Well, we were fast growing in ’12, ’13, ’14 but in ’14, ’15 and ’16 we've really leveled off.

In ‘14 we did about 950 million, in ’15 we did a little over a billion and ’16 a little more just over a billion. So 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 is the cash flow.

And you know, when you're growing no matter what, if you're growing significantly year over year they are always in the market to raise money because you’re going to need the capital of grow.

But now that we flatten 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 sort of running at a nice status quo in terms of growth, generating lots of cash.

As Jeff mentioned we paid off all of the debt, sort of 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 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 sort of thing to think about given all the other sort of things going on in the industry. Also, we continue our program on repurchasing our stock, we bought back another half a million shares or so in the quarter. We’ve now bought back over 3.5 million shares since we started buying back shares.

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.

So 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 see it and fit through the problems in the industry and on the economy.

I think the other thing that happened was we thought there -- something 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 the new president, the regulatory environment certainly will solidify and 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 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 we start to feel like a recession. So maybe that or one way or another, take care of itself soon.

And certainly it's the participants in the industry and there's a 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 sort of an opportunistic player in the industry during changes or shake outs.

And 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 and 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 to be trying to grow real 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 the stock market is 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 and 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 subprime 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. So with that, we sort of have the DQ is higher, losses aren't as bad as you might expect but still not what we would like.

But we’ll sort of see how this economy works and 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.

So again it's interesting times. We'll see how this all plays out. And with that, I’ll open it up for questions..

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

Hey guys. Thanks very much for the commentary. Brad, just trying to, I guess, 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?.

It’s an excellent question because we are sitting here in February and sort of being tax season, and again the government announced they’re going to push back the release of the tax refunds, but boy, considering this should be the beginning of tax season, it seems awfully quiet out there.

And so with that we would again think volumes are going to be even less than we might have initially expected.

And so as much as I think our forecast would be around that billion number again, if things don't start pick up, and to address your seasonality question, it’s sort of been weird that sort of the middle of the year for a couple years seemed to be when we saw our business instead of the beginning of the year and then it sort of switched back last year to the beginning, well this year that has seemed 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 a 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?.

Yeah, I mean that's always a possible -- mechanically that's always possible, right, because we can -- 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 tool box but that in turn has an impact on your competitiveness in the marketplace too. So we haven't -- we actually raised prices a little bit back in the middle of 2016 and we saw a little bit of an impact of that. I don’t know that we have a lot of that on the drawing board to do anytime soon..

I think the headwinds, for us to raise prices even a 25 basis points, 30 basis points which is what we did in 2016 and we got it done.

It wasn't -- I don't think we really lost much business doing it but given this market to try and do that again, 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 I think if you saw drop-off with the other players out there maybe we 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..

And then last question, you guys have increased your capital base pretty consistently over the past few years. You're now around, I think, 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?.

I think at 8% a lot of folks will still say that’s so extremely weak. But given the way that they do that measurement, it’s probably not a fair measurement.

But having said that, yes, we would like to continue to see that improve, I think we have the opportunity, it’s kind of 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 I think that we’re certainly out there looking, I think we find the deal we like, we might figure out a way to do it. I think sort of at the moment I guess the real answer is it's kind of 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, I mean 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 falls apart, 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 is available, maybe we'll be able to buy some stock back.

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

Our next question comes from David Scharf with 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 subprime 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, I mean 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 subprime borrower's running out of gas here, at least in the auto cycle..

Well, again I wish I could point to some usually definitive kind of answer and of course I can’t. But if I were going to point to something is 25 years in the industry. What's interesting is for one, I am a history guy, recessions are supposed to happen every seven years or so and we’re late.

And so 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 you know I agree with you, almost nobody is talking about recession.

Now we’ve got a new president, he’s going to boost the economy and maybe it will 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 it. I mean they're desperate to get more cars sold.

So that’s one indication, you hear that from the marketing people, you hear that from origination folks that either they’ll tell you that it's really slow at the dealerships or that they're seeing these bad loans getting pushed to see if we’d buy them.

And of course we won't but still it’s the continuing struggle because we also would like to always 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 is struggling dramatically to make the bill but of course we don't think that's true these days because losses would be much higher and the losses aren’t.

So I think on the collection side it’s more they've learned how to sort of work with the program of we’re going to call a lot and then when we’re sort telling you the time to pay, then they pay.

