CONSUMER PORTFOLIO SERVICES, INC. 10-Q

Item 1. Financial Statements CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) June 30, December 31, 2022 2021 ASSETS Cash and cash equivalents $ 11,348 $ 29,928 Restricted cash and equivalents 157,021 146,620 Finance receivables measured at fair value 2,174,133 1,749,098 Finance receivables 149,010 232,390 Less: Allowance for finance credit losses ( 35,672 ) ( 56,206 ) Finance receivables, net 113,338 176,184 Furniture and equipment, net 1,355 1,129 Deferred tax assets, net 17,523 19,575 Accrued interest receivable 1,383 2,269 Other assets 24,372 34,775 Total Assets $ 2,500,473 $ 2,159,578 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses $ 62,415 $ 43,648 Warehouse lines of credit 228,906 105,610 Residual interest financing 49,497 53,682 Securitization trust debt 1,934,156 1,759,972 Subordinated renewable notes 27,208 26,459 Total liabilities 2,302,182 1,989,371 COMMITMENTS AND CONTINGENCIES Shareholders' Equity Preferred stock, $ 1 par value; authorized 4,998,130 shares; none issued – – Series A preferred stock, $ 1 par value; authorized 5,000,000 shares; none issued – – Series B preferred stock, $ 1 par value; authorized 1,870 shares; none issued – – Common stock, no par value; authorized 75,000,000 shares; 21,206,839 and 21,143,764 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively 36,947 55,298 Retained earnings 162,966 116,531 Accumulated other comprehensive loss ( 1,622 ) ( 1,622 ) Total stockholders’ equity 198,291 170,207 Total liability and stockholder’ equity $ 2,500,473 $ 2,159,578 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Revenues: Interest income $ 75,670 $ 65,440 $ 145,730 $ 131,533 Mark to finance receivables measured at fair value 4,700 – 7,100 ( 4,417 ) Other income 1,648 1,329 3,554 2,765 Total revenues 82,018 66,769 156,384 129,881 Expenses: Employee costs 20,591 19,448 42,743 39,607 General and administrative 8,280 7,831 16,511 15,579 Interest 18,771 18,980 35,171 39,925 Provision for credit losses ( 8,000 ) – ( 17,400 ) – Sales 5,838 4,201 11,224 8,187 Occupancy 1,937 2,016 3,789 3,918 Depreciation and amortization 385 417 802 845 Total operating expenses 47,802 52,893 92,840 108,061 Income before income tax expense (benefit) 34,216 13,876 63,544 21,820 Income tax expense (benefit) 8,896 4,163 17,109 6,943 Net income $ 25,320 $ 9,713 $ 46,435 $ 14,877 Earnings per share: Basic $ 1.18 $ 0.43 $ 2.18 $ 0.65 Diluted 0.91 0.39 1.66 0.59 Number of shares used in computing earnings per share: Basic 21,370 22,842 21,296 22,791 Diluted 27,687 25,130 27,943 25,048 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income $ 25,320 $ 9,713 $ 46,435 $ 14,877 Other comprehensive income/(loss); change in funded status of pension plan – – – – Comprehensive income $ 25,320 $ 9,713 $ 46,435 $ 14,877 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income $ 46,435 $ 14,877 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of deferred acquisition fees and origination costs – 651 Net interest income accretion on fair value receivables 60,766 66,812 Depreciation and amortization 802 845 Amortization of deferred financing costs 3,628 3,598 Mark to finance receivables measured at fair value ( 7,100 ) 4,417 Provision for credit losses ( 17,400 ) – Stock-based compensation expense 1,518 735 Changes in assets and liabilities: Accrued interest receivable 886 1,416 Deferred tax assets, net 2,052 1,381 Other assets 9,316 8,644 Accounts payable and accrued expenses 18,767 9,030 Net cash provided by operating activities 119,670 112,406 Cash flows from investing activities: Payments received on finance receivables held for investment 80,246 142,464 Purchases of finance receivables measured at fair value ( 904,475 ) ( 485,117 ) Payments received on finance receivables at fair value 425,774 355,439 Change in repossessions held in inventory 1,087 982 Purchase of furniture and equipment ( 1,028 ) ( 1,024 ) Net cash provided by (used in) investing activities ( 398,396 ) 12,744 Cash flows from financing activities: Proceeds from issuance of securitization trust debt 712,400 470,545 Proceeds from issuance of subordinated renewable notes 2,682 5,684 Payments on subordinated renewable notes ( 1,933 ) ( 1,002 ) Net proceeds from (repayments of) warehouse lines of credit 124,606 ( 42,560 ) Net proceeds from (repayment of) residual interest financing debt ( 4,311 ) 42,332 Repayment of securitization trust debt ( 536,824 ) ( 541,065 ) Payment of financing costs ( 6,204 ) ( 3,872 ) Purchase of common stock ( 34,285 ) ( 1,582 ) Exercise of options and warrants 14,416 1,125 Net cash provided by (used in) financing activities 270,547 ( 70,395 ) Increase (decrease) in cash and cash equivalents ( 8,179 ) 54,755 Cash and restricted cash at beginning of period 176,548 144,152 Cash and restricted cash at end of period $ 168,369 $ 198,907 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Interest $ 30,809 $ 36,665 Income taxes $ 4,796 $ 2,962 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 CONSUMER PORTFOLIO SERVICES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Common Stock (Shares Outstanding) Balance, beginning of period 21,292 22,656 21,144 22,737 Common stock issued upon exercise of options and warrants 1,529 578 2,895 676 Repurchase of common stock ( 1,614 ) ( 179 ) ( 2,832 ) ( 358 ) Balance, end of period 21,207 23,055 21,207 23,055 Common Stock Balance, beginning of period $ 47,844 $ 72,877 $ 55,298 $ 72,926 Common stock issued upon exercise of options and warrants 8,556 827 14,416 1,125 Repurchase of common stock ( 20,181 ) ( 827 ) ( 34,285 ) ( 1,582 ) Stock-based compensation 728 327 1,518 735 Balance, end of period $ 36,947 $ 73,204 $ 36,947 $ 73,204 Retained Earnings Balance, beginning of period $ 137,646 $ 74,171 $ 116,531 $ 69,007 Net income 25,320 9,713 46,435 14,877 Balance, end of period $ 162,966 $ 83,884 $ 162,966 $ 83,884 Accumulated Other Comprehensive Loss Balance, beginning of period $ ( 1,622 ) $ ( 8,571 ) $ ( 1,622 ) $ ( 