Good day, everyone, and welcome to the Consumer Portfolio Services Fourth Quarter and Full Year 2020 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 valuations or 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 November 3 for further clarification. The company assumes no obligation to update publicly any forward-looking statements, which as a result of new information, further events or otherwise. With us here now is Mr. Charles Bradley, Chief Executive Officer; and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley. You may begin.

Thank you, and thank you, everyone, for joining us on our call. I think probably the best way to look at the fourth quarter is that it's the end of 2020 and everyone, certainly, us included, are glad to be done with 2020. It's been with -- certainly an up and down year, a difficult year in many ways. But in other ways, it was quite good for us. And certainly, the fourth quarter reflects that. We had -- if you take year-over-year, the fourth quarter DQ was 12% versus 15.5% last year. So that was very strong. Losses, 5% versus 8%, also very strong. And the recoveries were not unusual, but what we'll call historically high, 42% versus a normal 33%. So lots of the numbers went the right way. We have lots of good things that happened in the fourth quarter. We also renewed our Citibank warehouse line. We continue to have a very strong partnership with those folks. We do a lot of deals with them and have a good working relationship. And the line continues to improve each time we renew it. So we look forward to continuing to do our business with them. One thing we didn't do it in fourth quarter, we didn't do an ABS deal given the pandemic and the cutback in volumes. We didn't have enough volume to really make it -- weren't doing a deal in the fourth quarter. However, we did one -- pretty darn quick in the first quarter of 2021, and that deal was probably the best ABS deal in the history of the company, with all-in costs of 1.1%. So that part worked out really well. Probably the negative on the fourth quarter and certainly for the year, which I'll talk about a bit later, is just the struggle for volume. Given the pandemic, given the financial markets sort of closing or slowing down dramatically for a little bit. And even just the foot traffic of dealerships struggled in 2020 and certainly in the fourth quarter continuing was to get volume in here. But the flip side of that is we were able to really focus on cutting some expenses. We really focused on core quality. If you look at the ABS performance for literally since 2018, it is substantially better every single year. And I'm not so sure there's too many companies out there that can say that. Certainly, with the lower cost of funds coming along, that's going to sort of higher tide floats all boats. It's going to help out a few of our overly aggressive competitors. But nonetheless, it's still long run, probably just as good for us. So I'll get more into the year after Jeff runs through the fourth quarter financials.

Thanks, Brad. Welcome, everybody. I'll begin with the revenues. $62.4 million for the fourth quarter. That's a 12% decrease over the third quarter of this year and a 27% decrease over the fourth quarter of 2019. The full year revenues for 2020, $271.2 million is a 22% decrease compared to $345.8 million in the full year 2019. So there's 3 important components when you kind of break this down, the revenues. First of all, the legacy portfolio now is around $500 million, representing 23% of the total portfolio and currently yielding 18.5%. The fair value portfolio, which is everything we've originated since January of 2018 is $1.7 billion or 77% of the total portfolio, yielding 10.3%. And remember, too, we've talked about this many times, obviously, the fair value portfolio yield is net of losses, which is why you see what looks like such a dramatic decrease in revenues year-over-year. The third component this year anyway, is the markdowns we've taken in the fair value portfolio, reflecting the COVID environment. $6.5 million markdown in the fourth quarter, $29.5 million for the full year. And so it can be a little confusing. This is kind of a contra revenue item. So it detracts from the revenue rather than being an expense. Moving onto expenses. $56 million for the fourth quarter. That's a 14% reduction compared to 64.8% for the third quarter of this year, 34% reduction compared to $84.8 million in the fourth quarter of 2019. Full year expenses, $251 million is a 25% decrease compared to $336 million in 2019. And we've seen year-over-year reductions in almost every expense category due in part, as Brad alluded to, to lower originations volumes, but also due to some of the efficiencies that we've built in and technology investments that we made not…

