Good day, everyone, and welcome to the Consumer Portfolio Services 2020 Third 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. Any statements made during this call that are not statements of historical facts may be deemed forward-looking statements. Statements regarding current or historical valuation of receivables because dependent on estimates of future events also are forward-looking statements. All such forward-looking statements are subject to risks that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 16 and its quarterly report filed May 5 and July 31 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, further events or otherwise. With us here now are 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, everyone, to our third quarter conference call. So I guess, in the midst of the pandemic and all these other problems in the world, it's kind of a great thing that we actually had a very good quarter. So we must be doing something right and the fact that these are challenging times, and yet, we put together a really, really solid quarter. We had our earnings are way up, but just across the board, both in earnings, from a -- one thing we are doing is we're focused a little more on profitability rather than growth. Given the uncertain times, a quarter or so ago, at the beginning of this whole thing, call it, February, March, April, we decided that rather than try and fight through the pandemic in terms of growth, we should focus on profitability and so we have. And we're, in fact, beginning to grow again, and we would like to get a little more growth going as the next couple of quarters go by. But currently, profitability seems to be a very good focus for us, and it's working out tremendously well, along with strengthening all the departments to the bottom, cutting costs where we can. And as you can see in all the numbers, we've done a lot of that. The performance in the portfolio has been extraordinarily good. We're buying really good paper. Our collections forces are doing great. So our numbers are, both our charge-off and DQ numbers are very good this quarter, best in the long time. So really across the board, it's real good. Wall Street is doing real well. We did a securitization. It was the cheapest money we've had in 6 years. And so granted, that helps everyone and helps all things across all -- floats all boats, but for us, it's just one more thing that's working the right way. The auction recoveries, people are very worried that the auction prices were all going to be in trouble. We had one of the best auction recovery quarters we've had in years. So there's lots of things that are going, probably maybe a little bit not abnormally right like the auctions, but certainly, they're helpful, too. But even taking out sort of the things that might be momentarily related to what's going on with the pandemic and things, still the strength in terms of what the paper we're originating, the way we're collecting the paper, our access to Wall Street and funds are all super strong and super good. So I'll talk more specifically about that and a few other things after Jeff goes through the financials.

Thanks, Brad. Welcome, everyone. Let's begin with the revenues. $70.7 million for the quarter is a 5% increase over the June quarter this year and a 17% decrease compared to the third quarter of 2019. The 9-month revenues for this year, $208.7 million, a 20% decrease from the first 9 months of 2019. And so we continue our transition to the fair value portfolio. The legacy portfolio is down to about 26% of the total, just under $600 million. The legacy portfolio yielded almost 19% or around 19% and this -- and contributing to the revenues this quarter. So that was very good, actually. The fair value portfolio is now 74% of the total, $1.7 billion. That yielded 10.4%. Remember, please that, that yield is net of losses, which are baked into that number. And then you'll note that we did a -- booked a $3.1 million markdown on the fair value portfolio, which is essentially an estimate of future higher -- somewhat higher credit losses related to the virus. Moving on to expenses, $64.8 million for the quarter. That's a 4% increase over the June quarter this year, but a 22% decrease compared to $82.7 million in the third quarter last year. For the 9 months, $195.1 million in expenses, a 23% decrease compared to the first 9 months of 2019. So there's a lot of moving parts on the expense side. The biggest reduction in expenses year-over-year is the provisions for credit losses, but we've also had significant reductions in most of the core operating categories year-over-year employee costs and interest expense, all of it really had a lot of good efficiencies and improvements in the expense side of the ledger. I mentioned the provisions for credit losses. We did book $7.4 million on the legacy portfolio this…

Okay. So running through a couple of things. So as I mentioned, sales originations are performing very strongly. We have tried to focus a little more on quality than growth, even though we are now growing again. It's been a little bit trying to figure out what's appropriate timing to start growing given the pandemic and trying to figure out how it's all going to play out. But at some level, I think we've managed it rather well in that we've increased profitability. We've sort of tightened up in a lot of areas. We cut our workforce by 20%. We've cut expenses across the board. So a lot of those things have really worked out, and we're still getting the kind of performance we want. We have an APR that's over 19% again and strong originations fees. So we're really doing well in terms of profitability in the paper. And the LTV is down about 113%, which is the lowest it's been in a long time. So again, that's probably a good indicator of -- representative of the quality of the paper we're buying. We had a little bit of a shift to the higher -- to the upper tier. We might try and sort of even that out to more of our norm. But either way, the production is really good. The metrics on the productions are very strong, and the collections are good. Collections, interestingly enough, we're performing very well across all areas of the country. There doesn't seem to be any holes in sort of our coverage. We've added some near-shore collections, which just supplements what we're doing. It has some cost factors that are good. But overall, we haven't seen -- as the winter season comes along, that'll, of course, change a few things, but for…

[Operator Instructions] Our first question comes from David Scharf of JMP Securities.