8,571 ) Pension benefit obligation – – – – Balance, end of period $ ( 1,622 ) $ ( 8,571 ) $ ( 1,622 ) $ ( 8,571 ) Balance, beginning of period 170,207 – 170,207 – Pension benefit obligation – – – – Total Shareholders' Equity $ 198,291 $ 148,517 $ 198,291 $ 148,517 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Description of Business We were formed in California on March 8, 1991. We specialize in purchasing and servicing retail automobile installment sale contracts (“automobile contracts” or “finance receivables”) originated by licensed motor vehicle dealers located throughout the United States (“dealers”) in the sale of new and used automobiles, light trucks and passenger vans. Through our purchases, we provide indirect financing to dealer customers for borrowers with limited credit histories or past credit problems (“sub-prime customers”). We serve as an alternative source of financing for dealers, allowing sales to customers who otherwise might not be able to obtain financing. In addition to purchasing installment purchase contracts directly from dealers, we have also (i) lent money directly to consumers for loans secured by vehicles, (ii) purchased immaterial amounts of vehicle purchase money loans from non-affiliated lenders, and (iii) acquired installment purchase contracts in four merger and acquisition transactions. In this report, we refer to all of such contracts and loans as "automobile contracts." Basis of Presentation Our Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America, with the instructions to Form 10-Q and with Article 10 of Regulation S-X of the Securities and Exchange Commission, and include all adjustments that are, in management’s opinion, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature. Results for the six-month period ended June 30, 2022 are not necessarily indicative of the operating results to be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these Unaudited Condensed Consolidated Financial Statements. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Finance Receivables Measured at Fair Value Effective January 1, 2018, we adopted the fair value method of accounting for finance receivables acquired on or after that date. For each finance receivable acquired after 2017, we consider the price paid on the purchase date as the fair value for such receivable. We estimate the cash to be received in the future with respect to such receivables, based on our experience with similar receivables acquired in the past. We then compute the internal rate of return that results in the present value of those estimated cash receipts being equal to the purchase date fair value. Thereafter, we recognize interest income on such receivables on a level yield basis using that internal rate of return as the applicable interest rate. Cash received with respect to such receivables is applied first against such interest income, and then to reduce the recorded value of the receivables. 8 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS We re-evaluate the fair value of such receivables at the close of each measurement period. If the reevaluation were to yield a value materially different from the recorded value, an adjustment would be required. Results for the three-month and six-month periods ending June 30, 2022 include a $ 4.7 million and $ 7.1 million positive mark to the carrying value of the portion of the receivables portfolio accounted for at fair value. Mark downs of $ 4.4 million were included in the results for the six months ending June 30, 2021, and the mark down is reflected as a reduction in revenue. Anticipated credit losses are included in our estimation of cash to be received with respect to receivables. Because such credit losses are included in our computation of the appropriate level yield, we do not thereafter make periodic provision for credit losses, as our best estimate of the lifetime aggregate of credit losses is included in that initial computation. Also, because we include anticipated credit losses in our computation of the level yield, the computed level yield is materially lower than the average contractual rate applicable to the receivables. Because our initial recorded value is fixed as the price we pay for the receivable, rather than as the contractual principal balance, we do not record acquisition fees as an amortizing asset related to the receivables, nor do we capitalize costs of acquiring the receivables. Rather we recognize the costs of acquisition as expenses in the period incurred. Other Income The following table presents the primary components of Other Income for the three-month and six-month periods ending June 30, 2022 and 2021: Schedule of other income Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Origination and servicing fees from third party receivables $ 1,408 $ – $ 2,252 $ – Direct mail revenues – 890 774 1,869 Convenience fee revenue 40 180 120 420 Recoveries on previously charged-off contracts 24 45 44 60 Sales tax refunds 159 118 303 289 Other 17 96 61 127 Other income for the period $ 1,648 $ 1,329 $ 3,554 $ 2,765 9 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Leases The Company has operating leases for corporate offices, equipment, software and hardware. The Company has entered into operating leases for the majority of its real estate locations, primarily office space. These leases are generally for periods of three to seven years with various renewal options. The depreciable life of leased assets is limited by the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. The following table presents the supplemental balance sheet information related to leases: Supplemental balance sheet information related to leases June 30, December 31, 2022 2021 (In thousands) Operating Leases Operating lease right-of-use assets $ 25,819 $ 25,819 Less: Accumulated amortization right-of-use assets ( 20,296 ) ( 17,624 ) Operating lease right-of-use assets, net $ 5,523 $ 8,195 Operating lease liabilities $ ( 6,213 ) $ ( 9,058 ) Finance Leases Property and equipment, at cost $ 3,407 $ 3,407 Less: Accumulated depreciation ( 2,853 ) ( 2,348 ) Property and equipment, net $ 554 $ 1,059 Finance lease liabilities $ ( 597 ) $ ( 1,124 ) Weighted Average Discount Rate Operating lease 5.0 % 5.0 % Finance lease 6.5 % 6.5 % Schedule of maturities of lease liabilities Maturities of lease liabilities were as follows: (In thousands) Operating Finance Year Ending June 30, Lease Lease 2022 $ 2,738 $ 495 2023 1,888 84 2024 920 26 2025 795 9 2026 501 – Thereafter 1,160 – Total undiscounted lease payments 8,002 614 Less amounts representing interest ( 1,789 ) ( 17 ) Lease Liability $ 6,213 $ 597 10 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents the lease expense included in General and administrative and Occupancy expense on our Unaudited Condensed Consolidated Statement of Operations: Lease information Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Operating lease cost $ 1,760 $ 1,793 $ 3,630 $ 3,630 Finance lease cost 257 308 555 616 Total lease cost $ 2,017 $ 2,101 $ 4,185 $ 4,246 The following table presents the supplemental cash flow information related to leases: Supplemental cash flow information related to leases Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: (In thousands) (In thousands) Operating cash flows from operating leases $ 1,907 $ 1,892 $ 3,965 $ 3,822 Operating cash flows from finance leases 245 278 527 552 Financing cash flows from finance leases 12 30 28 65 Stock-based Compensation We recognize compensation costs in the financial statements for all share-based payments based on the grant date fair value estimated in accordance with the provisions of ASC 718 “Stock Compensation”. For the three and six months ended June 30, 2022, we recorded stock-based compensation costs in the amount of $ 1.5 million and $ 728,000 , respectively. These stock-based compensation costs were $ 327,000 and $ 735,000 for the three and six months ended June 30, 2021. As of June 30, 2022, unrecognized stock-based compensation costs to be recognized over future periods equaled $ 12.4 million. This amount will be recognized as expense over a weighted-average period of 2.7 years. 11 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following represents stock option activity for the six months ended June 30, 2022: Share-based payment arrangement option activity Weighted Average Number of Weighted Remaining Shares Average Contractual (in thousands) Exercise Price Term Options outstanding at the beginning of period 13,075 $ 4.54 N/A Granted 1,710 10.28 N/A Exercised ( 2,895 ) 4.98 N/A Forfeited ( 490 ) 7.07 N/A Options outstanding at the end of period 11,400 $ 5.18 3.59 years Options exercisable at the end of period 7,185 $ 4.40 2.23 years The following table presents the price distribution of stock options outstanding and exercisable as of June 30, 2022 and December 31, 2021: Schedule of stock options outstanding and exercisable Number of shares as of Number of shares as of June 30, 2022 December 31, 2021 Outstanding Exercisable Outstanding Exercisable Range of exercise prices: (In thousands) (In thousands) $0.95 - $1.99 32 32 577 577 $2.00 - $2.99 1,453 783 1,517 489 $3.00 - $3.99 3,952 3,367 4,285 3,382 $4.00 - $4.99 2,745 1,495 2,870 1,410 $5.00 - $5.99 – – – – $6.00 - $6.99 753 753 2,651 2,652 $7.00 - $7.99 755 755 1,175 1,175 $8.00 - $11.00 1,710 – – – Total shares 11,400 7,185 13,075 9,685 At June 30, 2022 the aggregate intrinsic value of options outstanding and exercisable was $ 57.8 million and $ 42.1 million, respectively. There were 2.9 million options exercised for the six months ended June 30, 2022 compared to 676,000 for the comparable period in 2021. The total intrinsic value of options exercised was $ 12.2 million and $ 1.9 million for the six-month periods ended June 30, 2022 and 2021. There were 2,661,000 shares available for future stock option grants under existing plans as of June 30, 2022. 12 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Purchases of Company Stock The table below describes the purchase of our common stock for the six months ended June 30, 2022 and 2021: Schedule of purchases of company stock Six Months Ended June 30, 2022 June 30, 2021 Shares Avg. Price Shares Avg. Price Open market purchases 1,938,637 $ 11.42 301,088 $ 4.18 Shares redeemed upon net exercise of stock options 893,153 13.56 56,983 4.47 Total stock purchases 2,831,790 $ 12.09 358,071 $ 4.42 Reclassifications Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on net income or shareholders’ equity. Financial Covenants Certain of our securitization transactions, our warehouse credit facilities and our residual interest financing contain various financial covenants requiring minimum financial ratios and results. Such covenants include maintaining minimum levels of liquidity and net worth and not exceeding maximum leverage levels. As of June 30, 2022, we were in compliance with all such covenants. In addition, certain of our debt agreements other than our term securitizations contain cross-default provisions. Such cross-default provisions would allow the respective creditors to declare a default if an event of default occurred with respect to other indebtedness of ours, but only if such other event of default were to be accompanied by acceleration of such other indebtedness. Provision for Contingent Liabilities We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Our legal counsel has advised us on such matters where, based on information available at the time of this report, there is an indication that it is both probable that a liability has been incurred and the amount of the loss can be reasonably determined. 13 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2) Finance Receivables Our portfolio of finance receivables consists of small-balance homogeneous contracts comprising a single segment and class that is collectively evaluated for impairment on a portfolio basis according to delinquency status. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key terms such as interest rate, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. We report delinquency on a contractual basis. Once a contract becomes greater than 90 days delinquent, we do not recognize additional interest income until the obligor under the contract makes sufficient payments to be less than 90 days delinquent. Any payments received on a contract that is greater than 90 days delinquent are first applied to accrued interest and then to principal reduction. In January 2018 the Company adopted the fair value method of accounting for finance receivables acquired after 2017. Finance receivables measured at fair value are recorded separately on the Company’s Balance Sheet and are excluded from all tables in this footnote. We consider an automobile contract delinquent when an obligor fails to make at least 90% of a contractually due payment by the following due date, which date may have been extended within limits specified in the servicing agreements. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable. Automobile contracts less than 31 days delinquent are not included. In certain circumstances we will grant obligors one-month payment extensions to assist them with temporary cash flow problems. The only modification of terms is to advance the obligor’s next due date by one month and extend the maturity date of the receivable by one month. In certain limited cases, a two-month extension may be granted. There are no other concessions such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, we consider such extensions to be insignificant delays in payments rather than troubled debt restructurings. Automobile finance receivables, net of unearned interest was $ 149.0 million and $ 232.4 million as of June 30, 2022 and December 31, 2021, respectively. The following table summarizes the delinquency status of finance receivables as of June 30, 2022 and December 31, 2021: Schedule of delinquency status of finance receivables June 30, December 31, 2022 2021 (In thousands) Deliquency Status Current $ 115,721 $ 186,625 31 - 60 days 21,866 30,980 61 - 90 days 9,247 12,070 91 + days 2,176 2,715 $ 149,010 $ 232,390 Finance receivables totaling $ 2.2 million and $ 2.7 million at June 30, 2022 and December 31, 2021, respectively, including all receivables greater than 90 days delinquent, have been placed on non-accrual status as a result of their delinquency status. 14 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Allowance for Credit Losses – Finance Receivables The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of finance receivables to present the net amount expected to be collected. Charge offs are deducted from the allowance when management believes that collectability is unlikely. Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions and, reasonable and supportable forecasts. We believe our historical credit loss experience provides the best basis for the estimation of expected credit losses. Consequently, we use historical loss experience for older receivables, aggregated into vintage pools based on their calendar quarter of origination, to forecast expected losses for less seasoned quarterly vintage pools. We measure the weighted average monthly incremental change in cumulative net losses for the vintage pools in the relevant historical period. For the pools in the relevant historical period, we consider each pool’s performance from its inception through the end of the current period. We then apply the results of the historical analysis to less seasoned vintage pools beginning with each vintage pool’s most recent actual cumulative net loss experience and extrapolating from that point based on the historical data. We believe the pattern and magnitude of losses on older vintages allows us to establish a reasonable and supportable forecast of less seasoned vintages. Our contract purchase guidelines are designed to produce a homogenous portfolio. For key credit characteristics of individual contracts such as obligor credit history, job stability, residence stability and ability to pay, there is relatively little variation from the average for the portfolio. Similarly, for key structural characteristics such as loan-to-value, length of contract, monthly payment and amount financed, there is relatively little variation from the average for the portfolio. Consequently, we do not believe there are significant differences in risk characteristics between various segments of our portfolio. Our methodology incorporates historical pools that are sufficiently seasoned to capture the magnitude and trends of losses within those vintage pools. Furthermore, the historical period encompasses a substantial volume of receivables over periods that include fluctuations in the competitive landscape, the Company’s rates of growth, size of our managed portfolio and fluctuations in economic growth and unemployment. In consideration of the depth and breadth of the historical period, and the homogeneity of our portfolio, we generally do not adjust historical loss information for differences in risk characteristics such as credit or structural composition of segments of the portfolio or for changes in environmental conditions such as changes in unemployment rates, collateral values or other factors. However, we have considered how certain qualitative factors may affect future credit losses and have incorporated our judgement of the effect of such factors into our estimates. The following table presents the amortized cost basis of our finance receivables by annual vintage as of June 30, 2022 and 2021. Schedule of amortized cost basis of finance receivables June 30, December 31, 2022 2021 (In thousands) Annual Vintage Pool 2012 and prior $ 102 $ 131 2013 485 1,091 2014 3,434 6,881 2015 16,467 29,695 2016 48,088 76,728 2017 80,434 117,864 $ 149,010 $ 232,390 15 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table presents a summary of the activity for the allowance for finance