Thank you, Jeff. So looking back at 2020, certainly, the big focus or the big thing was the pandemic. We started off thinking it would be whatever year we might have thought it would be. And certainly, by March, we knew where we were going. Normally, we would have done a deal in early April, we couldn't do a deal, no one else could for that matter. So there is no ABS. For the moment, it looked like all 2007 over again with the markets closing down, but of course, they didn't, which is good. So -- but at the moment, we had a problem there. And then when they finally started loosening up a little bit, sort of in April or May. They needed more cash, the stress levels -- where the rating agencies increased the stress levels, so you need more cash. Those kind of things normally, and certainly in 2007 would have caused us serious problems. Ironically though, because of the stimulus and then all things as part of the care package, we picked up $23 million in cash. The stimulus went to all of our customers. And as Jeff pointed out, all of a sudden, we had this tremendous cash flow. Now part of that, of course, was we've tightened credit over the years. And so we now all of a sudden, had stimulus, tighter credit, cash. And so we had this we're really in a great position shockingly coming through the pandemic. So the next hurdle, of course, was what we were going to do with people not being able to come to the office. And so we had to come up with a strategy for everyone who worked from home, which we did. And so of course, that was a problem, which we worked…

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

Congrats for getting through a very challenging year. Brad, maybe 2 things. First off, I know it's difficult to predict what volumes are going to look like this year, particularly with more stimulus coming and the effects of the vaccine on just foot traffic potentially. But as we think about sort of the cost structure, I think last quarter, you would -- provided an update that as much as 20% of the workforce, there may have been that much of a reduction from a combination of belt-tightening and natural attrition, given the lower volumes. I mean if volumes kind of stay at current levels, will employee costs kind of remain at these levels going forward, do you think? Or is there even more room to cut?

The easy answer is there's always more room to cut, but probably the safer answer is, I would say they'd stay at these levels. I think -- you got it right. Between the belt-tightening and natural attrition through all this, we've reduced the cost. I don't see us sort of rehiring up and sort of anticipating growth or something. I think with the automation, given 25 years. The automation is moving so quickly that you probably can grow and hire all you want without giving up much in terms of expanding expenses. So that part is really good. I think the growth is a tough one because on the one hand, it's nice to have low cost of funds increasing your margin, it also opens the door for just about everybody to get super aggressive if they want to. And the problem here, if you think about it, let's just take our deal we just did. At 1% cost of funds, and so you could say, well, we should get super aggressive because you got leased an extra 2 points or 3 points in that margin, all of a sudden. But they send you by a whole bunch of paper and often the markets come back, which I don't expect to happen soon, then all of a sudden, you don't have the margin you expected. And so I think a bunch of folks are doing just that. They're going, let's go, let's go fast and hard, and we'll sort of worry about the cost of funds later. Now we would love to play in that game, and we're going to try and do it, a very specific sort of safe as possible way to get some of that growth. But between the pandemic not quite being over and the vaccination is not quite being done and the massive weather they've had lately, it's really put a damper in terms of what's out there. But what you have seen is a Capital One or Santander have been quite aggressive, and they can do it. So we'll see how that plays. But to answer your question, I think a straight cost line or expense line isn't the bad option. And then we'll have to figure out how to get the volume to go up with it. The problem -- one of the problems with our revenue is, as Jeff pointed out, with changes to fair value, it just looks like it's going down a lot. It's really not, but trying to get the volume up, is it something we need to focus on.

Got it. That's helpful. And maybe as a follow-up along the lines on the revenue reporting. In terms of the 10.3% yield, which is really sort of a risk-adjusted yield on the fair value portfolio. I mean, using that as sort of a jumping-off point. As we think about the pretty low delinquency levels right now and what that might mean for losses this year as well as, as you had noted, maybe going a little deeper around pricing, just given the lower cost of funding. As we think about all that netting out since charge-offs are basically embedded in that GAAP revenue yield. Should that 10.3%, is it likely to creep up a bit just based on the loss outlook this year or potentially creep down a little bit as you maybe dig a little deeper on the pricing front?