Brad, a couple of things. The first is just to, maybe, get a little more color on maybe the near- and medium-term outlook in terms of just competition because it seems like there are a lot of competing factors. You noted how robust the ABS market is and that’s sort of reminiscent of when the industry became so competitive after the last financial crisis and rates came down. But at the same time, it looks like your yields have trended up, both within the legacy and in the fair value portfolio. Are you seeing more pricing flexibility? Or is that just a reflection of more caution and a little higher FICO focus given the pandemic?

Excellent question. We're certainly happy to have the higher pricing. And, I guess, I could simply say, yes, I think there's more pricing flexibility out there. But of course, going back to the beginning with the way you said with the ABS market being so strong and the cost of funds probably across the board for everything, both warehouse lines, borrowing money and ABS, certainly a high tide floats all boats, and it certainly has to help everyone. And so one would think, to the extent companies were struggling out there, having a better access to capital is helping them. Maybe people are trying to be more cautious. I think some of the non-prime guys are pushing pretty hard, but in our industry or our neck of the woods in the industry, we haven't heard too much. Certainly, I think the access to capital, our cost of funds is helping anyone who's struggling, but I also don't know that anyone -- it wouldn't be surprising if most people are taking -- give or take the approach we are, which is, proceed with caution and do what you can, but try not to get over your skis in case something else happens. So as much as our numbers are really good. Our performance has been really strong, our access to capital is really good. It's not like we're going to step on the accelerator real hard just -- and hope for the best. And probably, I would imagine most of the folks in the industry feel the same way. And as a result of that, you probably have gotten a little more pricing flexibility. We also probably think our model works really well and things like that but everyone else can say the same. So one might think some of the folks have backed off or some of the smaller guys were harder hit, it's a little hard to say. It's not like any big guys have disappeared. But I would agree with you that it certainly appears that there's a little more pricing flexibility in the marketplace today.

Okay. But just to be clear, I'm not getting a strong sense that we ought to be thinking about gross yields trending higher from Q3 levels. Is that fair?

Yes, that's probably fair. We're probably, give or take, if it gets better than this, then something is changing. So…

Right, right. Got it. And one follow-up on the recovery side. Obviously, throughout the pandemic, it's been a consistent theme in the industry about dealers being short supply of used vehicles, driving prices up. It seems like new vehicle sales may be on the -- kind of picking up once again, a lot of the manufacturing bottlenecks and really in the pandemic kind of working their way through, and that should drive up trade inventory or volume. Do you think this past quarter represents sort of the -- maybe the peak of collateral value that we ought to be -- I mean you had noted the recovery rate was unusual this quarter. We got that loud and clear, but just thinking more broadly, we've probably seen the peak of these auction values.

I agree with you. I think new car production is beginning to trend up. I mean, I've always said for a while that I think that the new car production got way ahead of themselves. And so probably one of the many groups or a few groups have really thought the pandemic helped them out, would be the manufacturers because they got to take a drop back and let the world catch up to the production, so I don't know that they're going to come storming back. And then obviously, they want to produce cars and make lots of money, but that lull is going to make the market a lot stronger for them going forward. So certainly, the number was so high this third quarter that it could be the peak, but it wouldn't shock me if the fourth quarter hung in there, and it was a slower transition back to what we call normal. I don't -- I mean, I don't know, who knows what the big guys will do, but if I were them, I wouldn't start to flood the market with new car vehicles. I think they -- all the dealers need new cars, they're going to try and provide new cars. I don't know if they're going to try and create another glut of new cars. And if not, that will keep the recoveries a little higher than normal for probably another -- it will probably take at least another quarter or 2 to get back to what we'll call normal.

Our next question comes from the line of Kyle Joseph of Jefferies.