What we haven't seen which would be obviously 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 get it. That certainly would be a massive indicator that real troubles are coming and we haven't seen that yet.

So 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 and -- unemployment and that voluntary repo are two real big tails in terms of bad times coming quickly.

So I just think the general -- the way our customers pay, the way the dealerships are operating, it just seems like when you look at the rest of our competitors who have all grown real fast, a lot of them are unprofitable, 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 sort of more like them. And this is the 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.

So 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. 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 recession any time soon but I think given our industry there’s still some benefits from doing what we're doing. But the real trick is if there's a recession any time in the next year or two we're going to do really well.

Rather than get caught like we did in 2007-2008. So something the 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 will see..

No, a lot of moving pieces obviously. I mean 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 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 6s, approaching 7, holding, 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?.

I think it's hard to sort of estimate the magnitude but I think 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, yes, I mean our portfolio is flat, you take away that growth dilution, the portfolio is going to continue to age.

At the end of the year the portfolio was about eighteen 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 I think if 2017 turns out to be a flat or down year from an origination standpoint, you're going to see the portfolio age and I think you can expect some general 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..

Yes, no, just trying to get a sense for the aging..

We’re not backing off the 900 either. I mean our goal is still to hit a billion but we’ll sort of see how it all plays out, the tax refunds do come through, that would be a good way to look at it. And also on the sort of credit performance, again as I mentioned ’14, ’15 are doing nicely, are doing better.

So then we get some better improvement out of ’14, ’15, ‘16 in terms of credit performance, that can almost offset a little bit of the other numbers. Again we're hoping, we’ll have to wait and see..

And then lastly, on the expense side, it sounds like you've proactively scaled back on the marketing reps, back to around 80. Is that -- 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.

I mean I think that even if we're able to have those guys and able to grow the business again and those that -- that component of expenses picks up, I mean I think that there are so many other significant categories where we continue to get some efficiencies and leverage that I think we're pretty comfortable with, those low 5% figures..

[Operator Instructions] Our next question comes from Jordan Hymowitz with Philadelphia Finance..

Hey guys, 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 that we keep hearing from the dealers. So I guess usually subprime is the incremental margin of sales, so to speak.

And if subprime is tightening, so to speak, 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 subprime lenders is contrasting with very strong new vehicle sales..

I agree, I mean certainly when I’ve had that question, I don’t know, about a dozen times in the last couple months which is okay, if vehicle sales are still really strong and subprime cutting back, who’s buying all this paper, right? And so -- the niche that sort of fills that generally speaking would be like credit unions, savings and loans, things like that.

So maybe the credit unions is picking it all up. It's possible you’d almost want one guy to say, oh, ours grew a ton, but no one said that. So the paper's got to be going somewhere and so maybe a few of the sort of bigger guys are reaching a little bit but it doesn’t seem to appear that way.

So the only place it could also disappear that nobody is really seeing it, would be like credit unions. And so that would be if I had to give an answer, I would bet that. Subprime is mostly pre-owned 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..

My second question is, you guys, I don't believe, are in the "direct business", if you know what I'm talking about basically, 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?.

The 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 that would be such that we backed out of it but it was doing great in the beginning. It was actually doing great until we pulled the plug. So we think the title lending business is terrific.

However given the regulatory environment not a business we want to be in today. But we put the whole thing together and 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're 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 it’s a huge big deal. And here's the interesting one -- and we think the losses are substantially less.

And here is why, is the customer -- when they go to the dealership they sort of get wrapped up in buying a car and they really only kind of 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 finance office and you sign on the paperwork.

When you come through the direct lending side 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 kind of understand the game better. That’s a big piece of it.

Secondarily we're the one screening in, as opposed to the dealer and so we get a lot of 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 were awful lot of regulatory hoops to get through. We did that most of that in 2015. So we've been doing direct lending in 2016. It's one of our areas that we would hope to expand and 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?.

I have to be perfectly honest, I'd be guessing. But I don't know that I'd 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. But again if we're doing -- we're only doing a couple million a month right now. So we 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’d be nice to grow it enough to where it really did impact the numbers. End of Q&A.

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..

Okay. So anyway I think we probably said enough about almost all parts of this. 2017 is going to be really interesting for everyone, it’d be interesting to the overall country, the economy, our industry and our borrowers.

And I think 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 sort of have a nice what we’ll call one of the first times ever a conservative year and maybe a very opportunistic one. So again thank you all for attending and we'll talk to you next quarter..

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