Well, there's a lot of moving pieces to the 10.3%. David, as you know. So it's the estimation of the losses that makes it risk-adjusted, but it's also the coupon and the receivables. And it's also the fees we either pay or charge to the dealers. And so as Brad mentioned, we're trying to do -- pull some levers here to grow the business. And one of the levers pull is to maybe put a couple of -- a couple more dollars into the dealer's pocket to incentivize the dealer to send us the contract. And we can also -- the scoring model and what our risk people do in the office is, tell us when we can buy something that maybe looks a little bit deeper but doesn't have necessarily greater loss expectations. So -- and when we think the business plan works pretty well at around that 10.5-or-so percent, risk-adjusted yield with the pricing. And so we're kind of -- I think it's safe to say that's a target for us, and it's going to fluctuate a little bit with those other levers. But we're pretty comfortable with that level.

Our next question comes from the line of John Rowan with Janney.

I just want to focus in a little bit on what happens when the legacy portfolio finally matures off? Jeff, you mentioned the size of the portfolio and the 18% yield, and that would imply that there's about $24 million. And correct me if I'm wrong there, on revenue that you're booking through the legacy portfolio, which obviously is in run-off and you're not booking any provisions against it. I'm wondering if there are any other cost offsets in that number, and even if that number is correct? Because without that, it doesn't look like just based off of the fair value portfolio that the company is profitable.

Well, there are a couple of other nuances that come along with the legacy portfolio. For instance, as you know, we either pay or charge dealers fees in conjunction with acquiring those contracts. And so embedded into the net yield on the legacy portfolio are additional, what's really a net fees that we charge to dealers that are being accreted into income over the life of that portfolio. So that's kind of -- that's not a giant piece, but that's a piece of the revenue picture for the legacy portfolio. And I think that -- I think, John, actually, with the -- as we talked about, the 10.5% yield on the fair value portfolio and our cost structures kind of coming down a little bit with some efficiencies. And I mean, I think the company is profitable.

So is there a finer point that you could put on how much revenue you actually generated off for the fair value? Maybe net of the dealer fees that you're talking about because obviously, at some point in 2021, the fair -- the legacy portfolio is going to go away unless costs come down quite a bit off of where they are. If there is like a $20-some-odd million run rate on the legacy portfolio, it just doesn't -- the math doesn't seem to indicate that there's much profit in 2021. Now unless there's a big decline in funding costs. I'm just trying to foot that up because -- or maybe you can just answer how much revenue came this quarter off of the legacy portfolio?

Well, member too, that we also had, for the year, $29.5 million marks on the fair value portfolio, which come out of the revenue. And so -- and those are -- I mean there's a little bit of a fair value adjustment there, but the vast majority of that is pandemic. I mean really it's all pandemic related. And so that -- if you're trying to really look at the fair value revenue component, that's the bulk of the right there. And we do a schedule in the 10-K, and fortunately, I don't have it with me right now. But we do schedule in the 10-K where we break out the fair value revenue and the legacy portfolio revenue in a more tabular fashion that might be helpful for you.

Okay. And then just lastly, the losses in the legacy portfolio, like 11%, yet you have 14-some-odd percent, if I'm not mistaken, allowance in that portfolio. As you get to 16% rather, as you get through the end of the year, if you don't materialize 16% losses, do you credit the differential back through the provision expense, right? Obviously, that -- those allowances were transferred there based on CECL, and were not a charge to earnings. Do they become a credit to earnings if you don't use up that 16% allowance through charge-offs as that book matures off in '21?

Yes. I mean, that would be the mechanics, theoretically, right? So if and in fact, I've seen where a couple of the institutions, banks, these were that filed their earnings reports already this year had caught back some of provisions that they had made earlier in the year, pandemic related provisions. And they go back through the P&L as sort of negative provision credit losses. And if you notice...