I just wanted to get sort of your thoughts on how the different portfolios are performing? Obviously, this quarter, we saw a smaller fair value mark on that portfolio, but a larger provision. And then we can see the legacy charge-offs are running higher, but at the same time, you talked about a better yield in there. So just kind of walk us through the differences in the performance between those 2 portfolios.

For the most part, I mean, the legacy portfolio is older, so it's going to not perform as well because as the paper reaches the end of its days, it's going to sort of have higher losses. I think part of what we're doing is trying to be super cautious in both portfolios. In terms of, again, I mean, we seem to be doing quite well in the pandemic, but you never know what's around the corner. So until I think it really evens out, it's going to -- I think we're going to be cautious. I don't know that the levels in either one are particularly relevant in terms of the performance. I mean it's easy enough to say, the legacy portfolio is not going to perform as well as the fair value. Probably, we would both say that fair value outperforming itself by a bit right now, even given the pandemic and everything else.

Got it. And then just obviously, a lot of uncertainty there -- out there right now in terms of the stimulus. Delinquencies are still down a lot year-over-year, which is great. They're up a bit sequentially, which you would expect from a normal seasonal perspective. But can you kind of walk us through what delinquencies did by month through the quarter? Did they go down again in July and then they ticked up post-stimulus or what's driving that?

Well, after -- Kyle, after the June quarter, yes, we saw nominal sequential monthly increases in delinquencies throughout the third quarter ending where we just announced. And as you pointed out, that's a normal seasonal pattern we'd expect to see because the third quarter represents a time period where people are typically taking vacations and going back-to-school. So typically, we see a big increase from second quarter to third quarter. This year, we saw a nominal increase because people aren't traveling probably as much as they normally would. And there -- even though their stimulus, their bonus employment benefits have run out during that period, most likely. I think people just have more money in their pockets because they have less to do. And so our collectors have done a good job staying on top of the customers. And what we've seen is a seasonal increase, but not as great as we've seen in the past.

Got it. And I know you addressed the offer on yourselves. So I think thinking about it more broadly, can you give us your sense for potential consolidation in the industry that at this point, no one's really struggling because there was so much stimulus? But going forward, as losses really manifest, do you see some potential consolidation opportunities for the industry?

Well, I always say, yes, when we have that question, and I've been mostly wrong. So I think you're still going to have some folks out there who aren't doing exactly what they're supposed to be doing. I think probably you might have had a bit of a reckoning for some of the really smaller guys over the last couple of quarters. I mean, the larger people, sort of us and bigger, I don't really see too much going on there, because certainly, the lower cost of funds and the access to capital probably has helped everyone, what we'll call, medium to large size a lot. And so I think there's still a decent chance you'll have some consolidation. You’re still going to have the PE guys. They're still sitting in those same companies they probably don't want to be in. Maybe they're feeling a little better about the company, but they still, at some point, got to get out. So I don't know how that plays, but yes, I think there'll be consolidation. I think maybe after the election, you see how that shakes out, what happens. But the easy answer is, low-cost of money is going to be there now for a while, and that's going to help a lot of folks. And I don't know that it'll cause anybody to come into the market. So it's kind of a weird setup because you have a whole lot of people because of all the low-cost and stuff access, they're all going to probably hang in there. It doesn't mean the PE guys still don't want to get out. So at some point, something is going to happen. But given the current access to capital, I'm probably not thinking it happens very soon, which means it will happen tomorrow, which would be great. So there you go.

Our next question comes from John Rowan of Janney.

So I just wanted to drill on something. You said that you cut 20% of the workforce. But I mean, employee costs are down less than 1%. And how much of that is variable just given -- I mean, you're obviously purchasing fewer contracts than you were last year. Obviously, it's come up a little bit of late, but it doesn't seem like that full 20% run rate has really hit your employee costs.

Well, it would be more over time. So it wasn't like we just did it this quarter. So there's probably other fact -- part of it’s the new accounting because…

So well, we had a little staff reduction where we actually laid off about 10% of the workforce. That was midway through the second quarter. And then we've had some -- just some attrition because the volumes have remained low. So I don't think that the sequential quarter comparisons or the even the year-over-year necessarily have reflected that, but the headcount is down about 20%.

Okay. I mean, what's a good run rate going forward? I mean does it continue to trickle down? I mean, obviously, if there was attrition or people let go in 2Q or in 3Q, do we continue to see a reduction in employee costs going into the end of the year?