credit losses for the three-month periods ended June 30, 2022 and 2021: Schedule of allowance for finance credit losses Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Balance at beginning of period $ 45,001 $ 73,497 $ 56,206 $ 80,790 Provision for credit losses on finance receivables ( 8,000 ) – ( 17,400 ) – Charge-offs ( 4,446 ) ( 6,699 ) ( 9,805 ) ( 18,820 ) Recoveries 3,117 5,444 6,671 10,272 Balance at end of period $ 35,672 $ 72,242 $ 35,672 $ 72,242 Excluded from finance receivables are contracts that were previously classified as finance receivables but were reclassified as other assets because we have repossessed the vehicle securing the Contract. The following table presents a summary of such repossessed inventory together with the allowance for losses in repossessed inventory that is not included in the allowance for finance credit losses: Schedule of allowance for losses on repossessed inventory June 30, December 31, 2022 2021 (In thousands) Gross balance of repossessions in inventory $ 3,015 $ 4,341 Allowance for losses on repossessed inventory ( 1,632 ) ( 1,871 ) Net repossessed inventory included in other assets $ 1,383 $ 2,470 16 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (3) Securitization Trust Debt We have completed many securitization transactions that are structured as secured borrowings for financial accounting purposes. The debt issued in these transactions is shown on our Unaudited Condensed Consolidated Balance Sheets as “Securitization trust debt,” and the components of such debt are summarized in the following table: Schedule of Long-term Debt Instruments Weighted Average Contractual Final Receivables Outstanding Outstanding Debt Scheduled Pledged at Principal at Principal at Interest Rate Payment June 30, Initial June 30, December 31, at June 30, Series Date (1) 2022 (2) Principal 2022 2021 2022 (Dollars in thousands) CPS 2017-A April 2024 – 206,320 – 17,644 – CPS 2017-B December 2023 – 225,170 – 12,491 – CPS 2017-C September 2024 20,386 224,825 16,045 25,846 5.72 % CPS 2017-D June 2024 21,508 196,300 17,940 26,744 5.30 % CPS 2018-A March 2025 24,446 190,000 21,109 29,518 5.09 % CPS 2018-B December 2024 29,676 201,823 25,645 36,092 5.44 % CPS 2018-C September 2025 34,544 230,275 30,613 42,765 5.62 % CPS 2018-D June 2025 42,143 233,730 36,179 49,634 5.41 % CPS 2019-A March 2026 52,883 254,400 45,191 62,667 5.18 % CPS 2019-B June 2026 53,660 228,275 45,691 61,730 4.95 % CPS 2019-C September 2026 62,999 243,513 55,760 75,065 4.05 % CPS 2019-D December 2026 80,677 274,313 71,050 98,625 3.46 % CPS 2020-A March 2027 75,756 260,000 71,236 99,485 3.64 % CPS 2020-B June 2027 83,602 202,343 59,024 87,048 5.37 % CPS 2020-C November 2027 112,313 252,200 99,770 138,899 2.83 % CPS 2021-A March 2028 119,399 230,545 102,679 147,516 1.18 % CPS 2021-B June 2028 144,642 240,000 134,085 179,856 1.54 % CPS 2021-C September 2028 208,515 291,000 193,836 250,003 1.34 % CPS 2021-D December 2028 279,643 349,202 267,832 330,325 1.58 % CPS 2022-A April 2029 293,039 316,800 273,751 – 1.94 % CPS 2022-B October 2029 411,728 395,600 380,095 – 3.98 % $ 2,151,560 $ 5,246,634 $ 1,947,529 $ 1,771,953 _________________ (1) The Final Scheduled Payment Date represents final legal maturity of the securitization trust debt. Securitization trust debt is expected to become due and to be paid prior to those dates, based on amortization of the finance receivables pledged to the trusts. Expected payments, which will depend on the performance of such receivables, as to which there can be no assurance, are $ 377.6 million in 2022, $ 801.4 million in 2023, $ 256.8 million in 2024, $ 249.2 million in 2025, $ 146.4 million in 2026, $ 85.8 million in 2027, and $ 16.9 million in 2028. (2) Includes repossessed assets that are included in Other assets on our Unaudited Condensed Consolidated Balance Sheet. . 17 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Debt issuance costs of $ 13.4 million and $ 12.0 million as of June 30, 2022 and December 31, 2021, respectively, have been excluded from the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the Securitization trust debt on our Consolidated Balance Sheets. All of the securitization trust debt was sold in private placement transactions to qualified institutional buyers. The debt was issued through our wholly-owned bankruptcy remote subsidiaries and is secured by the assets of such subsidiaries, but not by our other assets. The terms of the securitization agreements related to the issuance of the securitization trust debt and the warehouse credit facilities require that we meet certain delinquency and credit loss criteria with respect to the pool of receivables, and certain of the agreements require that we maintain minimum levels of liquidity and not exceed maximum leverage levels. As of June 30, 2022, we were in compliance with all such covenants. We are responsible for the administration and collection of the automobile contracts. The securitization agreements also require certain funds be held in restricted cash accounts to provide additional collateral for the borrowings, to be applied to make payments on the securitization trust debt or as pre-funding proceeds from a term securitization prior to the purchase of additional collateral. As of June 30, 2022, restricted cash under the various agreements totaled approximately $ 157.0 million. Interest expense on the securitization trust debt consists of the stated rate of interest plus amortization of additional costs of borrowing. Additional costs of borrowing include facility fees, amortization of deferred financing costs and discounts on notes sold. Deferred financing costs and discounts on notes sold related to the securitization trust debt are amortized using a level yield method. Accordingly, the effective cost of the securitization trust debt is greater than the contractual rate of interest disclosed above. Our wholly-owned bankruptcy remote subsidiaries were formed to facilitate the above asset-backed