Okay. I just want to make sure it was the same in a run-off portfolio, right? Those are still portfolios that are growing. So I just want to make sure that's still the mechanics in a runoff scenario.

It wouldn't make any difference, I don't think.

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

Congratulations on wrapping up 2020. On the legacy portfolio, it looked like a lot of the credit strength in the quarter was actually improvement on the legacy portfolio. Can you give us a sense for what specifically drove that in the quarter and the outlook for that credit performance on that portfolio going forward?

I think we'd attribute that -- and particularly in the losses, I think we'd attribute it to the auction recoveries primarily, which we're running at substantially better levels. And normally, with a season so portfolio like the legacy portfolio, it would be pretty rocky when it gets end of life, but I think that -- the whole portfolio, that segment, in particular, did very well for what we liquidated at the auctions. And then just the overall delinquencies, even for such a seasoned portfolio have been much better on the legacy portfolio than we would have expected.

Okay. And then I think that's a good transition. Can you guys give us kind of your sense for used car price -- your outlook for used car prices in '21?

I think our recoveries are going to drop, obviously, as the sort of the manufacturers catch up, then you'll see the demand that the auctions drop. And so our recoveries will come down. But I still think, at least for the rest of this year, that market still remains strong. And going back to the other point, if you think about the legacy portfolio, these are the guys that have been in the car for a long, long time. And probably, some level, are bouncing around from current to 30 days to 60 days. And so getting a stimulus check gave them a real opportunity to catch up kind of out of the blue. Rather than running their normal sort of in the bad part and the good part, having a seamless check not to mention, another one coming or they've gotten to, I guess, and another or third one coming, that's the kind of free money they get that gives them an opportunity to sort of make a movement in that kind of an older loan. And so it's easier to see in the legacy as much as it should have the same effect on the fair value, but since the fair value is newer, you got to figure people are sort of -- it's not so much people are buying cars, their stimulus checks, but you'd see it a little more clearly in the legacy portfolio as sort of a free money catch up for our customers. So -- but back to the used car prices or the used car market, I think you'll see -- I think that market will stay strong for the rest of the year.

Got it. And then last one for me. On the fair value mark, what triggered it in the fourth quarter? Obviously, we've seen it throughout the year, but we kind of know that there's a pandemic, the economy has been gradually recovering. In what scenario do we not see fair value adjustments going forward?

That's a good question. I think certainly, one of the things we've learned through time is to be cautious. And so I think the whole 2020 in the pandemic, as much as we pointed out, a lot of good things have happened as a result, you're just not sure what's going to happen next. I mean even -- so that's probably the easy answer for most of 2020 and all the adjustments we took, you just weren't sure what the future holds. Now as we move into 2021, depending on who you listen to, if you listen to some TORP in the government, we've got a couple more years of this. But if you don't, it's probably over in about 6 months or 3 months, and we're going to go with that version. And so at that point, you wouldn't see any more effect on the fair value hits. I mean, we think at this point, this thing should be over pretty darn quick. So I wouldn't expect -- don't hold me to it, but if I were going to guess I'd say we wouldn't have any more this year, going forward.

Thank you. I'm showing no further questions. I will now turn the call back over to Mr. Charles Bradley for any additional or closing remarks.

Thank you. I think we've kind of summed up where we stand. Fourth quarter was a nice way to finish up the year. The year worked out, given all the things we had to deal with really, really well. As we sort of alluded to a lot during this call, 2021 should be a significantly better year in terms of not having to deal with pandemic, we can really focus on doing what we normally do, which is running the company, growing the company, growing the portfolio, growing the profitability and working on that stock price. So thank you all for joining us, and we'll speak to you rather soon after the first quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Ladies and gentlemen, this does conclude today's conference call. A replay will be available beginning 2 hours from now into March 3, 2021, by dialing (855) 859-2056 or (404) 537-3406 with the conference identification number 3998868. 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 any time, and have a wonderful day.