Well, probably steady at these levels until the end of the year. We're trying to grow the business again. And when the business grows, when the originations volumes grow, then we have more variable employee costs because the salespeople are on commissions for the most part. If they grow, originations grow significantly, we'd have to add some bodies in the credit departments. One area where we're going to see continued efficiencies, though, even as the business grows, is on the servicing side. We've really done some interesting and effective changes and investments in technology on the servicing side of the business. We're going to lever those people much more effectively in the future than we've been able to do in the past. And so we're very -- feel very good about the control of operating expenses, employee costs as the business starts to grow again.

Okay. Moving on, so I was a little surprised to see the provision for the legacy portfolio. I mean, is that just a function of the change in the allowance? I mean, going forward, if you don't have to make adjustments to the allowance ratio, should we not have any provision in the runoff portfolio?

Theoretically, I mean, when we -- theoretically, when we adopted CECL in January, were it not for the pandemic, there may be wouldn't be any provisions for credit loss, right, because that's supposed to have been, at that time, a lifetime allowance, and that's what we calculate, and that's what we've booked. But because of the buyers and the pandemic to slow down the economy, it's hurt that seasoned portfolio. It seems to have hurt that seasoned portfolio more than the less seasoned fair value portfolio. And the reality is, and we talked about this before, those vintages of receivables, the 2015 and '16 receivables have really -- we've really taken our lumps on those pools. And so what we just find is that even though they're nearing the end of their lives, they're just -- the incremental losses are not slowing down to the degree that we would expect. And so we want to be cautious and we want the numbers to reflect the true performance. At some point, though, I think we'll -- the slowdown in the economy or the economy will start to rebound, we'll start feeling better about the legacy portfolio. Potentially, legacy portfolio is going to go away and pay off. And so I think we'll have -- hopefully, have seen the worst or the most significant provisions for credit losses on the legacy portfolio are behind us.

Well, okay. So that leads into my next question because there was -- credit obviously improved, except in the legacy portfolio, where charge-offs were up year-over-year. Is that just a function of the book maturing and kind of narrowing down to those vintages where you've had some trouble?

Well, like I said, yes, those underlying vintages, primarily '15 and '16. Although 2017 is in the legacy portfolio, too, which is a little bit better. Those pools started out at higher losses earlier in their lives, and they’ve just continued to run hotter, even though they're, like I said, approaching the end of their lives. And so the other thing, too, is like even though we've seen improvement at the auctions this quarter, these last 6 months, those cars in the legacy portfolio are much older. And so they're probably not benefiting from those better returns at the auctions as much as the fresher portfolios and the fair value segment are. And so it's just because of the age of the portfolio, the legacy portfolio and the relatively weaker performance from the start of those portfolios, they're just really kind of stumbling to the finish line a little bit, but we're comfortable that we have sufficient allowance against them now.

Okay. And just last question. Kind of housekeeping. I just want to make sure I'm calculating it correctly, am I right, there was about $11.8 million of actual dollar value charge-offs in the quarter.

On the legacy portfolio?

Just the charge offs, I mean, not -- it would be on the legacy portfolio, yes.

Yes. That sounds right for the legacy portfolio, yes.

At this time, I'd like to turn the call back over to Mr. Bradley for any additional or closing remarks. Sir?

Thank you. Again, we appreciate you all joining us for the call. We had a real nice quarter. Certainly, fourth quarter is always challenging from a collection point of view with the holidays and all and given the election and all these other sort of wild little variables and the pandemic and vaccine and whatever else you want to put on the list, we're still in interesting times, which is, again, why I'm glad the third quarter was so good. We're going to hope to keep that trend rolling, but you never know what's going to happen next. I wish we did. But we like what we're doing fundamentally. We like what the future holds. I think most everyone wants to get the hell out of 2020, and we do, too. So we're looking forward to 2021 and having a real good year. So thanks for attending, and we'll speak to you, well, next year. Thank you.

Thank you. This concludes today's teleconference. A replay will be available beginning 2 hours from now until October 27, 2020, by dialing (855) 859-2056 or (404) 537-3406 with conference identification number 2265436. A broadcast of the conference call will also be available live and for 90 days after the call via the company's website at www.consumerportfolio.com. Please disconnect your lines at this time, and have a wonderful day.