financing transactions. Similar bankruptcy remote subsidiaries issue the debt outstanding under our credit facilities. Bankruptcy remote refers to a legal structure in which it is expected that the applicable entity would not be included in any bankruptcy filing by its parent or affiliates. All of the assets of these subsidiaries have been pledged as collateral for the related debt. All such transactions, treated as secured financings for accounting and tax purposes, are treated as sales for all other purposes, including legal and bankruptcy purposes. None of the assets of these subsidiaries are available to pay other creditors. (4) Debt The terms and amounts of our other debt outstanding at June 30, 2022 and December 31, 2021 are summarized below: Schedule of debt outstanding Amount Outstanding at June 30, December 31, 2022 2021 (In thousands) Description Interest Rate Maturity Warehouse lines of credit 3.00% over one month Libor (Minimum 3.75%) July 2024 $ 99,866 $ 70,590 4.15% over a commercial paper rate (Minimum 5.15%) January 2024 130,750 35,420 Residual interest financing 8.60 % January 2026 – 4,311 Residual interest financing 7.86 % June 2026 50,000 50,000 Subordinated renewable notes Weighted average rate of 7.97% and 8.93% at June 30, 2022 and December 31, 2021, respectively Weighted average maturity of June 2024 and January 2024 at June 30, 2022 and December 31, 2021, respectively 27,208 26,459 $ 307,824 $ 186,780 18 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On February 2, 2022, we renewed our two-year revolving credit agreement with Ares Agent Services, L.P. There was $ 130.8 million outstanding under this facility at June 30, 2022. On June 28, 2022, we increased the capacity of its credit agreement with Ares Agent Services, L.P. from $ 100 million to $ 200 million. The revolving period for this facility was extended to January 2024 followed by an amortization period through January 2028 for any receivables pledged at the end of the revolving period. Unamortized debt issuance costs of $ 503,000 and $ 629,000 as of June 30, 2022 and December 31, 2021, respectively, have been excluded from the amount reported above for residual interest financing. Similarly, unamortized debt issuance costs of $ 1.7 million and $ 400,000 as of June 30, 2022 and December 31, 2021, respectively, have been excluded from the Warehouse lines of credit amounts in the table above. These debt issuance costs are presented as a direct deduction to the carrying amount of the debt on our Unaudited Condensed Consolidated Balance Sheets. (5) Interest Income and Interest Expense The following table presents the components of interest income: Schedule of interest income Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Interest on finance receivables $ 9,832 $ 18,491 $ 21,146 $ 40,590 Interest on finance receivables at fair value 65,730 46,943 124,470 90,931 Other interest income 108 6 114 12 Interest income $ 75,670 $ 65,440 $ 145,730 $ 131,533 The following table presents the components of interest expense: Schedule of interest expense Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Securitization trust debt $ 15,745 $ 16,823 $ 29,273 $ 35,276 Warehouse lines of credit 1,386 1,021 2,544 2,335 Residual interest financing 1,050 467 2,144 1,033 Subordinated renewable notes 590 669 1,210 1,281 Interest expense $ 18,771 $ 18,980 $ 35,171 $ 39,925 19 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (6) Earnings Per Share Earnings per share for the three-month and six-month periods ended June 30, 2022 and 2021 were calculated using the weighted average number of shares outstanding for the related period. The following table reconciles the number of shares used in the computations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2022 and 2021: Computation of earnings per share Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Weighted average number of common shares outstanding during the period used to compute basic earnings per share 21,370 22,842 21,296 22,791 Incremental common shares attributable to exercise of outstanding options and warrants 6,317 2,288 6,647 2,257 Weighted average number of common shares used to compute diluted earnings per share 27,687 25,130 27,943 25,048 If the anti-dilutive effects of common stock equivalents were considered, shares included in the diluted earnings per share calculation for the three-month and six-month periods ended June 30, 2022 would have included an additional 824,000 and 692,000 shares, respectively, attributable to the exercise of outstanding options and warrants. For the three-month and six-month periods ended June 30, 2021, an additional 6 .0 million and 6.9 million shares, respectively, would be included in the diluted earnings per share calculation. (7) Income Taxes We file numerous consolidated and separate income tax returns with the United States and with many states. With few exceptions, we are no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2015. As of June 30, 2022, and December 31, 2021, we had no unrecognized tax benefits for uncertain tax positions. We do not anticipate that total unrecognized tax benefits will significantly change due to any settlements of audits or expirations of statutes of limitations over the next 12 months. The Company and its subsidiaries file a consolidated federal income tax return and combined or stand-alone state franchise tax returns for certain states. We utilize the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 20 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, we believe that the realization of the recognized net deferred tax asset of $ 17,523 17.5 million as of June 30, 2022 is more likely than not based on forecasted future net earnings. Our net deferred tax asset of $17.5 million consists of approximately $ 10.5 million of net U.S. federal deferred tax assets and $ 7.0 million of net state deferred tax assets. Income tax expense was $ 8.9 million and $ 17.1 million for the three months and six months ended June 30, 2022, representing effective income tax rates of 26 % and 27 %, respectively, compared to income tax expense of $ 4.2 million and $ 6.9 million for the three months and six months ended June 30, 2021, and represents an effective income tax rates of 30 % and 32 % respectively. (8) Legal Proceedings Consumer Litigation. We are routinely involved in various legal proceedings resulting from our consumer finance activities and practices, both continuing and discontinued. Consumers can and do initiate lawsuits against us alleging violations of law applicable to collection of receivables, and such lawsuits sometimes allege that resolution as a class action is appropriate. For the most part, we have legal and factual defenses to consumer claims, which we routinely contest or settle (for immaterial amounts) depending on the particular circumstances of each case. There are as of the date of this report two civil actions that could possibly result in a material liability, if resolved adversely and on a class basis, as the respective plaintiffs allege would be appropriate. Following our filing of a complaint for a deficiency judgment in the Superior Court at Waterbury, Connecticut, the defendant filed a cross-claim alleging that our deficiency notices were not compliant with Connecticut law, and seeking relief on behalf of a class of Connecticut obligors whose vehicles we had repossessed. The defendant’s contract provided for resolution of disputes exclusively by arbitration, and exclusively on an individual basis, not a class basis. Nevertheless, in August 2021, the court denied our motion to compel arbitration, without opinion. In April 2022, a motion for certification of a class was filed but has not been ruled upon. It is reasonable to expect that resolution of these claims will be on a class basis. Wage and Hour Claim. On September 24, 2018, a former employee filed a lawsuit against us in the Superior Court of Orange County, California, alleging that we incorrectly classified our sales representatives as outside salespersons exempt from overtime wages, mandatory break periods and certain other employee protective provisions of California and federal law. The complaint seeks injunctive relief, an award of unpaid wages, liquidated damages, and attorney fees and interest. The plaintiff purports to act on behalf of a class of similarly situated employees and ex-employees. As of the date of this report, no motion for class certification has been filed or granted. We believe that our compensation practices with respect to our sales representatives are compliant with applicable law. Accordingly, we have defended and intend to continue to defend this lawsuit. Massachusetts Civil Investigative Demand . In September 2021, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the Company’s communications with and repossession notices sent to Massachusetts customers. We are cooperating with the inquiry. At this time, it is not possible to determine any amount of loss that is probable and measurable. 21 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In General. There can be no assurance as to the outcomes of the matters described or referenced above. We record at each measurement date, most recently as of June 30, 2022, our best estimate of probable incurred losses for legal contingencies, including the matters identified above, and consumer claims. The amount of losses that may ultimately be incurred cannot be estimated with certainty. However, based on such information as is available to us, we believe that the total of probable incurred losses for legal contingencies as of June 30, 2022 is $3.4 million, and that the range of reasonably possible losses for the legal proceedings and contingencies we face, including those described or identified above, as of June 30, 2022 does not exceed $11.3 million. Accordingly, we believe that the ultimate resolution of such legal proceedings and contingencies should not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the uncertainties inherent in contested proceedings there can be no assurance that the ultimate resolution of these matters will not be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our income for that period. (9) Fair Value Measurements ASC 820, "Fair Value Measurements" clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows: level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Effective January 2018 we have elected to use the fair value method to value our portfolio of finance receivables acquired in January 2018 and thereafter. Our valuation policies and procedures have been developed by our Accounting department in conjunction with our Risk department and with consultation with outside valuation experts. Our policies and procedures have been approved by our Chief Executive and our Board of Directors and include methodologies for valuation, internal reporting, calibration and back testing. Our periodic review of valuations includes an analysis of changes in fair value measurements and documentation of the reasons for such changes. There is little available third-party information such as broker quotes or pricing services available to assist us in our valuation process. Our level 3, unobservable inputs reflect our own assumptions about the factors that market participants use in pricing similar receivables and are based on the best information available in the circumstances. They include such inputs as estimates for the magnitude and timing of net charge-offs and the rate of amortization of the portfolio of finance receivable. Significant changes in any of those inputs in isolation would have a significant effect on our fair value measurement. For the quarter ended June 30, 2022, the Company evaluated the appropriate fair value and future earnings rate of existing receivables compared to recently acquired receivables and our assessment of potential additional future net losses on the portfolio of finance receivables carried at fair value and did not record a mark down to that portfolio. 22 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The table below presents a reconciliation of the finance receivables measured at fair value on a recurring basis using significant unobservable inputs: Schedule of reconciliation of the finance receivables measured at fair value on a recurring basis Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (In thousands) (In thousands) Balance at beginning of period $ 1,903,857 $ 1,533,723 $ 1,749,098 $ 1,523,726 Finance receivables at fair value acquired during period 511,068 279,658 904,475 485,117 Payments received on finance receivables at fair value ( 215,930 ) ( 199,419 ) ( 425,774 ) ( 355,439 ) Net interest income accretion on fair value receivables ( 29,562 ) ( 31,787 ) ( 60,766 ) ( 66,812 ) Mark to fair value 4,700 – 7,100 ( 4,417 ) Balance at end of period $ 2,174,133 $ 1,582,175 $ 2,174,133 $ 1,582,175 The table below compares the fair values of these finance receivables to their contractual balances for the periods shown: Finance receivables fair and contractual balances June 30, 2022 December 31, 2021 Contractual Fair Contractual Fair Balance Value Balance Value (In thousands) Finance receivables measured at fair value $ 2,402,830 $ 2,174,133 $ 1,972,699 $ 1,749,098 The following table provides certain qualitative information about our level 3 fair value measurements: Schedule of level 3 fair value measurements Financial Instrument Fair Values as of Inputs as of June 30, December 31, June 30, December 31, 2022 2021 Unobservable Inputs 2022 2021 (In thousands) Assets: Finance receivables measured at fair value $ 2,174,133 $ 1,749,098 Discount rate 9.9% - 11.3% 10.6% - 11.3% Cumulative net losses 10.0% - 18.4% 10.0% - 18.4% 23 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the delinquency status of these finance receivables measured at fair value as of June 30, 2022 and December 31, 2021: Schedule of delinquency status of finance receivables measured at fair value June 30, December 31, 2022 2021 (In thousands) Delinquency Status Current $ 2,191,162 $ 1,787,641 31 - 60 days 127,654 115,924 61 - 90 days 45,258 38,999 91 + days 14,820 11,564 Repo 23,936 18,571 $ 2,402,830 $ 1,972,699 Repossessed vehicle inventory, which is included in Other assets on our unaudited condensed consolidated balance sheet, is measured at fair value using level 2 assumptions based on our actual loss experience on sale of repossessed vehicles. At June 30, 2022 the finance receivables related to the repossessed vehicles in inventory totaled $ 3.0 million. We have applied a valuation adjustment, or loss allowance, of $1.6 million, which is based on a recovery rate of approximately 47%, resulting in an estimated fair value and carrying amount of $ 1.4 million. The fair value and carrying amount of the repossessed inventory at December 31, 2021 was $ 2.4 million after applying a valuation adjustment of $ 1.9 million. There were no transfers in or out of level 1, level 2 or level 3 assets and liabilities for the three months ended June 30, 2022 and 2021. The estimated fair values of financial assets and liabilities at June 30, 2022 and December 31, 2021, were as follows: Schedule of estimated fair values of financial assets and liabilities As of June 30, 2022 Financial Instrument (In thousands) Carrying Fair Value Measurements Using: Value Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 11,348 $ 11,348 $ – $ – $ 11,348 Restricted cash and equivalents 157,021 157,021 – – 157,021 Finance receivables, net 113,338 – – 101,305 101,305 Accrued interest receivable 1,383 – – 1,383 1,383 Liabilities: Warehouse lines of credit $ 228,906 $ – $ – $ 228,906 $ 228,906 Accrued interest payable 4,302 – – 4,302 4,302 Securitization trust debt 1,934,156 – – 1,829,109 1,829,109 Subordinated renewable notes 27,208 – – 27,208 27,208 24 CONSUMER PORTFOLIO SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2021 Financial Instrument (In thousands) Carrying Fair Value Measurements Using: Value Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 29,928 $ 29,928 $ – $ – $ 29,928 Restricted cash and equivalents 146,620 146,620 – – 146,620 Finance receivables, net 176,184 – – 178,795 178,795 Accrued interest receivable 2,269 – – 2,269 2,269 Liabilities: Warehouse lines of credit $ 105,610 $ – $ – $ 105,610 $ 105,610 Accrued interest payable 3,568 – – 3,568 3,568 Securitization trust debt 1,759,972 – – 1,740,901 1,740,901 Subordinated renewable notes 26,459 – – 26,459 26,459 (10) Subsequent Events On July 15, 2022, we renewed our two-year revolving credit agreement with Citibank, N.A., and doubled the capacity from $100 million to $200 million. There was $99.9 million outstanding under this facility at June 30, 2022. The revolving period for this facility was extended to July 2024 followed by an amortization period through July 2025 for any receivables pledged at the end of the revolving period. On August 3, 2022 we executed our third securitization of 2022. In the transaction, qualified institutional buyers purchased $391.6 million of asset-backed notes secured by $440.0 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2022-C, consist of five classes. Ratings of the notes were provided by Standard & Poor’s and DBRS Morningstar, and were based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer. The weighted average yield on the notes is approximately 6.02%. The 2022-C transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 11.00%. The transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 13.00% of the original receivable pool balance, or 31.50% of the then outstanding pool balance. The transaction utilizes a pre-funding structure, in which CPS sold approximately $368.0 million of receivables at inception and plans to sell approximately $72.0 million of additional receivables in August 2022. The transaction was a private offering of securities, not registered under the Securities Act of 1933, or any state securities law. 25